CommRev - Nego A

Commercial Law Review
Negotiable Instruments Law

Based on the course outline of Atty. Maria Zarah R. Villanueva Castro
Michael Vernon Guerrero Mendiola (SY 2005-2006, Second Semester)
A. Preliminary Considerations
1. Governing laws
Act 2031, the Negotiable Instruments Law, took effect on 2 June 1911, and is patterned after the U.S. Uniform Negotiable
Instruments Law (NIL), which in turn is copied from the English Bill of Exchange Act of 1882. 1 It was enacted 3 February
1911, and the publication thereof was completed in the Official Gazette on 4 March 1911. Being effective 90 days after
publication, the law took effect on 2 June 1911. 2
Code of Commerce. In addition to Act No. 2031 otherwise known as the NNIL, negotiable instruments are governed by
the provisions of the Code of Commerce that were not impliedly repealed by the NIL, such as Code of Commerce
provisions on crossed checks. 3
4
New Civil Code. The New Civil Code applies suppletorily.
2. Concept of negotiable instrument
Definition. A negotiable instrument is a written contract for the payment of money which is intended as a substitute for
money and passes from one person to another as money, in such a manner as to give a holder in due course the right to
hold the instrument free from defenses available to prior parties. The instrument must comply with Section 1, NIL to be
considered negotiable. 5
Incidents in “life” of negotiable instrument.

1. issue
2. negotiation
3. presentation for acceptance, in certain kinds of bills of exchange
4. acceptance
5. dishonor by non-acceptance
6. presentment for payment
7. dishonor by non-payment
8. notice of dishonor
9. discharge6
3. Classes of negotiable instrument
The NIL deals with three kinds of negotiable instruments: (1) promissory notes, (2) bills of exchange, and (3) checks,
which are also bills of exchange, but of a special kind. There are other forms of negotiable instrument as per Section 195,
NIL. 7
a. promissory note
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.8 A Promissory Note is
(1) an Unconditional promise,
(2) involving 2 parties,
(3) where the Maker is primarily liable, and
(4) requires Only one presentment (for payment). 9
A promissory note is essentially a promise in writing to pay a sum certain in money. The promise is to pay on
demand or at a fixed or determinable future time. Its use must be distinguished from the use of cash. A person who
purchased a piece of land at public auction cannot be compelled to accept a promissory note which the judgment
debtor is tendering under his right of redemption pursuant to Section 6 of Act 3135 as amended. 10
Characteristics.
1. “The figures,” at the upper left hand corner of the instrument, indicate the amount of the note and is more
quickly grasped than if written in words.
2. “The place” shows the place where the contract to pay is executed.
3. “The date” is usually inserted either to determine when the note is due or to fix the time when interest is to run,
when the payment of interest is stipulated, or whether or not the collection of the instrument is barred by the
statute of limitations.
4. “The date of maturity” indicates the time when the promise to pay is to be fulfilled. Where, however, the date of
maturity is not stated, the instrument is payable on demand, as per Section 7, NIL.
5. “The promise” consists of an absolute promise to do something, i.e. to pay. It is not subject to the fulfillment of a
condition.
6. “The words of negotiability” may be in the words “to the order of” which means that the promise is to pay as
ordered or as commanded by the payee. An instrument may also be payable to bearer.
7. “The name” is the person to whose order or command the money is promised to be paid. He is known as the
payee.
8. “The signature indicates the maker of the note. He is the one who promises to pay it at the first instance. A note
may be signed by more than one person either jointly, or jointly and severally.
1
Miravite, Jorge V. Bar Review Materials in Commercial Law, 12th Edition, 2002, p. 63
2
1 Agbayani, Aguedo F., Commentaries and Jurisprudence on the Commercial Laws of the Philippines, 1992 Edition, p. 100.
3
Sundiang, Jose R. Reviewer on Commercial Law, p. 79
4
Sundiang, Ibid., p. 79
5
6
1 Agbayani, Ibid, p. 109
7
1 Agbayani, Ibid, p. 100.
8
Sundiang, Ibid., pp. 81- 82; Agbayani, Ibid., p. 100
9
10
1 Agbayani, Ibid., p. 100; citing Aparri vs. Court of Appeals, 13 SCRA 611 [1965]
B-1
9. “The place of payment” indicates where the note is to be paid. However, that is not necessary. An instrument
may be made payable at any other place agreed upon by the parties.
10. “The amount” indicates, as the figures do, the sum promised to be paid. As it is written in words, it cannot be
easily altered and, since it takes longer to write the words than the figures, the words are more likely to be
accurate.
11. “The consideration” indicates that a consideration was given for the note. The consideration may be specified.
But the words “for value received” may be omitted and the consideration not specified, as consideration is
presumed, as per Section 24, NIL.11
Kinds.
1. Certificate of deposit. A form of promissory note which is a written acknowledgment of a bank of its receipt of
a certain sum with a promise to repay the same.
2. Bonds. A certificate or evidence of a debt on which the issuing company or governmental body promises to
pay the bondholders a specified amount of interest for a specified length of time, and to repay the loan on the
expiration date.
3. Debenture. A promissory note or bond backed by the general credit of a corporation and usually not secured
by a mortgage or lien on any specific property. 12
Parties.
1. The maker
2. The payee, if the instrument is payable to order; or the bearer, if the instrument is payable to bearer.
3. Others:
(a) indorser,
(b) in case of instruments payable to order, indorsee
(c) in case of instruments payable to bearer
(i) persons negotiating by mere delivery, and
(ii) persons to whom the instrument is negotiated by delivery.13
b. bill of exchange
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.14 A Bill of Exchange is
(1) an Unconditional order,
(2) involving 3 parties,
(3) where the Drawer is secondarily liable, and
(4) which requires, generally, 2 presentments, i.e. one for acceptance and one for payment. 15
A bill of exchange is essentially an order or a command in writing addressed to someone requiring him to pay a sum
certain in money.16
Characteristics.
1. Instead of a promise, the bill of exchange contains an “order or command to pay” money.
2. “The signature” indicates the drawer of the bill of exchange. He corresponds to the maker of a promissory note.
3. “The name directed” is the drawee. He is the one ordered or commanded to pay a sum certain in money. 17
Kinds.
1. Draft. Used synonymously with bill of exchange although it normally refers to a bill of exchange used in
documentary exchange like letters of credit transactions.
2. Inland and Foreign Bill. An inland bill 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.
3. Time draft. Draft that is payable at a fixed date.
4. Sight or Demand draft. Draft that is payable when the holder presents it for payment.
5. Trade acceptance. Bill that is used in contracts of sale where the seller as drawer orders the buyer (as drawee)
to pay a sum certain to the same seller (payee).
6. Banker's acceptance. A time draft across the face of which the drawee has written the word accepted.
7. Check. A bill of exchange drawn on a bank payable on demand. 18
Parties.
1. The drawer
2. The payee, if the instrument is payable to order; or the bearer, if the instrument is payable to bearer.
3 The acceptor, if the instrument is an ordinary bill of exchange; or the drawee, if the instrument is a check.
4. Others:
(a) indorser,
(b) in case of instruments payable to order, indorsee
(c) in case of instruments payable to bearer
(i) persons negotiating by mere delivery, and
(ii) persons to whom the instrument is negotiated by delivery.19
Bill of exchange not determined by nature of acceptance. 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.20
4, Functions of negotiable instrument
According to Sundiang,
1. It operates as a substitute of money.
2. It is a means of creating and transferring credit.
3. It facilitates the sale of goods.
11
1 Agbayani, pp. 101-102
12
Sundiang, Ibid., pp. 82- 83
13
14
Sundiang, Ibid, p. 81
15
16
1 Agbayani, p. 102
17
1 Agbayani, Ibid., p. 103
18
19
20
1 Agbayani., Ibid., p. 103
B-2
21
4. It increases the purchasing medium in circulation.
According to Miravite, the commercial functions of a negotiable paper are :

1. To supplement the currency of the government;
2. To substitute for money and increase the purchasing medium. 22
23
In commercial usage, they are regarded as substitutes for cash, although not legal tender.
According to Agbayani, they are a substitute for money and increase the purchasing medium in circulation. Otherwise,
more specie or paper money would be needed in circulation to take care of everyday business transactions. Many
customers of merchants pay their monthly bills by checks and manufacturers when unable to obtain cash from their
customers, take promissory notes, accepted bills, trade acceptances, or some form of commercial paper which their
banks will discount and turn into money for their payrolls. Thus, negotiable instruments operate to supplement the
currency of the government. The check is used for immediate payment while the ordinary bill of exchange and the
promissory note are intended for circulation of credits.24
5. Characteristics of negotiable instrument
a. negotiability
It is that attribute or property whereby a bill or note or check may pass from hand to hand similar to money, so as to
give the holder in due course the right to hold the instrument and collect the sum payable for himself free from
defenses. 25 Thus, men in this way without cash in hand are enabled by means of credit to conduct and carry to
completion business enterprises upon their promissory notes, bills of exchange and checks, knowing that other
businessmen will treat these promises as cash. Furthermore, the purpose of negotiability is to allow bills and notes to
go from hand to hand in the commercial transactions. 26 The defenses from which a holder in due course is free are
personal defenses but he is not free from real defenses. 27
Purpose. The primary purpose of negotiability of a negotiable instrument is to allow bills and notes the effect which
money, in the form of government bills or notes, supplies in the commercial world. 28
Determination. The negotiability of an instrument is to be determined by

1. the provisions of the NIL, particularly Section 1 thereof (the requirement lacking cannot be supplies by using a
separate instrument in which that requirement which is lacking appears)
2. considering the whole of the instrument; and
3. what appears on the face of the instrument and not elsewhere. 29
b. accumulation of secondary contracts
Secondary contracts are picked up and carried along with them as they are negotiated from one person to another,
or in the course of negotiation of a negotiable instrument, a series of judicial ties between the parties thereto arise
either by law or by privity. 30 This attribute is just as essential as negotiability, if they are to serve as substitute for
money. The party to whom it is offered may not know anything about the original parties on their solvency and can
afford to take the paper only if the party with whom he is dealing with adds his credit. Negotiation not only operates
to transfer a negotiable instrument but also makes a contract for the one negotiating it. 31
Advantage. Negotiable instruments improve as they pass from hand to hand, as more debtors are added. There are
as many secondary contracts and debtors as the indorsements. Hence, the more indorsements, the more debtors
there will be, and, the more debtors there are, the greater are the chances that the holder has to collect the amount
payable on the instrument.32
6. Negotiable instruments compared with other papers
a. document of title
A written description, identification or declaration of goods “which in the regular course of business or financing is
treated as adequately evidencing that the person in possession of it is entitled to receive, hold and dispose of the
document and the goods it covers. To be a document of title a document may purport to be issued by or addressed
to a bailee and purport to cover goods in the bailee’s possession which are either identified or are fungible portions
of an identified mass.”33 Examples are bill of lading, dock warrant, dock receipt, warehouse receipt or order for the
delivery of goods. 34
Negotiable Instruments Negotiable documents of title

Subject The subject is money The subject is goods
Relevance of A negotiable instrument is itself the property The document is a mere evidence of
document with value. title—the things of value being the
goods mentioned in the document.
Requisites A negotiable instrument has all the requisites of A negotiable document of title does not
Sec. 1 of the law. have these requisites.
Holder’s recourse A holder of negotiable instrument may run after Intermediate parties in a negotiable
when instrument is the secondary parties for payment if dishonored document of title are not secondarily
dishonored by the party primarily liable. liable if the document is dishonored.
Holder’s rights vis- A holder of a negotiable instrument, if a holder A holder of a negotiable document of
à-vis predecessor’s in due course, may acquire rights over the title can never acquire rights to the
rights instrument better than his predecessors. document better than his
predecessors.
21
22
Miravite, Ibid., p. 63
23
Miravite, Ibid., p. 63, citing Sy vs. People, 172 SCRA 685
24
1 Agbayani, Ibid., p. 114, citing Ogden, 5th ed., p. 44
25
Sundiang, Ibid, p. 81; 1 Agbayani, Ibid., p. 116; citing Ogden, 5th ed., p. 45
26
1 Agbayani, Ibid., p. 116, citing Ogden, 5th ed., p. 50
27
28
1 Agbayani, Ibid., p. 116; citing Friendlander vs. Railway Co., 130 US 416
29
30
31
32
33
U.C.C. § 1-201[15]
34
Black’s Law Dictionary, 6th Edition, p. 483
B-3
35
b. letter of credit
An engagement of the bank or other person made at the request of a customer that the issuer will honor drafts or
other demands for payment upon compliance with the conditions specified in the credit. A credit may be either
revocable or irrevocable. The engagement may be either an agreement to honor or a statement that the bank or
other person is authorized to honor.36 Letters of credit are intended generally to facilitate purchase and sale of goods
by providing assurance to the seller of prompt payment upon compliance with specified conditions or presentation of
stipulated documents without the sellers having to rely upon the solvency and good faith of the buyer. 37
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 paying. To break the impasse, the buyer may be required to contract a bank to issue letter of credit in favor of
the seller so that by virtue of the letter of credit, the issuing bank can authorize the seller to draw drafts and engage
to pay them upon their presentment simultaneously with the tender of documents required by the letter of credit. The
buyer and the seller agree on what documents are to be presented for payment, but ordinarily they are documents of
title evidencing or attesting to the shipment of the goods to the buyer. Once the credit is established, the seller ships
the goods to the buyer and in the process secures the required shipping documents or documents of title. To get
paid, the seller executes a draft and presents it together with the required documents to the issuing bank. The
issuing bank redeems the draft and pays cash to the seller if it finds that the documents submitted by the seller
conform with what the letter of credit requires. The bank then obtains possession of the documents upon paying the
seller. The transaction is completed when the buyer reimburses the issuing bank and acquires the documents
entitling him to the goods. Under this arrangement, the seller gets paid only if he delivers the documents of title over
the goods, while the buyer acquires the said documents and control over the goods only after reimbursing the bank.
In a letter of credit, there are three distinct independent contracts:
(a) the contract of sale between the buyer and the seller,
(b) the contract of the buyer with the issuing bank, and
(c) the letter of credit proper in which the bank promises to pay the seller pursuant to the terms and conditions state
therein. In a letter of credit, there would at least be three (3) parties:
(1) the buyer, who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt
of the documents of title;
(2) the bank issuing the letter of credit, which undertakes to pay the seller upon receipt of the draft and proper
documents of title and to surrender the documents to the buyer upon reimbursement; and
(3) the seller, who in compliance with the contract of sale ships the goods to the buyer and delivers the
documents of title and draft to the issuing bank to recover payment.
A letter of credit is a commercial transaction because it is one of the contracts provided by the Code of Commerce
not repealed by the Civil code. It is also form of negotiable instrument where all requisites of negotiability are
present, especially when used in international trade. 38
c. certificate of stock
A certificate of a corporation or joint-stock company that named person is owner of designated number of shares of
stock. It is merely written evidence of ownership of stock, and of the rights and liabilities resulting from such
ownership. It is a document representation of an incorporeal right, and stands on the footing similar to that of other
muniments of title. 39
d. pawn ticket
Pawn. A bailment of goods to a creditor, as security for some debt or engagement; a pledge; a deposit of personal
property made to a pawnbroker as security for a loan. The sort of bailment when goods or chattels are delivered to
another as security to him for money borrowed of him by the bailor. Also the specific chattel delivered to the creditor
as a pledge. 40
Ticket. In contracts, a slip of paper containing a certificate that the person to whom it is issued, or the holder, is
entitled to some right or privilege therein mentioned or described; such as a pawn ticket. 41
42
Pawn ticket. It is a non-negotiable instrument; it does not represent money but the pawned articles.
e. postal money order
Postal order. A money order. A letter of credit furnished by the government, at a small charge, to facilitate the
transmission of money. 43
Postal Money orders are non-negotiable as they governed by postal rules and regulations which may be inconsistent
with the NIL and it can only be negotiated once. 44 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 Status is that postal money orders are not
negotiable instruments,45 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.46 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.47
Postal money orders, according to weight of authority in the U.S., are not negotiable instruments because
35
36
U.C.C. § 5-103
37
Lustrelon Inc. vs. Prutcher, 178 N. J. Super. 128, 428 A. 2d 518, 523) (Black’s Law Dictionary, 6th Edition, pp. 903-904
38
Miravite, Ibid, pp. 69-71
39
40
41
Black’s Law Dictionary, 6th Edition, pp. 1481-82
42
43
44
45
Bolognesi vs. U. S., 189 Fed. 395; U. S. vs. Stock Drawers National Bank, 30 Fed. 912
46
Philippine Education Co. Inc. vs. Soriano [GR L-22405, 30 June 1971]
47
49 C. J. 1153
B-4
(1) the government, in establishing a postal money order system, is not engaged in commercial transactions, but
merely exercises a government power for public benefit, and
(2) restrictions imposed by the postal laws and regulations on money orders like one indorsement only, or
withholding payment for a list of causes, are inconsistent with the character of negotiable instruments. 48
f. treasury warrant
Treasury warrant. Order in check form on the treasury on which treasury (government) disbursements are paid. 49
They are non-negotiable for being payable out of particular fund 50
51
Warrant. An order by which the drawer authorizes one person to a particular sum of money.
7. Legal tender character
Legal tender. Legal tender is that kind of money which the law compels a creditor to accept in payment of his debt when
tendered by the debtor in the right amount. 52 Section 52 of the New Central Bank Act, Republic Act 7653, provides that
only notes and coins issued by the Bangko Sentral ng Pilipinas are considered legal tender. Section 60 of the same law
expressly provides that checks are not legal tender. Checks representing demand deposits 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 delivery
to the creditor of cash in an amount equal to the amount credited to his account. Section 52 thereof states that unless
otherwise fixed by the Monetary Board, coins shall be legal tender as follows:
(a) In amounts not exceeding Fifty pesos (P50.00) for denominations of Twenty-five centavos and above; and
(b) In amounts not exceeding Twenty pesos (P20.00) for denominations of Ten centavos or less. 53
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.54 A check, whether a manager's 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. 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 realized.55
Payment vis-à-vis different kinds of checks. A check, whether a manager's 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.56 A check is not legal tender and that a creditor may validly refuse payment by check, whether it be a
manager's, cashier's or personal check. 57 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 have been impaired. In the meantime, the action derived from the original obligation shall be held in
abeyance.58
Receipt of payment by public officer. In the absence of an agreement, either express or implied, payment means the
discharge of a debt or obligation in money 59 and unless the parties so agree, a debtor has no rights, except at his own
peril, to substitute something in lieu of cash as medium of payment of his debt.60 Consequently, unless authorized to do so
by law or by consent of the obligee, a public officer has no authority to accept anything other than money in payment of an
obligation under a judgment being executed. Strictly speaking, the acceptance by the sheriff of the debtor's checks does
not, per se, operate as a discharge of the judgment debt. 61
Practice of issuing check payable to judgment creditor through court sheriff. Payment in money or cash to the
implementing officer may be deemed absolute payment of the judgment debt but the Court has never suggested that
judgment debtors should settle their obligations by turning over huge amounts of cash or legal tender to sheriffs and other
executing officers. Payment in cash would result in damage or interminable litigations each time a sheriff with huge
amounts of cash in his hands decides to abscond. As a protective measure, therefore, the courts encourage the practice
of payments by check provided adequate controls are instituted to prevent wrongful payment and illegal withdrawal or
disbursement of funds. If particularly big amounts are involved, escrow arrangements with a bank and carefully
supervised by the court would be the safer procedure. Actual transfer of funds takes place within the safety of bank
premises. The object is always the safe and incorrupt execution of the judgment. It is, indeed, out of the ordinary that
checks intended for a particular payee are made out in the name of another. Making the checks payable to the judgment
creditor would have prevented the encashment or the taking of undue advantage by the sheriff, or any person into whose
hands the checks may have fallen, whether wrongfully or in behalf of the creditor. The issuance of the checks in the name
of the sheriff clearly made possible the misappropriation of the funds that were withdrawn. The pernicious effects of
issuing checks in the name of a person other than the intended payee, without the latter's agreement or consent, are as
many as the ways that an artful mind could concoct to get around the safeguards provided by the law on negotiable
instruments. 62
!!! Case(s)
1 Phil. Educ, Co., Inc. vs. Soriano, 39 SCRA 587
2 Tlbajia, Jr. vs. CA, 223 SCRA 163
3 Philippine Airlines vs. CA, 181 SCRA 557
4 Sesbreno vs, CA, May 24, 1993
---------------------------------------------------------------------CASE(S)---------------------------------------------------------------
1 Philippine Education Co. Inc. vs. Soriano [GR L-22405, 30 June 1971]
En Banc, Dizon (J): 8 concur, 2 took no part
48
Miravite, Ibid. p. 75
49
50
51
52
1 Agbayani., Ibid., p. 125; ciring Martin vs. Bolt, 17 Ind. App. 444, 46 NE 151
53
Sundiang, Ibid, pp. 80-81
54
Sec. 189, Act 2031 on Negs. 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
55
Art. 1249, Civil Code, par. 3
56
Philippine Airlines, Inc. vs. Court of Appeals [GR 49188, 30 January 1990, 181 SCRA 557]; Roman Catholic Bishop of Malolos, Inc. vs. Intermediate
Appellate Court [GR 72110, 16 November 1990, 191 SCRA 411]
57
Tibajia vs. Court of Appeals [GR 100290, 4 June 1993]
58
1 Agbayani, Ibid., p. 115; citing Article 1249, NCC; and referring to the conflict in different jurisdiction in the United States, as per Ogden, 5 th ed., p. 55.
59
US v. Robertson, 5 Pet. [US] 641, 8 L. ed. 257
60
Anderson v. Gill, 79 Md. 312, 29 A 527, 25 LRA 200, 47 Am. St. Rep. 402
61
Philippine Airlines vs. Court of Appeals [GR 49188, 30 January 1990]
62
Philippine Airlines vs. Court of Appeals [GR 49188, 30 January 1990]
B-5
Facts: On 18 April 1958 Enrique Montinola sought to purchase from the Manila Post Office 10 money orders of P200.00 each
payable to E. P. Montinola with address at Lucena, Quezon. After the postal teller had made out money orders numbered 124685,
124687-124695, Montinola offered to pay for them with a private check. As private checks 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, Montinola managed to
leave the building with his own check and the 10 money orders without the knowledge of the teller. On the same date, 18 April 1958,
upon discovery of the disappearance of the unpaid money orders, 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 Blank of America received a copy of said notice 3 days later. On 23 April 1958 one of the above mentioned money
orders numbered 124688 was received by Philippine Education Co. as part of its sales receipts. The following day it deposited the
same with the Bank of America, and one day thereafter the latter cleared it with the Bureau of Posts and received from the latter its
face value of P200.00. On 27 September 1961, Mauricio A. Soriano, Chief of the Money Order Division of the Manila Post Office,
acting for and in behalf of Post-master Enrico Palomar, notified the Bank of America that money order 124688 attached to his letter
had been found to have been irregularly issued and that, in view thereof, the amount it represented had been deducted from the
bank's clearing account. For its part, on August 2 of the same year, the Bank of America debited Philippine Education Co.'s account
with the same amount and gave it advice thereof by means of a debit memo. On 12 October 1961 Philippine Education Co.
requested the Postmaster General to reconsider the action taken by his office deducting the sum of P200.00 from the clearing
account of the Bank of America, but his request was denied. So was Philippine Education Co.'s subsequent request that the matter
be referred to the Secretary of Justice for advice. Thereafter, Philippine Education Co. elevated the matter to the Secretary of Public
Works and Communications, but the latter sustained the actions taken by the postal officers. In connection with the events set forth
above, Montinola was charged with theft in the Court of First Instance of Manila (Criminal Case 43866) but after trial he was
acquitted on the ground of reasonable doubt. On 8 January 1962 Philippine Education Co. filed an action against Soriano, et al. in
the Municipal Court of Manila. On 17 November 1962, after the parties had submitted the stipulation of facts, the municipal court
rendered judgment, ordering Soriano, et al. to countermand the notice given to the Bank of America on 27 September 1961,
deducting from said Bank's clearing account the sum of P200.00 representing the amount of postal money order 124688, or in the
alternative, to indemnify Philippine Education Co. in the said sum of P200.00 with interest thereon at the rate of 8-1/2% per annum
from 27 September 1961 until fully paid; without any pronouncement as to costs and attorney's fees." The case was appealed to the
Court of First Instance of Manila where, after the parties had resubmitted the same stipulation of facts, the appealed decision
dismissing the complaints with costs, was rendered. Philippine Education Co. appealed.
Issue: Whether the postal money order is a negotiable instrument.
Held: 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 Status 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.
2 Tibajia vs. Court of Appeals [GR 100290, 4 June 1993]

Second Division, Padilla (J): 3 concur
Facts: Case 54863 was a suit for collection of a sum of money filed by Eden Tan against the Tibajia spouses (Norberto Jr. and
Carmen). A writ of attachment was issued by the trial court on 17 August 1987 and on 17 September 1987, the Deputy Sheriff filed a
return stating that a deposit made by the Tibajia spouses in the Regional Trial Court (RTC) of Kalookan City in the amount of
P442,750.00 in another case, had been garnished by him. On 10 March 1988, the RTC, Branch 151 of Pasig, Metro Manila
rendered its decision in Civil Case 54863 in favor of Eden Tan, ordering the Tibajia spouses to pay her an amount in excess of
P300,000.00. On appeal, the Court of Appeals modified the decision by reducing the award of moral and exemplary damages. The
decision having become final, Eden Tan filed the corresponding motion for execution and thereafter, the garnished funds which by
then were on deposit with the cashier of the RTC of Pasig, Metro Manila, were levied upon. On 14 December 1990, the Tibajia
spouses delivered to Deputy Sheriff Eduardo Bolima the total money judgment in the following form: (1) Cashier's Check worth
P262,750.00, and Cash in the amount of P135,733.70 (Totalling P398,483.70). Eden Tan, refused to accept the payment made by
the Tibajia spouses and instead insisted that the garnished funds deposited with the cashier of the RTC of Pasig, Metro Manila be
withdrawn to satisfy the judgment obligation. On 15 January 1991, the spouses filed a motion to lift the writ of execution on the
ground that the judgment debt had already been paid. On 29 January 1991, the motion was denied by the trial court on the ground
that payment in cashier's check is not payment in legal tender and that payment was made by a third party other than the defendant.
A motion for reconsideration was denied on 8 February 1991. Thereafter, the spouses Tibajia filed a petition for certiorari, prohibition
and injunction in the Court of Appeals. The appellate court dismissed the petition on 24 April 1991 holding that payment by cashier's
check is not payment in legal tender as required by Republic Act 529. The motion for reconsideration was denied on 27 May 1991.
The spouses filed the petition for review.
Issue: Whether payment by means of check (even by cashier's check) is considered payment in legal tender as required by the
Civil Code, Republic Act 529, and the Central Bank Act.
Held: Article 1249 of the Civil Code which provides that "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 have been impaired. In the meantime, the action derived
from the original obligation shall be held in abeyance." Section 1 of Republic Act 529, as amended, on the other hand, provides that
"Every provision contained in, or made with respect to, any obligation which purports to give the 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 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." Also, Section 63 of
Republic Act 265, amended (Central Bank Act) which provides that "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." Further, in the recent cases of Philippine Airlines, Inc. vs. Court of Appeals
(GR 49188, 30 January 1990, 181 SCRA 557) and Roman Catholic Bishop of Malolos, Inc. vs. Intermediate Appellate Court (GR
72110, 16 November 1990, 191 SCRA 411), the Court held that "A check, whether a manager's 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." The ruling in these two (2) cases merely applies the statutory provisions which lay down the rule that a check is not legal
tender and that a creditor may validly refuse payment by check, whether it be a manager's, cashier's or personal check. In the more
recent case of Fortunado vs. Court of Appeals (GR78556, 25 April 1991, 196 SCRA 269), the Court stressed that, "We are not, by
this decision, sanctioning the use of a check for the payment of obligations over the objection of the creditor."
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3 Philippine Airlines vs. Court of Appeals [GR 49188, 30 January 1990]
En Banc, Gutierrez Jr. (J): 7 concur, 3 dissent in separate opinions where 4 joined
Facts: On 8 November 1967, Amelia Tan, under the name and style of Able Printing Press commenced a complaint for damages
before the Court of First Instance (CFI) of Manila (Civil Case 71307). After trial, the CFI of Manila, Branch 13, then presided over by
the late Judge Jesus P. Morfe rendered judgment on 29 June 1972, in favor of Tan, ordering Philippine Airlines, Inc. (PAL) to pay
Tan the amount of P75,000.00 as actual damages, with legal interest thereon from Tan's extra-judicial demand made by the letter of
20 July 1967; P18,200.00, representing the unrealized profit of 10% included in the contract price of P200,000.00 plus legal interest
thereon from 20 July 1967; P20,000.00 as and for moral damages, with legal interest thereon from 20 July 1967; P5,000.00
damages as and for attorney's fee; with costs against PAL. On 28 July 1972, PAL filed its appeal with the Court of Appeals (CA-GR
51079-R). On 3 February 1977, the appellate court rendered its decision, affirming but modifying the CFI's decision, ordering PAL to
pay the sum of P25,000.00 as damages and P5,000.00 as attorney's fee. Notice of judgment was sent by the Court of Appeals to
the trial court and on dates subsequent thereto, a motion for reconsideration was filed by Tan, duly opposed by PAL. On 23 May
1977, the Court of Appeals rendered its resolution denying Tan's motion for reconsideration for lack of merit. No further appeal
having been taken by the parties, the judgment became final and executory and on 31 May 1977, judgment was correspondingly
entered in the case.
The case was remanded to the trial court for execution and on 2 September 1977, Tan filed a motion praying for the issuance of a
writ of execution of the judgment rendered by the Court of Appeals. On 11 October 1977, the trial court, presided over by Judge
Ricardo D. Galano, issued its order of execution with the corresponding writ in favor of Tan. The writ was duly referred to Deputy
Sheriff Emilio Z. Reyes of Branch 13 of the Court of First Instance of Manila for enforcement. 4 months later, on 11 February 1978,
Tan moved for the issuance of an alias writ of execution stating that the judgment rendered by the lower court, and affirmed with
modification by the Court of Appeals, remained unsatisfied. On 1 March 1978, PAL filed an opposition to the motion for the issuance
of an alias writ of execution stating that it had already fully paid its obligation to Tan through the deputy sheriff of the court, Reyes,
as evidenced by cash vouchers properly signed and receipted by said Emilio Z. Reyes. On 3 March 1978, the Court of Appeals
denied the issuance of the alias writ for being premature, ordering the executing sheriff Reyes to appear with his return and explain
the reason for his failure to surrender the amounts paid to him by PAL. However, the order could not be served upon Deputy Sheriff
Reyes who had absconded or disappeared. On 28 March 1978, motion for the issuance of a partial alias writ of execution was filed
by Tan. On 19 April 1978, Tan filed a motion to withdraw "Motion for Partial Alias Writ of Execution" with Substitute Motion for Alias
Writ of Execution. On 1 May 1978, the Judge issued an order granting the motion, and issuing the alias writ of execution. On 18 May
1978, PAL received a copy of the first alias writ of execution issued on the same day directing Special Sheriff Jaime K. del Rosario
to levy on execution in the sum of P25,000.00 with legal interest thereon from 20 July 1967 when Tan made an extrajudicial demand
through a letter. Levy was also ordered for the further sum of P5,000.00 awarded as attorney's fees. On 23 May 1978, PAL filed an
urgent motion to quash the alias writ of execution stating that no return of the writ had as yet been made by Deputy Sheriff Reyes
and that the judgment debt had already been fully satisfied by PAL as evidenced by the cash vouchers signed and receipted by the
server of the writ of execution, Deputy Sheriff Reyes. On 26 May 1978, Special Sheriff del Rosario served a notice of garnishment
on the depository bank of PAL, Far East Bank and Trust Company, Rosario Branch, Binondo, Manila, through its manager and
garnished PAL's deposit in the said bank in the total amount of P64,408.00 as of 16 May 1978. PAL filed the petition for certiorari.
Issue: Whether the payment made to the absconding sheriff by check in his name operate to satisfy the judgment debt.
Held: Under the initial judgment, Amelia Tan was found to have been wronged by PAL. She filed her complaint in 1967. After 10
years of protracted litigation in the Court of First Instance and the Court of Appeals, Ms. Tan won her case. Almost 22 years later,
Ms. Tan has not seen a centavo of what the courts have solemnly declared as rightfully hers. Through absolutely no fault of her
own, Ms. Tan has been deprived of what, technically, she should have been paid from the start, before 1967, without need of her
going to court to enforce her rights. And all because PAL did not issue the checks intended for her, in her name. Under the peculiar
circumstances of the case, the payment to the absconding sheriff by check in his name did not operate as a satisfaction of the
judgment debt. In general, a payment, in order to be effective to discharge an obligation, must be made to the proper person. Article
1240 of the Civil Code provides that "Payment shall be made to the person in whose favor the obligation has been constituted, or
his successor in interest, or any person authorized to receive it." Further, Article 1249 of the Civil Code provides that "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
have been impaired. In the meantime, the action derived from the original obligation shall be held in abeyance." In the absence of
an agreement, either express or implied, payment means the discharge of a debt or obligation in money and unless the parties so
agree, a debtor has no rights, except at his own peril, to substitute something in lieu of cash as medium of payment of his debt.
Consequently, unless authorized to do so by law or by consent of the obligee, a public officer has no authority to accept anything
other than money in payment of an obligation under a judgment being executed. Strictly speaking, the acceptance by the sheriff of
PAL's checks does not, per se, operate as a discharge of the judgment debt. 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. A check, whether a manager's
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. 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 realized.
4 Sesbreno vs. Court of Appeals [GR 89252, 24 May 1993]

Third Division, Feliciano (J): 4 concur
See case entry 10
Facts: On 9 February 1981, Raul Sesbreño made a money market placement in the amount of P300,000.00 with the Philippine
Underwriters Finance Corporation (Philfinance), Cebu Branch; the placement, with a term of 32 days, would mature on 13 March
1981. Philfinance, also on 9 February 1981, issued the following documents to Sesbreno: (a) the Certificate of Confirmation of Sale,
"without recourse," 20496 of 1 Delta Motors Corporation Promissory Note (DMC PN) 2731 for a term of 32 days at 17.0 % per
annum; (b) the Certificate of Securities Delivery Receipt 16587 indicating the sale of DMC PN 2731 to Sesbreno, with the notation
that the said security was in custodianship of Pilipinas Bank, as per Denominated Custodian Receipt (DCR) 10805 dated 9 February
1981; and (c) post-dated checks payable on 13 March 1981 (i.e., the maturity date of Sesbreno's investment), with Sesbreno as
payee, Philfinance as drawer, and Insular Bank of Asia and America as drawee, in the total amount of P304,533.33. On 13 March
1981, Sesbreno sought to encash the post-dated checks issued by Philfinance. However, the checks were dishonored for having
been drawn against insufficient funds. On 26 March 1981, Philfinance delivered to Sesbreno the DCR 10805 issued by Pilipinas
Bank (Pilipinas). On 2 April 1981, Sesbreno approached Ms. Elizabeth de Villa of Pilipinas, Makati Branch, and handed to her a
demand letter informing the bank that his placement with Philfinance in the amount reflected in the DCR 10805 had remained
unpaid and outstanding, and that he in effect was asking for the physical delivery of the underlying promissory note. Sesbreno then
examined the original of the DMC PN 2731 and found: that the security had been issued on 10 April 1980; that it would mature on 6
April 1981; that it had a face value of P2,300,833.33, with Philfinance as "payee" and Delta Motors Corporation (Delta) as "maker;"
and that on face of the promissory note was stamped "NON-NEGOTIABLE." Pilipinas did not deliver the Note, nor any certificate of
participation in respect thereof, to Sesbreno. Sesbreno later made similar demand letters, dated 3 July 1981 and 3 August 1981,
again asking Pilipinas for physical delivery of the original of DMC PN 2731. Pilipinas allegedly referred all of Sesbreno's demand
letters to Philfinance for written instructions, as had been supposedly agreed upon in a "Securities Custodianship Agreement"
between Pilipinas and Philfinance. Philfinance never did provide the appropriate instructions; Pilipinas never released DMC PN
2731, nor any other instrument in respect thereof, to petitioner. Sesbreno also made a written demand on 14 July 1981 upon Delta
for the partial satisfaction of DMC PN 2731, explaining that Philfinance, as payee thereof, had assigned to him said Note to the
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extent of P307,933.33. Delta, however, denied any liability to Sesbreno on the promissory note, and explained in turn that it had
previously agreed with Philfinance to offset its DMC PN 2731 (along with DMC PN 2730) against Philfinance PN 143-A issued in
favor of Delta. In the meantime, Philfinance, on 18 June 1981, was placed under the joint management of the Securities and
Exchange Commission (SEC) and the Central Bank. Pilipinas delivered to the SEC DMC PN 2731, which to date apparently
remains in the custody of the SEC. As Sesbreno had failed to collect his investment and interest thereon, he filed on 28 September
1982 an action for damages with the Regional Trial Court (RTC) of Cebu City, Branch 21, against Delta and Pilipinas. The trial court,
in a decision dated 5 August 1987, dismissed the complaint and counterclaims for lack of merit and for lack of cause of action, with
costs against Sesbreno. Sesbreno appealed to the Court of Appeals (CA GR CV 15195). In a Decision dated 21 March 1989, the
Court of Appeals denied the appeal. Sesbreno moved for reconsideration of the above Decision, without success. Sesbreno filed the
Petition for Review on Certiorari.
Issue: Whether the marking “non-negotiable” in DMC PN 2731 prohibited Philfinance from assigning or transferring the same to
Sesbreno.
Held: The negotiation of a negotiable instrument must be distinguished from the assignment or transfer of an instrument whether
that be negotiable or non-negotiable. 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: "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." Herein,
DMC PN No. 2731, while marked "non-negotiable," was not at the same time stamped "non-transferrable" or "non-assignable." It
contained no stipulation which prohibited Philfinance from assigning or transferring, in whole or in part, that Note. Further, there is
nothing in the letter of agreement dated 10 April 1980 between Delta and Philfinance which can be reasonably construed as a
prohibition upon Philfinance assigning or transferring all or part of DMC PN 2731, before the maturity thereof. It is scarcely
necessary to add that, even had this "Letter of Agreement" set forth an explicit prohibition of transfer upon Philfinance, such a
prohibition cannot be invoked against an assignee or transferee of the Note who parted with valuable consideration in good faith and
without notice of such prohibition. It is not disputed that Sesbreno was such an assignee or transferee.
[The issue whether Delta is liable for the value of the promissory to Sesbreno was resolved through Articles 1279 and 1636 of the
New Civil Code as to compensation, and Article 1285 of the same as to the assignment of creditor's rights. The Court held that
since Sesbreno failed to notify Delta of the assignment of the creditor's (Philfinance) rights at any time before the maturity date of
DMC PN 2731, and because the record is bare of any indication that Philfinance had itself notified Delta of the assignment to
Sesbreno, the Court was compelled to uphold the defense of compensation raised by Delta. The Court, however, held that
Philfinance remained liable to Sesbreno under the terms of the assignment made by Philfinance to Sesbreno. As to the issue of
Pilipinas’ liability to Sesbreno, on the other hand, the Court held that Pilipinas must respond to Sesbreno for damages sustained by
him arising out of its breach of duty. By failing to deliver the Note to Sesbreno as depositor-beneficiary of the thing deposited --
when Pilipinas purported to require and await the instructions of Philfinance, in obvious contravention of its undertaking under the
DCR to effect physical delivery of the Note upon receipt of "written instructions" from Sesbreño -- Pilipinas effectively and unlawfully
deprived Sesbreno of the Note deposited with it. – Civil Law II issues, MVG.]
B. Form and interpretation of negotiable instruments
1. Requisites of negotiability (Sec. 1, NIL)
An instrument which does not comply with the requirements of NIL is a simple contract in writing and is merely in evidence
of such intangible rights as may have been created by the assent of the parties. If, however, it conforms to the
requirements of the NIL, the instrument is itself the contract and not just a mere evidence of rights. It is a mercantile
specialty. 63
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.
a. must be in writing and signed by the maker or drawer
Writing. The word “instrument” implies that which has been put in writing. In order to be negotiable., there must be a
writing of some kind for, if the instrument were not in writing, there would be nothing to be negotiated or passed from
hand to hand.64 Section 191 of the NIL provides that the word “written includes printed, and ‘writing’ includes print.”
The instrument may be printed, in ink or in pencil and it may be written in any material that substitutes paper like
cloth, leather or parchment, or any other substitute of paper. 65
Signed. The signature may be in one’s handwriting, printed, engraved, lithographed or photographed so long as they
are adopted as the signature of the signer. What is important is that the maker or the drawer used what he affixed
as his own signature for authentication. 66 The full name may be written. At least, the surname should appear and,
generally, the signature usually is by writing the signer’s name. But it may consist of mere initials or even numbers.
But, where the name is not signed, the holder must prove that what is written is intended as a signature of the person
sought to be charged. 67 The name may be printed, typewritten, stamped, engraved, photographed or lithographed.
But in such case, it must be shown to have been adopted and used by the party as his signature. 68 The signature of
the maker or drawer is usually written at the bottom right hand corner. The location of the signature is not material. It
63
64
65
Sundiang, Ibid., p. 87; 1 Agbayani, Ibid., p. 119; citing Geary vs. Physics, 5 Bary & Grers (Eng.) 234; Reed vs. Roarle, 14 Tex. 325; 65 Am. Dec. 127.
66
67
1 Agbayani., Ibid., p. 119, citing Palmer vs. Stgephens, 1 Denio (NY) 471, and referring to Note 14 LRA 693 and 22 LRA 372
68
1 Agbayani., Ibid., p. 120; citing Lexington vs. Union National Bank, 75 Miss. 1, 22 So. 291; Weston v. Myers, 33 III. 424; see also Note 7 ALR 672.
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may be at the top, in the middle, or at the bottom. What is important is that it appears therefrom that he person
intended to make it his own.69 It is held sufficient that the signature appears in the body of the note.70
Maker. He is the person who executes the written promise to pay. 71 He is the person who makes a promissory note
and promises to pay the amount stated therein. 72
Drawer. He is the person who executes the written order to pay. 73 He is the person who draws the bill of exchange;
he orders the drawee to pay a sum certain in money. 74
b. must contain an unconditional promise or order to pay a sum certain in money
Promise or Order to pay. The promise in a promissory note is the undertaking made by the maker to pay a sum
certain in money to the payee or the holder. On the other hand, a bill is something more than mere asking of a favor.
It is an instrument demanding right. The “order” in a bill is a command made by the drawer addressed to the drawee
ordering the latter to pay the payee or the holder a sum certain in money. The word “promise” or “order” need not
appear in the instrument to satisfy the requirements of Section 1(b) of the NIL. 75 Any words which are equivalent to
an order or which show the drawer’s will that the money should be paid, are sufficient to make the instrument a bill of
exchange.76
Intent or words needed. There must be an order or promise to pay to make the instrument negotiable. If it is a mere
authorization to pay, and that by its terms the bill gives a discretion to the drawee to pay or not pay, it is not a
negotiable instrument. A mere request to pay is also not a negotiable instrument. On the other hand, when the
instrument contains words of civility or courtesy, it does not make it non-negotiable. Inspite of these words of
courtesy or civility, the bill still contains an order to pay. The words “by paying” are held sufficient to import an order
to pay.77 In a note, the promise to pay must be on the instrument itself, although it is not necessary to us e the word
“promise.” It is enough that (1) the words of equivalent meaning are used, or (2) that the promise is implied with
promissory words contained in the instrument. But the promise to pay cannot be implied from the mere existence of
a debt. Instead of the promise, the following wods may be used: “agree,” “will pay,” “shall pay,” and the like. 78
(1) promise or order to pay must be unconditional
Section 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.
Unconditional. It is not enough that there be a promise or an order. The promise or order must also be
unconditional or absolute. It must not be subject to a condition. 79 An unqualified order or promise to pay is
unconditional within the meaning of NIL though coupled with:
(1) An indication of a particular fund out of which reimbursement is to be made or particular account to be
debited with the amount; or
(2) A statement of the transaction which gives rise to the instrument.
An order or promise to pay out of a particular fund; or an instrument payable upon a contingency (even if the
event happens) are both conditional. 80
(a) reference to transaction (Sec. 3, NIL)
Statement of transaction. Instruments are not issued without any transaction upon which they are based.
The mere fact that the purchase and sale which gives rise to the instrument is stated in the instrument will
not make the promise or order conditional. 81 But where the promise or order is made subject to the terms
and conditions of the transaction stated, then, the instrument is rendered non-negotiable. 82 To destroy the
negotiability of the instrument, the reference to the collateral contract must show that the obligation to pay
is burdened with the condition of the contract. 83
As per contract notes. The appearance of the words “As per contract” on the face of the instrument in
any position does not affect the negotiability of the instrument. 84
Chattel notes. A promissory note given for a chattel and stipulating the at the title to the chattel shall
remain in the vendor-payee until the note is paid, is not conditional. 85
Conditional sales agreement. The fact that a note contains conditional sales agreement does not destroy
its negotiability. 86
Reference to mortgage. The provisions in the mortgage do not affect the negotiability of the instrument it
secures. 87 Thus, where a note otherwise negotiable also contains the words “this note is secured by a
69
1 Agbayani., Ibid., p. 120; citing Lampkin vs. State, 195 Ala. 1 16 So. 575, and other cases; See also note 20 ALR 394
70
1 Agbayani., Ibid., p. 120; citing In RE Donohoe’s Estate (penn.) 115 Atl. 875
71
72
73
74
75
Sundiang, Ibid., p. 88; 1 Agbayani., Ibid., p. 120, referring to Ogden, 5th ed., p. 72
76
77
1 Agbayani., Ibid., pp. 120-121; referring to Hamilton vs. Spottiswood, 4 Exh. 200; Little vs. Slackford, Moody and Malkin, 171; Ruff vs. Webb, 1 Esp.
129, Rev. Rep. 723.
78
79
80
81
82
1 Agbayani, Ibid., pp. 147; citing Post vs. Kinzna Hemlock etc. vs., 171 Pa. 615, 33 Atl 362; Dilliy vs. Van Wie. 6 Wis. 209; Riech vs. Daigle, 17, N.D.
365, 117 N.W. 346
83
1 Agbayani, Ibid., pp. 147-148; citing Powell & Powell vs. Greenleaf & Currier, 104 Vt. 380, 162 Atl. 377
84
1 Agbayani, Ibid., pp. 147-148; citing Brannan, 7th ed., 253, citing many cases
85
1 Agbayani, Ibid., pp. 147-148; citing Brannan, 7th ed., 259, see also Ogden, 5th ed., p. 128. Note 49
86
1 Agbayani, Ibid., pp. 147-148; citing Brannan, 7th ed., 261, citing many cases; see also Ogden, 5th ed., p. 128. Note 49
87
1 Agbayani, Ibid., pp. 147-148; citing Brannan, 7th ed., 220
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mortgage” and the mortgage contains clauses promising to do many acts other than payment of money, it
was held that the note is not rendered non-negotiable. 88 The provision in a mortgage securing a negotiable
promissory note requiring the maker to pay, in addition to the principal and interest, such sums as the
mortgagee may be required to incur for insurance, taxes assessments and charges on the land, is not
made part of the note and does not render it non-negotiable. 89 But such provisions in the note itself will
render the note non-negotiable because of uncertainty of amount 90 or when such provisions become part
of the note, even though they are not in the note itself, the instrument, is also rendered as non-negotiable.
Thus, where the note contains a stipulation that it was secured by a mortgage, and that the payee agreed
to look to the mortgage security for its payment, the mortgage provisions became part of the note and
rendered it non-negotiable. 91 The same is true where the note contains the following: “This note is secured
by a mortgage and subject to the provisions of such a mortgage.” 92
(b) source or payment or account to be debited
Drawee. In bills of exchange, the drawee must be named. The name of the person on whom a bill is drawn
should appear on its face .Otherwise, the instrument would not be negotiable. Thus, an instrument in the
form of a bill but addressed “to ________, Manila, Philippines,” is not negotiable. 93 Still, under Section 14,
the drawee’s name may be omitted and be filled in under implied authority like any other blank. 94 And, an
acceptance may supply the omission of a designation. 95
Fund for reimbursement vis-à-vis- fund for payment. An unqualified order or promise to pay is
unconditional within the meaning of this Act though coupled with an indication of a particular fund out of
which reimbursement is to be made. But an order or promise to pay out of a particular fund is not
unconditional. In the first case, the particular fund indicated is not the direct source of payment. It is only
the source of reimbursement. In the second case, the particular fund indicated is the direct source of
payment. The true distinction seems to be this: in the first there two cases namely: (1) the drawee pays the
payee from his own funds; afterwards, (2) the drawee pays himself from the particular fund indicated. In
the second, however, there is only one act, namely, the drawee pays directly from the particular fund
indicated. In the second, where the payment to the payee is directly from the funds indicated, the payment
is subject to the condition that the funds indicated are sufficient. But the funds indicated may or may not be
sufficient. The order then is conditional. On the other hand, in the first case, where the fund is merely for
the purpose of subsequent reimbursement, the order or promise is not subject to the sufficiency of the
funds. The order or promise is upon the general credit of the drawee or maker. It may be argued that if the
drawer has no money in the hands of the drawee out of which reimbursement could be made, the drawee
may refuse to accept or pay the bill. However, whether a bill of exchange is negotiable or not does not
depend upon the drawee’s willingness or ability to pay. It depends upon the tenor of the terms of the order.
If the bill absolutely requires the drawee to pay, then the order in the bill is unconditional. 96
(2) payable in sum certain in money
Sum certain. A sum is certain within the contemplation of Section 1(b) of the NIL if the amount that is to be
unconditionally paid by the maker or drawee can be determined on the face of the instrument even if it requires
mathematical computation. 97 The amount of money to be paid must be determinable by inspection and must be
stated plainly on the face of the instrument, and, like the denomination of money, must be stated in the body of
the instrument.98
Not payable in goods, services, etc. A bill or note cannot be made payable in goods, wares or merchandise,
or in property, or in labor or service. So also, an instrument is not negotiable if it made payable in bonds,
corporate stock, state paper, scrip, checks, or foreign bills. 99
Money, not necessarily legal tender. Money need not be “legal tender,” an instrument is still negotiable
although the amount to be paid is expressed in currency that is not legal tender so long as it is expressed in
money.100 Under Republic Act 8183, the agreement to pay in foreign currency is valid. 101 The validity and the
negotiable character of the instrument are not affected by the fact that it designates a particular kind of current
money in which payment is to be made. 102 But where the instrument is made payable in the paper or currency
of a particular bank, specifically and absolutely, and without reference to the currency or value of the paper, it is
held not to be for the payment of money and is not negotiable. 103 A bill or note may be made payable in
denominations of foreign money, currency or coins. Thus, where a note is made payable in a country in the
money or coins of another country, which money or coins have a value fixed by the law or under the authority of
the law of the country where the note is payable and which value can, but a simple mathematical calculation, be
expressed in the value of the lawful money of the latter country, such note is negotiable. 104 The instrument
however, should express the specific denomination of money when it is payable in the money of a foreign
country in order that the courts may be able to ascertain its equivalent value; otherwise, it is not negotiable. 105
Reasons for requirement that instrument be paid in money. The real reason for the requirement that
negotiable instruments must be payable in money obviously is that money is the one standard of value in actual
business. All other commodities may rise and fall in value but in theory, at least, money always measures this
rise and fall and remains the same. A chattel which is used as means of payment may fluctuate in value. 106
Other acts which do not effect negotiability . If the obligor like the maker is given the option to deliver
something in lieu of money the instrument is not negotiable. If the instrument gives the holder an election to
88
1 Agbayani, Ibid., pp. 147-148; citing Williamson vs. Graig, 204 la. 555, 115 NW 664, approved in 26 Mich. LR. 436, stating that the case represents the
weight of authority
89
1 Agbayani, Ibid., pp. 147-148; citing Barker vs. Sartori, 66 Wash. 260, 119 Pac. 611
90
1 Agbayani, Ibid., pp. 147-148; citing Des Moines Sav. Bank vs. Arthur, 163 LA 205, 143 NW 556
91
1 Agbayani, Ibid., pp. 147-148; citing Allison vs. Hollenblack, 138 LA 479, 114 NW 1959
92
1 Agbayani, Ibid., pp. 147-148; citing Musto vs. Grosjean, et al., 208 Cal. 453, 281 Pac. 1022
93
1 Agbayani, Ibid., p. 134; citing Watrons vs. Halbrook, 39 Tex. 573.
94
1 Agbayani, Ibid., p. 134; referring to 10 CJS 582
95
1 Agbayani, Ibid., p. 134; citing Walton vs. Williams, 44 Ala. 347.
96
1 Agbayani, Ibid., pp. 143-145
97
98
99
1 Agbayani., Ibid., p. 125; referring to 10 CJS 541
100
PNB vs. Zulueta, 101 Phil. 1071
101
102
1 Agbayani., Ibid., p. 129; citing subpar (e), Sec. 6, NIL; and referring to 10 CJS 542
103
1 Agbayani., Ibid., p. 129; citing Milikan vs. Security Trust Company, 178 Ind. 307, 118 NE 568
104
1 Agbayani., Ibid., pp. 129-130, referring to 10 CJS 544, and citing Inciti vs. Ferante, 12 NJ Misc. 840, 175 Atl.
105
1 Agbayani., Ibid., p. 130, citing Thompson vs. Sloan, 23 Wend (NY), 71
106
1 Agbayani., Ibid., p. 125; citing Norton on Bills and Notes, 4th ed., 66.
B-10
require something to be done in lieu of payment of money, the instrument is still negotiable. 107 If some act
besides payment of money is promised or ordered, the instrument becomes non-negotiable. The following
additional acts, however, do not affect negotiability:
(a) authorizes the sale of collateral securities on default,
(b) authorizes confession of judgment on default,
(c) waives the benefit of law intended to protect the debtor, and
(d) allows the creditor the option to require something in lieu of money. 108
(a) provisions which do not affect certainty of sum payable
Section 2. Certainty as to sum; what constitutes. -- 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
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.
(b) payment of interest (Sec. 2, NIL)
The fact that the sum payable is to be paid with interest does not render the sum uncertain. The amount
due can be easily be computed. 109 When the interest is stipulated but not specified, the interest shall be
the legal rate, which is 12% for loans or forbearance of money. When interest is not stipulated, legal
interest will be paid when the debtor incurs in delay, as per Article 2209 of the New Civil Code. A debtor
incurs in delay from the time the obligee judicially or extrajudicially demands from him the payment of the
instrument as per Article 1169, NCC. Interest due shall earn legal interest from the time it is judicially
demanded, although the instrument may be silent upon this point. 110
Escalation clause and deescalation clause. An agreement pertaining to a loan or forbearance of money,
goods or credits may stipulate that the rate of interest agreed upon may be increased in the event that the
applicable maximum rate of interest is increased by law or by the Monetary Board. Deescalation clause is
a stipulation in the agreement that the rate of interest agreed upon shall be reduced if the maximum rate of
interest is decreased by law or by the Monetary Board. The escalation clause is valid id there is also a
deescalation clause. 111
(c) payment by installments (Sec. 2, NIL)
The dates of each installment must be fixed or at least determinable and the amount to be paid for each
installment must be stated. 112 An instrument containing a stipulation that the sum payable is paid by stated
installments would not thereby be rendered non-negotiable. The installments, however, (1) must be stated
and (2) the maturity of each installment must be fixed or determinable. This last qualification is required in
order to comply with the requisite that the instrument, if not payable on demand, must be payable at a
fixed or determinable future time. 113
(d) acceleration clause (Sec. 2, NIL)
An instrument containing a stipulation of stated installments with acceleration clause would not thereby be
rendered as non-negotiable. The acceleration clause is called in such a way because it hastens the
payment of the whole note.114
Acceleration Clauses (negotiable). The negotiability of the instrument is not affected even if it is to be
paid by stated installments, with a provision that, upon default in payment of any installment or of interest,
the whole shall become due. 115
Extension Clauses (negotiable). An instrument is payable at a definite time if by its terms it is payable at
a definite time subject to extension at the option of the holder, or to extension to a further definite time at
the option of the maker or acceptor or automatically upon or after a specified act or event. 116
Insecurity Clauses (non-negotiable). Provisions in the contract which allow the holder to accelerate
payment "if he deems himself insecure." The instrument is rendered non-negotiable. 117
(e) payment with exchange (Sec. 2, NIL)
An instrument with a stipulation that it is to be paid with exchange would not thereby be rendered non-
negotiable. This is because “while the rate of exchange is not always the same and while it is technically
true that resort must be had to extrinsic evidence to ascertain what it is, yet the current rate of exchange
between two places at a particular date is a matter of common commercial knowledge, or at least easily
ascertained by any one so that the parties can always, without difficulty, ascertain the exact amount
necessary to discharge the paper. 118
107
108
109
110
111
1 Agbayani, Ibid., pp. 137-138; citing Banco Filipino Savings & Mortgage Bank vs. Navarro, 28 July 1987, 152 SCRA 346, 355; citing in turn Section 7-
A, UL as added by Presidential Decree 1684, promulgated 17 March 1980
112
113
114
115
116
117
118
1 Agbayani, Ibid., pp. 139-140; citing Hasting vs. Thompson, 21 LRA 178
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Exchange. Exchange is the difference in value of the same amount of money in different countries. 119 The
exchange may be at the current rate or at a fixed rate. In the case of the latter, there is really no question
of uncertainty as to the amount because the rate is fixed. 120
Application. The provision on payment with exchange naturally applies only to instruments drawn in one
country and payable in another. Where an instrument is drawn and payable in the same country, there can
be no exchange, so a provision for payment of exchange may be disregarded. 121
(f) payment of attorney's fees (Sec. 2, NIL)
An instrument with a stipulation with costs and attorney’s fees would not thereby be rendered non-
negotiable. An instrument may this stipulate that “costs of collection and/or attorney’s fees shall be paid”
by the debtor in addition to the principal in case the instrument shall not be paid at maturity. The legality of
such a stipulation is expressly recognized by the NIL, and impliedly by the New Civil Code, as per Article
2208. 122 Although such a stipulation will make the sum payable after maturity uncertain, it will not affect
the certainty of the sum payable at maturity and, therefore, will not affect the negotiability of the instrument
in which it is stipulated. While attorney’s fees may be legally stipulated, they must be reasonable as per
Article 2208, NCC. The written stipulation shall control the amount to be paid, unless found by the court to
be unconscionable or unreasonable. Where the court finds the stipulated amount unconscionable or
unreasonable, it can ignore it and limit the recovery to reasonable compensation. 123
!!! Case(s)
5 Metropolitan Bank & Trust Company vs. CA, Feb. 18, 1991, 194 SCRA 169
c. payable on demand or at a fixed or determinable future time
(1) when payable on demand (Sec. 7, NIL)
Section 7. When payable on demand. -- An instrument is payable on demand --
a. When it is expressed to be so 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 overdue, it is, as regards the person so
issuing, accepting, or indorsing it, payable on demand.
On demand, at sight, or on presentation. Instead of “on demand” the words “on sight” or “on presentation”
may be used. The words “at sight” however are not ordinarily used in promissory notes. 124
No time for payment expressed. Where a promissory note expresses no time for payment, it is deemed
payable on demand. 125 Where blank for time for payment is unfilled, it may still be payable on demand. 126
However, it may be properly considered an incomplete instrument and may fall under the provision of Section
14 to 16, depending upon how the instrument is delivered. Moreover, a note payable “on ………………” has
been held payable on demand. 127
Last paragraph, Section 7; Instrument on demand only as to parties. It must be remembered that after the
date of maturity, the instrument can no longer be negotiated as to make the parties who acquire the instrument
after the date of maturity holders in due course because they become holders thereof with notice that it is
already overdue, as this can be determined from the face of the instrument. The last paragraph of section 7
means that the instrument is payable on demand only as between immediate parties. 128
(2) when payable at determinable future time (Sec. 4, NIL)
Section 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.
After sight. After sight means after the drawee has seen the instrument upon presentment for acceptance. 129
The bill is payable after the period stated from the time the bill was presented for acceptance, whether it has
been accepted or not. The period starts from the time the drawee “sees the bill at the time it is exhibited to him
for acceptance.130
On or before a fixed or determinable time. An instrument is payable at a determinable future time, within the
meaning of this Act, which is expressed to be payable on or before a fixed or determinable future time specified
therein. The maker has the option to pay on the specified date or before said date. 131
119
1 Agbayani, Ibid., p. 140; citing Negotiable Instruments, Norton, p. 68
120
121
1 Agbayani, Ibid., p. 140; citing Studebaker Bros. Rfg. Co. vs. David, 119 SW 532
122
123
124
125
1 Agbayani, Ibid., p. 162; citing Ponce de Leon vs. Rehabilitation Finance Corporation, et al., L-24571, 18 December 1970, 36 SCRA 289, 306-307
126
1 Agbayani, Ibid., p. 162; citing National Bank vs. 99 NIL. 13; 123 Atl. 98
127
1 Agbayani, Ibid., p. 162; citing Chelsea Exch. Bank vs. Warner, 195 NY Supp. 419
128
129
130
131
1 Agbayani, Ibid., p. 150; citing Walker vs. Woolen, 54 Ind., 164; Charlton vs. Reed, 61 Iowa 116, 16 NW 64, 47 Am. Rep. 808; Ernst vs. Stechman, 74
Pa. St. 13, 15 Am. Rep. 542. See also Note 11 LRA 748.
B-12
Acceleration notes. "There are certain notes containing acceleration provisions which, for convenience, we
may call acceleration notes. These provisions make it possible for the maker to pay the instrument at an earlier
date or possible for the holder to require payment of the instrument at an earlier date. An illustration of the first
class is the so-called “payable on or before a certain date” note. Illustrations of the latter class are those
instruments: (1) that contain acceleration clauses on the maker's default in payment of installments or of
interest, or on the happening of an extrinsic event; (2) or contain, in notes secured by collateral, a provision that
the maker shall supply additional collateral in case of depreciation in the value of the original deposit, with the
holder's right to declare the note due immediately on failure to make good the depreciation; or (3) contain
provisions for acceleration where holder deems himself insecure." 132 The first is covered by paragraph (b) of
Section 2.
Conflict of opinion as to the second. As to notes providing as to attached collateral that if it depreciates in
value, the maker must, on demand, deliver additional security or else the note shall mature at once, there is a
conflict of authority. 133 Thus:
(1) Those who maintain that such a stipulation renders the instrument non-negotiable argue that the time for
payment becomes uncertain and indefinite. "If the maker fails when demanded to furnish additional
security to the satisfaction of the holder, the note matures at once. It is argued that the maturity of the note
is to be accelerated by the failure of the maker to do something in addition to the payment of money and
both contingencies are made to depend upon something over which he has not the absolute control. It is
within the power of the holder by refusing assent to what the maker has done to make the note due at any
time. If the holder is not satisfied with the additional security, the note matures at once, and thus, the time
at which it may mature would depend upon the time at which the holder declared himself dissatisfied with
the security delivered by the maker. The effect of such stipulation, therefore, is to leave the time when
payable uncertain and indefinite." 134
(2) Those who maintain that the stipulation in question does not render the instrument containing it non-
negotiable argue "that from the standpoint of expediency as encouraging circulation and of business
custom on account of their common acceptance by the commercial world, such clauses should be
interpreted as not affecting negotiability." 135 This appears to be the better view.
Conflict of opinion also as to third. As to notes containing provisions for acceleration where the holder
deems himself insecure, there is a conflict of authority. 136 Thus:
(1) It has been held that a note is rendered non-negotiable where it is payable at a fixed future time, but with
an option on the part of the holder to declare it due and payable before maturity, whenever he deems it
insecure. 137
(2) However, Brannan, in commenting on this, states: “It is submitted that these cases holding an instrument
payable at a fixed time but accelerable at the option of the payee or holder non-negotiable are directly
contrary to the plain meaning of this section. Such instruments are certainly payable ‘on or before a fixed x
x x time specified therein', and to hold them non-negotiable is certainly a spurious construction of the Act.
Under a proper interpretation, these cases should be overruled.’” 138 This appears to be the better view.
On the occurrence of a specified event. It is essential that the specified event must be certain to happen
although the time of happening is uncertain. If the even specified is not certain to happen, then it is a condition,
and the instrument would be rendered non-negotiable. 139
After the occurrence of a specified event. An instrument is payable at a determinable future time, within the
meaning of this Act, which is expressed to be payable at a fixed period after the occurrence of a specified
event, which is certain to happen, though the time of happening be uncertain. It is to be noted that the word
used in the law is “after” not “before” When the word used is “before”, the date of maturity of the instrument can
be determined only after the note has become overdue. Consequently the time for payment is uncertain. 140
Payable upon a contingency, not negotiable. This refers to a condition such as marriage, the election of a
candidate, the graduation of a student, or the passing by a student of the bar examinations. Although there is a
fixed period after a specified event, but the event is not certain to happen. Hence, the promise is unconditional.
Even is the event happen, the happening of the contingency or condition does not cure the defect. 141
d. payable to order or bearer
Order or bearer. An instrument is not negotiable unless made payable to a person or his “order” or to “bearer” or
unless words of similar or equivalent import are used such as “assigns” or “assignees,” or “holder.” 142 Thus the word
“on return of this certificate properly indorsed” imply that it is to be indorsed and therefore payable to order within the
NIL.143 Where the instrument is payable only to a specified person, it is not payable to order, and is thus non-
negotiable.144 Where the instrument is payable to a specified person or his agent, it remains to be payable to a
specified person, and is thus non-negotiable. The reason is that a collector or an agent is the same as the principal.
The agent or collector is merely taking the place of the principal. Consequently, the instrument is actually payable
only to a specified person through his agent or collector. 145 Where the word “possessor”, instead of “bearer”, is used,
the word “possessor” is equivalent to the word “bearer.” 146
(1) when payable to bearer (Sec. 9, NIL)
Section 9. When payable to bearer. -- The instrument is payable to bearer --
a. When it is expressed to be so payable; or
b. When it is payable to a person named therein or bearer; or
132
1 Agbayani, Ibid., p. 150; citing Ogden, 5th ed., p. 86
133
1 Agbayani, Ibid., p. 150; referring to Ogden, 5th ed., p. 88
134
1 Agbayani, Ibid., p. 151; citing Ogden, 5th ed., p. 88-89; Continental Bank etc. Co. vs. Baker, 132 La. 544, 61 So. 575
135
1 Agbayani, Ibid., p. 151; citing Ogden, 5th ed., p. 89; See Note 72, ALR 268
136
137
1 Agbayani, Ibid., p. 151; citing Brannan, 7th ed., 275
138
139
140
141
142
1 Agbayani, Ibid., p. 133; referring to10 CJS 574; Wilson Country vs. Third National Bank of Nashville, 103 US 770, L. Ed., 485
143
1 Agbayani, Ibid., p. 133; referring to Felton vs. Commercial National Bank, 177 NE 52.
144
145
146
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c. When it is payable to the order of a fictitious or non-existing 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.
(a) rule when instrument is payable to a fictitious person
Requisites. In general, there are two requisites:

1. the payee named must be fictitious or non-existent
2. the one making the instrument so payable must know him to be fictitious or non-existing.
This provision of the law has been a prolific source of litigation on the question as to:
(1) when the paper is payable to a fictitious or non-existing person; and
(2) when "such fact is known to the person making it so payable" that is, who is "such person making it
so payable."147
Meaning of "fictitious person." The words "fictitious person" are not limited to persons having no real
existence. 148 An existing person may be considered a fictitious payee, depending upon the intention of the
one making or drawing the instrument. The words "fictitious person" mean to be a person who has no right
to the instrument because the drawer or the maker of it so intended, and, therefore, it does not matter
whether the name of the payee used by the drawer or maker be that of one living or dead, or one who
never existed. 149 The name is fictitious when it is feigned or pretended and a non-existent person is one
who does not exist in the sense that he was not intended to be the payee by the drawer. 150
Existing payee intended to receive proceeds; not payable to bearer. Negotiable paper made payable
to the name of an existing person known or believed by the maker or drawer to be existing, with intent that
he should receive it or its proceeds, or that it be paid to him or upon his indorsement, is not payable to a
fictitious payee or to bearer, although as a matter of fact such person has no interest in the paper and it
was procured by the fraud of a third person or of the maker's or drawer's employee or agent whose
knowledge or intent is not imputable to the principal or the employer, and cashed by the person having
possession upon the forged indorsement of the payee. 151 Further, the want of interest in the payee is not
the controlling consideration in determining whether an instrument is payable to bearer, as payable to a
fictitious person; and although a particular payee has in fact no interest in the instrument, if the drawer or
the maker intended that he should have such interest and that such instrument be paid to him or upon his
indorsement, although the payee has in fact no such interest, the paper is not payable to a fictitious
person, and must bear the genuine indorsement of such payee before it can be validly transferred. 152
Existing payee not intended to receive proceeds; payable to bearer. Although a person bearing the
name by which the payee is designated in the paper is in actual existence, the paper is payable to a
fictitious payee and by legal intendment to bearer, where the person making or drawing it, or his agent or
employee whose knowledge or intent is imputable to the principal or the employer, does not intend that he
shall receive the same or its proceeds, or that it be paid to him or upon his indorsement. It follows that the
mere fact that the payee named was an existing person does not preclude the application of the rule as to
fictitious payee, where, although the existence of the payee was known to or believed by the maker, he,
the maker, did not intend that he should receive the paper or have an interest therein. Thus, an existing
payee may be a fictitious payee. 153 It is the intention of the drawer that the payee designated in the paper
should not receive the same or its proceeds, and not the circumstance that such person was not in fact
entitled to the paper payable to a fictitious payee. Consequently, although the payees designated in the
paper are in fact entitled to the paper or its proceeds, the paper is payable to fictitious persons if the maker
intends that they should not have interest in the paper or its proceeds. 154
Non-existing payee, or one without interest, but believed existing or with interest, and intended to
receive proceeds; not payable to bearer. Where the instrument is made payable to the name of a non-
existing person, or of a person having no interest in the transaction, but the maker believes tha such
person exists and has an interest in the transaction and intends that he shall receive the same or its
proceeds, it is not payable to a fictitious person or to bearer, and the negotiation of such paper under the
forged indorsement of the name designated thereon as the payee vests in the purchaser no right to
enforce the same as against the maker or the drawer. Thus, just as an actually existing person may be a
fictitious payee, so a non-existing person may be a real person, within the meaning of this rule, where he is
believed to exist and is intended to receive the instrument. 155
Non-existing payee, or one without interest, known or believed non-existing not intended to
receive proceeds; payable to bearer. An instrument payable to the name of a non-existing person, or of
a person having no interest in the transaction, and known or believed to be non-existing, and which is not
intended to be paid to a particular person, is an instrument payable to a fictitious person and by legal
intendment to bearer. 156
Person to whom the fictitious or non-existing character of the payee must be known. Of course, the
drawer drawing a bill or the maker making a note is the person to whom the fictitious or non-existing
character of the payee must be known. However, where the instrument is drawn or made by an agent or
prepared by an employee with the maker or drawer signing only, the question arises as to whose intent
should control. The person who makes the instrument payable to the payee is the signer, after all create
the instrument and should determine who owns it. 157
Where agent has no authority to execute instrument. If the agent has no authority to execute the
instrument himself on behalf of his principal, the knowledge of the employer or principal is controlling, and
if he, the employer or principal, "has no knowledge of the fictitious or non-existing character of the payee,
147
1 Agbayani, Ibid., p. 169; referring to 118 ALR 17
148
1 Agbayani, Ibid., p. 169; citing US vs. Chase National Bank, 250 Fed. 10
149
1 Agbayani, Ibid., p. 169; citing Snyder vs., Co. Exch. 70 Atl. 876
150
1 Agbayani, Ibid., p. 169; citing Commonwealth vs. Globe Indemnity CO., 1323 Pa. 261, 185 Atl. 796
151
1 Agbayani, Ibid., p. 170; citing 118 ALR 21-22, citing many cases
152
1 Agbayani, Ibid., p. 170; citing 118 ALR 24, citing in turn Rogers vs. Ware, 2 Neb. 29
153
1 Agbayani, Ibid., p. 170; citing 118 ALR 25, citing many cases
154
1 Agbayani, Ibid., p. 171; citing 118 ALR 29, citing in turn Bourne vs. Mayland Cas. Co., supra
155
1 Agbayani, Ibid., p. 171; citing 118 ALR 29, citing many cases
156
1 Agbayani, Ibid., pp. 171-172; citing 118 ALR 35, citing many cases
157
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the knowledge of the agent or the employee will not avail to call into application the rule as to fictitious
payees" and the instrument will not be considered payable to bearer. 158 Where, however, the agent or
employee is authorized to make or draw the paper, the knowledge or intention of such an employee or
agent may be controlling, and if he knows the payee to be fictitious or non-existing, the instrument, may be
considered as payable to bearer. 159
Name of payee not name of person. A check drawn payable to the order of “cash” is a check payable to
bearer, and the bank may pay it to the person presenting it for payment without the drawer’s indorsement.
160
Only or last indorsement in blank. The instrument is payable to bearer where (1) there is only one
indorsement and that indorsement is in blank, or (2) there are several indorsements but the last
indorsement is in blank. 161
(2) when payable to order
Section 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 therein
with reasonable certainty.
There are only two ways by which an instrument can be made payable to order under Section 8, NIL. The
instrument can either be payable to the order of a specified person or to a specified person or his order. 162
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. 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. 163
Necessity of naming payee. The law requires that the payee must be named or otherwise indicated with
reasonable certainty. The payee of instrument payable to order must be a person in being, natural or legal, and
ascertained at the time of issue. 164 If there is no payee, where the instrument is payable to order, no one could
indorse the instrument. Consequently, it is useless to consider it negotiable. 165 Where blank for the name of
payee is unfilled, it is not payable to order. However, it may be considered an incomplete instrument and may
be covered by Section 13, 14 and 15, depending upon how it is delivered. However, it has been held that any
bearer who came by it regularly can no longer fill the blank and recover thereon. 166
(b) to whose order the instrument may be made payable
A note may be made and a bill may be drawn to the order of

1. a payee who is not the maker
2. a payee who is not the drawer
3. a payee who is not the drawee
4. the drawer as payee
5. the maker as payee
6. the drawee as payee
7. two or more payees jointly
8. one or some of several payees
9. the holder of an office for the time being. 167
!!! Case(s)
6 Ang Tek Lian vs. CA, 87 Phil. 383
e. omissions that do not affect negotiability (Sec. 6, NIL)
Section 6. Omission; 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
c. Does not specify the place where it is drawn or the place where it is payable; or
d. Bears a seal; or
158
1 Agbayani, Ibid., p. 172; referring to 118 ALR 35, citing in turn Contintental Nat. Bank vs. Olney Nat. Bank, 33 F. (2d) 437
159
1 Agbayani, Ibid., p. 172; referring to 118 ALR 35, citing in turn Goodyear Tire etc. vs. Wells Fargo etc. O *2d), 483 and other cases.
160
1 Agbayani, Ibid., p. 173; citing Ang Tek Lian vs. Court of Appeals, 48 OG No. 1, p. 23, 87 Phil. 383
161
162
Sundiang, Ibid., p. 95; 1 Agbayani, Ibid., p. 164
163
1 Agbayani, Ibid., p. 164; citing Salas vs. Court of Appeas, 22 January 1990, 181 SCRA 296
164
1 Agbayani, Ibid., pp. 164-165; citing Wayman vs. Torreyson, 4 Nev. 124; US vs. Coffeyville First National Bank, 82 Fed. 410; New vs. Walker, 108 nd.
365, 9 NE 386, 58 Am. Rep 40; Eddy vs. Bond, 19 Me. 461, 36 Am. Dec. 767
165
166
1 Agbayani, Ibid., p. 166; citing Tower vs. Stanley, 220 Mass. 429, 107 NE 1010.
167
B-15
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.
Omission of date. Even where the instrument is not dated, still the instrument is not rendered non-negotiable.
There are, however, cases where the date is necessary to fix the date of maturity. 168
Omission of value. Usually, all that is stated in the instrument is that it is being issued for “value received” without
specifying what the value is. Nevertheless, even where the value given is not specified, still the instrument is not
rendered non-negotiable. As a matter of fact, it is not even necessary to state that the value has been received. The
reason is that consideration is presumed, as per Section 24, NIL. 169
Omission of place. Even where the places where the bill was drawn and where payable are not stated, still the
instrument is not rendered non-negotiable. 170
Bears seal. At common law, a sealed instrument is rendered non-negotiable and becomes subject to the rule
governing contracts under seal. Under the NIL, that is no longer true. Hence, even if the instrument is sealed, that
fact alone will not make it non-negotiable. 171
Particular kind of current money. Even if the money in which the instrument is to be payable is not legal tender,
provided that it is current money or foreign money which has a fixed value in relation to the money of the country in
which the instrument is payable, still the negotiability of the instrument is not affected, as the instrument would still be
considered payable in money. 172
Non-alteration and non-repeal of any statute requiring the nature of the consideration stated in the
instrument. Where a statute requires that a particular contract specify the value given, the value given under such
contract must be specified. There seems, however, to be no statute of this kind in the Philippines. 173
f. additional provisions not affecting negotiability (Sec. 5, NIL)
Section 5. Additional provision 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.
Test of negotiability. The test of negotiability is whether the promise would give rise to a cause of action for breach
of contract if the additional act is not done. If it does, the instrument is rendered non-negotiable. 174
Promise to furnish additional security. A promise of the maker to furnish additional collateral will render the note
non-negotiable, as that would be an additional act to the promise to pay money. However, they are to be
distinguished from those instruments in which the holder may demand collateral and, failure to furnish it accelerates
the instrument which are clearly negotiable, being merely accelerable on the non-performance of an optional act. 175
(1) sale of collateral securities
Sometimes the obligation arising from the transaction which gives rise to the instrument is secured by a
mortgage or a pledge. When the note contains an act to be performed, after the date of maturity when the
instrument ceases to be negotiable in full commercial sense, in the addition to the payment of money, the
instrument is still negotiable. Before the date of maturity, no additional act is to be performed except the
payment of money. Hence, before and until the date of maturity, the promise to pay is to pay money only. 176 But
a stipulation, authorizing sale of collateral securities even before the date of maturity, would render the
instrument non-negotiable. Thus, 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 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. 177
(2) confession of judgment
As additional act. The confession of judgment is an additional act, and the act is to be performed after the date
of maturity when the instrument ceases to be negotiable in the full commercial sense. 178 A note which contains a
provision authorizing confession of judgment at any time thereafter, whether due or not, is not negotiable. 179 A
power of attorney confessing judgment at any time before maturity renders a note non-negotiable. 180 A
provision authorizing confession of judgment “before, at or after maturity” renders the instrument non-
negotiable. 181
168
1 Agbayani, Ibid., p. 160; referring to Section 13, NIL
169
170
171
1 Agbayani, Ibid., p. 160; citing Section 6(d)
172
1 Agbayani, Ibid., pp. 160-161; citing Section 6(e)
173
174
175
1 Agbayani, Ibid., p. 154; referring to Brannan, 7th ed., 287
176
177
1 Agbayani, Ibid., p. 155; citing Kimpton vs. Studebaker Bros. Co., 94 Pac. 1039
178
179
180
1 Agbayani, Ibid., p. 157; citing First National Bank vs. Runell, 124 Tenn. 618, 139 SW 734
181
1 Agbayani, Ibid., p. 157; citing Crothers vs. National Bank, 158 Ind., 487, 149 Atl. 270
B-16
Effect of confession of judgment in the Philippines. Confessions of judgment have been declared void “as
against public policy” (1) because they enlarge the field of fraud; (2) because under this instrument, the
promissory bargains away his right to a day in court; and (3) because the effect of the instrument is to strike
down the right of appeal accorded by statute. 182 And the mere fact that under Section 5(b), authorization of
confession of judgment is allowed, does not validate such kind of stipulation in the Philippines, as under the last
paragraph of the same section, nothing in the section “shall validate any provision or stipulation otherwise
illegal.” 183
Kinds as per common law. In common law, there are two kinds of judgments by confession” (1) judgment by
cognovit actionem, and (2) by confession relicta verificatione. 184 The term “cognivit” is often used
interchangeably with the term “confession of judgment” or “judgment notes” but technically this is incorrect since
“cognovit” means more than a warrant of attorney, as it also covers the judgment itself. 185
1. Cognovit actionem is a written confession of an action by a defendant, subscribed, but not sealed, and
irrevocably authorizing any attorney of any court of record to confess judgment and issue execution
usually for a sum named. It is given in order to save expense and different from a warrant of attorney
which is given to an expressly designated attorney before commencement of any action and is under seal.
186
2. Confession relicta verificatione is a confession of judgment made after plea is pleaded, such as
congnovit acctionem, accompanied by a withdrawal of the plea.
3. Warrant of attorney is an instrument in writing address to one or more attorneys named therein,
authorizing them, generally to appear in any court, or in some specified court on behalf of the person
giving it, and to confess judgment in favor of some particular person therein named in an action of debt. 187
(3) waiver of benefit
Benefits intended for the advantage or protection of the obligor are the rights to (1) a presentment for payment,
(2) notice of dishonor, and (3) protest. All of these may be waived. Provisions intended merely to prevent the
discharge of secondary parties by extensions of time and not alter the specified date of maturity, unless there is
an express agreement between maker and holder for such an extension subsequent to the execution of the
note, fall within Section 5(c), NIL and do not impair the negotiability of the instrument. 188
Election of holder to require some other act. Even if there is an additional act, the instrument still remains
negotiable provided that the right to choose between payment of money or the performance of the additional act is in
the hands of the holder. 189
!!! Case(s)
7 Philippine National Bank vs. Manila Oil Refining and By Products Company, 43 Phil. 445
2. Rules to be followed interpreting negotiable instruments (Sec. 17, NIL)
Section 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 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.
Sum payable expressed in words and figures. When is disparity as to the amount in words and in figures at the
margin, the words prevail over the figures at the margin. The figures in the margin do not form part of the instrument and
are simply for convenience or reference, 190 and that it is easier to change the figures or to commit mistake in regards to
them than when the sum is written out in words. But when the words are ambiguous or uncertain, reference may be had
to the figures to fix the amount. 191
Payment of interest. This applies to instruments where interest is stipulated but the date when interest begins to be paid
is not specified. A note which reads as "with interest at ____%, from____" will earn interest from the date of the note, or
the date its issue, at the legal rate. This is one case where the date is necessary to determine when interest is to run. 192
Instrument not dated. This is different from Section 11. Under said section, the date of the instrument, if dated, will be
presumed to be its true date. However, the presumption is prima facie, or rebuttable, between the immediate parties (but
not against holders in due course). Proof may be adduced to show a different date as the true date of the issue,
acceptance, or indorsement. Under Section 17, however, the instrument is not dated. In such a case, the date of its issue
182
1 Agbayani, Ibid., p. 157; citing PNB vs. Manila Oil and Refining, etc. 43 Phil. 444, 460
183
184
1 Agbayani, Ibid., p. 156; citing PNB vs. Manila Oil & Refining etc. Co., 43 Phil 444, 460
185
1 Agbayani, Ibid., p. 156; citing Ogden, 5th ed., 94
186
1 Agbayani, Ibid., p. 156; citing Bouvier Inst. 3229
187
1 Agbayani, Ibid., p. 156; referring to Treat vs. Tolman, 113 F. 892
188
1 Agbayani, Ibid., pp. 157-158; citing Brannan, 7th ed. 292
189
190
1 Agbayani, Ibid., p. 191, citing Smith vs Smith, 53 Am. Dec. 652
191
192
B-17
will be considered its date. And in a case, it was held that an undated acceptance of an undated bill of exchange is
payable on demand and will be considered to be dated as of the time it was executed. 193
Conflict between written and printed provisions. Where there is conflict between written and printed provisions, the
handwritten words will prevail. The reason in the rule is that the written words are deemed to express the true intention of
the maker because they are written by himself and printed forms are printed without any particular contract in view. 194
Capacity of party signing not clear. Usually, the signature of the maker or drawer is at the lower right hand
corner of the face of the instrument, that of the indorsers at the back of the instrument; and that of the acceptor across the
face of the instrument. However, there may be cases where it is not clear in what capacity a person signing intended to
sign. 195 Hence, (1) One who signed in the place the maker's name is not an indorser. Section. 17 (f) applies only. to cases
of doubt arising out of the location of the signature; 196and (2) where a note reading "we promise to pay" and stating "the
maker and indorser each hereby waive" various privileges was signed by the maker, followed by the names of twenty
persons on the face of the instrument, it was held that these persons were liable indorsers, and indorsements may be
written on the face of instruments. 197
Two or more persons signing. Where the note used the words “I promise” and signed by more than one person, said
persons are solidarily liable for the note. In other words, the holder of the instrument can collect the amount of the
instrument from any of the persons signing, i.e. co-makers. However, where the note used the words “we promise” and
signed in the same manner, the makers would only be jointly liable. In this jurisdiction, the word “jointly” when used by
itself in a judgment rendered in English, is equivalent to the word “mancomunadamente.” 198
!!! Case(s)
8 Republic Planters Bank vs. CA, 216 SCRA 738
9 Sps. Evangelista vs. Mercator Finance Corp., et. al., 21 August 2003
---------------------------------------------------------------------CASE(S)---------------------------------------------------------------
5 Metropolitan Bank & Trust Company vs. Court of Appeals [GR 88866, 18 February 1991]
First Division, Cruz (J): 4 concur
Facts: The Metropolitan Bank and Trust Co. (MetroBank) 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 Lucia
Castillo, Magno Castillo and Gloria Castillo as its principal officers. In January 1979, a certain Eduardo Gomez opened an account
with Golden Savings and deposited over a period of 2 months 38 treasury warrants with a total value of P1,755,228.37. They were
all drawn by the Philippine Fish Marketing Authority and purportedly signed by its General Manager and counter-signed by its
Auditor. 6 of these were directly payable to Gomez while the others appeared to have been indorsed by their respective payees,
followed by Gomez as second indorser. On various dates between June 25 and July 16, 1979, all these warrants were subsequently
indorsed by Gloria Castillo as Cashier of Golden Savings and deposited to its Savings Account 2498 in the Metrobank branch in
Calapan, Mindoro. They were then sent for clearing by the branch office to the principal office of Metrobank, which forwarded them
to the Bureau of Treasury for special clearing. More than 2 weeks after the deposits, Gloria Castillo went to the Calapan branch
several times to ask whether the warrants had been cleared. She was told to wait. Accordingly, Gomez was meanwhile not allowed
to withdraw from his account. Later, however, "exasperated" over Gloria's repeated inquiries and also as an accommodation for a
"valued client," MetroBank says it finally decided to allow Golden Savings to withdraw from the proceeds of the warrants. The first
withdrawal was made on 9 July 1979, in the amount of P508,000.00, the second on 13 July 1979, in the amount of P310,000.00,
and the third on 16 July 1979, in the amount of P150,000.00. The total withdrawal was P968,000.00. In turn, Golden Savings
subsequently allowed Gomez to make withdrawals from his own account, eventually collecting the total amount of P1,167,500.00
from the proceeds of the apparently cleared warrants. The last withdrawal was made on 16 July 1979. On 21 July 1979, Metrobank
informed Golden Savings that 32 of the warrants had been dishonored by the Bureau of Treasury on 19 July 1979, 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 in the Regional Trial Court of Mindoro. After trial, judgment was rendered in favor of
Golden Savings, which, however, filed a motion for reconsideration even as Metrobank filed its notice of appeal. On 4 November
1986, the lower court modified its decision, by dismissing the complaint with costs against Metrobank; by issolving and lifting the writ
of attachment of the properties of Golden Savings and Spouses Magno Castillo and Lucia Castillo; directing Metrobank to reverse
its action of debiting Savings Account 2498 of the sum of P1,754,089.00 and to reinstate and credit to such account such amount
existing before the debit was made including the amount of P812,033.37 in favor of Golden Savings and thereafter, to allow Golden
Savings to withdraw the amount outstanding thereon before the debit; by ordering Metrobank to pay Golden Savings attorney's fees
and expenses of litigation in the amount of P200,000.00; and by ordering Metrobank to pay the Spouses Magno Castillo and Lucia
Castillo attorney's fees and expenses of litigation in the amount of P100,000.00. On appeal to the appellate court, the decision was
affirmed, prompting Metrobank to file the petition for review.
Issue: Whether the treasury warrants in question are negotiable instruments.
Held: Clearly stamped on the treasury warrants' face is the word "non-negotiable." Moreover, and this is of equal significance, it is
indicated that they are payable from a particular fund, to wit, Fund 501. Section 1 of the Negotiable Instruments Law, provides that
"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." Section 3 (When promise is unconditional) thereof
provides that "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." 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 unconditional" and the warrants themselves non-negotiable. There should be no question that the exception on
Section 3 of the Negotiable Instruments Law is applicable in the present case. 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 Section 66 of the Negotiable Instruments Law. The simple reason is that this law is not applicable to the non-negotiable
treasury warrants. The indorsement was made by Gloria Castillo not for the purpose of guaranteeing the genuineness of the
warrants but merely to deposit them with Metrobank for clearing. It was in fact Metrobank that made the guarantee when it stamped
on the back of the warrants: "All prior indorsement and/or lack of endorsements guaranteed, Metropolitan Bank & Trust Co.,
Calapan Branch."
193
1 Agbayani, Ibid., pp. 191-192; citing Hubbard & Co. vs. Morton, 92 NE 5252
194
195
196
1 Agbayani, Ibid., p. 193; citing Germania Nat. Bank vs. Mariner, 109 NW 574
197
1 Agbayani, Ibid., p. 193; citing Colona vs. Paksley Nat. Bank, 92 SE 979
198
1 Agbayani, Ibid., p. 193; citing Sharuff vs. Tayabas Land Co., 37 Phil. 655
B-18
6 Ang Tek Lian vs. Court of Appeals [GR L-2516, 25 September 1950]
En Banc, Bengzon (J): 6 concur
Facts: Knowing he had no funds therefor, Ang Tek Lian drew on Saturday, 16 November 1946, a check upon the China Banking
Corporation for the sum of P4,000, payable to the order of "cash". He delivered it to Lee Hua Hong in exchange for money which the
latter handed in the act. On 18 November 1946, the next business day, the check was presented by Lee Hua Hong to the drawee
bank for payment, but it was dishonored for insufficiency of funds, the balance of the deposit of Ang Tek Lian on both dates being
P335 only. Ang Tek Lian was charged and was convicted of estafa in the Court of First Instance of Manila. The Court of Appeals
affirmed the verdict.
Issue: Whether indorsement is necessary for the presentation of a bearer instrument for payment.
Held: Under Section 9(d) of the Negotiable Instruments Law, a check drawn payable to the order of "cash" is a check payable to
bearer, and the bank may pay it to the person presenting it for payment without the drawer's indorsement. A check payable to the
order of cash is a bearer instrument. Where a check is made payable to the order of “cash,” the word “cash “does not purport to be
the name of any person, and hence the instrument is payable to bearer. The drawee bank need not obtain any indorsement of the
check, but may pay it to the person presenting it without any indorsement." Of course, if the bank is not sure of the bearer's identity
or financial solvency, it has the right to demand identification and/or assurance against possible complications, — for instance, (a)
forgery of drawer's signature, (b) loss of the check by the rightful owner, (c) raising of the amount payable, etc. The bank may
therefore require, for its protection, that the indorsement of the drawer — or of some other person known to it — be obtained. But
where the Bank is satisfied of the identity and/or the economic standing of the bearer who tenders the check for collection, it will pay
the instrument without further question; and it would incur no liability to the drawer in thus acting. A check payable to bearer is
authority for payment to the holder. Where a check is in the ordinary form, and is payable to bearer, so that no indorsement is
required, a bank, to which it is presented for payment, need not have the holder identified, and is not negligent in failing to do so.
Consequently, a drawee bank to which a bearer check is presented for payment need not necessarily have the holder identified and
ordinarily may not be charged with negligence in failing to do so. If the bank has no reasonable cause for suspecting any irregularity,
it will be protected in paying a bearer check, “no matter what facts unknown to it may have occurred prior to the presentment.”
Although a bank is entitled to pay the amount of a bearer check without further inquiry, it is entirely reasonable for the bank to insist
that the holder give satisfactory proof of his identity. Herein anyway, it is significant, and conclusive, that the form of the check was
totally unconnected with its dishonor. It was returned unsatisfied because the drawer had insufficient funds — not because the
drawer's indorsement was lacking.
7 Philippine National Bank vs. Manila Oil Refining & By-Products Company, Inc. [GR L-18103, 8 June 1922]
First Division, Malcolm (J): 6 concur
Facts: On 8 May 1920, the manager and the treasurer of the Manila Oil Refining & By-Products Company, Inc,. executed and
delivered to the Philippine National Bank (PNB), a written instrument reading 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 do 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 Manila Oil Refining & By-Products Company, Inc. failed to pay the promissory note
on demand. PNB brought action in the Court of First Instance of Manila, to recover P61,000, the amount of the note, together with
interest and costs. Mr. Elias N. Recto, an attorney associated with PNB, entered his appearance in representation of Manila Oil, and
filed a motion confessing judgment. Manila Oil, however, in a sworn declaration, objected strongly to the unsolicited representation
of attorney Recto. Later, attorney Antonio Gonzalez appeared for Manila Oil and filed a demurrer, and when this was overruled,
presented an answer. The trial judge rendered judgment on the motion of attorney Recto in the terms of the complaint. <The
disposition of the trial court and the process as to how the case reached the Supreme Court is not in the facts.> In the Supreme
Court, the question of first impression raised in the case concerns the validity in this jurisdiction of a provision in a promissory note
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 attorney's fees, and waives all errors, rights to inquisition, and appeal, and all property
exemptions.
Issue [1]: Whether the Negotiable Instruments Law (Act No. 2031) expressly recognized judgment notes, enforcible under the
regular procedure.
Held [1]: 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 confession of judgment if the instrument be not paid at maturity"; but
this provision of law cannot be taken to sanction judgments by confession, because it is a portion of a uniform law which merely
provides that, in jurisdictions where judgments 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 stipulation otherwise illegal."
Issue [2]: Whether provisions in notes authorizing attorneys to appear and confess judgments against makers should not be
recognized in Philippine jurisdiction by implication.
Held [2]: Judgments by confession as appeared at common law were considered an amicable, easy, and cheap way to settle and
secure debts. They are quick remedy serve to save the court's time. Time also save 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, 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 for fraud, because under these instruments the promissor 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 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 the Philippines might be the source of abuse and oppression, and make the courts involuntary parties thereto. If the bank has a
meritorious case, the judgment is ultimately certain in the courts. The Court is of the opinion thus that warrants of attorney to
confess judgment are not authorized nor contemplated by Philippine law; and 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.
8 Republic Planters Bank vs. Court of Appeals [GR 93073, 21 December 1992]
Second Division, Campos Jr. (J): 4 concur
Facts: Shozo Yamaguchi and Fermin Canlas were President/Chief Operating Officer and Treasurer respectively, of Worldwide
Garment Manufacturing, Inc.. By virtue of Board Resolution 1 dated 1 August 1979, Shozo Yamaguchi and Fermin Canlas were
authorized to apply for credit facilities with the petitioner Republic Planters Bank (RPB) in the forms of export advances and letters
of credit/trust receipts accommodations. Republic Planters Bank issued nine promissory notes, each of which were uniformly
B-19
worded in the following manner: "___________, after date, for value received, I/we, jointly and severaIly 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 phrase "and (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",
and "of WORLDWIDE GARMENT MFG. CORP." These entries were separated from the text of the notes with a bold line which ran
horizontally across the pages. In three promissory notes, the name Worldwide Garment Manufacturing, Inc. was apparently rubber
stamped above the signatures of Yamaguchi and Canlas. On 20 December 1982, Worldwide Garment Manufacturing, Inc. (WGMI)
noted to change its corporate name to Pinch Manufacturing Corporation (PMC). On 5 February 1982, RPB filed a complaint for the
recovery of sums of money covered among others, by the nine promissory notes with interest thereon, plus attorney's fees and
penalty charges. The complainant was originally brought against WGMI inter alia, but it was later amended to drop WGMI as
defendant and substitute PMC it its place. PMC and Shozo Yamaguchi did not file an Amended Answer and failed to appear at the
scheduled pre-trial conference despite due notice. Only Canlas filed an Amended Answer wherein he, denied having issued the
promissory notes in question since according to him, he was not an officer of PMC, but instead of WGMI, and that when he issued
said promissory notes in behalf of WGMI, the same were in blank, the typewritten entries not appearing therein prior to the time he
affixed his signature. On 20 June 1985, The Regional Trial Court rendered a decision in favor of RPB, ordering PMC (formerly
WGMI),Yamaguchi and Canlas to pay, jointly and severally, RPB the following sums with interest thereon at 16% per annum under
7 promissory notes, the sum of P300,000.00 with interest from 29 January 1981 until fully paid; P40,000.00 with interest from 27
November 1980; P166,466.00 which interest from 29 January 1981; P86,130.31 with interest from 29 January 1981; P12,703.70
with interest from 27 November 1980; P281,875.91 with interest from 29 January 1981; and P200,000.00 with interest from 29
January 1981. PMC and Yamaguchi were also ordered to pay jointly and severally, RPB the sum of P367,000.00 with interest of
16% per annum from 29 January 1980 under another promissory note. PMC was ordered to pay PRB the sum of P140,000.00 with
interest at 16% per annum from 27 November 1980 until fully paid, under another promissory note; to pay the sum of P231,120.81
with interest at 12% per annum from 1 July 1981, until fully paid and the sum of P331,870.97 with interest from 28 March 1981, until
fully paid. The court also ordered PMC, Yamaguchi, and Canlas to pay, jointly and severally, RPB the sum of P100,000.00 as and
for reasonable attorney's fee and the further sum equivalent to 3% per annum of the respective principal sums from the dates above
stated as penalty charge until fully paid, plus 1% of the principal sums as service charge; with costs against PMC, et al. From the
above decision only Canlas appealed to the then Intermediate Court (now the Court Appeals). His contention was that inasmuch as
he signed the promissory notes in his capacity as officer of the defunct WGMI, he should not be held personally liable for such
authorized corporate acts that he performed. The appellate court affirmed the decision of trial court except that it completely
absolved Canlas from liability under the promissory notes and reduced the award for damages and attorney's fees. RPB appealed
by a way of a petition for review on certiorari. It is the contention of RPB that having unconditionally signed the 9 promissory notes
with Yamaguchi, jointly and severally, Canlas is solidarity liable with Yamaguchi on each of the nine notes.
Issue [1]: Whether Fermin Canlas is solidarily liable on each of the promissory notes bearing his signature.
Held [1]: Fermin Canlas is solidarily liable on each of the promissory notes bearing his signature. The promissory motes are
negotiable instruments and must be governed by the Negotiable Instruments Law. Under the Negotiable lnstruments Law, persons
who write their names on the face of promissory notes are makers and are liable as such. By signing the notes, the maker promises
to pay to the order of the payee or any holder according to the tenor thereof. Based on the above provisions of law, there is no
denying that Canlas is one of the co-makers of the promissory notes. As such, he cannot escape liability arising therefrom. Where
an instrument containing the words "I promise to pay" is signed by two or more persons, they are deemed to be jointly and severally
liable thereon. An instrument which begins" with "I" ,We" , or "Either of us" promise to, pay, when signed by two or more 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. Herein, the
solidary liability of 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 RPB. 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 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 his
proportionate share. By making a joint and several promise to pay to the order of RPB, 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 PMC 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, it is immaterial and will not affect to the liability of Canlas as a joint and several debtor of the notes.
With or without the presence of said phrase, Canlas is primarily liable as a co-maker of each of the notes and his liability is that of a
solidary debtor.
Issue [2]: Whether Canlas can avoid liability on the promissory notes by claiming to be a mere agent of the corporation.
Held [2]: 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 is
still bound by the acts of its agents if authorized by the Board. Under the Negotiable Instruments Law, the liability of a person
signing as an agent is specifically provided for in Section 20 thereof, which provides that "Liability of a 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. Where 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 agent's personal liability."
Issue [3]: Whether the promissory notes were delivered to Canlas in blank for his signature, or were incomplete instruments, to
allow the application of Section 14 of the Negotiable Instruments Law.
Held [3]: A careful examination of the notes in question shows that they are the stereotype printed form of promissory notes
generally used by commercial banking institutions to be signed by their clients in obtaining loans. Such printed notes are incomplete
because there are blank spaces to be filled up on material particulars such as payee's name, amount of the loan, rate of interest,
date of issue and the maturity date. The terms and conditions of the loan are printed on the note for the borrower-debtor's perusal.
An incomplete instrument which has been delivered to the borrower for his signature is governed by Section 14 of the Negotiable
Instruments Law. Proof that the notes were signed in blank was only the self-serving testimony of Canlas. The Court chose to
believe the bank's testimony that the notes were filled up before they were given to Canlas and Yamaguchi for their signatures as
joint and several promissors. For signing the notes above their typewritten names, they bound themselves as unconditional makers.
The court took judicial notice of the customary procedure of commercial banks of requiring their clientele to sign promissory notes
prepared by the banks in printed form with blank spaces already filled up as per agreed terms of the loan, leaving the borrowers-
debtors to do nothing but read the terms and conditions therein printed and to sign as makers or co-makers. When the notes were
given to Canlas for his signature, the notes were complete in the sense that the spaces for the material particular had been filled up
by the bank as per agreement. The notes were not incomplete instruments; neither were they given to Canlas in blank as he claims.
Thus, Section 14 of the NegotiabIe Instruments Law is not applicable.
B-20
9 Evangelista vs. Mercator Finance Corp. [GR 148864, 21 August 2003]
Third Division, Puno (J): 2 concur, 2 on official leave
Facts: Spouses Eduardo B. Evangelista and Epifania C. Evangelista filed a complaint for annulment of titles against Mercator
Finance Corp. Lydia P. Salazar, Lamecs Realty and Development Corporation, and the Register of Deeds of Bulacan. The spouses
Evangelista claimed being the registered owners of 5 parcels of land contained in the Real Estate Mortgage executed by them and
Embassy Farms, Inc. They alleged that they executed the Real Estate Mortgage in favor of Mercator only as officers of Embassy
Farms. They did not receive the proceeds of the loan evidenced by a promissory note, as all of it went to Embassy Farms. Thus,
they contended that the mortgage was without any consideration as to them since they did not personally obtain any loan or credit
accommodations. There being no principal obligation on which the mortgage rests, the real estate mortgage is void. With the void
mortgage, they assailed the validity of the foreclosure proceedings conducted by Mercator, the sale to it as the highest bidder in the
public auction, the issuance of the transfer certificates of title to it, the subsequent sale of the same parcels of land to Lydia P.
Salazar, and the transfer of the titles to her name, and lastly, the sale and transfer of the properties to respondent Lamecs Realty &
Development Corporation. Mercator admitted that the spouses Evangelista were the owners of the subject parcels of land. It,
however, contended that on 16 February 1982, the spouses executed a Mortgage in favor of Mercator for and in consideration of
certain loans, and/or other forms of credit accommodations obtained from the Mortgagee (Mercator) amounting to P844,625.78 and
to secure the payment of the same and those others that the Mortgagee may extend to the mortgagor. It contended that since the
spouses and Embassy Farms signed the promissory note as co-makers, aside from the Continuing Suretyship Agreement
subsequently executed to guarantee the indebtedness of Embassy Farms, and the succeeding promissory notes[8] restructuring the
loan, then the spouses are jointly and severally liable with Embassy Farms. Due to their failure to pay the obligation, the foreclosure
and subsequent sale of the mortgaged properties are valid. Salazar and Lamecs asserted that they are innocent purchasers for
value and in good faith, relying on the validity of the title of Mercator. Lamecs admitted the prior ownership of the spouses of the
subject parcels of land, but alleged that they are the present registered owner. Salazar and Lamecs likewise assailed the long
silence and inaction by the spouses as it was only after a lapse of almost 10 years from the foreclosure of the property and the
subsequent sales that they made their claim. Thus, Salazar and Lamecs averred that petitioners are in estoppel and guilty of laches.
After pre-trial, Mercator moved for summary judgment on the ground that except as to the amount of damages, there is no factual
issue to be litigated. Mercator argued that petitioners had admitted in their pre-trial brief the existence of the promissory note, the
continuing suretyship agreement and the subsequent promissory notes restructuring the loan, hence, there is no genuine issue
regarding their liability. The mortgage, foreclosure proceedings and the subsequent sales are valid and the complaint must be
dismissed. The spouses opposed the motion for summary judgment claiming that because their personal liability to Mercator is at
issue, there is a need for a full-blown trial. The RTC granted the motion for summary judgment and dismissed the complaint. The
spouses’ motion for reconsideration was denied for lack of merit. Thus, the spouses went up to the Court of Appeals, but again were
unsuccessful. A motion for reconsideration by the spouses was likewise denied for lack of merit. The spouses filed the Petition for
Review on Certiorari. The spouses allege, inter alia, that there is an ambiguity in the wording of the promissory note and claim that
since it was Mercator who provided the form, then the ambiguity should be resolved against it.
Issue: Whether the spouses are solidarily liable with Embassy Farms, in light of the promissory note signed by them.
Held: The promissory note and the Continuing Suretyship Agreement prove that the spouses are solidary obligors with Embassy
Farms. The promissory notes subsequently executed by the spouses and Embassy Farms, restructuring their loan, likewise prove
that the spouses are solidarily liable with Embassy Farms. The spouses allege that there is an ambiguity in the wording of the
promissory note and claim that since it was Mercator who provided the form, then the ambiguity should be resolved against it.
Courts can interpret a contract only if there is doubt in its letter. But, an examination of the promissory note shows no such
ambiguity. Besides, assuming arguendo that there is an ambiguity, Section 17 of the Negotiable Instruments Law states that "Where
the language of the instrument is ambiguous or there are omissions therein, the following rules of construction apply: (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." Further, even if the spouses intended to sign the note merely as officers of Embassy Farms, still this does not erase
the fact that they subsequently executed a continuing suretyship agreement. A surety is one who is solidarily liable with the
principal. The spouses cannot claim that they did not personally receive any consideration for the contract for well-entrenched is the
rule that the consideration necessary to support a surety obligation need not pass directly to the surety, a consideration moving to
the principal alone being sufficient. A surety is bound by the same consideration that makes the contract effective between the
principal parties thereto. Having executed the suretyship agreement, there can be no dispute on the personal liability of the spouses.
C. Negotiation
1. Modes of transfer
According to Sundiang, if the instrument is negotiable, transfer thereof can be effected either through:
(a) negotiation or
(b) through assignment. 199
According to Agbayani, there are three methods of transfer, namely:

(1) by assignment,
(2) by operation of law,
200
(3) by negotiation, which may either be by indorsement completed by delivery or by mere delivery.
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. 201 Negotiation is such transfer of an instrument from one person to another as
to constitute the transferee the holder of the instrument. Negotiation is is a mode of transferring an instrument. It is
distinguished from other modes of transfer in that its effects is to make the transferee the holder of the instrument.
Specifically, in the case of an instrument which is payable to order, any series of series of steps which makes the
transferee both the indorsee of the instrument and the possessor thereof constitute negotiation; and in the case of an
instrument which is payable to bearer, any step which makes the transferee of the instrument one in possession thereof
constitutes negotiation.202 Hence, negotiation may either be by indorsement completed by delivery or by mere delivery.
Usually, where the instrument is payable to order, it is negotiated by the indorsement of the holder completed by delivery,
and where it is payable to bearer, by mere delivery. But aside from (1) indorsement plus delivery and (2) mere delivery, it
"is possible to have a negotiation by means other than these." The first sentence of the Section 30 states the general
method of negotiation and the next sentence is only illustrative but not exclusive. 203
Issue. "Issue" is the first delivery of the instrument complete in form to a person who takes it as a holder (Sec. 191,
NIL). 204 The issuance to the payee is negotiation because the transfer constitutes the payee the holder of the
199
200
201
Sundiang, Ibid., p. 100; 1 Agbayani, Ibid., p. 254
202
203
1 Agbayani, Ibid., p. 254; referring to Brannan, 7th ed., 591
204
1 Agbayani, Ibid., p. 109; citing Section 191, NIL
B-21
instrument. The payee may even be a holder in due course if he has acquired the note from another holder or he has
not directly dealt with the maker thereof. 205
Assignment. It is the method of transferring a non-negotiable instrument whereby the assignee is merely placed in the
position of the assignor and acquires the instrument subject to all defenses that might have been set up against the
original payee. 206
Assignment of non-negotiable instruments. The mode of assignment of non-negotiable instruments differs in no

respect from that of any other contract. Although some sort of written assignment is customarily employed, it may be
written either on the instrument itself or on a separate piece of paper. 207 The effect of the assignment of a non-
negotiable instrument is that the party holding the right drops out of the contract and another takes his place. The
assignee is substituted in place of the assignor. The assignee and every subsequent person to whom the instrument
comes by assignment may be considered as the person who made the instrument in the first instance and as having
said and done everything in making the instrument which the original assignor said or did. Hence, if the original
assignor said or did something which under the ordinary law of such contracts would prevent him from enforcing the
contract or asserting his right against the other party to the original contract, the assignee, although he knows
nothing of the original transaction, may be deemed to have said and done the same things. And further, if any
subsequent assignee from whom, as an assignor, the holder in turn derives the contract, has done anything to
prevent its enforcement against the original party, the said holder cannot enforce it against the original party. Each
assignee takes his chances as to the exact position in which any party making an assignment of it stands. And, as it
is called in law, the assignee takes the contract subject to equities, that is, to defenses to the contract which would
avail in favor of the original party up to the time the notice of the assignment is given to the person against whom the
contract is sought to be enforced. 208
Assignment of negotiable instruments. A person taking a negotiable instrument by assignment in a separate

piece of paper takes it subject to the rules applying to assignment. 209 And where the holder of a bill payable to order
transfers it without indorsement, it operates as an equitable assignment. 210
Transfer by operation of law. The full title to a bill or note may pass without either assignment, indorsement, or delivery,
that is, by operation of law, (1) by the death of the holder, where the title vests in his personal representative, or (2) by the
bankruptcy of the holder, where title vests in his assignee or trustee, or (3) upon the death of a joint payee or indorsee, in
which case the general rule is that the title vests at once in the surviving payee or indorsee. 211
2. Concept of negotiation (Sec. 30, NIL); distinguished from assignment
Section 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 completed by
delivery.
Negotiation vis-à-vis assignment, the latter whether of negotiable or non-negotiable instruments. The negotiation
of a negotiable instrument must be distinguished from the assignment or transfer of an instrument whether that be
negotiable or non-negotiable. 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: "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." 212 Assignability pertains to contracts in general, negotiability pertains
to negotiable instruments. One who takes an instrument by assignment takes the instrument subject to the defenses
obtaining among the original parties, whereas a person, who takes the instrument by negotiation, takes it free from
personal defenses available among the parties.213
More particularly, the distinctions between assignability and negotiability are:

1. Assignability is a more comprehensive term than negotiability and pertains to contracts in general. On the other
hand, negotiability pertains only to a special class of contracts, i.e. negotiable instruments.
2. A person who takes an instrument by assignment takes the instrument subject to the defenses obtaining among the
original parties, whereas, a person who takes an instrument by negotiation takes it free from the personal defenses
available among the parties.
3. At common law, to maintain an action on a common law instrument, it was necessary to allege and prove
consideration. But in an action on a negotiable instrument, consideration is presumed and need not be alleged and
proved. This distinction does not, however, exist in the Philippines, as in every contract, whether negotiable or not,
“although the cause is not stated in the contract, it is presumed that it exists, and is lawful unless the debtor proves
the contrary,” as per Article 1354 of the New Civil Code.
4. The indorser is not liable on his indorsement unless there be presentment for payment at maturity and prompt notice
of dishonor in case of dishonor. When these steps are taken, he becomes immediately liable on the instrument.
5. The general indorser is secondarily liable for any cause for which the party primarily liable for any cause for which
the party primarily liable on a negotiable instrument does not or cannot pay. He warrants the solvency of the party
primarily liable as per Section 66 NIL. The qualified indorser and the person negotiating by mere delivery have a
limited secondary liability.214
!!! Case(s)
10 Sesbreno vs. CA, 222 SCRA 466
11 Consolidated Plywood Inc. vs. IFC Leasing 149 SCRA 448
3. Ways of negotiation (in case of order or bearer instruments)
205
206
1 Agbayani, Ibid., p. 253; referring to Montinola vs. PNB, GR L-2961, 26 February 1961.
207
1 Agbayani, Ibid., p. 253; citing Michell v. Walker, 17 Fed. Cas No. 9670; Deshler v. Guy, 5 Ala. 186
208
1 Agbayani, Ibid., pp. 253-254; citing Ogden, 5th ed., pp. 216-217
209
210
1 Agbayani, Ibid., p. 254; citing Brown vs. Wilson, 45 SC 519, 23 SW 630, 55 Am. St. Rep. 779; Contro vs. Rafferty, 7 Montreal Super Ct. 146;
Schoepter vs. Tommach, 97 Ill. App. 562; also See Sec. 49 NIL
211
212
Sesbreno vs. Court of Appeals [GR 89252, 24 May 1993]
213
Sundiang, Ibid., pp. 86-87
214
B-22
1) If payable to bearer, it is negotiated by delivery.
215
2) If payable to order, it is negotiated by the indorsement of the holder completed by delivery.
Bearer Instrument or Order instrument where last indorsement was in blank; Delivery. The negotiation of negotiable
instrument may be effected by the delivery alone of the instrument to the transferee in those negotiable instruments which
are originally payable to bearer, or originally payable to order instruments where the last indorsement is an indorsement in
blank. 216 Although an instrument payable to bearer is negotiated by mere delivery, the law does not prohibit negotiation
by indorsement completed by delivery. 217 The one who negotiated the instrument by delivery, therefore, is also a party
added to the instrument upon negotiation. For lack of a better term, he may be designated as “person negotiating by
delivery.” The person to whom the instrument payable to bearer is negotiated acquires certain rights as a holder. He is
therefore also an additional party to the instrument. For a lack of a better name, he may be designated as “person to
whom an instrument is negotiated by delivery.” 218 Delivery is sufficient because, by delivery, the transferee is placed in
possession of the instrument, and he moment the transferee is in possession, he is constituted the holder thereof since
the holder of an instrument payable to bearer is the one in possession of it. 219
Order Instrument; Indorsement followed by delivery. If the instrument is payable to order, it must be negotiated by
indorsement complete by delivery as per Section 30 NIL. 220 A negotiable instrument payable to the order of a specified
person, or to him or his order, may be negotiated by the payee by indorsement followed by delivery of the instrument to
the indorsee. Subsequent negotiations may be made in this manner if the holder who indorses acquired the instrument
under a special indorsement. 221 The payee of a negotiable instrument acquires no interest thereto until its delivery to him.
222
Indorsement is necessary to make the transferee the indorsee, and the delivery is also necessary to place the
transferee in possession of the instrument. If there is indorsement but no delivery, the transferee would be merely an
indorsee but not in possession. If there is delivery only but no indorsement, the transferee would be in possession, but not
the indorsee. In either case, the transferee would not be constituted the holder. Hence, there would be no negotiation. But
if there is indorsement completed by delivery, the transferee would be constituted the holder of the instrument, since the
holder of an instrument payable to order is the payee or indorsee thereof who is in possession of it. 223
4. Concept of delivery
Section 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 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.
Delivery. Delivery is defined as the transfer of possession of the instrument by the maker or drawer with the intention to
transfer title to the payee and recognize him as holder thereof.224 Delivery is the transfer of possession with intent to
transfer of title, and consists principally of placing the transferee in possession of the instrument, but it must be
accompanied by an intent to transfer title. 225 Delivery of an instrument means transfer of possession, actual or
constructive, from one person to another. Without 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. 226
Delivery is essential as “every contract on a negotiable instrument is incomplete and revocable until delivery f the
instrument for the purpose of giving effect thereto.”227
Scope of section 16. The section applies to an instrument that is mechanically complete but undelivered. 228
Undelivered instrument is incomplete. The law provides that "every contract on a negotiable instrument is incomplete
and revocable until delivery of the instrument for the purpose of giving effect thereto." And no rights, properly speaking,
arise in respect to an instrument until it is delivered. 229
Delivery and issue. As between immediate parties and as regards a note 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."-16 Issue is "the first delivery of the instrument, complete in form, to a person who takes it
as a holder."" Delivery and issuance are used interchangeably. Delivery or issuance may be made either by the maker or
drawer himself or through a duly authorized agent. Delivery or issuance may be made either to the payee himself or to his
duly authorized agent. 230
Outline of rules on delivery of negotiable instruments. The following is an outline of the rules on delivery of
negotiable instruments under Sections 15 and 16:
(1) Delivery is essential to the validity of any negotiable instrument.
(2) As between immediate parties, or those in like cases, delivery must have been with the intention of passing title.
(3) An instrument signed by the drawer or maker but not completed by him and retained in his own custody, is invalid as
to him for want of delivery, even though stolen and negotiated to a holder in due course.
(4) But when the instrument mentioned in (3) is in the hands of a holder in due course, there is prima facie presumption
of delivery which the maker or drawer may rebut by proof of non-delivery.
(5) Where the custody of the incomplete instrument has been entrusted to another, who wrongfully completes and
negotiates it to a holder in due course, delivery to the agent or custodian is a sufficient delivery to bind the drawer or
maker.
(6) Where maker or drawer executes a complete instrument which is found in the possession of another other than a
holder in due course, there is a prima facie presumption of delivery - but subject to rebuttal.
215
216
217
1 Agbayani. Ibid., p. 110
218
219
220
221
222
Miravite, Ibid., p. 138, citing Development Bank of Rizal vs. Sima Wei, 219 SCRA 736
223
224
Sundiang, Ibid., p. 100; citing De la Victoria v. Burgos, 245 SCRA 374 [1995]
225
226
Miravite, Ibid., p. 138, citing Development Bank of Rizal vs. Sima Wei, 219 SCRA 736
227
228
229
1 Agbayani, Ibid., p. 184; citing Kauffman vs. National Bank, 42 Phil. 183
230
B-23
(7) Where the instrument mentioned in (6) is in the hands of a holder in due course, there is a conclusive presumption of
delivery.
(8) Delivery of the instrument may be made on a parol condition or for a special purpose not inconsistent with its written
terms, where the validity of the instrument is to arise out of performance of the condition or consummation of the
purpose. But such condition or specification or purpose does not affect the rights of a holder in due course. Such
condition is a condition precedent, and is to be sharply distinguished from a condition subsequent. the happening or
non-happening of which is to defeat or qualify the instrument. Such condition subsequent contradicts the written
terms and may not be set up by parol evidence. 231
Right to revoke. Before delivery, the maker or drawer can revoke, cancel or tear up the instrument. The payee named
the instrument acquires no right until the instrument is delivered to him. 232
Immediate and remote parties.

1. Literal meaning. Literally, the "drawer" and "payee" are immediate parties to each other. So are the "maker" and the
"payee" to each other. So also are the "indorser' and the "indorsee" to whom the indorser indorses the instrument, to
each other. But as to the drawer" or "maker," an indorsee is not an "immediate party." 233
2. Broad meaning. Under the law, the term "immediate parties" and "remote parties" are given broader meanings than
their literal significations. It has been held that the term "immediate parties" is confined to "those who are
‘immediate,’ in the sense of knowing or being held to know the conditions or limitations placed upon the delivery of
the instrument." 234 It means privity, not proximity. 235 In other words, the criterion is whether or not the party in
question knows of the conditions or limitations placed upon the delivery or the fact that the instrument was not
delivered but stolen. If the party in question knows, he is an immediate party even if he is physically remote. On the
other hand, if he does not know, he is not an immediate party even if he is the next party physically. 236
Presumption of valid delivery as to immediate party or remote party not holder in due course; presumption
rebuttable. Under the law "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." However, as against an
immediate party and remote party who is not a holder in due course, the presumption will exist in his favor only until the
contrary is proven. In other words, the presumption is rebuttable as against an immediate party or a remote party who is
not a holder in due course and, as against him, it may be proved that: (1) no delivery was made; or (2) if there was
delivery, it was not authorized ; or (3) if the delivery was made or authorized, the delivery was conditional or for a special
purpose and not for the purpose of transferring the property in the instrument." 237
Presumption of delivery as to holder in due course. Under the law, "where the instrument is in the hands of a holder in
due course, a valid delivery thereof by all parties to him is conclusively presumed." A presumption is said to be conclusive
when contrary proof is barred. 238
It is a personal defense. Under Section 16, the possible defense of a party sought to be charged is that the instrument
was not delivered, or if delivered, delivery was not authorized or only on a condition or for a special purpose. This defense
may be termed "want of delivery of a mechanically complete instrument." Such a defense is not available against a holder
in due course because under the law, proof of lack of delivery, or of unauthorized delivery, or of conditional delivery, or of
delivery for a special purpose, is barred inasmuch as in the hands of a holder in due course, the valid and intentional
delivery of a mechanically complete but not delivered instrument is conclusively presumed. It can, however; be interposed
against an immediate party and remote parties not holders in due course, inasmuch as the presumption of valid and
intentional delivery is only rebuttable as to immediate parties and to remote parties who are not holders in due course.
The defense is, therefore, only a personal defense. 239
Conclusive presumption not applicable to incomplete instruments. It must be remembered that the bills or notes
dealt with in this section are mechanically complete. When they are mechanically incomplete, there is no conclusive
presumption of valid and intentional delivery as to a holder in due course, because this section applies only to complete
instruments not delivered. Under Section 15, an incomplete and undelivered instrument is not valid even in the hands of a
holder in due course as against a party prior to delivery. 240
Lost or destroyed instruments. The duties and rights of the loser, finder and holder of lost and destroyed negotiable
instruments differ from the duties and rights as to ordinary chattels. The reason is that negotiable instruments take the
place of money, and "it would be embarrassing if every taker of such instruments was bound to inquire into the title of the
holder and if he were obliged to take it with all the imperfections and subject to all the defenses which attach to it in the
hands of the holder." 241
1. Diligence of owner. "As soon as the owner discovers that he has lost a negotiable instrument, he should instantly
give notice of the loss to all the parties on such paper and inform them not to pay the amount to any one except to
the loser or his order. Thus, if an unaccepted bill of exchange be lost, the drawee should be advised not to accept
the same." 242
2. Rights of finder. No title to a lost bill or note vests in the finder and, the owner, when he has identified it, may
maintain trover – an action at law to recover goods or damages – against the finder. If the finder has received
payment of the bill or note, an action for money had and received for his use may be maintained against him. The
owner may likewise maintain an action of replevin against the finder. 243
3. Discharge of party liable. A party liable will not be discharged if he pays the amount to the holder of the lost
instrument before maturity, as such a payment is not made in the usual course of business. 244 "Neither will the party
liable be discharged if he had notice of the loss unless the holder is a bona fide holder for value and entitled to
enforce payment." 245
Theft of negotiable instruments. Checks and other commercial papers are subjects of theft, and, any person who, with
intent to gain, but without violence against or intimidation of persons nor force upon things, shall take a negotiable
231
1 Agbayani, Ibid., pp. 184-185; citing Bigelow, The Law on Bills, Notes and Checks, 3rd ed., 1928
232
233
234
1 Agbayani, Ibid., p. 186; citing Liberty Trust Co. vs. Tilton, 105 NE 605
235
1 Agbayani, Ibid., p. 186; citing Howard Nat. Bank vs. Wilson, 120 Atl. 889, other cases
236
237
238
239
240
241
1 Agbayani, Ibid., pp. 188-189; citing Ogden, 5th ed., p. 55
242
243
1 Agbayani, Ibid., pp. 188-189; citing Halbert v. Rosenblam, 49 Neb. 498, 68 N.W. 622
244
1 Agbayani, Ibid., p. 189; citing Hinckley v. Union Pacific Railroad Co., 129 Mass. 52
245
B-24
instrument belonging to another without the latter's consent, is guilty of the crime of theft. 246 The face value of the check or
commercial paper shall serve as the basis for grading the penalty corresponding to the crime. 247
Estafa by destruction or concealment of negotiable instruments. Any person who shall defraud another by removing,
concealing or destroying in whole or in part a negotiable instrument is guilty of the crime of estafa. 248 Thus, a debtor who
has asked his creditor for the return of a promissory note in order that he might renew it but later on fails to return the note
because of having destroyed the same when it came into his possession is guilty of estafa. 249 And the concealment of a
document of credit thereby making it difficult to collect the debt, constitutes the crime of estafa, and the basis of the
penalty is the amount of credit evidence in the document. 250
!!! Case(s)
12 De la Victoria vs. Hon. Burgos, 245 SCRA 374
13 Development Bank of Rizal vs. Sima Wei, 219 SCRA 736
5. Indorsement
When an instrument is negotiated, other parties are added to the instrument. Where the negotiation is by indorsement
completed by delivery, the parties added are the indorser and the indorsee.
1. Indorser. He is the one who negotiates by indorsement. When the payee indorses a bill or a note, he becomes also
an indorser. When the indorsee further indorses the instrument, he likewise becomes an indorser.
2. Indorsee. He is the one whom the instrument is negotiated by indorsement.251
a. concept
Defined. Indorsement is a legal transaction, effected by the writing of one’s own name on the back of the instrument
or upon a paper attached thereto, with or without additional words specifying the person to whom or to whose order
the instrument is to be payable whereby one not only transfers one’s full legal title to the paper transferred but
likewise enters into an implied guaranty that the instrument will be duly paid. 252 Essentially, an instrument consists of
the signature of the one indorsing and that an indorsement is usually written at the back of the instrument. 253
Nature of indorsement. An indorsement is not only a mode of transfer. It is also a contract. Every indorser is a new
drawer and the terms are found on the face of the bill or note. There is an added obligation upon the instrument
aside from What appears upon the face the instrument. “The indorsement of a bill or note implies an undertaking
from the indorser to the person in whose favor it 1s made and to every other person to whom the bill or note may
afterwards be transferred exactly similar to that which is implied by drawing a bill except that, in the case of drawing
a bill, the stipulations with respect to the drawer's responsibility and undertaking do not apply.” 254 Thus, the general
indorser, in effect, states to every person. who follows him: "This instrument will be paid by the maker, if a note, or
accepted by the drawee or paid by the acceptor, if a bill. If it is dishonored by non-payment or non-acceptance and
you give me notice thereof, I will pay it." This, in effect, is the contract of the general indorser. 255
Negotiation, indorsement, delivery, compared.

1. Strictly speaking, indorsement is not equivalent to negotiation. Indorsement is merely the first step in the
process of negotiating an instrument which is payable to order. The second step in the process is delivery.
However, Section 191 defines as an indorsement completed by delivery. In this sense, indorsement is
equivalent to negotiation.
2. Where the instrument is payable to order, neither is delivery equivalent to negotiation. The mere delivery of
such an instrument, without indorsement, is merely equivalent too an assignment thereof, as per section 49 NIL.
But where the instrument is payable to bearer, delivery is equivalent to negotiation.
3. The terms “indorsement,” “indorser,” and “indorsee” should be applied only to negotiable instruments and the
words “assignment,” “assignor,” and “assignee” is applied to non-negotiable instruments, i.e. to all other
instruments except negotiable instruments. 256
b. how made (Sec. 31 & 32, NIL)
Section 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.
How made. The act of a payee, drawee, accommodation indorser, or holder of a bill note, check or other negotiable
instrument, in writing his name upon the back of the same, with or without further or qualifying words, whereby the
property in the same is assigned and transferred to another. 257 The signature on an instrument of a person who has
the liability thereon of an indorser. Any signature in an ambiguous capacity is an indorsement. 258 As applied to
documents, the term means the signature thereon of a person to whose order the document runs. An indorsement
must be written for or no behalf of the holder and on the instrument or on a paper so firmly affixed thereto as to
become a part thereof. An indorsement is effective for negotiation only when it conveys the entire instrument or any
unpaid residue. If it purports to be of less it operates only as a partial assignment. 259 * As “writing” includes “print,” an
indorsement may be typewritten260 or made by rubber stamp. 261 But the indorsement does not prove itself. It must be
shown that the means was intended as an indorsement. 262
Where placed. The indorsement should be placed on the instrument itself or separate piece of paper attached to the
instrument (called “allonge”). 263 If written on the instrument itself, the indorsement is usually written on the back
thereof. But the indorsement may be written on the face of the instrument. 264 Where the indorsement is written on a
246
1 Agbayani, Ibid., p. 189; citing Art. 308, R.P.C. U.S. v. Wiskersham, 20 Phil. 440; US v. Raboy, 25 Phil. 1
247
1 Agbayani, Ibid., p. 189; citing U.S. v. Wickersham and U.S. v. Raboy, supra
248
1 Agbayani, Ibid., p. 189; citing Subparagraph (c) of paragraph 2 of Article 315, Revised Penal Code
249
1 Agbayani, Ibid., pp. 189-190; referring US vs. Kilayko, 31 Phil. 37
250
1 Agbayani, Ibid., p. 190; citing US vs. Tan Jenjua, 1 Phil. 38; also US vs. Ricoy, 1 Phil. 595
251
252
1 Agbayani, Ibid., p. 110; referring to sections 31 and 34, NIL; and Ogden, 5th ed., p. 183.
253
254
255
256
1 Agbayani, Ibid., p. 111; citing Ogden, 5th ed. P. 50.
257
U.C.C. § 3-202 et seq.
258
U.C.C. § 3-402
259
U.C.C. § 3-202
*
260
1 Agbayani, Ibid., p. 256; citing Pingree Nat. Bank vs. McFarland, 195 Pac. 313
261
1 Agbayani, Ibid., p. 256; citing Flanders vs. Snare, 37 Pac. Sup. Ct. 28
262
263
264
1 Agbayani, Ibid., p. 256; citing Fisher Lumber & Coal vs. Robbins, 180 Pac. 264
B-25
paper attached to instrument, such paper is called an "allonge." But the allonge must be tacked or pasted on the
instrument so as to become part of it, and where the separate paper is only temporarily attached, as when clipped or
pinned, it cannot be considered as allonge. 265 It has been held that the use of an allonge is allowable only when
there is a physical impossibility of writing the indorsement on the instrument itself, and an indorsement an a separate
piece of paper where there is sufficient space on the instrument for indorsements will be considered a mere
assignment, not a negotiation. 266 This view, however, is questionable according to Agbayabi, who opined that
“Indorsement on the note itself are not invalidated because there is a blank space above them. In neither case does
leaving a blank space facilitate fraud, since nobody would gain any advantage by inserting his name in the space
and rendering himself liable to those who indorsed below him upon the note or the allonge.”
Section 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 a negotiation of the instrument. But where the instrument has been paid in part, it may be
indorsed as to the residue.
Manner. The general rule is that the "indorsement must be of the entire instrument." Accordingly, an indorsement of
a part of the instrument does not operate as a negotiation thereof. 267 Negotiation to two or more indorsees severally
is disallowed. 268
Effect of partial indorsement when unauthorized; Exception. Partial indorsement does not operate as an
indorsement. But it may constitute a valid assignment binding between the parties. The person to whom the
instrument is indorsed would not be considered an indorsee but merely an assignee and would therefore take the
instrument subject to defenses available between the original parties. 269 But where the instrument has been paid in
part, it may be indorsed as to the residue. 270
c. kinds
Section 33 provides that “An indorsement may be either special or in blank; and it may also be either restrictive or
qualified, or conditional.” There are two principal kinds of indorsement, special and blank indorsement. 271 In fine, an
indorsement may be (1) special, (2) in blank, (3) absolute, (4) conditional, (5) restrictive, (6) qualified, (7) joint, (8)
successive, (8) irregular, and (1) facultative. 272
1. special and blank (Sec. 34 and 35, NIL)
Section 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.
Special. An indorsement that specifies a person to whom or to whose order the instrument is thereafter
payable.273 Any instrument specially indorsed becomes payable to the order of the special indorsee and may be
further negotiated only by his indorsement. 274 Designates the (name of the) indorsee, such as “Pay to X.” 275
How further negotiated.

(1) Where the instrument is originally payable to order and it is negotiated by the payee by special
indorsement, it can be further negotiated by the indorsee by indorsement completed by delivery.
(2) Where the instrument is originally payable to order and it is negotiated by the payee by blank indorsement,
it can be further negotiated by the holder by mere delivery. The reason is that the effect of a blank
indorsement is to make the instrument payable to bearer.
(3) Where the instrument is originally payable to bearer, it can be further negotiated by mere delivery, even if
the original bearer negotiated it by special indorsement. 276
Section 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.
Blank. A blank indorsement is an indorsement which does not specify the name of the person to whom or to
whose order the instrument is to be payable (the indorsee), and usually consists of the indorser’s signature, and
nothing else, found at the back of the instrument. 277 The blank indorsement allows the transferee the right to
negotiate the instrument further by mere delivery of the instrument to the next transferee. 278 One made by the
mere writing of the indorser’s name on the back of the note or bill, without mention of the name of any person in
whose favor the indorsement is made, but with the implied understanding that any lawful holder may fill in his
own name above the indorsement if he so chooses. An indorsement in black specifies no particular indorsee
and may consist of a mere signature. An instrument payable to order and indorsed in black becomes payable to
bearer and may be negotiated by delivery alone until specially indorsed. The holder may convert a blank
indorsement into a special indorsement by writing of the indorser in black any contract consistent with the
character of the indorsement.279 ** No indorsee is specified and it is done by affixing the indorser’s signature. 280
Limitation upon conversion of blank indorsement. The holder must not write any contract not consistent
with the indorsement, that is, the contract so written must not change the contract of the blank indorser. 281 The
265
266
1 Agbayani, Ibid., p. 256; citing Clark vs. Thompson, 69 So. 925
267
268
269
1 Agbayani, Ibid., p. 257; citing Edgar v. Haines, 741 N.E. 837; Montinola v. Phil. Nat. Bank, G.R. No. L-1867, Prom. Feb. 26, 1961
270
1 Agbayani, Ibid., p. 257; citing Last sentence, Section 32, NIL
271
272
273
U.C.C. § 3-204[1]; 1 Agbayani, Ibid., p. 110; referring to Section 34, NIL
274
275
Sundiang, Ibid., p. 102; Miravite, Ibid., p. 140
276
277
Miravite, Ibid., p. 140; 1 Agbayani, Ibid., p. 111
278
279
U.C.C. § 3-204[2],[3]
* *
280
281
B-26
following have been held to be contracts inconsistent with the character of the indorsement: (1) "Pay to X and
Y"; (2) "Demand and notice waived"; (3) "I guaranty payment." This will make the indorser a guarantor and
deprive him thereby of his right to demand notice"; (4) Without recourse. 282
2. conditional (Sec. 39, NIL)
Section 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.
Absolute indorsement. One by which the indorser binds himself to pay, upon no other condition than the
failure of prior parties to do so and upon due notice to him of such failure. 283
Conditional indorsement. An indorsement subject to the happening of a contingent event, that is, an event
that may or may not happen, or a past event unknown to the parties. 284 In a conditional indorsement, the right of
the indorsee under the instrument is made to depend on the happening of the contingent event stated in the
instrument. Said indorsee may however negotiate the instrument. 285 An indorsement that is restrictive because it
purports to limit when the instrument can be paid or further transferred, or to condition payment or further
transfer on the occurrence of a specified event. One by which the indorser annexes some condition (other than
the failure of prior parties to pay) to his liability. The condition may be either present or subsequent. Special
indorsement with additional words of condition.286 ***
Right to disregard conditions. 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. 287
Obligation of conditional indorsee. Under the second sentence of this section, the indorsee, holds the note or
the proceeds thereof, if he is paid by the maker, subject to the rights of the indorser. In other words, if the maker
disregards the condition, and pays to the indorsee the amount without waiting for the condition to be fulfilled, the
indorsee does not acquire ownership over the sum. The indorsee must hold it in trust while the condition is not
fulfilled. It is upon the fulfillment of the condition that such ownership over the proceeds of the note is absolutely
acquired by the conditional indorsee. In case of non-fulfillment, he must turn over the amount to the conditional
indorser. 288
Effect of conditional indorsement on negotiability. A conditional indorsement does not render an instrument
non-negotiable. But if the condition is on the face of the instrument, making the order or promise to pay
conditional, the condition renders it non-negotiable as the promise or order therein would not be unconditional.
289
3. qualified (sec. 38, NIL)
Section 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.
A qualified indorsement is made by adding to the indorser's signature the words "without recourse," "sans
recours"; "indorser not holden"; or "with intent to transfer title only, and not to incur liability as indorser", "at the
indorsee's own risk." 290 A qualified indorsement is one where the indorser places under the signature the words
“without recourse” or the like. 291 Without recourse means “without resort to a person who is secondarily liable
after the default of the person who is primarily liable.” 292 In effect, any one who indorses without recourse states
that "all parties to the paper are genuine; I am the lawful holder of that paper, and I have title to it and know of
no reason why you could not recover on it as a valid instrument, but one thing I do not guarantee; I do not
guarantee the financial responsibility of the parties on that paper but I do say that I hold the title to it just the
same as any other personal property." 293
Effects.
1. As to title. It constitutes the indorser a mere assignor of the title of 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.294
2. As to liability of qualified indorser. The qualified indorser does not become liable secondarily under his
indorsement.295 One which retains or limits, or qualifies or enlarges, the liability of the indorser, in any
manner different from what the law generally imports as his true liability, deducible from the nature of the
instrument.296 A transfer of a bill or promissory note to an indorsee, without any liability to the indorser.
Such is accomplished by adding after signature words such as “without recourse” or the like. 297 **** The
qualified indorser is not entirely free from secondary liability, according to Agbayani. He is secondarily
liable on his warranties as an indorser under Section 65, that is, the qualified indorser is liable if the
instrument is dishonored by non- acceptance or non-payment due to: (1) forgery; (2) lack of good title on
the part of the indorser; (3) lack of capacity to indorse on the part of the prior parties; or (4) the fact that, at
the time of the indorsement, the instrument was valueless or not valid and he knew of that fact. 298
282
1 Agbayani, Ibid., p. 259; citing Fraile vs. Rudiger, 104 Atl. 142
283
284
285
Miravite, Ibid., pp. 139-140
286
U.C.C. § 3-205[a]
* **
287
288
289
1 Agbayani, Ibid., p. 266; referring to Palmer vs. Sargent, 25 Am. Rep. 479; Hill vs. Nutter, 19 Atl. 170.
290
1 Agbayani, Ibid., p. 264; citing Velasco vs. Tan, 43 Phil. 195
291
292
1 Agbayani, Ibid., p. 265; referring to Industrial Bank & Trust Co. vs. Henelberg, 195 NW (2d) 470
293
294
295
296
Stover Bank vs. Welpman, Mo.App. 284 S.W. 177,180
297
U.C.C. § 3-414[1], 3-417 [2] [3]
* ***
298
B-27
3. As to negotiability. A qualified indoresment "does not impair the negotiable character of the instrument.
299
4. restrictive (sec. 36 & 37, NIL)
Section 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.
A restrictive indorsement is one which stops the negotiability of the instrument, or which contains such a
definite direction as to the payment as to preclude the indorsee from making any further transfer of the
instrument. An indorsement is restrictive which either
(a) is conditional or
(b) purports to prohibit further transfer of the instrument; or
(c) includes the words “for collection,” “for deposit,” “pay any bank,” or like terms signifying a purpose of
deposit or collection; or
(d) otherwise states that it is for the benefit or use of the indorser or of another person..300 *****
Indorsee agent of the indorser. This is known as the "agency type" of restrictive indorsement. Any action the
indorsee (agent) may file is subject to defenses available against the indorser (principal), such as lack of
consideration. Thus, "where the proof tends to show that the plaintiff held the draft for collection only, and that
the acceptance of it by the defendants was conditional, and that after such an acceptance, the defendants
refused to accept the goods evidenced by the draft, which were returned to and accepted by the plaintiff, who
agreed to release the defendants from any liability, plaintiff thereafter cannot recover.” 301
Indorsements for deposit. An indorsement for deposit constitutes the indorsee the agent of the indorser. Such
an indorsement, like an indorsement for collection, constitutes a retention of title in the depositor in the absence
of any practice or agreement to the contrary. In any event, a restrictive indorsement of an instrument for
collection or deposit or to the use of the indorser and for his benefit, in the absence of any other circumstances,
will not divest the indorser of his title thereto until the money is paid. 302 Indorsements for deposit only are
usually informal. Most are by means of a rubber stamp. A bank would be justified in accepting a check indorsed
for deposit even with only a typed indorsement. 303 The notation "for deposit" is a restrictive indorsement and
indicates that the indorsee bank is an agent for collection and not the payee. Indorsement for a check by the
payee "for deposit" does not thereby render it negotiable but prohibits further negotiation for any purpose except
for collection for deposit in the payee's account in the bank selected by the payee. By adding the notation, title
to the check remained in the name of the payee. 304
Whether indorsee subject to defenses against indorser. There are two views on the question:
(1) In the case of Sulbrason-Dickensen Co. v. Hopkins, 305 an indorsement was held restrictive under Section
47 of the Negotiable Instruments Law, making the indorsee or his successors subject to good defenses
against the restrictive indorser.
(2) Some learned writers, however, declare this holding to be unsound. 306 Thus, it has been held that the
indorsee of a check indorsed in trust for a third person who is a holder in due course could recover from
the drawer who had a defense of failure of consideration, for while the restrictive indorsement creating a
trust gives notice of this trust to subsequent purchasers, it did not give notice of defenses obtaining
between prior parties. 307
Presumption of consideration in restrictive indorsement. As a general rule, an indorsement of a negotiable

bill which purports to pass the title to the bill to the indorsee, imports a consideration and the burden of proving
want of consideration rests upon the party alleging it. The restrictive indorsements which are held to negative
the presumption of a consideration are such as to indicate that they are not intended to pass the title but merely
to enable the indorsee to collect for the benefit of the indorser, such as indorsements “for collection” or others
showing that the indorser is entitled to the proceeds. But an indorsement to one person for the use or benefit of
another, affords no such indication. The indorser parts with his whole title to the bill and the presumption is that
he does so for a consideration. The only effect of such an indorsement, by way of restriction, is to give notice of
the rights of the beneficiary named in the indorsement and protect him against a misappropriation. 308
Effect of omission of words of negotiability. Under the law, "the mere absence of words implying power to
negotiate does not make an indorsement restrictive." The omission of the word "order" does not render the
indorsement restrictive. But while the omission of words of negotiability in the indorsement does not affect the
negotiability of the instrument, such omission in the body thereof will render the instrument non-negotiable. 309
Section 37. Effect of restrictive indorsement; rights of indorsee. -- A restrictive indorsement confers
upon the indorsee the right --
a. To receive payment on the instrument;
b. To bring any action thereon that the indorser could bring;
299
300
U.C.C. § 3-205
* ****
301
1 Agbayani, Ibid., pp. 259-260; referring to Asia Banking vs. Tan Sen Guan, 44 Phil. 511
302
303
1 Agbayani, Ibid., p. 260; citing San Carlos Milling Co. vs. Bank of PI, 59 Phil. 59
304
1 Agbayani, Ibid., p. 261; citing Granado vs. Riverdale Inc., CA 24147-R, November 27, 1964
305
170 US 326, 175 N.W. 93
306
1 Agbayani, Ibid., p. 261; citing Brannan, 7th ed., 615; Bigelow on Bill, Notes, and Infra.
307
1 Agbayani, Ibid., p. 261; referring to Atlantic vs. Comm. Lumber Co., 155 Atl. 762
308
1 Agbayani, Ibid., pp. 261-262; citing Hook vs. Praft, et al. Court of Appeals of New York, 1879, 43 Am. Rep. 539, 78 NY 371
309
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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.
A restrictive indorsement limits the right of the indorsee by restricting further negotiation, or making the indorsee
the collecting agent of the indorser, or making the indorsee a trustee or a person named in the endorsement. 310
Hence, a restrictive indorsement
(a) Prohibits the further negotiation of the instrument;
(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. 311
Restrictive indorsee may transfer his rights. A restrictive indorsement confers upon the indorsee the right x x
x to transfer his rights as such indorsee, where the form of the indorsement authorizes him to do so. It is stated
that a fair interpretation of the clause in Section 47 declaring a paper negotiable in its origin to continue
negotiable until it has been restrictively indorsed, is that the words "until it has been restrictively indorsed" do
not contemplate every restrictive indorsement but a restrictive indorsement that prohibits the further negotiation
of the instrument under subdivision 1 of Section 36 of the Negotiable Instruments Law. It is declared by these
authorities that the purpose of Section 47 of the Negotiable instruments Law was not to declare the effects of a
restrictive indorsement already provided for in Sections 36 and 37 of that law but to preserve as far as possible
the negotiability of an instrument negotiable in its origin and that the implication of Section 47 should not be
taken as destroying negotiability of an instrument heretofore universally accepted as negotiable. 312
Extent of negotiability after restrictive indorsement. Another writer, 313 as to restrictive indorsement, states:
Three propositions follow: (1) That all three forms of restrictive indorsement impose some degree of limitation
of negotiability; (2) That they do no all impose the same degree of limitation; and (3) That the indorsement itself
discloses the extent of the limitation in the particular case. 314 An indorsement or collection does not destroy the
transferability of the instrument and it can be reindorse so that the indorsee can sue in his own name. Neither
does an indorsement "for deposit only" destroy the transferability of the instrument, but the restrictive indorsee
cannot transfer the instrument for his own debt or for his own benefit. 315
d. other rules on indorsement
1. indorsement of an instrument payable to bearer (Sec. 40, NIL)
Section 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.
316
Where the instrument negotiable by delivery is indorsed by the holder, he becomes liable as an indorser.
Application of Section 40. This section applies only to instruments which are originally payable to bearer. It
does not apply to instruments originally payable to order, even when they become payable to bearer because
the only or last indorsement is in blank. 317 The section cannot apply where the paper is originally made payable
to order and indorsed in blank; for by Section 9, a note or bill which, upon its face, is payable to order, becomes
payable to bearer only when the last indorsement is in blank; and hence, when a blank indorsement is followed
by a special indorsement, the instrument is not within the terms of Section 9. The reason for making a
distinction in this respect between instruments originally drawn payable to bearer and instruments which have
become so payable because they were indorsed in blank is obvious. In one case, the maker or drawer has
expressly provided that the instrument shall be payable to bearer, and it cannot be made payable to order
without modifying these terms. But where, upon its face, it is payable to order, a transferee taking under a blank
indorsement, does not, by indorsing it specially, change its tenor as originally drawn. 318
Negotiation of instrument payable to bearer but specially indorsed. "Where an instrument payable to
bearer is indorsed, it may nevertheless be further negotiated by delivery." This means that an instrument which
is originally payable to bearer is always payable to bearer. Hence, even when specially indorsed, it can be
negotiated by mere delivery. 319
2. where instrument is payable to two or more persons (Sec. 41, NIL)
Section 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.
Application of Section 41. This section applies only to instruments payable to two or more payees severally. It
does not apply to instruments payable to two or more payees severally. These fall under Section 8 (c) and such
instruments payable may be negotiated by the indorsement of one payee. 320
How indorsement of joint payees made. Where the instrument is payable to two or more payees, all payees
must each indorse in order to negotiate the instrument. 321 If only one indorses, he passes only his part of the
instrument. Such an indorsement would not operate as such because it would not be an indorsement of the
entire instrument." But the following are exceptions to the rule requiring joint indorsement: (1) where the payee
or indorsee indorsing has authority to indorse for the others, and (2) where the payees or indorsees are
partners. 322
310
311
312
Bryant Smith, 7 Tex. Law Rev. 520, cited in Ogden, 5th ed., pp. 199-200
313
1 Agbayani, Ibid., p. 263; citing Fawsett v. Nat. Life Ins. Co., 97 Ill. 11; Haskell v. Avery, 63 N.W. 15; Robinson v. Gentry, 103 S.W. (2d) 913
314
315
1 Agbayani, Ibid., p. 263; citing Ogden, 5th ed., p. 199 referring to Brannan, 7th ed., p. 615 and Bigelow on Bills, Notes and Checks (3rd ed.) See. 217(a)
316
317
1 Agbayani, Ibid., p. 267; referring to Brannan, 7th ed., pp. 628-630
318
1 Agbayani, Ibid., p. 267; citing Crawford's Annotated Negotiable Instruments Law, 40 pp. 83, 84, cited in Ogden, 5th ed., p. 213
319
320
1 Agbayani, Ibid., p. 268; citing Union Bank vs. Spies, 130 NW 928, and other cases.
321
1 Agbayani, Ibid., p. 268; citing Wood vs. Wood, 16 NIL 428; Foster vs. Hill, 36 NIL 526
322
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3. instrument is drawn or indorsed to a person as cashier (Sec. 42, NIL)
Section 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.
Presumption is disputable. The presumption established in this section is disputable. Proof may be adduced
to show that the bill is payable to the cashier personally as the real creditor to the maker. 323
As to municipal or public corporations. An instrument payable to the treasurer of a town/city, in legal effect,
stands on the same footing as if payable to the town which is the real payee. However, the town treasurer has
authority to indorse the said instrument since "corporation" in Section 42 does not include cities and
towns. 324
4. where name of payee or indorsee is misspelled (Sec. 43, NIL)
Section 43. Indorsement where name is misspelled, and so forth. -- Where the name of a payee or
indorsee is wrongly designated or misspelled, he may indorse the instrument as therein described
adding, if he thinks fit, his proper signature.
5. indorsement in a representative capacity (Sec, 44, NIL)
Section 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.
How agent must indorse. He must indorse in the same manner as an agent of the maker, drawer or acceptor
should in order to escape personal liability as required under Section 20. In short, (1) he must add words
describing himself as an agent; and (2) at the same time disclose his principal. But it has been held that an
agent may indorse by merely signing the name of the principal. 325 Of course (3) he must be duly authorized. 326
6. presumption as to time of indorsement (Sec. 45, NIL)
Section 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.
When the instrument is indorsed without the indorsement being dated, the presumption is that the indorser
indorsed the instrument before it became overdue. The presumption however is rebuttable or disputable. The
burden of proof is on the person alleging indorsement after maturity. If the indorsement bears a date, the
presumption in this section would not arise. The presumption would be that stated in Section 11, namely, that
the date written is the true date. 327
Importance of this provision. This provision becomes important when considered in connection with Section
52(b). Under this provision, in order that one may be a holder in due course, the instrument must be negotiated
to him before it becomes overdue. The indorsement without date establishes a prima facie presumption that the
instrument was negotiated before maturity, and one who denies that the holder of such instrument is a holder in
due course has the burden of proof. 328 And the fact that an indorsement appears to be in such fresher ink than
the face of a demand note is not sufficient to overcome the presumption that it was indorsed before it was
overdue. 329
7. place of indorsement (Sec. 46, NIL)
Section 46. Place of indorsement. -- Except where the contrary appears, every indorsement is
presumed prima facie to have been made at the place where the instrument is dated.
Where the instrument is subsequently indorsed without writing the place without writing the place of
indorsement, the presumption is that the indorsement was made in the place where the instrument is dated.
The presumption, however, is rebuttable. The place of indorsement sometimes is material because an
indorsement is governed by the laws of the state where it is indorsed, although the instrument is drawn or made
in a different state. 330
8. striking out of indorsement (Sec. 48, NIL)
Section 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.
When holder may or may not strike out indorsement. A holder may strike out any indorsement which is not
necessary to his title. But where an instrument is transferred by a special indorsement, the holder has no right
to strike out the name of the person mentioned in, such indorsement and insert his own name in place thereof
(nor can he strike out such name and convert such special indorsement into a blank indorsement. The holder
who acquires title subsequent to the succeeding special indorsement must trace his title not only through the
blank indorsement but through the special indorsement as well. 331 Where the instrument is payable to bearer,
indorsements appear at the back at the note, and where the last indorsee delivers the note to another, the
indorsement appearing at the back of the note are not necessary to vest ownership of the note in the present
holder as mere delivery was sufficient. The present holder may strike out the indorsement(s) at the back of the
323
324
1 Agbayani, Ibid., p. 269; citing Franklin Savings Bank vs. Framingham, 98 NE 925
325
1 Agbayani, Ibid., p. 270; citing Mechanics Bank vs. Bank of Columbia, 55 Wheat. 326.
326
1 Agbayani, Ibid., p. 270; referring to Insular Drug Co. vs. PNB, 58 Phil. 684
327
328
1 Agbayani, Ibid., p. 271; citing Cook vs. Tannery, 234 Pac. 590
329
1 Agbayani, Ibid., p. 271; citing Giboons vs. Longine & Reid, 121 So. 490
330
331
1 Agbayani, Ibid., p. 274; citing Chan Wan vs. Tan Kim, et .al.; No. L-15380, Sept. 30, 1960
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instrument. 332 Where instrument is originally payable to order. The holder of a negotiable instrument may at any
time strike out any indorsement which is not necessary to his title; he may strike out all intervening
indorsements and aver that the first blank indorser indorsed immediately to him. 333 Without the immediate
indorsement in blank, which is necessary the holder's title, there would be no valid negotiation of the instrument
to the holder since the instrument is payable to order and he can not then validly negotiate the bill to a
subsequent party by mere delivery. 334
Effect of striking out. The following are the effects of striking out:
(1) The indorser whose indorsement is struck out is relieved from his liability on the instrument; and
(2) All subsequent indorsers are also relieved from their liability on the instrument. 335
9. transfer of an order instrument without indorsement (Sec. 49, NIL)
Section 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.
Application of Section 49. This section applies only to instruments payable to order. This contemplates a case
when, there is delivery and payment of value but no indorsement. There is, therefore, one element lacking for
the negotiation of the instrument, namely, indorsement by the payee or indorsee. This operates as an equitable
assignment. 336
Rights of transferee for value. The following are the rights of the transferee for value:
(1) The transferee acquires only the rights of the transferor. This means that if a defense is available against
the transferor, that defense is also available against the transferee.
(2) The transferee has also the right to require the transferor to indorse the instrument. 337
When transferee becomes holder in due course. The time for determining whether the transferee is a holder in
due course is as of the time of actual indorsement, not at the time of the delivery. The reason is that negotiation
is completed at the time of indorsement, not at the time of delivery. 338
!!! Case(s)
14 Metropol (Bacolod) Financing vs. Sambok Motors Co., et al., 120 SCRA 864
15 Gempesaw vs. CA, 218 SCRA 622
6. Negotiation by a prior party (Sec: 50, NIL)
Where an instrument is negotiated back to a prior party, such party may reissue and further negotiate the same. But he is
not entitled to enforce payment thereof against any intervening party to whom he was personally liable. However, he may
strike out the intervening indorsements because they are not necessary for his title and he is liable to them because of his
initial indorsement. 339
Section 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.
---------------------------------------------------------------------CASE(S)---------------------------------------------------------------
10 Sesbreno vs. Court of Appeals [GR 89252, 24 May 1993], supra.

See case entry 4
11 Consolidated Plywood Industries Inc. vs. IFC Leasing and Acceptance Corp. [GR 72593, 30 April 1987]
Second Division, Gutierrez Jr. (J): 5 concur
Facts: Consolidated Plywood Industries Inc. (CPII) 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 Baganga, Manay, and Caraga, Davao Oriental. For this purpose, it needed 2 additional units
of tractors. Cognizant of CPII's need and purpose, Atlantic Gulf & Pacific Company of Manila, through its sister company and
marketing arm, Industrial Products Marketing (IPM), a corporation dealing in tractors and other heavy equipment business, offered
to sell to CPII 2 "Used" Allis Crawler Tractors, 1 an HD-21-B and the other an HD-16-B. In order to ascertain the extent of work to
which the tractors were to be exposed, and to determine the capability of the "Used" tractors being offered, CPII requested the
seller-assignor to inspect the jobsite. After conducting said inspection, IPM assured CPII that the "Used" Allis Crawler Tractors
which were being offered were fit for the job, and gave the corresponding warranty of 90 days performance of the machines and
availability of parts. With said assurance and warranty, and relying on the IPM's skill and judgment, CPII through Henry Wee and
Rodolfo T. Vergara, president and vice-president, respectively, agreed to purchase on installment said 2 units of "Used" Allis
Crawler Tractors. It also paid the down payment of P210,000.00. On 5 April 1978, IPM issued the sales invoice for the 2 units of
tractors. At the same time, the deed of sale with chattel mortgage with promissory note was executed. Simultaneously with the
execution of the deed of sale with chattel mortgage with promissory note, IPM, by means of a deed of assignment, assigned its
rights and interest in the chattel mortgage in favor of IFC Leasing and Acceptance Corporation. Immediately thereafter, IPM
delivered said 2 units of "Used" tractors to CPII's jobsite and as agreed, IPM stationed its own mechanics to supervise the
operations of the machines. Barely 14 days had elapsed after their delivery when one of the tractors broke down and after another 9
days, the other tractor likewise broke down. On 25 April 1978, Vergara formally advised IPM of the fact that the tractors broke down
and requested for IPM's usual prompt attention under the warranty. In response to the formal advice by Vergara, IPM sent to the
jobsite its mechanics to conduct the necessary repairs, but the tractors did not come out to be what they should be after the repairs
were undertaken because the units were no longer serviceable. Because of the breaking down of the tractors, the road building and
simultaneous logging operations of CPII were delayed and Vergara advised IPM that the payments of the installments as listed in
the promissory note would likewise be delayed until IPM completely fulfills its obligation under its warranty. Since the tractors were
no longer serviceable, on 7 April 1979, Wee asked IPM to pull out the units and have them reconditioned, and thereafter to offer
them for sale. The proceeds were to be given to IFC Leasing and the excess, if any, to be divided between IPM and CPII which
offered to bear 1/2 of the reconditioning cost. No response to this letter was received by CPII and despite several follow-up calls,
332
333
1 Agbayani, Ibid., p. 275; citing Preston vs. Mann, 25 Conn 127; referring also to Maryland Trust Co. vs. Gregory, 39 SE (2d) 359.
334
335
336
1 Agbayani, Ibid., p. 276; citing Brwon vs. Wilson, 45 S.C. 519, 23 630, 55 Am. St. Rep.779; Contro vs. Rofferty, 7 Montreal Super Ct 146; Schoegfer
vs. Tommack, 97 Ill. App. 562.
337
338
339
B-31
IPM did nothing with regard to the request, until the complaint in the case was filed by IFC Leasing against CPII, Wee, and Vergara.
The complaint was filed by IFC Leasing against CPII, et al. for the recovery of the principal sum of P1,093,789.71, accrued interest
of P151,618.86 as of 15 August 1979, accruing interest there after at the rate of 12% per annum, attorney's fees of P249,081.71
and costs of suit. CPII, et al. filed their amended answer praying for the dismissal of the complaint and asking the trial court to order
IFC leasing to pay them damages in an amount at the sound discretion of the court, P20,000.00 as and for attorney's fees, and
P5,000.00 for expenses of litigation, among others. In a decision dated 20 April 1981, the trial court rendered judgment, ordering
CPII, et al. to pay jointly and severally in their official and personal capacities the principal sum of P1,093,798.71 with accrued
interest of P151,618.86 as of 15 August 1979 and accruing interest thereafter at the rate of 12% per annum; and attorney's fees
equivalent to 10% of the principal and to pay the costs of the suit. On 8 June 1981, the trial court issued an order denying the motion
for reconsideration filed by CPII, et al. CPII, et al.appealed to the Intermediate Appellate Court. On 17 July 1985, the Intermediate
Appellate Court issued the decision affirming in toto the decision of the trial court. CPII et al.'s motion for reconsideration was denied
by the Intermediate Appellate Court in its resolution dated 17 October 1985, a copy of which was received by CPII, et al. on 21
October 1985. CPII, et al. filed the petition for certiorari under rule 45 of the Rules of Court.
Issue: Whether the promissory note in question is a negotiable instrument.
Held: The pertinent portion of the note provides that ""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 (P1,093,789.71), 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 must contain the so
called "words of negotiability" — i.e., 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. 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 IFC Leasing can never be a holder in due course but remains a mere assignee of the note in question.
Thus, CPII may raise against IFC Leasing all defenses available to it as against IPM. This being so, there was no need for CPII to
implead IPM when it was sued by IFC Leasing because CPII's defenses apply to both or either of them.
12 De la Victoria vs. Burgos [GR 111190, 27 June 1995]

First Division, Bellosillo (J): 2 concur, 1 concurs in separate opinion to which 1 joined
Facts: Raul H. Sesbreno filed a complaint for damages against Assistant City Fiscal Bienvenido N. Mabanto, Jr., et al. before the
Regional Trial Court of Cebu City. After trial Judgment was rendered ordering Mabanto, et al. to pay P11,000.00 to Sesbreno. The
decision having become final and executory, on motion of the latter, the trial court ordered its execution. This order was questioned
by Mabanto, et al. before the Court of Appeals. However, on 15 January 1992 a writ of execution was issued. On 4 February 1992 a
notice of garnishment was served on Loreto D. de la Victoria as City Fiscal of Mandaue City where Mabanto, Jr., was then detailed.
The Notice directed De la Victoria not to disburse, transfer, release or convey to any other person except to the deputy sheriff
concerned the salary checks, monies, or cash due or belonging to Mabanto, Jr., under penalty of law. On 10 March 1992 Sesbreno
filed a motion before the trial court for examination of the garnishees. On 25 May 1992 the petition pending before the Court of
Appeals was dismissed. Thus the trial court, finding no more legal obstacle to act on the motion for examination of the garnishees,
directed De la Victoria on 4 November 1992 to submit his report showing the amount of the garnished salaries of Mabanto, Jr.,
within 15 days from receipt taking into consideration the provisions of Sec. 12, pars. (f) and (i), Rule 39 of the Rules of Court. On 24
November 1992 Sesbreno filed a motion to require De la Victoria to explain why he should not be cited in contempt of court for
failing to comply with the order of 4 November 1992. On the other hand, on 19 January 1993 De la Victoria 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., until delivered to him. He further claimed that, as such, they were still public funds which could not be subject to
garnishment. On 9 March 1993 the trial court denied both motions and ordered De la Victoria to immediately comply with its order
of 4 November 1992. It opined that the checks of Mabanto, Jr., had already been released through De la Victoria by the Department
of Justice duly signed by the officer concerned; that upon service of the writ of garnishment, De la Victoria as custodian of the
checks was under obligation to hold them for the judgment creditor; that De la Victoria became a virtual party to, or a forced
intervenor in, the case and the trial court hereby acquired jurisdiction to bind him to its orders and processes with a view to the
complete satisfaction of the judgment; and that additionally there was no sufficient reason for De la Victoria to hold the checks
because they were no longer government funds and presumably delivered to the payee, conformably with the last sentence of
Section 16 of the Negotiable Instruments Law. With regard to the contempt charge, the trial court was not morally convinced of De la
Victoria's guilt. On 20 April 1993 the motion for reconsideration was denied. De la Victoria filed the petition.
Issue: Whether a check still in the hands of the maker or its duly authorized representative is owned by the payee before physical
delivery to the latter.
Held: 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. As Assistant City Fiscal, the source of the salary of Mabanto, Jr., is public funds. He receives his
compensation in the form of checks from the Department of Justice through De la Victoria as City Fiscal of Mandaue City and head
of office. Under Section 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 giving effect thereto. As ordinarily understood, delivery means the
transfer of the possession of the instrument by the maker or the drawer with intent to transfer title to the payee and recognize him as
the holder thereof. 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. As held in Tiro v. Hontanosas, "the salary check of a government officer or employee such a s 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." As a necessary consequence of being public fund, the checks may not be garnished to satisfy the judgment. The
rationale behind this doctrine is obvious consideration of public policy. The Court succinctly stated in Commissioner of Public
Highways v. San Diego that "the functions and public services rendered by the State cannot be allowed to be paralyzed or disrupted
by the diversion of public funds from their legitimate and specific objects, as appropriated by law." The trial court exceeded its
jurisdiction in issuing the notice of garnishment concerning the salary checks of Mabanto, Jr., in the possession of De la Victoria.
13 Development Bank of Rizal vs. Sima Wei [GR 85419, 9 March 1993]
Facts: In consideration for a loan extended by the Development Bank of Rizal (DBR) to Sima Wei, the latter executed and delivered
to the former a promissory note, engaging to pay DBR or order the amount of P1,820,000.00 on or before 24 June 1983 with
interest at 32% per annum. Sima Wei made partial payments on the note, leaving a balance of P1,032,450.02. On 18 November
1983, Sima Wei issued two crossed checks payable to DBR drawn against China Banking Corporation, bearing respectively the
serial numbers 384934, for the amount of P550,000.00 and 384935, for the amount of P500,000.00. The said checks were allegedly
issued in full settlement of the drawer's account evidenced by the promissory note. These two checks were not delivered to DBR or
to any of its authorized representatives. For reasons not shown, these checks came into the possession of Lee Kian Huat, who
deposited the checks without DBR's indorsement (forged or otherwise) to the account of the Asian Industrial Plastic Corporation, at
B-32
the Balintawak branch, Caloocan City, of the Producers Bank. Cheng Uy, Branch Manager of the Balintawak Branch of Producers
Bank, relying on the assurance of Samson Tung, President of Plastic Corporation, that the transaction was legal and regular,
instructed the cashier of Producers Bank to accept the checks for deposit and to credit them to the account of said Plastic
Corporation, inspite of the fact that the checks were crossed and payable to DBR and bore no indorsement of the latter. On 5 July
1986, DBR filed the complaint for a sum of money against Sima Wei and/or Lee Kian Huat, Mary Cheng Uy, Samson Tung, Asian
Industrial Plastic Corporation and the Producers Bank of the Philippines, on two causes of actionL (1) To enforce payment of the
balance of P1,032,450.02 on a promissory note executed by Sima Wei on 9 June 1983; and (2) To enforce payment of two checks
executed by Sima Wei, payable to DBR, and drawn against the China Banking Corporation, to pay the balance due on the
promissory note. Except for Lee Kian Huat, Sima Wei, et al. filed their separate Motions to Dismiss alleging a common ground that
the complaint states no cause of action. The trial court granted the Motions to Dismiss. The Court of Appeals affirmed the decision,
to which DBR, represented by its Legal Liquidator, filed the Petition for Review by Certiorari.
Issue: Whether DBR, as the intended payee of the instrument, has a cause of action against any or all of the defendants, in the
alternative or otherwise.
Held: The normal parties to a check are the drawer, the payee and the drawee bank. Courts have long 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 drawer's 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
is 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. Section 16 of the
Negotiable Instruments Law, which governs checks, provides in part that "Every contract on a negotiable instrument is incomplete
and revocable until delivery of the instrument for the purpose of giving effect thereto." Thus, the payee of a negotiable instrument
acquires no interest with respect thereto until its delivery to him. Delivery of an instrument means transfer of possession, actual or
constructive, from one person to another. Without 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. Herein, the two (2) China Bank
checks, numbered 384934 and 384935, were not delivered to the payee, DBR. Without the delivery of said checks to DBR, the
former did not acquire any right or interest therein and cannot therefore assert any cause of action, founded on said checks, whether
against the drawer Sima Wei or against the Producers Bank or any of the other respondents. Since DBR never received the checks
on which it based its action against said respondents, it never owned them (the checks) nor did it acquire any interest therein. Thus,
anything which the respondents may have done with respect to said checks could not have prejudiced DBR. It had no right or
interest in the checks which could have been violated by said respondents. DBR has therefore no cause of action against said
respondents, in the alternative or otherwise. If at all, it is Sima Wei, the drawer, who would have a cause of action against her co-
respondents, if the allegations in the complaint are found to be true.
14 Metropol (Bacolod) Financing & Investment Corporation vs. Sambok Motors Co. [GR L-39641, 28 February 1983]
Second Division, De Castro (J): 4 concur, 1 on leave, 1 concurs but articulating his observation that the appeal could have been
treated as a petition for review under RA 5440 and dismissed by minute resolution.
Facts: On 15 April 1969 Dr. Javier Villaruel executed a promissory note in favor of Ng Sambok Sons Motors Co., Ltd., in the amount
of P15,939.00 payable in 12 equal monthly installments, beginning 18 May 1969, with interest at the rate of 1% per month. It is
further provided that in case on non-payment of any of the installments, the total principal sum then remaining unpaid shall become
due and payable with an additional interest equal to 25% of the total amount due. On the same date, Sambok Motors Company, a
sister company of Ng Sambok Sons Motors Co., Ltd., and under the same management as the former, negotiated and indorsed the
note in favor of Metropol Financing & Investment Corporation with the following indorsement: "Pay to the order of Metropol Bacolod
Financing & Investment Corporation with recourse. Notice of Demand; Dishonor; Protest; and Presentment are hereby waived.
SAMBOK MOTORS CO. (BACOLOD) By: RODOLFO G. NONILLO, Asst. General Manager." The maker, Dr. Villaruel defaulted in
the payment of his installments when they became due, so on 30 October 1969, Metropol formally presented the promissory note
for payment to the maker. Dr. Villaruel failed to pay the promissory note as demanded, hence Metropol notified Sambok as indorsee
of said note of the fact that the same has been dishonored and demanded payment. Sambok failed to pay, so on 26 November
1969 Metropol filed a complaint for collection of a sum of money before the Court of First Instance of Iloilo, Branch I. Sambok did not
deny its liability but contended that it could not be obliged to pay until after its co-defendant Dr. Villaruel, has been declared
insolvent. During the pendency of the case in the trial court, Dr. Villaruel died, hence, on 24 October 1972 the lower court, on
motion, dismissed the case against Dr. Villaruel pursuant to Section 21, Rule 3 of the Rules of Court. On Metropol's motion for
summary judgment, the trial court rendered its decision dated 12 September 1973, ordering Sambok to pay to Metropol the sum of
P15,939.00 plus the legal rate of interest from 30 October 1969; the sum equivalent to 25% of P15,939.00 plus interest thereon until
fully paid; and to pay the cost of suit. Not satisfied with the decision, Samboc appealed. Sambok argue that by adding the words
"with recourse" in the indorsement of the note, it becomes a qualified indorser; that being a qualified indorser, it does not warrant
that if said note is dishonored by the maker on presentment, it will pay the amount to the holder; that it only warrants the following
pursuant to Section 65 of the Negotiable Instruments Law: (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.
Issue: Whether Sambok is a qualified indorser of the subject promissory note.
Held: 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 relieves the indorser of the
general obligation to pay if the instrument is dishonored but not of the liability arising from warranties on the instrument as provided
in Section 65 of the Negotiable Instruments Law. However, Sambok indorsed the note "with recourse" and even waived the notice of
demand, dishonor, protest and presentment. "Recourse" means resort to a person who is secondarily liable after the default of the
person who is primarily liable. Sambok, 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, Metropol can go
after Sambok. 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 will pay the amount thereof to the holder. Sambok's intention of indorsing the note without qualification is made
even more apparent by the fact that the notice of demand, dishonor, protest and presentment were all waived. The words added by
Sambok do not limit his liability, but rather confirm his obligation as a general indorser. Further, after an instrument is dishonored by
non-payment, the person secondarily liable thereon ceases to be such and becomes a principal debtor. His liability becomes the
same as that of the original obligor. Consequently, the holder need not even proceed against the maker before suing the indorser.
15 Gempesaw vs. Court of Appeals [GR 92244. 9 February 1993]

see case entry 32
Facts: Natividad O. Gempesaw owns and operates four grocery stores located at Rizal Avenue Extension and at Second Avenue,
both in Caloocan City. Among these groceries are D.G. Shopper's Mart and D.G. Whole Sale Mart. Gempesaw maintains a
checking account numbered 13-00038-1 with the Caloocan City Branch of PBCom. To facilitate payment of debts to her suppliers,
Gempesaw draws checks against her checking account with PBCom as drawee. Her customary practice of issuing checks in
payment of her suppliers was as follows: The checks were prepared and filled up as to all material particulars by her trusted
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bookkeeper, Alicia Galang, an employee for more than 8 years. After the bookkeeper prepared the checks, the completed checks
were submitted to Gempesaw for her signature, together with the corresponding invoice receipts which indicate the correct
obligations due and payable to her suppliers. Gempesaw signed each and every check without bothering to verify the accuracy of
the checks against the corresponding invoices because she reposed full and implicit trust and confidence on her bookkeeper. The
issuance and delivery of the checks to the payees named therein were left to the bookkeeper. Gempesaw admitted that she did not
make any verification as to whether the checks were actually delivered to their respective payees. Although PBCom notified her of
all checks presented to and paid by the bank, Gempesaw did not verify the correctness of the returned checks, much less check if
the payees actually received the checks in payment for the supplies she received. In the course of her business operations covering
a period of 2 years, Gempesaw issued, following her usual practice, a total of 82 checks in favor of several suppliers. These checks
were all presented by the indorsees as holders thereof to, and honored by PBCom. PBCom correspondingly debited the amounts
thereof against Gempesaw's checking account numbered 30-00038-1. Most of the checks were for amounts in excess of her actual
obligations to the various payees as shown in their corresponding invoices. Practically, all the checks issued and honored by
PBCom were crossed checks. Aside from the daily notice given to Gempesaw by PBCom, the latter also furnished her with a
monthly statement of her bank transactions, attaching thereto all the cancelled checks she had issued and which were debited
against her current account. It was only after the lapse of more than 2 years that Gempesaw found out about the fraudulent
manipulations of her bookkeeper. All the 82 checks with forged signatures of the payees were brought to Ernest L. Boon, Chief
Accountant of PBCom at the Buendia branch, who, without authority therefor, accepted them all for deposit at the Buendia branch to
the credit and/or in the accounts of Alfredo Y. Romero and Benito Lam. Ernest L. Boon was a very close friend of Alfredo Y.
Romero. 63 out of the 82 checks were deposited in Savings Account 00844-5 of Alfredo Y. Romero at PBCom's Buendia branch,
and 4 checks in his Savings Account 32-81-9 at its Ongpin branch. The rest of the checks were deposited in Account 0443-4, under
the name of Benito Lam at the Elcano branch of the respondent drawee Bank. About 30 of the payees whose names were
specifically written on the checks did not receive nor even see the subject checks and that the indorsements appearing at the back
of the checks were not theirs. The team of auditors from the main office of PBCom which conducted periodical inspection of the
branches' operations failed to discover, check or stop the unauthorized acts of Ernest L. Boon. All the deposit slips of the 82 checks
in question were initialed and/or approved for deposit by Ernest L. Boon, contrary to the rules of PBCom, where only a Branch
Manager, and no other official of PBCom, may accept a second indorsement on a check for deposit. The Branch Managers of the
Ongpin and Elcano branches accepted the deposits made in the Buendia branch and credited the accounts of Alfredo Y. Romero
and Benito Lam in their respective branches. On 7 November 1984, Gempesaw made a written demand on PBCom to credit her
account with the money value of the 82 checks totalling P1,208,606.89 for having been wrongfully charged against her account.
PBCom refused to grant Gempesaw's demand. On 23 January 1985, Gempesaw filed a Complaint against the Philippine Bank of
Communications (PBCom) for recovery of the money value of 82 checks charged against Gempesaw's account with PBCom on the
ground that the payees' indorsements were forgeries. The Regional Trial Court, Branch CXXVIII of Caloocan City, which tried the
case, rendered a decision on 17 November 1987 dismissing the complaint as well as PBCom's counterclaim. On appeal, the Court
of Appeals in a decision rendered on 22 February 1990, affirmed the decision of the RTC on two grounds, namely (1) that
Gempesaw's gross negligence in issuing the checks was the proximate cause of the loss and (2) assuming that the bank was also
negligent, the loss must nevertheless be borne by the party whose negligence was the proximate cause of the loss. On 5 March
1990, Gempesaw filed the petition for review under Rule 45 of the Rules of Court.
Issue [1]: Whether the drawer’s account may be charged for checks where the indorsements were forged.
Held [1]: As a matter of practical significance, problems arising from forged indorsements of checks may generally be broken into
two types of cases: (1) where forgery was accomplished by a person not associated with the drawer — for example a mail robbery;
and (2) where the indorsement was forged by an agent of the drawer. This difference in situations would determine the effect of the
drawer's negligence with respect to forged indorsements. While 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 depositor's 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 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 loses his right against
the drawee who has debited his account under the forged indorsement. As a rule, a drawee bank who has paid a check on which an
indorsement has been forged cannot charge the drawer's 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 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 the active participation of the latter. Most of the cases involving forgery by an
agent or employee deal with the payee's indorsement. The drawer and the payee oftentimes have 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 drawer's books. It will then be just a question of time until the fraud is discovered. This is specially true when the agent
perpetrates a series of forgeries as herein. The negligence of a depositor which will prevent recovery of an unauthorized payment is
based on failure of the depositor to act as a prudent businessman would under the circumstances. Herein, Gempesaw relied
implicitly upon the honesty and loyalty of her bookkeeper, and did not even verify the accuracy of the amounts of the checks she
signed against the invoices attached thereto. Although she regularly received her bank statements, she apparently did not carefully
examine the same nor the check stubs and the returned checks, and did not compare them with the sales invoices. Otherwise, she
could have easily discovered the discrepancies between the checks and the documents serving as bases for the checks. With such
discovery, the subsequent forgeries would not have been accomplished. It was not until 2 years after the bookkeeper commenced
her fraudulent scheme that Gempesaw discovered that 82 checks were wrongfully charged to her account, at which time she
notified PBCom. Gempesaw's failure to make such adequate inquiry constituted negligence which resulted in the bank's honoring of
the subsequent checks with forged indorsements. Gempesaw's negligence was the proximate cause of her loss. And since it was
her negligence which caused PBCom to honor the forged checks or prevented it from recovering the amount it had already paid on
the checks, Gempesaw cannot now complain should the bank refuse to recredit her account with the amount of such checks. Under
Section 23 of the NIL, she is now precluded from using the forgery to prevent the bank's debiting of her account.
Issue [2]: Whether banking rules prohibiting the drawee bank from having checks with more than one indorsement invalidate the
negotiation or transfer of the said check.
Held [2]: The banking rule banning acceptance of checks for deposit or cash payment with more than one indorsement unless
cleared by some bank officials does not invalidate the instrument; neither does it invalidate the negotiation or transfer of the said
check. In effect, this rule destroys the negotiability of bills/checks by limiting their negotiation by indorsement of only the payee.
Under the Negotiable Instruments Law, the only kind of indorsement which stops the further negotiation of an instrument is a
restrictive indorsement which prohibits the further negotiation thereof. 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 indorsement does
not authorize him to do so. Although the holder of a check cannot compel a drawee bank to honor it because there is no privity
between them, as far as the drawer-depositor is concerned, such bank may not legally refuse to honor a negotiable bill of exchange
or a check drawn against it with more than one indorsement if there is nothing irregular with the bill or check and the drawer has
sufficient funds. The drawee cannot be compelled to accept or pay the check by the drawer or any holder because as a drawee, he
B-34
incurs no liability on the check unless he accepts it. But the drawee will make itself liable to a suit for damages at the instance of the
drawer for wrongful dishonor of the bill or check.
D. Holders
1. General concept of a holder
Definition. Holder is the person who is in possession of a bearer instrument or an indorsee of an order instrument who is
in possession thereof. A holder is the obligee, a person who can enforce payment of the instrument. 340 Section 190,
defines “holder” as “the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof.” And “bearer”
is therein defined as “the person in possession of a bill or note which is payable to bearer.” Hence, the meaning of
“holder” depends upon the kind of instrument involved. If payable to order, “holder” means the person (1) who is the
payee or indorsee therein, and (2) who is in possession thereof. If payable to bearer, “holder” means the person who is in
possession thereof.341
2. Holder in due course (requisites) (Sec. 52, NIL)
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 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.
Presumption holder is in due course. Under Section 59, generally, every holder is presumed prima facie to be a holder
in due course. Any one, therefore, who claims otherwise must prove that the holder in question acquired the instrument
with one or more of the conditions lacking. Any holder proved to have taken an instrument with one of the conditions
enumerated in this section lacking is not a holder in due course. 342
Whether payee can be holder in due course. There is a serious conflict of authorities on this point. But “there can be no
doubt that a proper interpretation of the Act as a whole leads to the conclusion that a payee may be a holder in due
course under any circumstances in which he meets the requirements of Section 52.” 343
Whether drawee can be holder in due course. The “holder” refers to one who has taken the instrument as it passes
along in the course of negotiation towards the drawee and not the drawee, who in the acceptance adnd payment of the
instrument, thereby strips it of all negotiability and reduces it to a mere voucher or proof of payment. 344 Accordingly, the
drawee of a draft is not a holder in due course under Section 52. 345 And the drawee of a check towhom it is presented for
payment is not even a holder, and therefore, cannot be a holder in due course. 346
Whether pledgee can be holder in due course. The pledgee for value in good faith of a complete unmatured note,
without notice of equities, is a holder in due course. 347
a. instrument complete and regular
b. taken before overdue
Acquisition before instrument is overdue. The holder of the instrument must have become the “holder of it before
it was overdue.” 348 One who has purchased two promissory notes without the necessary indorsement on the part of
the holder, after payment thereof had already been one year overdue, and without having made inquiries about the
solvency of their makers, cannot be considered a holder in due course. 349 One taking past due paper is chargeable
with notice of all equities between the original parties, but not with equities between intermediate indorsers. 350
Moreover, if the instrument is overdue, it is also a notice that it has been dishonored. 351
When instrument is overdue. An instrument is overdue after the date of maturity. On the date of maturity, the
instrument is not overdue, and a holder who acquires the instrument on that date is a holder in due course (provided
that the other conditions are present) because the principal debtor has the whole day to pay. 352
(1) rule in case of installment instruments
As to acceleration instruments. When the instrument contains an acceleration clause, knowledge of the
holder at the time of acquisition thereof that one installment or interest, or both, as the case may be, is unpaid,
is notice that the instrument Is overdue. 353
As to interest. One who purchases in good faith an instrument upon which the interest is overdue is a holder in
due course. 354 But where, by the terms of the instrument, the principal was to become due upon default of the
payment of interest, one who takes the instrument upon which the interest is overdue is not a holder in due
course. 355
340
1 Sundiang, Ibid., p. 86
341
342
343
344
1 Agbayani, Ibid., p.291; citing Nat. Bank of Comm. Vs. Seattle Nat. Bank, 187 Pac. 342
345
1 Agbayani, Ibid., p.291; citing Amer. Hominy Co. vs. Milliken Nat. Bank, 273 Fed. 550 III
346
1 Agbayani, Ibid., p.291; citing Wells Fargo Bank vs. Italy, 214 Cal. 156
347
1 Agbayani, Ibid., p. 291; citing Anderson vs. Union Bank, 83 SE 1080
348
1 Agbayani, Ibid., p. 280; citing Section 52, paragraph b
349
1 Agbayani, Ibid., p. 280; citing Santos v. Reyes & Reyes, 64 Phil. 383
350
1 Agbayani, Ibid., p. 280; citing Young Men's Christian Ass'n Gymnasium Co. v. Rockford Nat. Bank, 179 111. 599, 54 297, 46 L.R.A. 703, 70 Am. St.
Rep. 135
351
352
1 Agbayani, Ibid., p. 280; citing Continental Nat. Bank v. Townsend, 87 N.Y. 8
353
1 Agbayani, Ibid., p. 280; referring to Wulfe Nuhler State Bank vs. Wible, 245 Pac. 1067
354
1 Agbayani, Ibid., p. 280; citing Hodge vs. Wallace, 108 NW 312
355
1 Agbayani, Ibid., p. 280; referring to Wulfe Nuhler State Bank vs. Wible, 245 Pac. 1067
B-35
(2) rule in case of demand instruments (Sec. 53, NIL)
Section 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.
Application of Section 53. It applies to instruments which are payable on demand. Under paragraph (b) of
Section 52, a holder who becomes such after it is over due is not a holder in due course. It obviously applies to
an instrument payable at a fixed or determinable future time. Section 53 provides that where the instrument is
negotiated an unreasonable length of time after its issue, the holder is not deemed a holder in due course. 356
Thus, one who took the check two and a half years after it became payable is not a holder in due course. By
then, the check was stale. 357
What constitutes unreasonable length of time. Unreasonable length of time: (1) nine month's delay; 358 (2)
negotiation after issue of a note, twenty months, 359 or six months. 360 Practically no authorities hold that a
reasonable time for negotiating a demand note could be extended beyond a year. 361
But the following have been held not to be negotiation for an unreasonable length of time: (1) Where the note is
negotiated thirty days after its issue; 362 (2) where the note is negotiated sixteen months after issue, if the
payments of monthly interests were made to the payee; 363 (3) and even three years when interest for demand
note is paid; 364 where a certified check which was held for nearly six months to secure performance of a
government contract when negotiated and presented within a few days after the completion of the contract. It is
not negotiation at an unreasonable length of time from its issue. The reason is that the holder of a certified
check is placed on the same footing as a depositor, and the certifying bank can not complain of any delay within
the statute of limitations as it is benefited by such delay. 365
c. notice of infirmity or defect (Sec. 56 & 57, NIL; see also Sec. 54, NIL)
Acquisition without notice of defect of title or of infirmity. At the time the-instrument. is negotiated to the holder,
"he had no notice of any infirmity in the instrument or defect of title of the person negotiating it." 366
Section 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.
The Negotiable Instruments Law, in defining things that may be wrong with an instrument uses three terms, namely,
(1) defenses,
(2) infirmities, and
(3) defects of title. 367
Defenses. The term "defenses" seems to include common law defenses, outside of those covered in Section 55.
Defenses then include
(1) mistake;
(2) absence and failure of consideration covered in Section 28;
(3) minority and other forms of incapacity to contract covered in Section 22;
(4) lack of authority of an agent covered in Section 19, etc.
One acquiring an instrument with knowledge of any of the foregoing defenses is not a holder in due course. 368
Infirmities. Infirmities must include things that are wrong with the instrument itself as distinguished from those that
are lacking in the contracts on the instrument. Such infirmities are to be found in situations arising under:
(1) Section 13, wrong date inserted where the instrument is expressed to be payable at a fixed period after sight is
undated;
(2) Section 14, filling up of a blank instrument not strictly in accordance with the authority given or not within
reasonable time, where it was delivered wanting in a material particular;
(3) Section 15, filling up and negotiating without authority an incomplete and undelivered instrument;
(4) Section 16, lack of valid and intentional delivery of a mechanically complete instrument;
(5) Section 21, agent signing per procuration beyond the scope of his authority;
(6) Section 23, for forgery;
(7) Sections 124 and 125, material alteration.
Accordingly, notice by the holder of an instrument of any of the foregoing, at the time of the negotiation of the
instrument to him, would render him not a holder in due course. 369
Defects of title. Defects of the title are defined by Section 55 to cover all those situations which at common law were
known as equitable defenses, and also to cover those equities of ownership where there was breach of faith in
negotiation. Under Section 55, the defective title of a person over an instrument may result from the following:
(1) Acquisition of the instrument by fraud;

(2) Acquisition of the instrument by force, duress or fear;
(3) Acquisition of the instrument by unlawful means;
(4) Acquisition of the instrument for an illegal consideration;
356
357
1 Agbayani, Ibid., p. 292; citing Montinola vs. ONB, GR K-2861, 26 February 1951
358
1 Agbayani, Ibid., p. 292; citing Fayette Nat. Bank vs. Meyers, 277 NE 292
359
1 Agbayani, Ibid., p. 292; citing Title Loan Investment Co. vs. Fuller, 184 Pac. 2727
360
1 Agbayani, Ibid., p. 292; citing State & City Bank & Trust Co. vs. Redrick, 131 SE 723
361
1 Agbayani, Ibid., p. 292; citing McAdam vs. Grand Forks, etc., 47 LRA (NS) 246
362
1 Agbayani, Ibid., p. 292; citing Saymur & Co. vs. Artz., 5 La. App. 556
363
1 Agbayani, Ibid., p. 292; citing McLean vs. Bryer, 54 Atl. 688
364
1 Agbayani, Ibid., p. 292; citing German vs. Adelman, 135 Atl. 688
365
1 Agbayani, Ibid., p. 292; citing Nat. Mechanics Bank vs. Schmlez Nat. Bank, 116 SE 380
366
367
1 Agbayani, Ibid., p. 286; referring to Brennan, 7th ed.,. p. 706
368
369
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(5) Negotiation of the instrument in breach of faith; and
(6) Negotiation of the instrument under circumstances that amount to fraud.
One acquiring an instrument with knowledge of any of the foregoing defects of title of the person negotiating, is not a
holder in due course. 370
Defective title in general. The title of a person in an instrument becomes defective either:
(1) in the acquisition, or
(2) in the negotiation thereof.
In the acquisition thereof, the title of a person becomes defective when he obtains the instrument or any signature
thereto by:
(1) fraud,
(2) duress or force and fear,
(3) other unlawful means, or
(4) for an illegal consideration.
In the negotiation thereof, the title of a person becomes defective when he negotiates it:
(1) with breach of faith, or
(2) under such circumstances as amount to a fraud. 371
Illustration of other unlawful means. Where the note is stolen, or, as has been held, where a person acquires a
note by indorsement of a part thereof, he gets title by "unlawful means" within this section since the transfer is a
contravention of the provisions of this law. 372
Section 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.
Notice of defect of title in general. To constitute notice of defect or infirmity, the transferee must have actual
knowledge, either:
(1) of the defect or infirmity, or
(2) of such facts that his action in taking the instrument amounts to bad faith.
The clear weight of authority seems to interpret Section 56 as abolishing the old common law doctrine of constructive
notice and that actual notice of facts is necessary to constitute bad faith. 373 Nevertheless, "by Section 56 the rule
that knowledge and bad faith may be established by circumstantial evidence has not been abolished. This section
does not wholly eliminate the duty of inquiry. The circumstantial evidence may be so strong and decisive that to only
be negligence but an act of bad faith.” 374
Actual knowledge. Knowledge is required, not mere suspicion, surmise or fear. 375 But knowledge of the exact truth,
such as, the particulars or even of the nature of the fraud, is not necessary. Knowledge of some truth such as, that
the instrument is tainted in some way, as would prevent the taking of the instrument by commercially honest men is
enough. 376 Knowledge of agent is knowledge by principal. 377
Taking amounting to bad faith. Bad faith consists in guilty knowledge, or wilful ignorance, showing a vicious or evil
mind. 378 But negligence, even gross negligence, is not bad faith. 379 While mere suspicion is not enough, where there
is knowledge of suspicious circumstances, coupled with means of verifying them, taking the instrument may amount
to bad faith. 380 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. 381
Section 54. Notice before full amount 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.
d. good faith
Acquisition in good faith, meaning. The holder must take the instrument "in good faith." “Good faith" refers to the
indorsee or transferee, not to the seller of the paper. So even if the seller is in bad faith, the transferee may still be a
holder in due course. Taking in good faith means that if the holder does not take in bad faith, his good faith is
sufficiently shown, and bad faith, under Section 56, means that he must have knowledge of facts which render it
dishonest for him to take a particular piece of negotiable paper. Knowledge, not surmise, suspicion, or fear, is
necessary; not knowledge of the exact truth but knowledge of some truth that would prevent action by those
commercially honest men for whom the law is made. 382
Meaning of holder in good faith. The term bona fide holder, or holder in good faith, means a holder without
knowledge or notice of equities of any sort which could be set up against a prior holder of the instrument. 383
370
371
372
1 Agbayani, Ibid., p. 293; citing Edgar vs. Haines, 33 ALR 795
373
1 Agbayani, Ibid., p. 294; citing Ashville Sav. Bank v Lee, 214 Ala. 051, 108 So. 335; Mitchell v. Perkins, 118 Kan. 449, 235 Pac. 1036; Jenkins v.
Johnson, 116 Okla. 17, 243 Pac. 178
374
375
1 Agbayani, Ibid., p. 295; citing (USCCA), 31 F (ed) 236
376
1 Agbayani, Ibid., p. 295; referring to David vs. Oaklanf First Nat. Bank, 299 Pac. 391
377
378
1 Agbayani, Ibid., p. 295; referring to Durham Loan, etc., Go vs. Sethman, 171 Pac. 884
379
1 Agbayani, Ibid., p. 295; citng Goodman vs. Sinmonds, 15 L. ed., 934
380
1 Agbayani, Ibid., p. 295; citing Hess vs. Iowa Banker’s Mortg. Co., 201 NW 91
381
1 Agbayani, Ibid., p. 295; citing Vicente de Ocampo & Co. vs. Gatchalian et al. No. L-15126, 30 November 1961
382
1 Agbayani, Ibid., p. 281; citing Gerseta Corp. v. Wessex-Campbell Silk Co. (U.S.C.C.A.) 3 F (2d) 236
383
1 Agbayani, Ibid., p. 281; citing Ogden, 5th. ed., p. 285, citing Stephens v. Olson, 62 Minn. 295, 64 N.W. 898; Whistler v. Forster, 14 C.B. N.S. 248, 108
E.G.L. 248; and other cases
B-37
Absence of knowledge of the defense, when the instrument was taken, is the essential element in the matter of good
faith. 384
Bad faith. 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. 385 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 to bad faith. 386 The term “bad
faith” does not necessarily involve furtive motives but means bad faith in a commercial sense. 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. 387
Effect of failure to make inquiry. Ordinarily, failure to inquire after notice of facts merely sufficient to cause a
person of ordinary prudence to make inquiry as to an infirmity in a negotiable instrument and defect in the holder’s
title, is not evidence of purchaser's bad faith so as to bar him from recovery. 388 In other words, the test for
determining whether a holder acquires an instrument in good faith is not whether he was negligent, 389 such as in
failing to make inquiries, but whether his purpose was dishonest. 390 Even gross negligence in purchasing a
negotiable instrument from a holder whose title was defective does not establish bad faith. 391 In short, the test is
subjective test of honesty, not an objective test of due care. 392
When failure to inquire amounts to bad faith. It has, however, been held that failure to make inquiry, when
circumstances strongly indicate defect, renders the holder not a holder in due course. 393 A willful failure of one
purchasing a note, with actual knowledge of suspicious circumstances, to make inquiries, may amount to bad faith.
394
And suspicious facts and circumstances and grossly inadequate price may properly be considered in determining
whether a purchaser acquired notes in bad faith. 395
Good faith means lack of notice of defect or infirmity. Paragraph (c) of Section 52 requires of a holder in due
course that he takes in "good faith." It is clear that anyone who acquired an instrument with "notice" of an "infirmity"
in it or "defect in the title of the person negotiating it," as these are defined in Sections 55 and 56, would not qualify
as a taker in good faith. If this is the case, then paragraph (d) of Section 52 is really a mere elaboration of what has
already been said in the third subdivision. Defect in title is elucidated by Section 55, while Section 56 declares what
amounts to "notice" of an infirmity in the instrument or defect in the title of the negotiator. It appears, then, that
Section 52 (d) is an elaboration of Section 52 (c) and Sections 55 and 56 are in turn elaborations of Section 52 (d). 396
e. holder for value
Meaning of holder for value. One who gives valuable consideration for an instrument issued or negotiated to him is
a holder for value. But the term "holder for value" is not limited to one who is known to have given valuable
consideration for the instrument he holds. It refers also to any holder of an instrument for which value has been given
at any time. 397
Acquisition for value. The holder must take the instrument "for value." Where the holder gave no valuable
consideration for the transfer of the instrument to him, he cannot be a holder in due course. But the fact that a note
is purchased at a discount does not of itself raise an inference that the purchaser is buying a tainted instrument. 398
Effect of inadequacy of consideration. Article 1355 of the New Civil Code provides that "except in cases specified
by law, lesion or inadequacy of cause shall not invalidate a contract, unless there has been fraud, mistake or undue
influence." The law presumes that a man is capable of managing his own affairs and the fact as to whether or not his
bargains are wise or unwise is not a proper question for either a legal or equitable tribunal. While inadequacy of
consideration is not of itself a sufficient ground for either legal or equitable relief, yet it may be shown as evidence of
fraud. Ordinarily, the mere fact of inadequacy of consideration has very little weight, when standing alone, but
coupled with other elements tending to show fraud, it becomes a very material factor of constructive fraud. 399
Effect where sum is trifling. An amount paid for an instrument, if a trifling sum, may of itself establish notice. "If the
amount which the holder offers to take for a negotiable instrument is insignificant as compared to its face value, it
might be, under the circumstances, implied notice that there was something wrong about it; and taken without
inquiry, one should not be protected. For it is obvious that a bona fide owner would not throw away his property for a
trifle and that the purchaser acted in bad faith when he acquired it for comparatively nothing." 400 The consideration
should be so utterly trifling as to bear upon its face the impress of fraud to leave open no reasonable conjecture but
that the purchaser must have known, from the very nature of the facts, that they could not have originated from any
but a corrupt source. The known insolvency of prior parties would, of course, strengthen the argument of implied
notice and bad faith wherever they were alleged. 401
3. Presumption of due course holding (Sec. 59, NIL)
Section 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
384
1 Agbayani, Ibid., p. 281; citing Helner v. Krolick, 36 Mich. 371; Raphoel v. Bank of England, 17 C.B. 161. 84 E.C.L. 161
385
De Ocampo vs. Gatchalian [GR L-15126, 30 November 1961]; citing Paika v. Perry, 225 Mass. 563, 114 N. E. 830
386
De Ocampo vs. Gatchalian [GR L-15126, 30 November 1961]; Ozark Motor Co. v. Horton (Mo. App.), 196 S. W. 395. Accord. Davis v. First Nat. Bank,
26 Ariz. 621, 229 Pac. 391
387
De Ocampo vs. Gatchalian [GR L-15126, 30 November 1961]; citing Brannan's Negotiable Instruments Law, 6th ed., pp. 640-642; which in turn refer to
Morris v. Muir, 111 Misc. Rep. 739, 181 N. Y. Supp. 913, affd. in memo., 191 App. Div. 947, 181 N. Y. Supp. 945.
388
1 Agbayani, Ibid., pp. 281-282; citing West v. 1st Baptist Church of Taft, 123 Tex. 388, 71 S.W. (2d) 1090
389
1 Agbayani, Ibid., p. 282; referring to Moore v. Potomac Sav. Bank of Wash. D.C., 160 Va. 597. 169 S.E. 922, 91 A.L.R. 1733
390
1 Agbayani, Ibid., p. 282; citing Hartford Nat. Bank & Trust Co. v. Credenza, 119 Coun. 368, 117 Atl. 132
391
1 Agbayani, Ibid., p. 282; citing West v. First Baptist Church of Taft, 123, 71 S.W. (2d) 1090
392
393
1 Agbayani, Ibid., p. 282; citing Coppersmith v: Maunz, 227 App. Div. 119, 237 N.Y. Supp. 1; De Ocampo & Co. v. Gatchalian, L-15126, Nov. 30,
1961, 3 SCRA 596
394
1 Agbayani, Ibid., p. 282; citing Bane Trust Co. v. Zodd, 103 Vt. 392, 154 Atl. 680
395
1 Agbayani, Ibid., p. 282; citing Kelly v. Industrial Operating Co., 329 Mo. 629, 46 S.W. (2d) 181
396
397
398
1 Agbayani, Ibid., p. 284; citing Lister v. Donlaw, 85 Mont. 571, 281 Pac. 348
399
1 Agbayani, Ibid., p. 284; citing Jones v. Degge, 84 Va. 685, 5 S.L. 548, Abbe v. Newton, 19 Conn. 20.
400
1 Agbayani, Ibid., p. 284; citing Ogden. 5th ed., pp. 297-298
401
1 Agbayani, Ibid., p. 284; citing Ogden. 5th ed., p. 297
B-38
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 last-mentioned rule does not apply in favor of a party who became
bound on the instrument prior to the acquisition of such defective title.
In whose favor presumption arises. The presumption expressed in this section arises 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. 402 However, when the instrument is not payable to the holder thereof or to bearer, there is said to be a defect in
the title of the holder and the rule that a possessor of the instrument is prima facie a holder in due course does not apply.
403
Furthermore, the presumption does not apply in favor of a person who is no longer in possession of the instrument . 404
When presumption accrues. It is presumed that he acquired the note under all the circumstances required under said
section. But of course, before the presumption arises, he must prove that he is the holder of the instrument, that is, that he
is the indorsee in possession of the instrument, as it is payable to order. 405
When burden is shifted. When 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 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. 406 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 under
whom he claims, acquired the title as holder in due course." 407 It has been held that where draft was negotiated under
circumstances amounting to fraud, it became incumbent upon the plaintiff to prove that it occupies the position of a bova
fide purchaser of said draft for va1ue and without notice. 408
Presumption not applicable when holder's title was defective or suspicious. 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.
In other words, 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.
The burden was, therefore, placed upon it to show that, notwithstanding the suspicious circumstances, it acquired the
check in actual good faith. 409
Reason for the rule. "The reason for this salutary rule given by the courts in innumerable decisions is that the guilty
maker or holder 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 fide of the
transfer. The law therefore requires the holder of such paper to manifest the most complete candor and show exactly the
circumstances under which the paper was acquired. "410
When burden is not shifted. "But the last mentioned rule does not apply in favor of a party who became bound on the
instrument prior to the acquisition of such defective title." 411 The last mentioned rule referred to is the shifting of the
burden of proof to the holder where it is shown that there is a defect in the title of any person who has negotiated it. The
shifting of burden of proof upon showing of previous defective title - does not apply in favor of a party who became bound
on the instrument prior to the acquisition of the defective title. Whether a defendant who has no defense of his own, and
admits his liability as such, can set up collateral equities (defenses) existing in favor of other persons, the great weight of
authority is that A cannot unless he has been notified by the rightful owner not to pay the same to the holder. In such a
case, two persons would be claiming ownership of the same thing. The remedy is to file a complaint in interpleader or to
bring him in as a party to the action if one has already been instituted. 412
4. Rights of holders in due course (Sec. 57, NIL)
Section 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.
Rights of a holder in due course.

(1) He may sue on the instrument in his own name;
(2) he may receive payment and if the payment is in due course, the instrument is discharged; 413
(3) he holds the instrument free from any defect of title of prior parties and free from defenses available to prior parties
among themselves; and
(4) he may enforce payment of the instrument for the full amount thereof against all parties liable thereon. 414
5. Shelter Rule (Sec. 58, NIL)
Section 58. When subject to original defenses. -- 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. 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.
Rights of holder not in due course.

(1) He may sue on the instrument in his own name;
(2) He may receive payment and if the payment is in due course, the instrument is discharged; 415
(3) He holds the instrument subject to the same defenses as if it were non-negotiable. Generally, both real and equitable
defenses can be interposed against a person not a holder in due course;
402
1 Agbayani, Ibid., p. 316; citing Night & Day Bank v. Rosebaun, 191 Mo. App. 559, 574; Fossum v. Fernandez, 44 Phil. 713
403
1 Agbayani, Ibid., p. 316; citing De Ocampo & Co. vs. Gatchalian, et. al., L-16126, November 30, 1961, 3 SCRA 596, 604
404
1 Agbayani, Ibid., p. 316; citing Fossum vs. Fernandez, 44 Phil. 713
405
406
De Ocampo vs. Gatchalian [GR L-15126, 30 November 1961]; citing Howard National Bank v. Wilson, et al., 96 Vt. 438, 120 At. 889, 894
407
1 Agbayani, Ibid., p. 317; citing 2nd clause, 1st sentence, Sec. 69. See also concurring opinion, Asia Banking v. Ten Sen Guan, 44 Phil. 511
408
1 Agbayani, Ibid., p. 317; citing Asia Banking Corporation v. Ten Sen Guan, 44 Phil. 511
409
1 Agbayani, Ibid., pp. 317-318; citing Vicente de Ocampo & Co. v. Gatchalian et al, No. L-15126, Nov. 30, 1961, 3 SCRA 696
410
1 Agbayani, Ibid., p. 318; citing Concurring op., Asia Banking v. Ten Sen Guan, supra
411
Last sentence, Sec. 59, NIL
412
1 Agbayani, Ibid., p. 318; Brannan, 7th ed., p. 885
413
Section 51, NIL
414
Section 57, NIL
415
Section 51, NIL
B-39
(4) But a holder not in due course 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. 416
Holder acquiring from holder in due course. The general rule that equitable defenses can be interposed against a
person not a holder in due course has this exception, that "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 to all parties prior to the latter." 417 Thus, a purchaser from a holder in due course is entitled to recover against
prior parties even though he has notice of the defenses; 418 or notice of maturity of a negotiable certificate of deposit; 419 or
with knowledge of the equities. 420 In other words, though he is not himself a holder in due course, equitable defenses
cannot be interposed against him by parties prior to the holder in due course from whom he derived his title. But, of
course, real defenses can be interposed against him. it will be noted that there are two requisites, namely: (1) that he
derived his title from a holder in due course, and (2) that he was not himself a party to any fraud or illegality affecting the
instrument. 421
Burden of proof to show predecessor holder in due course. In order that a holder who derives his title from a holder
in due course may recover on the instrument, it is incumbent upon him to show that the person through whom he derives
his title was a holder in due course; and this must be proven as an independent matter of fact. 422
As to one not holder in due course reacquiring from holder in due course. It is a well-known rule of law that if the
original payee of a note unenforceable for lack of consideration repurchases the instrument after transferring it to a holder
in due course, the paper again becomes subject in the payee's hands to the same defenses to which it would have been
subject as if the paper had never passed through the hands of a holder in due course. 423 The same is true where the
instrument is retransferred to an agent of the payee. 424
!!! Case(s)
16 De Ocampo vs. Gatchalian, 03 SCRA 596
17 Stelco Marketing Corporation vs. CA, June 17, 1992
18 Bataan Cigar & Cigarette Factory, Inc. vs. CA, March 3, 1994
19 State Investment House vs. CA, 175 SCRA 311
20 Yang vs. CA, G.R. No. 138074, August 15, 2003
---------------------------------------------------------------------CASE(S)---------------------------------------------------------------
16 De Ocampo vs. Gatchalian [GR L-15126, 30 November 1961]

En Banc, Labrador (J): 8 concur, 1 concurs in result
Facts: On or about 8 September 1953, in the evening, 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 Gatchalian. Gonzales represented to Gatchalian that he was duly authorized by the owner of the car,
Ocampo Clinic, to look for a buyer of said car and to negotiate for and accomplish said sale. Gatchalian, finding the price of the car
quoted by Gonzales to her satisfaction, requested 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. On this request of Gatchalian, 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 Gonzales requested Gatchalian to give
him 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 Gonzales and to be returned to Gatchalian the following day when Gonzales brings the car and
the certificate of registration. Relying on these representations of Gonzales and with this assurance that said check will be only for
safekeeping and which will be returned to Gatchalian the following day when the car and its certificate of registration will be brought
by Gonzales to Gatchalian, Gatchalian drew and issued a check that Gonzales executed and issued a receipt for said check. On the
failure of Gonzales to appear the day following and on his failure to bring the car and its certificate of registration and to return the
check on the following day as previously agreed upon, Gatchalian issued a "Stop Payment Order" on the check with the drawee
bank. When Gonzales received the check from Gatchalian under the representations and conditions above specified, he delivered
the same to the Ocampo Clinic, in payment of the fees and expenses arising from the hospitalization of his wife. Vicente R. De
Ocampo & Co. for and in consideration of fees and expenses of hospitalization and the release of the wife of Gonzales from its
hospital, accepted said check, applying P441.75 thereof to payment of said fees and expenses and delivering to Gonzales the
amount of P158.25 representing the balance on the amount of the said check. The acts of acceptance of the check and application
of its proceeds in the manner specified were made without previous inquiry by De Ocampo from Gatchalian. De Ocampo filed with
the Office of the City Fiscal of Manila, a complaint for estafa against Gonzales based on and arising from the acts of Gonzales in
paying his obligations with De Ocampo and receiving the cash balance of the check and that said complaint was subsequently
dropped.
De Ocampo subsequently filed an action for the recovery of the value of a check for P600 payable to De Ocampo and drawn by
Gatchalian. The Court of First Instance of Manila, through Hon. Conrado M. Vasquez, presiding, sentenced Gatchalian and
Gonzales to pay De Ocampo the sum of P600, with legal interest from 10 September 1953 until paid, and to pay the costs.
Gatchalian, et al. appealed.
Issue [1]: Whether De Ocampo is a holder in due course.
Held [1]: NO. Section 52, Negotiable Instruments Law, defines holder in due course as "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." Although De Ocampo was not aware of the circumstances under which the check was delivered to
Gonzales, the circumstances -- such as the fact that Gatchalian 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 —- should have put De Ocampo to inquiry as to the why and wherefore of the possession of the check by Gonzales, and
why he used it to pay Matilde's account. It was payee's duty to ascertain from the holder Gonzales what the nature of the latter's title
to the check was or the nature of his possession. Having failed in this respect, De Ocampo was guilty of gross neglect in not finding
out the nature of the title and possession of Gonzales, amounting to legal absence of good faith, and it may not be considered as a
holder of the check in good faith.
416
Section 58, NIL
417
1 Agbayani, Ibid., pp. 314-315; citing 2nd sentence, Sec. 58. See also Fossum v. Fernandez, 44 Phil. 713
418
1 Agbayani, Ibid., p. 315; citing Amer. Trust Co. v. Anagnes, 145 S.E. 699
419
1 Agbayani, Ibid., p. 315; citing Dickson v. Merchants, etc., 195 N.Y. Supp. 320
420
1 Agbayani, Ibid., p. 315; citing Emery v. Mariano, 113 Atl. 3
421
422
423
1 Agbayani, Ibid., p. 316; citing Kost v. Bender, 25 Mich. 515; Shade v. Hayes, L.R.A. (1916D), 271, 8 C.P. 470
424
1 Agbayani, Ibid., p. 316; citing Fossum v. Fernandez, 44 Phil. 713, citing in turn Battersbee v. Calins, 128 Mich. 569
B-40
Issue [2]: Whether the rule that a possessor of the instrument is prima facie a holder in due course applies.
Held [2]: 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 -- 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.
17 Stelco Marketing Corp. vs. Court of Appeals [GR 96160, 17 June 1992]
Second Division, Narvasa (J): 3 concur, 1 on leave
Facts: Stelco Marketing Corporation is engaged in the distribution and sale to the public of structural steel bars. On 7 different
occasions in September and October 1980, it sold to RYL Construction, Inc. quantities of steel bars of various sizes and rolls of G.I.
wire. These bars and wire were delivered at different places at the indication of RYL Construction, Inc. The aggregate price for the
purchases was P126,859.61. Although the corresponding invoices issued by STELCO stipulated that RYL would pay "COD" (cash
on delivery), the latter made no payments for the construction materials thus ordered and delivered despite insistent demands for
payment by the former. On April 4, 1981, RYL gave to Armstrong Industries — described by STELCO as its "sister corporation" and
"manufacturing arm" — a check drawn against Metrobank in the amount of P126,129.86, numbered 765380 and dated 4 April 1981.
That check was a company check of another corporation, Steelweld Corporation of the Philippines, signed by its President, Peter
Rafael Limson, and its Vice-President, Artemio Torres. The check was issued by Limson at the behest of his friend, Romeo Y. Lim,
President of RYL. Romeo Lim had asked Limson for financial assistance, and the latter had agreed to give Lim a check only by way
of accommodation, "only as guaranty but not to pay for anything." Why the check was made out in the amount of P126,129.86 is
not explained. The check was actually issued in said amount of P126,129.86, and as already stated, was given by R.Y. Lim to
Armstrong, Industries, in payment of an obligation. When the latter deposited the check at its bank, it was dishonored because
"drawn against insufficient funds." When so deposited, the check bore two (2) indorsements, that of "RYL Construction," followed by
that of "Armstrong Industries." On account of the dishonor of Metrobank Check 765380, and on complaint of Armstrong Industries
(through a Mr. Young), Rafael Limson and Artemio Torres were charged in the Regional Trial Court of Manila with a violation of
Batas Pambansa Bilang 22. They were acquitted in a decision rendered on 28 June 1984 "on the ground that the check in question
was not issued by the drawer 'to apply on account for value,' it being merely for accommodation purposes." That judgment however
conditioned the acquittal with the pronouncement that "this is not however to release Steelweld Corporation from its liability under
Sec. 29 of the Negotiable Instruments Law for having issued it for the accommodation of Romeo Lim."
Eleven months later — and some 4 years after issuance of the check — in May, 1985, STELCO filed with the Regional Trial Court of
Caloocan City a civil complaint against both RYL and STEELWELD for the recovery of the value of the steel bars and wire sold to
and delivered to RYL in the amount of P126,129.86, plus 18% interest from 20 August 1980 and 25% of the total amount sought to
be recovered as and by way of attorney's fees. A preliminary attachment was issued by the trial court on the basis of the averments
of the complaint but was shortly dissolved upon the filing of a counter-bond by STEELWELD. RYL could no longer be located and
could not be served with summons. It never appeared. Only STEELWELD filed an answer, under date of 16 July 1985. Judgment
was rendered on 26 June 1986. The judgment sentenced Steelweld to pay to Stelco the amount of P126,129.86 with legal rate of
interest from 9 May 1985, when the case was instituted until fully paid, plus another sum equivalent to 25% of the total amount due
as and for attorney's fees. STELCO's motion for reconsideration was denied by the Appellate Tribunal's resolution dated 13
November 1990. STELCO appealed.
Issue[1]: Whether the fourth condition, i.e. as to notice, for a holder in due course is applicable to an accommodation party.
Held [1]: "A holder in due course," says the law, "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 persons negotiating it." As regards an
accommodation party (such as STEELWELD), the fourth condition, i.e., lack of notice of any infirmity in the instrument or defect in
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 for value" against the accommodation party notwithstanding that "such holder, at the time of taking the
instrument, knew him to be only an accommodation party."
Issue [2]: Whether STELCO ever became a holder in due course of Check 765380, a bearer instrument within the contemplation of
the Negotiable Instruments Law.
Held [2]: NO. It never did. There is no evidence whatever that STELCO's possession of Check 765380 ever dated back to any time
before the instrument's presentment and dishonor. There is no evidence whatsoever that the check was ever given to it, or indorsed
to it in any manner or form in payment of an obligation or as security for an obligation, or for any other purpose before it was
presented for payment. On the contrary, STELCO never became a holder for value and that "(n)owhere in the check itself does the
name of Stelco Marketing appear as payee, indorsee or depositor thereof." What the record shows is that: (1) the STEELWELD
company check in question was given by its president to R.Y. Lim; (2) it was given only by way of accommodation, to be "used as
collateral for another obligation;" (3) in breach of the agreement, however, R.Y. Lim indorsed the check to Armstrong in payment of
an obligation; (4) Armstrong deposited the check to its account, after indorsing it; (5) the check was dishonored. The record does not
show any intervention or participation by STELCO in any manner or form whatsoever in these transactions, or any communication of
any sort between STEELWELD and STELCO, or between either of them and Armstrong Industries, at any time before the dishonor
of the check. The record does show that after the check had been deposited and dishonored, STELCO came into possession of it in
some way, and was able, several years after the dishonor of the check, to give it in evidence at the trial of the civil case it had
instituted against the drawers of the check (Limson and Torres) and RYL. Possession of a negotiable instrument after presentment
and dishonor, or payment, is utterly inconsequential; it does not make the possessor a holder for value within the meaning of the
law; it gives rise to no liability on the part of the maker or drawer and indorsers. It is clear from the relevant circumstances that
STELCO cannot be deemed a holder of the check for value. It does not meet two of the essential requisites prescribed by the
statute. It did not become "the holder of it before it was overdue, and without notice that it had been previously dishonored," and it
did not take the check "in good faith and for value." Neither is there any evidence whatever that Armstrong Industries, to whom R.Y.
Lim negotiated the check, accepted the instrument and attempted to encash it in behalf, and as agent of STELCO. On the contrary,
the indications are that Armstrong was really the intended payee of the check and was the party actually injured by its dishonor; it
was after all its representative (a Mr. Young) who instituted the criminal prosecution of the drawers, Limson and Torres, albeit
unsuccessfully.
B-41
18 Bataan Cigar and Cigarette Factory vs. Court of Appeals [GR 93048, 3 March 1994]
Second Division, Nocon (J): 3 concur
see case entry 44
Facts: 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 October 1978. In consideration
thereof, BCCFI, on 13 July 1978 issued crossed checks post dated sometime in March 1979 in the total amount of P820,000.00.
Relying on the supplier's representation that he would complete delivery within three months from 5 December 1978, BCCFI
agreed to purchase additional 2,500 bales of tobacco leaves, despite the supplier's failure to deliver in accordance with their earlier
agreement. Again BCCFI issued postdated 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 State Investment House, Inc. (SIHI) On 19 July 1978, he
sold at a discount check TCBT 551826 bearing an amount of P164,000.00, post dated 31 March 1979, drawn by BCCFI, naming
George King as payee to SIHI. On December 19 and 26, 1978, he again sold to SIHI checks TCBT 608967 & 608968, both in the
amount of P100,000.00, post dated September 15 & 30, 1979 respectively, drawn by BCCFI in favor of George King. In as much as
George King failed to deliver the bales of tobacco leaf as agreed despite BCCFI's demand, BCCFI issued on 30 March 1979, a stop
payment order on all checks payable to George King, including check TCBT 551826. Subsequently, stop payment was also ordered
on checks TCBTs 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 case for collection on three unpaid checks, 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 the case, since he, as payee, is not an indispensable
party. The Court of Appeals affirmed the decision of the trial court. BCCFI filed the petition for review.
Issue: 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.
Held: The Negotiable Instruments Law states what constitutes a holder in due course, i.e. "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. 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. Herein, 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.
(Note: It does not mean, however, that SIHI 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, SIHI can collect from the
immediate indorser, George King.)
19 State Investment House Inc. (SIHI) vs. Intermediate Appellate Court [GE 72764, 13 July 1989]
Third Division, Fernan (CJ): 3 concur, 1 on leave
Facts: Shortly before 5 September 1980, New Sikatuna Wood Industries, Inc. (NSWII) requested for a loan from 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, Anita Pena Chua (Harris Chua's wife) issued 3 crossed checks payable to NSWII all postdated 22
December 1980. The total value of the postdated checks amounted to P 299,450.00. Subsequently, NSWII entered into an
agreement with State Investment House, Inc. (SIHI) whereby for and in consideration of the sum of Pl,047,402.91 under a deed of
sale, the former assigned and discounted with SIHI 11 postdated checks including the 3 postdated checks issued by Peña Chua to
NSWII. When the three checks issued by Pena Chua were allegedly deposited by SIHI, these checks were dishonored by reason of
"insufficient funds", "stop payment" and "account closed", respectively. SIHI claimed that despite demands on Peña Chua 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 before the Regional Trial Court of Manila, Branch XXXVII (Civil Case 82-10547). The spouses Chua filed a third party
complaint against NSWII for reimbursement and indemnification in the event that they be held liable to SIHI. For failure of NSWII to
answer the third party complaint despite due service of summons, the latter was declared in default. On 30 April 1984, the lower
court rendered judgment against the spouses, ordering them to pay jointly and severally to SIHI P 229,450.00 with interest at the
rate of 12% per annum from 24 February 1981 until fully paid; P 29,945.00 as and for attorney's fees; and the costs of suit. On the
third party complaint, NSWII was ordered to pay the spouses all amounts said spouses may pay to SIHI on account of the case. On
appeal filed by the spouses (AC-GR CV 04523), the Intermediate Appellate Court (now Court of Appeals) reversed the lower court's
judgment in its decision, dismissing the complaint, with costs against SIHI. SIHI filed the petition for review.
Issue [1]: Whether SIHI is a holder in due course as to entitle it to proceed against the spouses Chua for the amount stated in the
dishonored cross checks.
Held [1]: NO. 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 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 lights and liabilities arising therefrom, does not mention
"crossed checks". But the 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 that the holder of the check is not a holder in good faith. Relying on the ruling in Ocampo v. Gatchalian
(GR L-15126, 30 November 1961), 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 purpose, otherwise he is not a holder in
due course. Further, the appellate court said that when SIHI rediscounted the check knowing that it was a crossed check he was
knowingly violating the avowed intention of crossing the check; that his failure to inquire from the holder, NSWII, 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; that being not a holder in due course, SIHI was subject to personal defenses, such as lack of
consideration between the spouses and NSWII (no deposits were made, hence no loan was made, hence the three checks are
without consideration as per Section 28, NIL); that NSWII negotiated the three checks in breach of faith in violation of Section 55,
Negotiable Instruments Law, which is a personal defense available to the drawer of the check; that such instruments are mentioned
in Section 541 of the Code of Commerce; and that tThe 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. The Supreme Court agreed with the appellate court.
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Issue [2]: Whether SIHI is a proper party authorized to make presentment of the cross checks in question.
Held [2]: NO. 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 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. Herein, the three subject checks had been crossed generally
and issued payable to NSWII 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 SIHI against the drawer of the subject checks, Pena Chua,
considering that SIHI is not the proper party authorized to make presentment of the checks in question.
Issue [3]: Whether SIHI can still recover even if it is not a holder in due course.
Held [3]: YES. It does not follow that simply because SIHI 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,
SIHI 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. Herein, SIHI may recover from NSWII 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 instrument is subject to
defenses as if it were non-negotiable.
20 Yang vs. Court of Appeals [GR 138074, 15 August 2003]

Second Division, Quisumbing (J): 3 concur, 1 on leave
Facts: On or before 22 December 1987, Cely Yang and Prem Chandiramani entered into an agreement whereby the latter was to
give Yang a Philippine Commercial International Bank (PCIB) manager's check in the amount of P4.2 million in exchange for 2 of
Yang's manager's checks, each in the amount of P2.087 million, both payable to the order of Fernando David. Yang and
Chandiramani agreed that the difference of P26,000.00 in the exchange would be their profit to be divided equally between them.
Yang and Chandiramani also further agreed that the former would secure from Far East Bank & Trust Company (FEBTC) a dollar
draft in the amount of US$200,000.00, payable to PCIB FCDU Account 4195-01165-2, which Chandiramani would exchange for
another dollar draft in the same amount to be issued by Hang Seng Bank Ltd. of Hong Kong. Accordingly, on December 22, 1987,
Yang procured (a) Equitable Banking Corporation [ECB] Cashier's Check CCPS 14-009467 in the sum of P2,087,000.00, dated 22
December 1987, payable to the order of Fernando David; (b) FEBTC Cashier's Check 287078, in the amount of P2,087,000.00,
dated 22 December 1987, likewise payable to the order of Fernando David; and (c) FEBTC Dollar Draft 4771, drawn on Chemical
Bank, New York, in the amount of US$200,000.00, dated 22 December 1987, payable to PCIB FCDU Account 4195-01165-2. At
about 1:00 p.m. of the same day, Yang gave the aforementioned cashier's checks and dollar drafts to her business associate, Albert
Liong, to be delivered to Chandiramani by Liong's messenger, Danilo Ranigo. Ranigo was to meet Chandiramani at Philippine Trust
Bank, Ayala Avenue, Makati City, Metro Manila where he would turn over Yang's cashier's checks and dollar draft to Chandiramani
who, in turn, would deliver to Ranigo a PCIB manager's check in the sum of P4.2 million and a Hang Seng Bank dollar draft for
US$200,000.00 in exchange. Chandiramani did not appear at the rendezvous and Ranigo allegedly lost the two cashier's checks
and the dollar draft bought by Yang. Ranigo reported the alleged loss of the checks and the dollar draft to Liong at 4:30 p.m. of 22
December 1987. Liong, in turn, informed Yang, and the loss was then reported to the police. It transpired, however, that the checks
and the dollar draft were not lost, for Chandiramani was able to get hold of said instruments, without delivering the exchange
consideration consisting of the PCIB manager's check and the Hang Seng Bank dollar draft. At 3:00 p.m. or some 2 hours after
Chandiramani and Ranigo were to meet in Makati City, Chandiramani delivered to David at China Banking Corporation branch in
San Fernando City, Pampanga, the (a) FEBTC Cashier's Check 287078, and the (b) Equitable Cashier's Check CCPS 14-009467.
In exchange, Chandiramani got US$360,000.00 from David, which Chandiramani deposited in the savings account of his wife,
Pushpa Chandiramani; and his mother, Rani Reynandas, who held FCDU Account 124 with the United Coconut Planters Bank
(UCPB) branch in Greenhills, San Juan, Metro Manila. Chandiramani also deposited FEBTC Dollar Draft 4771, in PCIB FCDU
Account 4195-01165-2 on the same date. Meanwhile, Yang requested FEBTC and ECB to stop payment on the instruments she
believed to be lost. Both banks complied with her request, but upon the representation of PCIB, FEBTC subsequently lifted the stop
payment order on FEBTC Dollar Draft 4771, thus enabling the holder of PCIB FCDU Account 4195-01165-2 to receive the amount
of US$200,000.00.
On 28 December 1987, Yang lodged a Complaint for injunction and damages against ECB, Chandiramani, and David, with prayer
for a temporary restraining order, with the Regional Trial Court of Pasay City (Civil Case 5479). The Complaint was subsequently
amended to include a prayer for Equitable to return to Yang the amount of P2.087 million, with interest thereon until fully paid. On 12
January 1988, Yang filed a separate case for injunction and damages, with prayer for a writ of preliminary injunction against FEBTC,
PCIB, Chandiramani and David, with the RTC of Pasay City, docketed as Civil Case No. 5492. This complaint was later amended to
include a prayer that FEBTC et al return to Yang the amount of P2.087 million, the value of FEBTC Dollar Draft 4771, with interest at
18% annually until fully paid. On 9 February 1988, upon the filing of a bond by Yang, the trial court issued a writ of preliminary
injunction in Civil Case No. 5479. A writ of preliminary injunction was subsequently issued in Civil Case 5492 also. Meanwhile,
David moved for dismissal of the cases against him and for reconsideration of the Orders granting the writ of preliminary injunction,
but these motions were denied. David then elevated the matter to the Court of Appeals in a special civil action for certiorari (CA-GR
SP 14843), which was dismissed by the appellate court. As Civil Cases 5479 and 5492 arose from the same set of facts, the two
cases were consolidated. The trial court then conducted pre-trial and trial of the two cases, but the proceedings had to be
suspended after a fire gutted the Pasay City Hall and destroyed the records of the courts. After the records were reconstituted, the
proceedings resumed and the parties agreed that the money in dispute be invested in Treasury Bills to be awarded in favor of the
prevailing side, and limiting the issues in the case. On 4 July 1995, the trial court handed down its decision in Civil Cases 5479 and
5492, in favor of David declaring him entitled to the proceeds of the 2 cashier's checks, together with the earnings derived therefrom
pendente lite; ordering Yang to pay David moral damages in the amount of P100,000.00; attorney's fees in the amount of
P100,000.00 and to pay the costs. The trial court dismissed the complaint against FEBTC, PCIB and EBC; without prejudice to
whatever action Yang will file against Chandiramani for reimbursement of the amounts received by him from David. Yang then
moved for reconsideration of the RTC judgment, but the trial court denied her motion in its Order of 20 September 1995. Yang
seasonably filed an appeal with the Court of Appeals (CA-GR CV 52398). On 25 March 1999, the appellate court affirmed the
decision of the trial court with modification and ordered Yang to pay PCIB the amount of P25,000.00, as attorney's fees. Yang filed
the petition for review on certiorari.
Issue: Whether David was a holder in due course.
Held: Every holder of a negotiable instrument is deemed prima facie a holder in due course. However, this presumption arises only
in favor of a person who is a holder as defined in Section 191 of the Negotiable Instruments Law, meaning a "payee or indorsee of a
bill or note, who is in possession of it, or the bearer thereof." Herein, it is not disputed that David was the payee of the checks in
question. The weight of authority sustains the view that a payee may be a holder in due course. Hence, the presumption that he is a
prima facie holder in due course applies in his favor. However, said presumption may be rebutted. Hence, what is vital to the
B-43
resolution of this issue is whether David took possession of the checks under the conditions provided for in Section 52 of the
Negotiable Instruments Law. All the requisites provided for in Section 52 must concur in David's case, otherwise he cannot be
deemed a holder in due course. Yang's challenge to David's status as a holder in due course hinges on two arguments: (1) the lack
of proof to show that David tendered any valuable consideration for the disputed checks; and (2) David's failure to inquire from
Chandiramani as to how the latter acquired possession of the checks, thus resulting in David's intentional ignorance tantamount to
bad faith. In sum, Yang posits that the last two requisites of Section 52 are missing, thereby preventing David from being considered
a holder in due course. Unfortunately for Yang, her arguments on this score are less than meritorious and far from persuasive.
Issue [a]: Whether there is lack of proof to show that David tendered any valuable consideration for the disputed checks.
Held [a]: With respect to consideration, Section 24 of the Negotiable Instruments Law creates 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 David's favor
that he gave valuable consideration for the checks in question. In alleging otherwise, Yang has the onus to prove that David
got hold of the checks absent said consideration. In other words, Yang must present convincing evidence to overthrow the
presumption. The records, however, shows that Yang failed to discharge her burden of proof. Yang's averment that David did
not give valuable consideration when he took possession of the checks is unsupported, devoid of any concrete proof to sustain
it. Note that both the trial court and the appellate court found that David did not receive the checks gratis, but instead gave
Chandiramani US$360,000.00 as consideration for the said instruments. Factual findings of the Court of Appeals are
conclusive on the parties and not reviewable by the Supreme Court; they carry great weight when the factual findings of the
trial court are affirmed by the appellate court.
Issue [b]: Whether David's failure to inquire from Chandiramani as to how the latter acquired possession of the checks,
resulted in David's intentional ignorance tantamount to bad fait
Held [b]: Yang fails to point any circumstance which should have put David on inquiry as to the why and wherefore of the
possession of the checks by Chandiramani. David was not privy to the transaction between Yang and Chandiramani. Instead,
Chandiramani and David had a separate dealing in which it was precisely Chandiramani's duty to deliver the checks to David
as payee. The evidence shows that Chandiramani performed said task to the letter. Yang admits that David took the step of
asking the manager of his bank to verify from FEBTC and Equitable as to the genuineness of the checks and only accepted the
same after being assured that there was nothing wrong with said checks. At that time, David was not aware of any "stop
payment" order. Under these circumstances, David thus had no obligation to ascertain from Chandiramani what the nature of
the latter's title to the checks was, if any, or the nature of his possession. Thus, he cannot be held guilty of gross neglect
amounting to legal absence of good faith, absent any showing that there was something amiss about Chandiramani's
acquisition or possession of the checks. David did not close his eyes deliberately to the nature or the particulars of a fraud
allegedly committed by Chandiramani upon Yang, absent any knowledge on his part that the action in taking the instruments
amounted to bad faith.
Issue [c]: Whether David should at least have inquired as to whether he was acquiring said checks for the purpose for which
they were issued, pursuant to Bataan Cigar & Cigarette Factory, Inc. v. Court of Appeals.
Held [c]: Yang's reliance on the Bataan Cigar case, however, is misplaced. The facts in the case are not on all fours with
Bataan Cigar. In the latter case, the crossed checks were negotiated and sold at a discount by the payee, while herein, the
payee did not negotiate further the checks in question but promptly deposited them in his bank account. The Negotiable
Instruments Law is silent with respect to crossed checks, although the Code of Commerce makes reference to such
instruments. Nonetheless, 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 effects 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. In Bataan Cigar, the rediscounting of the check by the payee knowingly violated the avowed
intention of crossing the check. Thus, in accepting the cross checks and paying cash for them, despite the warning of the
crossing, the subsequent holder could not be considered in good faith and thus, not a holder in due course. The ruling in
Bataan Cigar reiterates that in De Ocampo & Co. v. Gatchalian. The factual circumstances in De Ocampo and in Bataan Cigar
are not present herein. For here, there is no dispute that the crossed checks were delivered and duly deposited by David, the
payee named therein, in his bank account. In other words, the purpose behind the crossing of the checks was satisfied by the
payee.
E. Liability of Parties
1. Primary and secondary liability distinguished
Primary liability is the engagement of a party to an instrument that on its due date he will accept or pay, or both, the
instrument to the payee, or to any one to whom it is negotiated, according to its tenor. Secondary liability is an
engagement by a party to an instrument that on its 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 payee or to whom it is negotiated or to any subsequent indorser who may be compelled
to pay it. 425
It is not necessary that a suit be first brought against the parties primarily liable not that any collateral undertaking be first
pursued as distinguished from that of subsidiary liability. 426
When primarily and secondarily liable. Under the NIL, 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 as per Section
192 NIL. When one speaks of primary and secondary liability, at least two debtrors or obligors are contemplated. 427
2. Liability distinguished from warranties
A warranty consists of a party’s undertaking that, at the time of his negotiation, he had title to the instrument and it is valid
and subsisting. 428
Effect of warranty vis-à-vis liability. Warranties are not of much legal consequence in the case of indorsers who are
secondarily liable since secondary liability is an immediate, or affords an immediate right of recourse to a holder which is a
much more effective remedy than calling for any warranty reparation. 429
3. Liability and/or warranties of parties
425
Vitug, Jose C. Pandect of Commercial Law and Jurisprudence; Third edition, 1997; p.60
426
Vitug, Ibid. p.60, referring to Miller vs. Levitt, 115 NE 431
427
428
Vitug, Ibid., p.60
429
Vitug, Ibid., p.63
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Summary of distinctions between liabilities of persons negotiating.
(1) As to the party negotiating by delivery, his warranties extend only to the immediate transferee, while as to the
qualified indorser and the general indorse'r, they extend to parties subsequent to them. As between a qualified
indorser and a general indorser, the warranties of the first extend to all subsequent parties who acquire title through
his indorsement. regardless of whether they are holders in due course or not, while as to the second, his warranties
extend only to subsequent holders in due course, subsequent parties deriving their title from holders in due course
and his immediate transferee.
(2) Under Section 65, the party negotiating by delivery or by qualified indorsement warrants only that he is ignorant of
any fact which would impair the validity of the instrument or render it valueless, while under Section 66, the general
indorser warrants that the instrument is valid and subsisting.
(3) Under Section 65, the party negotiating by delivery or qualified indorsement does not engage to pay the instrument if
it is dishonored by non-acceptance or non-payment except when such dishonor arises from his four warranties. In
other words, his secondary liability is limited. Under Section 66, the general indorser engages to pay the holder or
any intervening party who may be compelled by the holder to pay if the instrument is dishonored either by non-
acceptance or non-payment, whether such dishonor arises from the warranties or from other causes such as
insolvency. In other words, his secondary liability is not limited to the four warranties. 430
a. Maker (Sec. 60, NIL)
Section 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.
Maker primarily liable. In a promissory note, the maker is primarily liable. Under Section 60, the agreement of the
maker is that he will pay the instrument according to its tenor. He does not say that he will pay it if somebody does
not pay. Hence, he is primarily liable. 431 The engagement of the maker is to pay absolutely the note according to its
tenor. The maker's liability is primarily and unconditional. 432 And one who has signed as maker is presumed to have
acted with care and to have signed the document in question with full knowledge of its contents unless, of course,
fraud is proved. 433
Maker must pay according to terms of the note. When an action to recover the debt was brought in court, the
debtor tried to escape liability as maker by alleging that he spent the money for the medical treatment of his
daughter, who is, in turn, a beneficiary of a trust which is administered by the creditor as trustee. The Supreme Court
ruled that the debtor bound himself to pay personally. He cannot shift the obligation to another without the consent of
the payee. He cannot allege that he spent the money on expenses which should be charged to a trust administered
by the creditor because it is not the payee's concern to know how the proceeds should be spent. That is the sole
concern of the maker. The payee's interest is merely to see that the note is paid according to its term. 434
Liability of one who is a mere agent and not the real borrower. An action on a promissory note is properly
dismissed against a defendant who is not the real borrower. 435
Liability of two or more makers. When two or more makers sign jointly and severally, each of them is individually
liable for the payment of the full amount of their obligation, 436 even if one of them did not receive part of the value
given therefor, as he would be considered an accommodation party. 437 But suppose the note runs thus: "We
promise to pay, etc., (Sgd.) A & B." Are they jointly liable only because under the New Civil Code, 438 joint and several
liability cannot be presumed? It must be expressly stipulated. (But see liability of joint indorsers, under section 68)
Payee's existence, etc. Aside from engaging to pay the instrument according to its tenor, the maker also admits the
existence of the payee and his then capacity to indorse. Thus, without expressly stating it in the note, the maker, by
merely signing his name in a note as such, without more, represents to the world that the payee is an existing person
with the then capacity to indorse. The maker consequently is precluded from setting up the following defenses: (1)
that the payee is a fictitious person because, by making the note, he admits that the payee exists; and (2) that the
payee was insane, a minor, or a corporation acting ultra vires because, by making the note, he admits the then
capacity of the payee to indorse. 439
Summarization of liabilities and warranties of maker. Primary liability and an admission of the existence of the
payee and his then capacity to indorse. 440
b. Drawer (Sec. 61, NIL)
Section 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.
Drawer secondarily liable. By the mere drawing of the bill, without saying more, the drawer assumes the liability
stated in Section 61. Under said section, the general tenor of the liability of the drawer is that he will pay the bill of
the drawee does not accept or pay the bill. If the drawee pays, then he is not required to pay. It is only when the
drawee does not pay that he wil be required to pay. 441 The drawer does not engage to pay the bill absolutely. He
engages merely that the bill will be accepted or paid or both, according to its tenor, and that he will pay only when:
(1) it is dishonored; (2) and the necessary proceedings of dishonor are duly taken 442 The liability of the drawer is
therefore, subject to these two conditions and attaches only upon their fulfillment. Thus, without expressly stating it
in the bill, the drawer, by merely drawing the bill and signing his name in the bill as such drawer, without more,
impliedly engages to be so secondarily liable, as if he has incorportaed the provisions of Section 61 in the bill.
Accordingly, if a bill is not paid, the drawer becomes liable for the payment of its value to the holder provided that
430
431
432
1 Agbayani, Ibid., p. 319; citing PNB v. Macenas, 48 Phil. 207, 210
433
1 Agbayani, Ibid., p. 319; referring to Tan Tua Sia v. Yu Biao Sontua, 56 Phil. 707
434
1 Agbayani, Ibid., p. 319; citing Araneta v. Perez, (1965) 14 SCRA 498
435
436
1 Agbayani, Ibid., p. 320; citing Parot vs. Gemora, 7 Phil. 94
437
1 Agbayani, Ibid., p. 320; referring to Clark vs. Sellner, 42 Phil 384
438
Article 1208, NCC
439
440
Vitug, Ibid., p.61, citing Section 61, NIL
441
442
1 Agbayani, Ibid., p. 321; referring to Sections 70, 89, and 152
B-45
notice of dishonor is given. 443 In the absence of due presentment, the drawer is not liable. 444 And a person in whose
favor a bank sells a telegraphic exchange on a foreign bank may, in case payment is refused by the bank of
destination, maintain an action, against the bank selling the exchange, without regard to whether such payee was an
immediate party to the purchase of the exchange or not. 445
To whom drawer secondarily liable. The secondary liability of the drawer is in favor of: (1) the holder, or (2) if any
of the indorsers intervening between the holder and the drawer is compelled to pay by the holder, the drawer will be
liable to that indorser so compelled to pay. 446
Payee's existence. Like the maker, the drawer, by merely signing his name on the bill as drawer, also admits the
eristence of the payee and his then capacity to indorse. 447
Negatives his liability. The law allows the drawer to negative or limit his liability by express stipulation, as by adding
to his order to pay the words: (1) "without recourse," (2) "I shall not be liable in case of non-payment or non-
acceptance." 448
Summarization of liabilities and warranties of drawer. Secondary liability and admission of the existence of the
payee and his then capacity to indorse. The drawer may, by stipulation in his indorsement, negate his own liability to
the holder. 449 A drawer has the duty to inform the drawee bank of an order to stop payment made to it by the
purchaser of a bank draft, and it renders itself liable for any failure to so communicate such instruction to the drawee
bank. 450
(1) relationship with drawee
(No direct annotation yet)
Is drawer of unaccepted bill primarily liable? It has been held that until the bill has been accepted, the
drawer is the primary debtor and after acceptance, the drawee or acceptor is the principal debtor and the
drawer becomes secondarily liable. 451 His liability is the same as that of a first indorser. It may be pointed out,
however, that under Section 61, whether the bill is accepted or not, the drawer is not absolutely required ta pay.
Therefore, strictly speaking, under Section 192, which defines a person primarily liable as one "who by the
terms of the instrument is absolutely required to pay the same," the drawer is not primarily liable thereon even if
the bill is unaccepted.452
(2) relationship with collecting bank
(No direct annotation yet)
Drawer of checks should pay for their value to paying bank., where drawee bank did not debit account
of paying bank. In a case, where a depositor of a bank, encashed checks with the bank, but the drawee bank
did not debit the account of the paying bank, the depositor should pay their value to the paying bank. This
controversy boils down to the fundamental legal and equitable proposition that no one should enrich himself at
the expense of another. 453
c. Acceptor (Sec. 127 & 62, NIL)
Section 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.
An unaccepted draft cashed hy the bank at the drawer’s request is not an assignment of the drawer’s funds in the
name of the drawee. 454 And a holder in due course of a dishonored bill has no cause of action against the drawee
either at law or in equity as a n assignee of the drawer’s contractual rights underlying the bill. 455
Section 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.
Primarily liable in a bill of exchange. The acceptor is primarily liable. He is primarily liable because under Section
62, he is absolutely required to pay the instrument as he engages that he will pay it according to the tenor of his
acceptance. He does not say that he will pay it if someone does not pay. In a bill of exchange, the drawer, the
qualified or general indorsers, and the persoon negotiating by mere delivery, are secondarily liable. 456
Acceptor primarily liable. The acceptor engages to pay absolutely according to the tenor of his acceptance. His
liability is not subject to any condition. Thus, without expressly stating it on the bill, the acceptor, by merely signing
the bill as such, engages to pay unconditionally the bill according to the tenor of his acceptance. It is to be noted,
however, that as already stated, the acceptor is a drawee who accepts the bill. Before acceptance, the drawee is not
liable on the bill. "The drawee by acceptance becomes liable to the payee or his indorsee, and also to the drawer
himself." 457 His acceptance immediately places a legal liability on him for the payment of the bill in favor of one who
became a holder thereof after acceptance, and if he wants to escape liability, it is up to him to show that he is a mere
443
1 Agbayani, Ibid., p. 321; referring to PNB vs. Picornell, 46 Phil. 716
444
1 Agbayani, Ibid., p. 321; citing Chan Wan vs. Tan Kim, No. L-15380, September 30, 1960
445
1 Agbayani, Ibid., p. 321; referring to Kauffman vs. PNB, 42 Phil. 182
446
1 Agbayani, Ibid., p. 322; citing Clayton Town Site Co. v. Clayton Drug Co., 20 N.W 385, 147 Pac. 460
447
448
449
450
Vitug, Ibid., p.61, referring to Citytrust Banking Corporation vs. CA, 196 SCRA 553.
451
452
453
1 Agbayani, Ibid., p. 322; citing PNB v Court of Appeals, March 15, 1982, 112 SCRA 553, 565
454
1 Agbayani, Ibid., p. 417; citing Jones vs. Crumpler, 98 S.E. 232
455
1 Agbayani, Ibid., pp. 417-418; citing State ex. Rel. Macon Creamery vs. Mix, 7 S.W. (2d) 290.
456
457
1 Agbayani, Ibid., pp. 322-323; citing PNB v. Picornell, 46 Phil. 716
B-46
agent of the drawer, 458 or allege and prove any other defense which he has to the liability. 459 The prevailing view is
that the same rule found in Section 62 applies in the case of a drawee who pays a bill without hav-ing previously
accepted it. 460
Effect of mortgage executed by acceptor. Where being unable to pay certain bills of exchange which the drawee
has accepted, the latter makes a mortgage in favor of the holder of said bills upon certain merchandise the value of
which is sought to be collected through said bills, in order to secure the payment of said amount if the merchandise
is sold and the integrity thereof while the sale is not effected, the execution of said mortgage does not constitute any
novation of the obligation represented by said accepted bills unless it is so expressly stated in said mortgage. 461
Acceptor to pay according to tenor of his acceptance. It is to be noted that while the maker of a note engages to
pay according to the tenor of the note, an acceptor engages to pay according to the tenor of his acceptance, not of
the bill he accepts. This is an important distinction, for the tenor of the acceptor's acceptance may be different from
the tenor of the bill, as the acceptor may accept the bill with qualifications. 462 But, of course, if his acceptance is
general, the tenor of the bill is the same tenor as the tenor of his acceptance.
Whether original tenor or altered tenor is tenor of acceptance.

1. View that altered tenor is tenor of acceptance. "Since an acceptor, by Section 62 engages to pay the bill
‘according to the tenor of his acceptance,' he must pay to the innocent payee or subsequent holder the amount
called for by the time he accepted, even though larger than the original amount ordered by the drawer.
Moreover, he would be a party who has himself assented to the alteration." 463 In one case, and in denying a
recovery, the court said: "In its last analysis, the question presented for decision is the liability of the acceptor of
a negotiable instrument under Section 62 of the Negotiable Instruments Law. This section declares that the
acceptor, by accepting the instrument, engages that he will pay the instrument which he has accepted
according to the tenor of his acceptance, and admits the existence of the payee and his then capacity to
indorse." This construction of Section 62 is in accordance with that sound principle which declares that, where
one of two innocent parties must suffer a loss, the law will leave the loss where it finds it." 464 In another case,
the Supreme Court of California stated that it was not the legislative intent that the obligation of the acceptor
should be limited to the tenor of the instrument as drawn by the maker, as was the rule at common law, but that
it should be enforceable in favor of a holder in due course against the acceptor according to its tenor at the time
of its acceptance or certification. The wording of the Act suggests that a change in the common law was
intended. A careful reading of the law independent of any common law influence, requires that the words
"according to the tenor of its acceptance," be construed as referring to the instrument as it was at the time it
came into the hands of the acceptor for acceptance, for he accepts no other instru-ment than the one presented
to him - the altered form - and by it alone, he engages to pay. 465
2. View that original tenor is tenor of acceptance. A learned writer takes the opposite view and he is supported
by some decisions. He suggests that the Nat. City Bank of Chicago v. Bank of the Republic case overlooks
other pertinent sections of the Negotiable Instruments Law and that Section 62 should be paraphrased to state
that the liability of the acceptor depends upon the terms of his acceptance, that is, whether it is a general
acceptance or a qualified acceptance or an acceptance for honor. He suggests that all three of these
acceptance contracts are within the purview of the provision of Section 62 that the acceptor, by accepting the
instrument, engages that he will pay it not according to the tenor of the bill since this would deny him the right to
qualify the acceptance or to accept for honor but according to the tenor of his acceptance. 466
Admission of drawer's existence, etc. The acceptor, by his acceptance, admits: (1) the drawer's existence, (2) the
genuineness of the drawer's signature; and (3) the capacity and authority of the drawer to draw the instrument. But
he does not admit the genuineness of the indorsers' signature. 467 Thus, without adding any word to his acceptance,
the acceptor, by signing the bill as such, represents that the drawer exists, that his signature is genuine, and that he
has the capacity and authority to draw the bill. 468
Effect of acceptor's admissions.

(1) The acceptor is consequently precluded from setting up the defense that the drawer is non-existent or fictitious
because of his admission of the drawer's existence;
(2) Neither can he claim that the drawer's signature is a forgery because he admits the genuineness of the drawer's
signature;
(3) Neither can the drawee escape liability by alleging want of consideration between him and the drawer 469 as, by
accepting the bill, he admits the capacity and authority of the drawer to draw the bill. For the same reason, the
better rule seems to be that the acceptor is liable on the bill even if the drawer has overdrawn his account . 470
Payee's existence. Like the maker and drawer, the "acceptor, by accepting the instrument x x x admits the
existence of the payee and his then capacity to indorse." 471
Summarization of liabilities and warranties of acceptor. Primary liability and an admission of the authority of the
drawer to draw the instument and the genuineness of his signature, as well as the existence of the drawer, the payee
and their capacity to indorse. 472 Thus, a bill of exchange, drawn by one who forges the signature of an apparent
drawer and accepte dby the drawee, is enforceable against the drawee-acceptor by any holder subsequent to such
acceptance. By accepting the instrument the drawee is deemed to have warranted the genuineness of the drawer’s
signature. The drawee-payor may thereafter charge the apparent drawer; instead, such payor should proceed
against the forger. 473 While the drawee is not liable unless he accepts the instrument, an unjustifiable refusal on his
part to accept it may subject him to liability to the drawer depending on, and to the extent of, their own liability to the
458
1 Agbayani, Ibid., p. 323; referring to Westminister Bank, Ltd. v. K. Nasoor, Inc., 58 Phil. 855
459
1 Agbayani, Ibid., p. 323; referring to Union Guarantee Co. v. Ding Kee & Co., 44 Phil. 533
460
1 Agbayani, Ibid., p. 323; citing Phil. Nat. Bank v. Court of Appeals, 26 SCRA 696
461
1 Agbayani, Ibid., p. 323; citing Asia Banking Corp. v. Lacson & Co., 48 Phil. 482
462
1 Agbayani, Ibid., p. 323; referring to Sections 139 and 141, NIL
463
Section 124
464
1 Agbayani, Ibid., pp. 324-325; citing Nat. City Bank of Chicago v. Bank of the Republic, 300 Ill. 103, 132 N.E. 832, 22 A.L.R. 1153, cited in Ogden,
5th ed., pp. 231-232
465
1 Agbayani, Ibid., p. 325; citing Wells Fargo Bank & Union Trust Co. v. Bank of Italy, et al., 214 Calif. 166, 4 P (2d) 781, also cited in Ogden, 5th ed., p.
232
466
1 Agbayani, Ibid., pp. 325-326; citing Bigelow on Bills, Notes & Checks, 3rd ed., pp. 134-136; also cited in Ogden, 5th ed., pp. 232-233
467
1 Agbayani, Ibid., p. 326; referring to Ocean Accident & Guarantee Corp. v. Lincoln Nat. Bank, 112 NIL 630, 172 Atl. 45
468
469
1 Agbayani, Ibid., p. 327; citing Phil. Nat. Bank v. Picornell, 45 Phil. 716
470
1 Agbayani, Ibid., p. 327; referring to Liberty Trust Co. v. Haggerty, 713 Atl. 596
471
Paragraph (b), Section 62, NIL
472
473
Vitug, Ibid., p.61
B-47
holder. 474 It has been held that a drawee bank, acting as a “payor” in a bank draft, is liable for its failure to act in
accordance with the instruction of drawer bank or of the purchaser of the draft. 475
d. Indorsers
When person deemed indorser. In the absence of any indication in what capacity a person whose signature is
written on the instrument intends to be bound, he shall be deemed an indorser. 476 But one making a note payable to
his own order does not, by indorsement thereof, assume liability as indorser. 477
Indication to be bound otherwise than as indorser. One who signs otherwise than as maker, drawer or acceptor,
will not be deemed an indorser if he indicates by appropriate words his intention to be bound in some other capacity.
Accordingly, an indorser upon a promissory note or bill of exchange who indorses for the purpose of identifying the
person only and not for the purpose of incurring any liability as to the payment of such promissory note or bill of
exchange, incurs no liability. This indorsement or guaranty, however, must clearly indicate that it is for the purpose of
identification only. 478 But anyone who assumes the responsibility of identifying the payee of a check is answerable to
the bank cashing the check if the bank pays its amount to such payee so identified. But where a party signed his
name on the back of the check below the clause "far identification of payee's signature and payment guaranteed,"
stamped immediately after a signature appearing thereon as last indorsee, and thereafter the agents of the bank
encashed the check in favor of the drawee and not in favor of the person so identified, such agents are guilty of
negligence, and the bank is liable to the drawer for the amount of check. 479 In the following cases, the person signing
is not bound as indorser but as indicated: (1) A person who adds to his signature the words "as guarantor" or "as
surety." 480 (2) A stranger who indorses on the back of the note, "I hereby guarantee payment of the within note,"
indicates his intention to be bound as guarantor, not as indorser. 481 (3) The intent to be bound in some other capacity
may be found on the face of the instrument, such as, the case when the note reads, "We, the signers, indorsers,
sureties, and all of us in solida, promise to pay, etc." The signers on the back of the instrument before delivery were
held to be bound in solido, not as indorsers, and therefore, not entitled to notice of dishonor. 482
Admissibility of parol evidence. Section 63 is a statutory command that the legal effect of a blank indorsement
cannot be changed by parol proof or by evidence from other source. 483 So that, under this section, one who indorses
in blank cannot show by parol that he signed merely as agent for a prior party and was not individually liable. He is
an indorser. 484 Also the intent to be bound in some other capacity than as an indorser must be indicated in the
indorsement or on the face of the instrument and can not be shown by parol. 485
Liability of indorser and assignor compared. "The vendor in good faith shall be responsible for the existence and
legality of the credit at the time of the sale unless it should have been sold as doubtful but not far the solvency of the
debtor unless it has been so expressly stipulated or unless the insolvency was prior to the sale and of common
knowledge. Even in these cases he shall be liable for the price received and for the expenses specified in No. 1 of
Article 1616. The vendor in bad faith shall always be answerable for the payment of all expenses, and damages." 486
The expenses enumerated in Article 1616 are "(1) the expenses of the contract and other legitimate payments made
by reason of the sale"; and "(2) the necessary and useful expenses made on the thing sold." "In case the assignor in
good faith should have made himself responsible for the solvency of the debtor and the contracting parties should
not have agreed upon the duration of the liability, it shall last for one year only from the time of the assignment if the
period had already expired. "If the credit should be payable within a term or period which has not yet expired, the
liability shall cease one year after maturity." 487 Ordinarily, like the qualified indorser or person negotiating by delivery,
but not like the general indorser, an assignor is not responsible for the insolvency of the principal debtor and will not
be liable to the assignee if for that reason the assignee can not collect from the principal debtor. On the other hand,
unlike the qualified indorser and person negotiating by delivery, but like the general indorser, the assignor warrants
the existence and legality of the credit assigned and will, therefore, be liable to the assignee in case the assignee
can not collect from the principal debtor where the credit as signed is illegal or non-existent. As in the case of general
indorser, this liability of the assignor exists whether or not he knows of the illegality or non-existence of the credit he
assigned. 488
Secondary liability of indorsers. By indorsing an instrument, without saying more, an indorser assumes all the
liabilities stated in Section 65 or 66. Under said sections, the general tenor of the liability of the indorser is that he will
pay the instrument if the person primarily liabile will not pay. He is, therefore, not absolutely required to pay the
instrument. If the person primarily liable pays, the indorser will not be required to pay. It is only when the person
primarily liable fails to pay tat he may be required to pay. 489 The qualified or general indorser and person negotiating
by mere delivery are secondarily liable in a promissory note. 490
(1) General indorsers (Sec. 66, NIL)
Section 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.
474
475
Vitug, Ibid., p.61, referring to Citytrust Banking Corporation vs. CA, 196 SCRA 553.
476
1 Agbayani, Ibid., p. 328; referring to Section 17, paragraph (f), NIL
477
1 Agbayani, Ibid., p. 328; citing Perez v. Leake, 169 La. 29, 124 So. 735
478
1 Agbayani, Ibid., p. 328; citing Amer. Bank v. Macondray & Co., 4 Phil. 695
479
1 Agbayani, Ibid., pp. 328-329; citing Calinog vs. PNB, Jan. 31, 1955, 55 O.G. 4104
480
1 Agbayani, Ibid., p. 329; citing Manuel v. Salvador, 28 O.G. 2481 (1940)
481
1 Agbayani, Ibid., p. 329; citing Noble v. Beeman-Spauling Co., 131 Pac. 1006
482
1 Agbayani, Ibid., p. 329; citing Donark v. Rabito, 70 So. 166
483
1 Agbayani, Ibid., p. 329; citing First Nat. Bank v. Kern, 179 S.W. 721
484
1 Agbayani, Ibid., p. 329; citing Eaves v. Keeton, 193 S.W. 629
485
1 Agbayani, Ibid., p. 329; referring to Busbee v. Greech, 136 S.E. 326
486
Article 1628, NCC
487
Article 1629, NCC
488
489
490
B-48
Application of Section 66. This section deals with the liability or warranties of one negotiating by general
indorsement, as distinguished from qualified indorsers or persons negotiating by mere delivery. It has been held
that this section includes an indorser for collection. 491 This holding seems correct where the indorser for
collection receives value from the bank so that he can be considered a seller. Under such circumstances, the
restrictive nature of the indorsement should not negative the usual warranties of a seller of an instrument, for,
on correct principles, it merely adds the promise that on presentation, it will be honored, and is an obligation to
protect subsequent holders for value from loss in the manner as if there was no trust. 492
Liability of general indorser. The general indorser, by merely placing his signature on the instrument as such,
without adding any words to his signature, warrants as follows:
(1) That the instrument is genuine and in all respects what it purports to be;
(2) That he has a good title to it;
(3) That all prior parties had capacity to contract; 493 and
(4) That the instrument is, at the time of his indorsement, valid and subsisting . 494
It will be noted that the first three warranties of a general indorser are the same as those of a qualified indorser
or of a person negotiating by mere delivery. 495
Fourth warranty of general indorser and qualified indorser, distinguished. The fourth warranty of the
general indorser is different from that of a qualified indorser or person negotiating by delivery. While the
qualified indorser or person negotiating by delivery warrants that he is ignorant of any fact that will render the
instrument valueless or impair its validity, the general indarser warrants that the instrument he is indarsing is
valid and subsisting regardless of whether he is ignorant of that fact or not. But the fourth warranty of a general
indorser does not run in favor of holders who are parties to the illegal transaction. 496
To whom warranties extend. The law extends the warranties only to subsequent holders in due course. 497 But
a person negotiating by delivery is liable only to his immediate transferee, while a qualified indorser is liable to
all parties who can trace their title to his indorsemant, whether such parties are holders in due course or not.
However, an opinion is expressed that there seems to be no reason why the warranties of a general indorser
should not run in favor of any person to whom the instrument is negotiated as in Section 65. The law does not
use the word "only." Thus, it is silent as to the rights of a holder not in due course. Accordingly, the warranties of
a general indorser extend to the following:
(1) Subsequent holders in due course. 498
(2) Persons who derive their title from holders in due course. 499
(3) Immediate transferees, even if they are not holders in due course. Otherwise, the transferee of a qualified
indorser would have greater rights than the transferee of a general indorser. 500
Warranties do not extend to drawee. The indorser of a check does not warrant the genuineness of the
drawer's signature to the drawee who pays it since the drawee is not a holder in due course under Section 52
nor a holder under Section 191. 501 The warranties provided for in Sections 65 and 66 do not run in favor of the
drawee in respect to the genuineness of the drawer's signature but only in favor of subsequent holders in due
course, inasmuch as the drawee is not such holder nor is the presentation for payment to him a negotiation. 502
Other liability of general indorser. In addition to his four (4) warranties, a general indorser, by merely signing
his name as such on an instrument and without expressly stating it on the instrument, "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 of dishonor be duly taken, he will pay the amount to the holder, or to
any subsequent indorser who may be compelled to pay it." 503 This is similar to the secondary liability of the
drawer. 504
General indorser is secondarily liable. The general indorser is secondarily liable. Under the last paragraph,
his secondary liability is not limited only to the four warranties. He is liable if, for any reason, the person
primarily liable cannot pay, as distinguished from the limited secondary liability of the qualified indorser or of the
person negotiating by mere delivery under Section 65. This is to say that he is secondarily liable if the
instrument is dishonored. And, in a Philippine case, 505 it has been held that the law does not require that the
reason for 'the dishonor be established. It is sufficient that there was dishonor. Moreover, being a holder in due
course does not defeat the liability of an indorser and his warranties as set forth in Sections 65 and 66. 506
Accordingly, where a co-accused in a malversation of public funds indorsed a check not covered by funds, in
order to cash the same from public funds in the hands of the other accused, said indorser, as such and as an
accommodation party, is liable to the government for the amount malversed, even if said co-accused was
acquitted in the criminal case, under Sections 57, 63, 66 and 29 of the Negotiable Instruments Law. 507
Indorser's liability where person primarily liable is insolvent. Where the person primarily liable is insolvent,
the general indorser is liable, even if he neither knew nor concealed that fact because he engages to pay if the
person primarily liable cannot pay. Accordingly, "where a person makes an unqualified indorsement of a
promissory note, the Negotiable Instruments Law specifies and defines his liability and parol testimony is not
admissible to explain or defeat such liability." 508
When parol evidence admissible as to extrinsic agreement of indorser. It has, however, been held that any
prior or contemporaneous conversation in connection with a note or its indorsement may be proved by parol
evidence, and that an extrinsic agreement between indorsers and indorsee which cannot be embodied in the
491
1 Agbayani, Ibid., p. 335; citing In re Ziegenhein, 178 S.W. 983
492
1 Agbayani, Ibid., p. 335; citing Brannan, p. 746
493
Paragraphs (a), (b) and (c), Section 65; paragraph (a), Section 66, NIL
494
495
496
1 Agbayani, Ibid., p. 336; citing Burke v. Smith, 75 Atl. 114
497
1 Agbayani, Ibid., p. 336; citing Farmers Bank v. Bank of Rutherword, 88 S.W. 939
498
Section 66, NIL
499
500
1 Agbayani, Ibid., p. 337; citing Brannan's Neg. Inst. Law, 5th ed., p. 747
501
1 Agbayani, Ibid., p. 337; citing Farmers Bank v. Bank of Rutherford, 88 S.W. 939
502
1 Agbayani, Ibid., p. 337; citing Figueres v. Bly, 193 S.W. 170
503
1 Agbayani, Ibid., p. 338; citing Last par., Sec. 66, NIL; Gullas v. PNB, 62 Phil. 519; See also Banco de Islas Filipinas v. Espinosa & Pardo, 40 O.G. (4th
Supp.) 68.
504
Section 51, NIL
505
1 Agbayani, Ibid., p. 338; citing Chartered Bank of India, Australia & China v. Tuljaram, April 14, 1955
506
507
1 Agbayani, Ibid., p. 339; citing People v Julia Maniego, Feb 27, 1987, GR L-30910
508
1 Agbayani, Ibid., p. 339; citing Velasco v. Tan Liuan & Co., 43 Phil. 195, 203
B-49
instrument without impairing its credit is provable by parol provided that such extrinsic agreement should not
vary, alter or destroy the obligations attached by law to the indorsement. Accordingly, the Court held that the
oral assurances of the indorser of a check that the drawer has funds and that he would refund the amount of the
check if the drawer had no funds are precisely the ordinary obligations of an indorser, and such obligations are.
under the law, considered discharged by an unreasonable delay in the presentation of the check for payment,
as there is no express obligation assumed by the indorser that the drawer would always have funds, or that he
would refund the amount of the check even if there is delay in its presentation. 509
510
Summarization of liabilities and warranties of general indorser. Secondary liability and warranties.
Indorsers warrant that the instrument is genuine and in all respects what is purports to be. 511
(2) Qualified indorser (Sec. 65, NIL)
Section 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 to persons negotiating public or
corporation securities, other than bills and notes.
Application of Section 65. This section treats of the warranties or liabilities of: (1) a person negotiating by
mere delivery, and (2) a person negotiating by qualified indorsement. It is, of course, to be understood that one
negotiating by qualified indorsement completes the process with delivery. The first refers to instrument payable
to bearer, either originally or when the only or last indorsement is in blank. But one indorsinq in blank is not
referred to here, as he negotiates by indorsement (although blank) completed by delivery, not by delivery only.
The second refers to instrument payable to order. 512
Nature of liability. A qualified indorser or a person negotiating by mere delivery are secondarily liable, and that
their secondary liability is limited, namely, to their warranties. In other words, they are secondarily liable only
when the person primarily liable cannot pay because of a violation of any of the four warranties but they will not
be liable if the person primarily liable cannot pay for any other reason than the violation of the four warranties. 513
Liability of qualified indorser. The qualified indorser has the same warranties as those of a person
negotiating by mere delivery. The only difference is that, while the person negotiating by mere delivery is liable
only to his immediate transferee, the person negotiating by qualified indorsement is liable to all parties who
derive their title through his indorsement. 514
Summarization of liabilities and warranties of qualified indorser. A qualified indprser is liable merly for
breach of warranties to all person who acquire title (since warranties are based on privity) through his
indorsement. Qualified indorsers, like parties who negotiate by mere delivery, are not secondarily liable. 515
(3) Order of liability
Section 68. Order in which indorsers are liable. -- As respects 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.
Application of Section 68. This rule applies only with respect to an indorser as against another but not as
against a holder in due course. Under this rule, every indorser is liable to all indorsers subsequent to him but
not those prior to him whom he in turn makes liable. This section contemplates successive negotiations of the
instrument and successive indorsements. It does not determine the order of liability of joint indorsers among
themselves. 516
Liability as against holder. The rule that indorsers are liable in the order they indorse is only as between or
among themselves but not as against the holder. As to the holder,they are liable in any order. 517
Joint and several liability of joint payees. "Joint payees or joint indorsees are deemed to indorse jointly and
severally." 518 Liability is disputable presumed to be joint and several. 519 One of the joint indorsers cannot
escape liability because proper notice of dishonor was not given to his joint indorser. 520 Consequently, when the
holder expressly releases the first indorser, the second indorser will be discharged. 521 However, if one of the
joint indorsers pays the instrument, the second joint indorser is prima facie liable to contribute and the burden.
of proof to show release from such liability is upon the second indorser. 522 Under the New Civil Code, in joint
509
1 Agbayani, Ibid., p. 339; citing PNB v. Seeto, G.R. No. L-4388, Aug. 13, 1952
510
Vitug, Ibid., p.62, citing Sections 66 and 67, NIL
511
Vitug, Ibid., p.62, referring to Section 65, NIL
512
513
514
515
Vitug, Ibid., p.63, citing Section 38, NIL; and referring to Section 65, NIL
516
1 Agbayani, Ibid., p. 342; citing Cassel v. Murray, 196 N.W. 591
517
518
519
520
1 Agbayani, Ibid., p. 343; citing Eaves v. Keeton, 196 Mo. App. 424, 193 S.W. 629
521
1 Agbayani, Ibid., p. 343; citing Sunflower St. Bank v. Bowman, 243 S.W. 403
522
1 Agbayani, Ibid., p. 343; citing McKourn v. Silver, 128 S.E. 134
B-50
and several obligations, "he who made the payment may claim from his co-debtors only the share which
corresponds to each, with interest for the payment already made." 523
Liabilities and warranties of special indorser. If an indorser is special, the indorser’s secondary liability is in favor
merely of person who make title under his indorsement. 524
e. Parties negotiating by mere delivery (Sec. 65, NIL)
Liability of person negotiating by delivery. A person negotiating by mere delivery becomes liable to the holder
only when the holder cannot obtain payment from the person primarily liable by reason of the fact that any of the
warranties of the person negotiating by delivery is or becomes false. 525 By merely delivering an instrument payable
to bearer, without saying more, a person negotiating by mere delivery assumes the liability stated in Section 65.
Under said section, the general tenor of the liability of a person negotiating by delivery is similar to that of an
indorser.526
Warranty as to genuineness. Suppose that the instrument is altered or the maker's signature is forged, for which
reason the holder cannot collect from the maker. The party negotiating by mere delivery is liable to the holder
because he warrants that "the instrument is genuine and in all respects what it purports to be." 527
Warranty as to good title. Suppose that the title of the party negotiating by delivery is defective as he acquired the
instrument by means of fraud, 528 for which reason the holder cannot collect from the maker or acceptor. The party
negotiating by delivery is liable to the holder because he warrants that "he has a good title" to the instrument. 529
Warranty as to capacity to contract. Suppose that the maker is a minor, 530 a lunatic or other cases of
incompetency, 531 a married woman, or a corporation acting ultra vires, 532 for which reason the holder cannot collect
from the maker. The party negotiating by delivery is liable to the holder because he warrants that "prior parties have
capacity to contract." But under the last paragraph, "a.party negotiating public or corporation securities other than
bills and notes, do not warrant the capacity of prior parties to contract." 533
Warranty as to ignorance of certain facts. Suppose that the maker was insolvent at the time of the negotiation of
the instrument. This fact renders the instrument valueless, and for this reason, the holder cannot collect on the
instrument against the insolvent maker. (1) If the party negotiating by delivery knew that the maker was insolvent,
and he concealed that fact, he would be liable because he warrants that he is ignorant of any fact that would render
the instrument valueless, and it turns out that he knew. But if the party negotiating did not know of the maker's
insolvency, he would not be liable. 534 (2) The party negotiating by delivery would also be liable, if he knew but
concealed that the instrument is not valid for want of consideration 535 because he warrants that he does not know of
any fact which would impair the validity of the instrument. But if he did not know that fact, he would not be liable, as
he does not warrant that the instrument is valid.536
To whom warranties extend; Warranties not exclusive. The warranties of a person negotiating by mere delivery
extend "in favor of no holder other than the immediate transferee." 537 The four warranties expressed in this section
are not exclusive but may be extended by analogy to like situations. So that, when an indorser, without recourse of a
note secured by a lien, released the lien after he had indorsed it to the holder, said indorser is liable for breach of
warranty. The Negotiable Instruments Law, Section 65, does not state the only warranties and under said section, by
analogy, the person negotiating by delivery or indorsing qualifiedly warrants also that "he will do no act to prevent the
indorsee from collecting the note." 538
Summarization of liabilities and warranties of parties negotiating by delivery. Not liable secondarily; he is,
however, subject to warranties in favor of the immediate transferee. 539 A holder who negotiates by delivery similarly
answers for breach of warranties but only in favor of the immediate transferee. 540
f. Other cases:
(1) irregular indorser (Sec. 64, NIL)
Section 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 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.
Irregular indorser. Based on the first sentence of Section 64, an irregular or anomalous indorser is a person
who, "not otherwise a party to an instrument, places thereon his signature in blank before delivery." In order,
therefore, that a person may be considered an irregular indorser, the following three requisites must be present:
523
Article 1217, NCC
524
525
526
527
1 Agbayani, Ibid., p. 333; referring to Hunt v. Sanders, 232 S.W. 456
528
Section 56, NIL
529
530
1 Agbayani, Ibid., p. 333; citing Commercial Credit Co. v. Ward & Son Auto Co., 109 So. 674
531
1 Agbayani, Ibid., p. 333; citing Fleming v. Consolidated Motor Sales Co., 240 Pac. 376
532
1 Agbayani, Ibid., p. 333; citing Rosenthal v. 34th St. Shop, 220 N.Y. Supp. 733
533
Section 65, NIL
534
1 Agbayani, Ibid., p. 334; citing Speigleman v. Eastman, 272 Pac. 761
535
1 Agbayani, Ibid., p. 334; citing Cressler v. Brown, 192 Pac. 417
536
537
Section 65, NIL
538
1 Agbayani, Ibid., p. 334, citing Section 65, NIL
539
540
B-51
(1) he must not otherwise be a party to the instrument, that is, he must not be a maker, drawer, acceptor or
regular indorsee thereon; (2) he must sign the instrument in blank; and (3) he must sign before delivery. 541
Reason for use of term. Such a party so signing is called an irregular or anomalous indorser because he
indorses in an unusual, singular or peculiar manner. His name appears where we would naturally expect
another name. 542
Meaning of "before delivery." The law uses the word "delivery" Does this mean the initial delivery or every
delivery from one party to another in the course of the negotiation of the instrument? In dealing with irregular
indorsers, Ogden543 uses the word "initial" to modify "delivery." On the other hand, under a case 544 "delivery"
seems to include not only the original delivery to the payee but also every delivery from the party
accommodated to a subsequent party.545
Application of Section 64. Where a person puts his signature on the instrument after delivery, this section
does not apply. It is Section 17 (f) and Section 63 which apply. 546 This section applies where the signature in
blank is placed on the instrument before delivery. 547 And this section deals only with the liability of the irregular
indorser to the payee but doesnot fix the rights of various irregular indorsers as between themselves which shall
be governed by Section 68, under which evidence is admissible as to the order in which they are to be liable. 548
Where "the instrument is payable to the order of a third person, he (irregular indorser) is liable to the payee and
to all subsequent parties. 549 Where "the instrument is payable to the order of the maker or drawer or is payable
to bearer, he (irregular indorser) is liable to all subsequent parties to the maker or drawer. 550 Where the irregular
indorser "signs for the accommodation of the payee, he is liable to all parties subsequent to the payee." 551
Summarization of liabilities and warranties of irregular indorser. Secondary liability in favor of the payee
and subsequent holders unless it is shown that his indorsement was to accommodate the payee in which cases
his liability shall be in favor of parties subsequent to said payee. 552
(2) indorser of bearer instrument (Sec. 67, NIL)
Section 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.
Liability of indorser where paper negotiable by delivery. A bearer can negotiate the note by mere delivery
and his liability and warranties would be those stated in Section 65. But if he indorses the note, his liablities and
warranties would be: (1) as stated in Section 66, if he indarses generally; or (2) as stated in Section 65, if he
indorses qualifiedly. 553
(3) accommodation party (Sec. 29, NIL)
Section 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.
Accommodation party; requisites. "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." 554 The following therefore are the requisites in order that a person may be considered an
accommodation party:
(1) he must be a party to the instrument, signing as maker, drawer, acceptor or indorser;
(2) he must not receive value therefor; and
(3) he must sign for the purpose of lending his name or credit.
On the basis of the foregoing requisites, it is not a valid defense that the accommodation party did not receive
any valuable consideration when he executed the instrument . 555
Meaning of "without receiving value therefor:" One who allegedly signs for the purpose of lending his name
is given money in consideration of lending his name but not for the instrument he signs, does not cease to be
an accommodation party, It should be noted that the phrase "without receiving value therefor," as used in
Section 29, x x x, 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." 556
Effect of placing "value received:" When the note contains the phrase "value received," it will not negate the
character of the note as an accommodation paper. "An accommodation note showing on the face in express
terms that it had been issued for no consideration would be of little or no use to the payee, and for that reason,
if for no other, practically all accommodation notes are so drawn as to either express or imply a valuable
consideration prima facie." 557
Rights and legal position of accommodation party.

(1) The accommodation party is generally regarded as a surety for the party accommodated. 558
541
542
543
544
1 Agbayani, Ibid., p. 330; referring to Flinch vs. Wood, 145 NY Supp. 51
545
546
1 Agbayani, Ibid., p. 330; citing Thomas v. Hobel, 271 Pac. 931
547
1 Agbayani, Ibid., p. 330; citing Kohn v. Consolidated Butter & Eg. Co., 63 Supp. 265
548
1 Agbayani, Ibid., pp. 330-331; citing Wilson v. Hendee, 66 Atl. 113
549
Paragraph (a), Section 64, NIL
550
551
Paragraph (c), Section 64, NIL
552
553
554
1st sentence, Section 29, NIL
555
1 Agbayani, Ibid., p. 241; citing Ang Tiong vs. Ting, et. al., L-26767, Feb. 22, 1968, 22 SCRA 713, 716
556
1 Agbayani, Ibid., p. 244; citing Clark v. Sellner, 42 Phil. 384; Brannan, 7th ed., 554; Morris Country Brick Co. v. Austin, 75 Atl. 550
557
1 Agbayani, Ibid., pp. 244-245; citing Bank of P.I. v. Laguna Coconut Oil Co., 48 Phil. 14
558
1 Agbayani, Ibid., p. 245; citing 36 A.L.R. 554; Nat. Bank v. Maza and Macena, 48 Phil. 207, 211; Acuna v. Velasco and Javier, 50 Phil. 241, 525
B-52
(2) 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." 559
Accommodated party cannot recover from accommodation party. The accommodated party cannot
recover from the accommodation party. As between them, absence of consideration is a defense. 560 In fact, as
between them, the understanding is that the accommodated party either is (1) to reimburse the amount which
the accommodation party may be obliged to pay, or (2) to pay the instrument directly to the holder. The real
debtor is the accommodated party. As between the accommodated party and the accommodation party, the
latter is secondarily liable. 561
Want of Consideration Cannot Be Interposed Against Holder For Value. The defense of want of
consideration is availablu against the party accommodated but it may not be interposed against a holder who
has acquired the instrument for value even if such holder knew that the acceptor is a mere accommodation
acceptor. "In a bill of exchange, failure of consideration between drawer and drawee is not a defense by the
drawee who has accepted the bill, in an action brought by the payee upon such acceptance." 562
Liability of the accommodation party. Under this section, the accommodation party 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." 563 The accommodation party does not receive any valuable
consideration for the instrument he signs but he is liable to a holder for value as if the contract was not for
accommodation. 564 Consequently, where the holder for value knows or has notice of the fact that the
accommodation party is an accommodation party, this means that the holder for value has notice of the fact that
the accommodation party did not receive valuable consideration for the instrument, he is nevertheless
considered a holder in due course. 565 In instruments which are not accommodation papers, the effect of this
notice of want of consideration is to render the holder for value not a holder in due course because he has
notice of a defense of prior parties, 566 namely, want of consideration, which is a defense under Section 28.
However, because of the provisions of this section, an accommodation party cannot interpose the defense of
want of consideration between him and the accommodated party against a holder for value even if the holder
for value has notice of the fact that he is an accommodation party and therefore, has notice that he did not
receive any consideration far the instrument which he signed. 567
Under Section 29, a holder for value can hold the accommodation party liable even if he knows him to be an
accommodation party. "The law now is that the accommodation party can claim no benefit as such, but he is
liable according to the fact of his undertaking, the same as if he were himself financially interested in the
transaction. x x x To fasten liability upon an accommodation maker, it is not necessary that any consideration
should move him. The consideration which supports the promise of the accommodation maker is that parted
with by the person taking the note and received by the person accommodated." 568 The credit given to the
accommodation party is sufficient to bind the accommodation maker. 569 On the other hand, the fact that 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 a holder in due course. Said remedy is a matter of
concern exclusively between the accommodation indorser and the accommodated party. So that the fact that
the accommodation indorser stands only as a surety in relation to the maker is immaterial to the claim of the
holder in due course and does not a bit diminish nor defeat the rights of the latter who is a holder for value. The
liability of accommodation 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 expediency of interposing the defense is that he is a mere accommodation
indorser. 570
Corporations are not liable as accommodation parties even to holders for value. The 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 parties. This is because the issue or
indorsement of negotiable paper by a corporation without consideration and for the accommodation of another
is ultra vires. Hence, one who has 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 recover against the
corporation thereon. 571
Officers signing for corporation as accommodation party without authority to do so for their individual
debts or transactions are personally liable thereon. 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 only if specifically authorized to do so. Corollarily, corporate officers, such as
the president and vice-president, have no power to execute for mere accommodation a negotiable instrument of
the corporation far their individual debts or transactions arising from or in relation to matters 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 therefore, as
well as for consequences arising from their acts in connection therewith. 572
Rights of Accommodation Parties As Against Each Other. Where the principal debtor failed to pay the
balance due on a promissory note, either one of the solidary accommodation makers may be held liable for the
559
1 Agbayani, Ibid., p. 245; citing National Bank v. Maza and Macena, 48 Phil. 207; see 36 A.L.R. 554. See also People v lVianiego, Feb 22, 1987, 148
SCRA 30
560
1 Agbayani, Ibid., p. 245; referring to Ogden, 5th ed., p. 154; Central Bank of Maco v. Lawson, 275 W (2d) 125; First National Bank v. Stephen, 291 Ill.
App. 373, 9 N.E. (2d) 653
561
562
1 Agbayani, Ibid., p. 246; citing Prudential Bank and Trust Co. v. Ramesh Trading Co., C.A. 32908-R, Sept. 10, 1964. See also Prudencio v. Court of
Appeals, July 14, 1986, 143 SCRA 7, 14-15
563
Section 29, last sentence, NIL
564
1 Agbayani, Ibid., p. 246; citing Ang Tiong vs. Ting, et. al., L-26767, Feb. 22, 1968, 22 SCRA 714, 716
565
1 Agbayani, Ibid., p. 246; citing Ang Tiong vs. Ting, et. al., L-26767, Feb. 22, 1968, 22 SCRA 7l3, 716; Philippine National Bank vs. Maza, et. al. 48
Phil. 210
566
1 Agbayani, Ibid., p. 247; citing PNB v. Maza and Macenas, 48 Phil. 207, 210, citing Amer. cases.
567
568
1 Agbayani, Ibid., p. 247; citing PNB v. Maza and Macenas, 48 Phil. 207
569
1 Agbayani, Ibid., p. 247; citing Maulini v. Serrano, 28 Phil. 640, 644
570
1 Agbayani, Ibid., p. 248; citing Ang Tiong v. Ting, 22 SCRA 713
571
1 Agbayani, Ibid., pp. 248-249; citing Crisologo-Jose v Court of Appeals, Sept 15, 1989, 177 SCRA 594
572
1 Agbayani, Ibid., p. 249; citing Crisologo-Jose v Court of Appeals, Sept 15, 1989, 177 SCRA 594
B-53
said balance. Where a solidary accommodation maker paid to the bank the balance due on a promissory note,
he may seek contribution from the other solidary accommodation maker in the absence of a contrary agreement
between them. This right springs from an implied promise between the accommodation makers to share equally
the burdens resulting from their execution of the note. Since the Negotiable Instruments Law does not define
the right of an accommodation maker, to seek reimbursement from another accommodation maker, Article 2073
of the New Civil Code applies. Under this article, a solidary accommodation maker (1) may demand from the
principal debtor reimbursement of the amount which he paid on the promissory note and (2) he may demand
contribution 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) the principal debtor is insolvent. In
this case, the solidary accommodation maker who paid the balance due on a promissory note is not entitled to
demand contribution from the estate of his co-accommodation maker where he made the payment voluntarily
and without any judicial demand and there is no proof that the principal debtor is insolvent. 573
Holder must otherwise be holder in due course. But the holder for value must otherwise be a holder in due
course, that is, he must meet all the requisites under Section 52 except notice of want of consideration. In other
words, the holder for value must have acquired the instrument complete and regular on its face, before it is
overdue and without notice that it was previously dishonored if such be the fact, in good faith, etc. 574
Consequently, "a transferee from the accommodated party, acquiring accommodation paper after maturity,
although he gives a valuable consideration therefor, takes only the title of the transferor and obtains no higher
right against the accommodation party than he would have in the case of the purchase of ordinary commercial
paper under similar circumstances. This is the weight of American authority.'' 575 In other words, where the holder
is not otherwise a holder in due course, Section 28 will govern and not Section 29. 576
Summarization of liabilities and warranties of accommodation party. Liability may either be primary or
secondary depending on the capacity he assumes. 577 This is to say that where one accommodates as a maker,
or a drawee-acceptor, then his liability would be primary, and where, upon the other hand, a person merely
signs for the accommodation of a person secondarily liable, such as when he assumes the capacity of a
general indorser, his liability would only be secondary in nature. But in whatever capacity or character the
accommodation party signs a negotiable instument, whether primarily or ssecondarily, or whether he stands as
surety or as solidary co-debtor, 578 the holder for value of the instument, subsequent to the accommodation
party, may hold the latter to that liability even if or when said holder knew the other to be merely an
accommodation party. In effect, an accommordation party becomes the surety for the accommodated party. 579 It
is not a valid defense against his liability that he did not receive any valuable consideration when he executed
the instrument. He differs from the ordinary concept of a debtor in the sense that although he has not received
any valuable consideration, he nevertheless, is liable to a holder for value as if the contract was not for
accommodation, in whatever capacity such accommodation party signed the instrument, whether primarily or
secondarily. 580 Section 29 of the Negotiable Instruments Law which holds an accommodation party liable on
the instrument to a holder for value does not apply to corporations which are accommodation parties because
the issue or indorsement of negotiable paper by a corporation without consideration and for the accommodation
of another is ultra vires. The fact, however, that for lack of capacity the corporation is not bound by an
accommodation paper does not thereby absolve but renders personally liable, the signatories of said
instruments where the accommodation involved was for their personal account, undertaking or purpose and the
creditor was aware thereof. 581 Corporate liability, however, it is believed, may ensue if the accommodation
paper involves an aspect of corporate business or in the pursuit thereof and the officer or agent of the
corporation signs conformably therewith. Article 2073 of the Civil Code may be applied to a solidary
accommodation party seeking reimbursement from another solidary accommodation party: "When there are two
or more guarantors of the same debt, the one among them who has paid may demand of each of the others the
share which is proportionally owing from him. If any of the guarantors should be insolvent, his share shall be
borne by the others, including the payer, in the same proportion. The provisions of this article shall not be
applicable, unless the payment has been made in virtue of a judicial demand or unless the principal debtor is
insolvent." 582
(4) agents signing in behalf of the principal
Section 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.
Signature through agent; form. The party may sign personally or through an agent. The agency may be oral
or written. There is no particular form required by the law and the agency may be proved by oral or written
evidence, unless specific provisions of the general law, such as, the statute of frauds, require otherwise. 583
Authority to collect does not include indorsement. But "the right of an agent to indorse commercial paper is
a very responsible power and will not be lightly inferred. A salesman with authority to collect money belonging to
his principal does not have implied authority to indorse checks received in payment. Any person taking checks
made payable to a corporation which can act only by agents, does so at his peril and must abide by the
consequences if the agent who indorses the same is without authority." 584
Section 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.
Requisites for agent to escape liability. In order to escape personal liability on the instrument, an agent must:
(1) be duly authorized;
(2) add words to his signature indicating that he signs as an agent, that is, for or on behalf of a principal, or in
a representative capacity; and
573
1 Agbayani, Ibid., p. 250; citing Sadaya v. Sevilla, 19 SCRA 924 (1967)
574
Section 52, NIL
575
1 Agbayani, Ibid., p. 250; citing 48 A.L.R. 1285 citing cases; see also Brannan, 7th ed., p. 563-566
576
1 Agbayani, Ibid., pp. 250-251; referring to Prudencio v Court of Appeals, Jul 14, 1986, 113 SCRA 7, 14-15 quoting with approval portions hereof
577
Vitug, Ibid., p.65; citing Section 29, NIL
578
Vitug, Ibid., p.65; citing Prudencio et al. vs. Court of Appeals, et al. 143 SCRA 7
579
Vitug, Ibid., p.65; citing Philippine Bank of Commerce vs. Aruego, 102 SCRA 530
580
Vitug, Ibid., p.66; citing Crisologo-Jose vs. Court of Appeals, G.R. 80599, 15 September 1989, 177 SCRA 594
581
Vitug, Ibid., p.66; citing Crisologo-Jose vs. Court of Appeals, G.R. 80599, 15 September 1989, 177 SCRA 594
582
Vitug, Ibid., pp.66-67
583
584
1 Agbayani, Ibid., p. 195; citing Insular Drug Co. v. PNB, 58 Phil. 684
B-54
(3) disclose his principal. 585
Where principal not disclosed. The agent is personally liable on this instrument even if he is duly authorized,
as he did not disclose his principal. The word "agent" following his name merely describes him. 586 Thus, also,
one is not relieved from liability by adding the descriptive form "trustee", "administrator", or "guardian". 587
Disclosure need not be in signature. The disclosure of the principal in order to relieve the agent from liability
need not be in the signature. There is a sufficient disclosure of principal in the body of the note. 588
Rule as to government officers. Officers of the government and other public corporations are not held to the
same rule of agency by which, in exceeding their authority, they bind themselves; everyone having dealings
with a public officer is supposed to know the legal limitations of his agency so that when the public officer, in
innocent mistake of the law, makes an unauthorized contract in the name of the public corporation, neither he
nor the corporation is bound. 589
Section 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.
Effect of signature per procuration. Instead of "per procuration," the following may also be used: "per proc."
"P. P." or “Pp.” It constitutes a warning that the agent has but a limited authority, and, therefore, a person who
takes the instrument so signed is bound at his peril to inquire into the extent and nature of the agent's authority,
and this applies to every person. 590
Section 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 65 of this Act,
unless he discloses the name of his principal, and the fact that he is acting only as agent.
Application of Section 69. This section seems to refer to instruments which are payable to bearer. The liability
and warranties of the agent are those stated in Section 65. To escape personal liability as a party negotiating by
delivery, the agent must (1) disclose his principal; and (2) state that he is acting only as an agent. But parol
evidence is not admissible to relieve an agent whose indorsement brings him within this section. 591
Summarization of liabilities and warranties of agent/broker. No liability arises as long as he indicates that
capacity and discloses the name of his principal; 592 otherwise, he subjects himself to liability as a real party to
the instrument. Mee words describing himself as an agent without disclosing his principal does not relieve him
from personal liability. 593
Summarization of liabilities and warranties of partner. In common law, solidary liability is the rule; under
Philippine law, each partner is an agent of the partnership (which has its own personality) who can thus bind the
partnership. If the firm’s assets are insufficient, the partners’ liability woyld be governed by the Civil Code, viz: If
contractual, the liability is pro rata; and if delictual or quasi-delictual, the liability is solidary. 594
Summarization of liabilities and warranties of infants and incapacitated persons. No liability (a real defense),
but they may validly effect the negotiation of the instrument. 595
!!! Case(s)
21 Philippine National Bank vs. Picornell, et al., 46 Phil 716
22 People vs. Maniego, 148 SCRA 30
23 Astro Electronics vs. Roxas, et al., September 23, 2003
24 Garcia vs. Dionisio, December 8, 2003
---------------------------------------------------------------------CASE(S)---------------------------------------------------------------
21 Philippine National Bank (PNB) vs. Picornell et al. [GR L-18751, 26 September 1922]; also PNB vs. Picornell [GR L-
18915]
First Division, Romualdez (J): 7 concur
Facts: Bartolome Picornell, following instruction Hyndman, Tavera & Ventura, bought in Cebu 1,735 bales of tobacco. Picornell
obtained from the branch of the National Bank in Cebu the sum of P39,529,83, the value of the tobacco, together with his
commission of 1 real per quintal, having, in turn, drawn the a bill of exchange. This instrument was delivered to the branch of the
Philippine National Bank (PNB) in Cebu, together with the invoice and bill of lading of the tobacco, which was shipped in the boat
Don Ildefonso, on 27 February 1920, consigned to Hyndman, Tavera & Ventura at Manila. The invoice and bill of lading were
delivered to PNB with the understanding that the bank should not deliver them to Hyndman, Tavera & Ventura except upon payment
of the bill; which condition was expressed by the well-known formula "D/P" (documents for [against] payment). The central office of
PNB in Manila received the bill and the aforesaid documents annexed thereto. On 3 March 1920, PNB presented the bill to
Hyndman, Tavera & Ventura, who accepted it, stating on the bill face thereof that "Accepted, 3d March, 1920. Due, 2d April, 1920,
Hyndman, Tavera & Ventura, by (Sgd.) J. Pardo de Tavera, member of the firm." The tobacco having arrived at Manila, the firm of
Tambunting, owner of the ship Don Ildefonso, that brought the shipment, requested Hyndman, Tavera & Ventura to send for the
goods, which was done by the company without the knowledge of PNB which retained and always had in its possession the invoice
and bill of lading of the tobacco, until it presented them as evidence at the trial. Hyndman, Tavera & Ventura proceeded to the
examination of the tobacco, which was deposited in their warehouses, and wrote and cabled to Picornell, notifying him that of the
tobacco received, there was a certain portion which was of no use and was damaged. To these communications, Through these
communications, therefore, Picornell learned that Hyndman, Tavera & Ventura had in their possession the tobacco. In view of the
question raised by the said company as to the quality of the aforesaid tobacco, more correspondence was exchanged between the
company and Picornell. Picornell requested PNB to extend the time for payment of the bill for P39,529,83 against Messrs.
Hyndman, Tavera & Ventura of Manila for 30 days. PNB granted the request of Picornell; wherefore Hyndman, Tavera & Ventura
reaccepted the bill in the terms: "Accepted for thirty days. Due May 2d, 1920. Hyndman, Tavera & Ventura, by (Sgd.) J. Pardo de
Tavera, member of the firm." 2 May 1920, arrived and the bill was not paid. On the 4th of the same month, Hyndman, Tavera &
Ventura sent a letter to PNB informing the latter that it absolutely refise to pay draft 2 for P39,529.83, referring to 1,871,235 quintals
585
586
1 Agbayani, Ibid., p. 196; referring to Bryson v. Lucas, 37 Am. Rep. 634
587
1 Agbayani, Ibid., p. 196; citing Dumnvolt v. Rigaley, 20 Md. 170; Daniel v. Gidden, 80 Pac. 811
588
589
1 Agbayani, Ibid., pp. 196-197; citing Walker v. Christian, 21 Gratt 927; Hodgson v. Dexter, 1 Cranch 315
590
591
1 Agbayani, Ibid., p. 343; citing People's Bank v. Baker, 193 S.W. 632
592
Vitug, Ibid., p.64, citing Section 69, NIL; See also Sections 20 and 44, NIL
593
Vitug, Ibid., p.64, citing Philippine Bank of Commerce vs. Aruego, 102 SCRA 530
594
Vitug, Ibid., p.64
595
Vitug, Ibid., pp.64-65, citing Section 22, NIL
B-55
of Leaf Tobacco Barili, owing to noncompliance of the contract by the drawer. PNB protested the bill, took possession of the
tobacco, and had it appraised on the 12th of the same month, its value having been fixed at P28,790.72. The bank brought the
action for the recovery of the value of the bill of exchange, and about September 1921, sold the tobacco, obtaining from the sale
P6,708.82.
In a decision rendered 9 January 1922, and amended by an order of February 18th next, the Court of First Instance of Manila
sentenced Bartolome Picornell et al. to pay solidarily to the Philippine National Bank (PNB) the sum of P28, 790.72 with interest at
the rate of 9% per annum from 3 May 1921, and costs; and Picornell, specifically, to pay PNB the sum of P10,739.11 with interest at
9% per annum, all as aforesaid, deducting the sum of P6, 708.82 from such amounts to be paid by Picornell et al. This total sum
which Picornell et al are required to pay represents the value of a bill of exchange drawn by Picornell in favor of PNB, against the
firm of Hyndman, Tavera & Ventura, now dissolved, its only successor being Joaquin Pardo de Tavera. From this judgment Picornell
et al. appealed.
Issue [1]: Whether Hyndman, Tavera & Ventura company can escape liability due to want of full consideration.
Held [1]: Whether the tobacco was worth the value of the bill, does not concern PNB. Such partial want of consideration, if it was,
does not exist with respect to the bank which paid to Picornell the full value of said bill of exchange. The bank was a holder in due
course, and was such for value full and complete. The Hyndman, Tavera & Ventura company cannot escape liability in view of
section 28 of the Negotiable Instruments Law. 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 of 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 against the acceptor, the
question as to the 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 for the accommodation of the drawer.
Issue [2]: Whether Bartolome Picornell, even as a commissioned agent of Hyndman, Tavera & Ventuta in the purchase of the
tobacco, is liable for the bill.
Held [2]: As to Bartolome Picornell, he warranted, as drawer of the bill, that it would be accepted upon proper presentment and paid
in due course, and as it was not paid, he became liable to the payment of its value to the holder thereof, which is the plaintiff bank.
(Sec. 61, Negotiable Instruments Law.) The fact that Picornell was a commission agent of Hyndman, Tavera & Ventura, in the
purchase of the tobacco, does not necessarily make him an agent of the company in its obligations arising from the drawing of the
bill by him. His acts in negotiating the bill constitute a different contract from that made by his having purchased the tobacco on
behalf of Hyndman, Tavera & Ventura. Furthermore, he cannot exempt himself from responsibility by the fact of his having been a
mere agent of this company, because nothing to this effect was indicated or added to his signature on signing the bill. (Sec. 20,
Negotiable Instruments Law.) The fact that the tobacco was or was not of inferior quality does not affect the responsibility of
Picornell, because while it may have an effect upon the contract between him and the firm of Hyndman, Tavera, Ventura, yet it
cannot have upon the responsibility of both to the bank, upon the bill drawn and accepted as above stated.
(Upon the non-payment of the bill by the drawee-acceptor, the bank had the right of recourse, which it exercised, against the
drawer. [Sec. 84, Negotiable Instruments Law] The drawee, the Hyndman, Tavera & Ventura company, or its successors, J. Pardo
de Tavera, accepted the bill and is primarily liable for the value of the negotiable instrument, while the drawer, Bartolome Picornell,
is secondarily liable.)
22 People vs. Maniego [GR L-30910, 27 February 1987]

First Division, Narvasa (J): 6 concur
Facts: The information which initiated the criminal proceedings in the Court of First Instance of Rizal indicted 3 persons — Lt.
Rizalino M. Ubay, Mrs. Milagros Pamintuan, and Mrs. Julia T. Maniego — for the crime of MALVERSATION , committed as follows:
"That on or about the period covering the month of May, 1957 up to and including the month of August, 1957, in Quezon City,
Philippines, the above-named accused, conspiring together, confederating with and helping one another, with intent of gain and
without authority of law, did, then and there, wilfully, unlawfully and feloniously malverse, misappropriate and misapply public funds
in the amount of P66,434.50 belonging to the Republic of the Philippines, in the following manner, to wit: the accused, Lt. RIZALINO
M. Ubay, a duly appointed officer in the Armed Forces of the Philippines in active duty, who, during the period specified above, was
designated as Disbursing Officer in the Officer of the Chief of Finance, GHQ, Camp Murphy, Quezon City, and as such was
entrusted with and had under his custody and control public funds, conspiring and confederating with his co-accused, MILAGROS T.
PAMINTUAN and JULIA T. MANIEGO, did then and there, unlawfully, willfully and feloniously, with intent of gain and without
authority of law, and in pursuance of their conspiracy, take, receive, and accept from his said co-accused several personal checks
drawn against the Philippine National Bank and the Bank of the Philippine Islands, of which the accused, MILAGROS T.
PAMINTUAN is the drawer and the accused, JULIA T. MANIEGO, is the indorser, in the total amount of P66,434.50, cashing said
checks and using for this purpose the public funds entrusted to and placed under the custody and control of the said Lt. Rizalino M.
Ubay, all the said accused knowing fully well that the said checks are worthless and are not covered by funds in the aforementioned
banks, for which reason the same were dishonored and rejected by the said banks when presented for encashment, to the damage
and prejudice of the Republic of the Philippines, in the amount of P66,434.50, Philippine currency." Only Lt. Ubay and Mrs. Maniego
were arraigned, Mrs. Pamintuan having apparently fled to the United States in August, 1962. Both Ubay and Maniego entered a
plea of not guilty. After trial judgment was rendered by the Court of First Instance, convicting Ubay of the crime of malversation and
sentenced him to suffer the penalty of reclusion temporal of 12 years, 1 day to 14 years, 8 months, and a fine of P57,434.50 which
is the amount malversed, and to suffer perpetual special disqualification; while acquitting Maniego but ordering her to pay solidarily
with Ubay the amount of P57,434.50 to the government. Maniego sought reconsideration of the judgment, praying that she be
absolved from civil liability or, at the very least, that her liability be reduced to P46,934.50. The Court declined to negate her civil
liability, but did reduce the amount thereof to P46,934.50. She appealed to the Court of Appeals as Ubay had earlier done. Ubay's
appeal was subsequently dismissed by the Appellate Court because of his failure to file brief. On the other hand, Maniego submitted
her brief in due course. Because, in the Appellate Court's view, Maniego's brief raised only questions of law, her appeal was later
certified to the Supreme Court.
Issue: Whether a mere indorser may be made liable on account of the dishonor of the checks indorsed by her.
Held: 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 thereof 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 maker, drawer, or acceptor unless he clearly indicates by
appropriate words his intention to be bound in some other capacity." Such an indorser "who indorses without qualification," inter alia
"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 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
therefor, and for the purpose of lending his name to 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 her to be only an accommodation party,"
B-56
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 the surety."
23 Astro Electronics Corp. vs. Philippine Export and Foreign Loan Guarantee Corporation [GR 136729, 23 September
2003]
Second Division, Austria-Martinez (J): 3 concur, 1 concurs in result
Facts: Astro Electronics Corporation (Astro) was granted several loans by the Philippine Trust Company (Philtrust) amounting to
P3,000,000.00 with interest and secured by three promissory notes: PN PFX-254 dated 14 December 1981 for P600,000.00, PN
PFX-258 also dated 14 December 1981 for P400,000.00 and PN 15477 dated 27 August 1981 for P2,000,000.00. In each of these
promissory notes, it appears that Peter Roxas signed twice, as President of Astro and in his personal capacity. Roxas also signed a
Continuing Suretyship Agreement in favor of Philtrust Bank, as President of Astro and as surety. Thereafter, Philippine Export and
Foreign Loan Guarantee Corporation (Philguarantee), with the consent of Astro, guaranteed in favor of Philtrust the payment of 70%
of Astro's loan, subject to the condition that upon payment by Philguarantee of said amount, it shall be proportionally subrogated to
the rights of Philtrust against Astro. As a result of Astro's failure to pay its loan obligations, despite demands, Philguarantee paid
70% of the guaranteed loan to Philtrust. Subsequently, Philguarantee filed against Astro and Roxas a complaint for sum of money
with the RTC of Makati. In his Answer, Roxas disclaims any liability on the instruments, alleging, inter alia, that he merely signed the
same in blank and the phrases "in his personal capacity" and "in his official capacity" were fraudulently inserted without his
knowledge. After trial, the RTC rendered its decision in favor of Philguarantee, ordering Astro and Roxas to solidarily pay
Philguarantee the sum of P3,621,187.52 representing the total obligation of Astro and Roxas in favor of Philguarantee as of 31
December 1984 with interest at the stipulated rate of 16% per annum and stipulated penalty charges of 16% per annum computed
from 1 January 1985 until the amount is fully paid. On appeal, the Court of Appeals affirmed the RTC decision agreeing with the trial
court that Roxas failed to explain satisfactorily why he had to sign twice in the contract and therefore the presumption that private
transactions have been fair and regular must be sustained. Astro and Roxas filed the petition for review on certiorari.
Issue: Whether Roxas should be jointly and severally liable (solidary) with Astro for the sum awarded by the RTC.
Held: YES. Astro's loan with Philtrust Bank is secured by three promissory notes. These promissory notes are valid and binding
against Astro and Roxas. As it appears on the notes, Roxas signed twice: first, as president of Astro and second, in his personal
capacity. In signing his name aside from being the President of Astro, Roxas became a co-maker of the promissory notes and
cannot escape any liability arising from it. Under the Negotiable Instruments Law, persons who write their names on the face of
promissory notes are makers, promising that they will pay to the order of the payee or any holder according to its tenor. Thus, even
without the phrase "personal capacity," Roxas will still be primarily liable as a joint and several debtor under the notes considering
that his intention to be liable as such is manifested by the fact that he affixed his signature on each of the promissory notes twice
which necessarily would imply that he is undertaking the obligation in two different capacities, official and personal. Further, the
three promissory notes uniformly provide: "FOR VALUE RECEIVED, I/We jointly, severally and solidarily, promise to pay to
PHILTRUST BANK or order." An instrument which begins with "I", "We", or "Either of us" promise to pay, when signed by two or
more persons, makes them solidarily liable. Also, the phrase "joint and several" binds the makers jointly and individually to the
payee so that all may be sued together for its enforcement, or the creditor may select one or more as the object of the suit. Having
signed under such terms, Roxas assumed the solidary liability of a debtor and Philtrust Bank may choose to enforce the notes
against him alone or jointly with Astro. Furthermore, Roxas is the President of Astro and reasonably, a businessman who is
presumed to take ordinary care of his concerns. Absent any countervailing evidence, it cannot be gainsaid that he will not sign a
document without first informing himself of its contents and consequences. Clearly, he knew the nature of the transactions and
documents involved as he not only executed these notes on two different dates but he also executed, and again, signed twice, a
"Continuing Suretyship Agreement" notarized on 31 July 1981. Such continuing suretyship agreement even re-enforced his solidary
liability to Philtrust because as a surety, he bound himself jointly and severally with Astro's obligation. Roxas cannot now avoid
liability by hiding under the convenient excuse that he merely signed the notes in blank and the phrases "in his personal capacity"
and "in his official capacity" were fraudulently inserted without his knowledge.
24 Garcia vs. Llamas [GR 154127, 8 December 2003]

First Division, Panganiban (J): 4 concur
Facts: The case started out as a complaint for sum of money and damages by Dionisio Llamas against Romeo Garcia and Eduardo
de Jesus (Civil Case Q97-32-873), the complaint alleged that on 23 December 1996, Garcia and de Jesus borrowed P400,000.00
from Llamas; that, on the same day, they executed a promissory note wherein they bound themselves jointly and severally to pay
the loan on or before 23 January 1997 with a 5% interest per month; that the loan has long been overdue and, despite repeated
demands, Garcia and de Jesus have failed and refused to pay it; and that, by reason of their unjustified refusal, Llamas was
compelled to engage the services of counsel to whom he agreed to pay 25% of the sum to be recovered from Garcia and de Jesus,
plus P2,000.00 for every appearance in court. Annexed to the complaint were the promissory note and a demand letter, dated 2
May 1997, by Llamas addressed to Garcia and de Jesus. Resisting the complaint, Garcia, in his answer, averred that he assumed
no liability under the promissory note because he signed it merely as an accommodation party for de Jesus; among others. During
the pre-trial conference, de Jesus and his lawyer did not appear, nor did they file any pre-trial brief. Neither did Garcia file a pre-trial
brief, and his counsel even manifested that he would no longer present evidence. Given this development, the trial court gave
Llamas permission to present his evidence ex parte against de Jesus; and, as regards Garcia, the trial court directed Llamas to file a
motion for judgment on the pleadings, and for Garcia to file his comment or opposition thereto. Instead, Llamas filed a Motion to
declare Garcia in default and to allow him to present his evidence ex parte. Meanwhile, Garcia filed a Manifestation submitting his
defense to a judgment on the pleadings. Subsequently, Llamas filed a Manifestation/Motion to submit the case for judgment on the
pleadings, withdrawing in the process his previous motion. Thereunder, he asserted that Garcia's and de Jesus' solidary liability
under the promissory note cannot be any clearer, and that the check issued by de Jesus did not discharge the loan since the check
bounced. On 7 July 1998, the Regional Trial Court (RTC) of Quezon City (Branch 222) disposed of the case, rendering the decision
in favor of Llamas and ordering Garcia and De Jesus] to pay, jointly and severally, Llamas the sums of P400,000.00 representing
the principal amount plus 5% interest thereon per month from 23 January 1997 until the same shall have been fully paid, less the
amount of P120,000.00 representing interests already paid by de Jesus; P100,000.00 as attorney's fees plus appearance fee of
P2,000.00 for each day of court appearance, and; Cost of this suit. On appeal and on 26 November 2001, the Court of Appeals,
insofar as it pertains to Garcia, affirmed the decision of the trial court subject to the modification that the award for attorney's fees
and cost of suit was deleted. As to portion pertainng to de Jesus, the Court set said portion aside and ordered the case against de
Jesus remanded to the court of origin for purposes of receiving ex parte Llamas' evidence against de Jesus. On 26 June 2002, the
appellate court denied Garcia's motion for reconsideration. Garcia filed the petition for review.
Issue: Whether a person, who signed the promissory note merely as an accommodation party, was released as obligor when the
maker agreed to extend the term of the obligation.
Held: The note in question is not a negotiable instrument. 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, Garcia cannot
avail himself of the NIL's provisions on the liabilities and defenses of an accommodation party. 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.
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, Garcia would be liable for the promissory note. 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. The relation between an accommodation party and the party accommodated is, in effect, one of principal and
B-57
surety — the accommodation party being the surety. It is a settled rule that a surety is bound equally and absolutely with the
principal and is deemed an original promisor and debtor from the beginning. The liability is immediate and direct.
F. Defenses
Kinds of defenses
1. Legal and equitable defenses. The defense referred to in Section 57, from which the holder in due course is free, are
equitable defenses only, not legal defenses, which latter class of defenses can be set up even against a holder in due course.
At common law, the distinction was well established between real or legal defenses, which prevailed against a holder in due
course, and personal or equitable defenses, which could not be interposed against holders in due course. 596
2. Equitable or personal defenses. Personal or equitable defenses are "those which grow out of the agreement or conduct of a
particular person in regard to the instrument which renders it inequitable for him, though holding legal title, to enforce it against
the defendant, but which are not available against bona fide purchasers for value without notice.” 597 They can be set up against
persons not holders in due course but not against holders in due course. They are called personal defenses because they are
available only against that person or a subsequent holder who stands in privity with him. 598
3. Legal or real defenses. Legal or real defenses are those that attach to the instrument itself and can be set up against the
whole world, including a holder in due course. 599 They are called real defenses because they attach to the res, i.e., the
instrument itself, regardless of the merits or demerits of the plaintiff. 600
1. Real and personal defenses, distinguished.
Real or absolute defenses attach to the instrument and are available against all holders, whether in due course or not, but
only by the party or parties entitled to raise them. While personal or equitable defenses are available only against the
holder who stands in privity with the party who is entitled to set up or those who are not or do not have the rights of a
holder in due course. 601
602
Real defenses Personal Defense

Minority (available only to minor) Failure or Absence of Consideration
Forgery Illegal consideration
Non-delivery of incomplete instrument Non-delivery of complete instrument
Material alterations Conditional delivery of complete instrument
Ultra vires act of corporation Fraud in inducement
Fraud in Factum or Esse Contractus Filling up blank not within authority
Illegality – if declared void for any purpose Duress or intimidation
Vicious Force or violence Filling up blank beyond reasonable time
Want of authority Transfer in breach of faith
Prescription Mistake
Discharge in insolvency Insertion of wrong date
Ante-dating or post-dating for illegal of fraudulent purposes
2. Real defenses:
Nature of real defenses. In real defenses, the right sought to be enforced has never existed or ceased to exist. It is a
defense against everybody - against the party who receives it immediately from the maker, and against all subsequent
holders. The case of the real or absolute defense is presented where the contract was void, not voidable only, as to the
defendant in its inception - as where his signature was forged or unauthorized; or he was legally incapable of making the
contract; or his signature was secured by misrepresentation of the kind of paper he was signing; or the contract was void
(not voidable only) under an invalidating statute; or else the contract has lost its vitality by the occurrence of a subsequent
event or by material alteration without defendant's consent, lapse of time, or by discharge by payment in due course, by
bankruptcy proceedings or otherwise. 603
Enforcement of instrument subject to real defense. An instrument subject to a legal defense cannot be enforced
against the person to whom the legal defense is available. But it can be enforced against those to whom such a defense
is not available such as, in the case of forgery, persons precluded from setting it up. 604 The real defense, in many
instances, applies only to the person who made the instrument. As a matter of fact, as a general rule that a real defense is
a defense which the person against whom one is endeavoring to recover may set up and that person is usually the person
primarily liable upon the instrument. 605 For example, a defense available to the makers will not as a rule be available to the
indorser, nor will a defense available to the indorser be available to the makers. On the other hand, where the action is
against joint makers, a defense belonging personally to one of them will not be available to the other co-maker; but where
the defense of one defendant goes to the merits of the case defeating plaintiff's right to recover, it is available to the
benefit of the other defendant. 606 The last statement seems to mean defenses which are derived from the nature of the
obligation.607
Examples of real defenses.

(1) Alteration. 608 Alteration is classified by Ogden as a real defense. 609 But under Section 124, a holder in due course
may enforce the instrument according to its original tenor. 610 Spoilation, on the other hand, is an alteration made
by a stranger to the instrument. "Such a change of an instrument is held in most jurisdictions to have no effect
upon it, if the original meaning can be ascertained. That is, if the alteration be made by a stranger to the
instrument, the rights of the parties are not affected. 611 However, Prof. Ames, Judge Brewster and Mr. McKeehan
all agree that Section 124 abrogates the American doctrine of spoliation and substitutes the English rule. 612 The
effect, is, therefore, the same as where the alteration is made by a party, that a holder in due course can recover
on the original tenor of the instrument. "Where a material alteration was innocently made or was made by a
stranger, the instrument is discharged but the debt survives. But where a material alteration was made by a party
596
1 Agbayani, Ibid., p. 297; referring to Brannan’s Neg. Inst. Law, 6th ed., p. 618
597
598
1 Agbayani, Ibid., p. 297; citing Ames Cases on Bills and Notes, 812
599
1 Agbayani, Ibid., p. 297; referring to Ogden, 5th ed., 309
600
601
602
603
1 Agbayani, Ibid., p. 297; referring to Bigelow on Bills, Notes and Checks. 3rd ed.. 402
604
605
606
1 Agbayani, Ibid., p. 298; referring to 8 C.J. 727
607
1 Agbayani, Ibid., p. 298; referring to Article 1222, NCC
608
1 Agbayani, Ibid., p. 304; referring to Ogden, 5th ed., 349 but see Sec. 124, NIL
609
5th ed., p. 349
610
611
1 Agbayani, Ibid., p. 304; citing Buckler v. Huff, 53 Ind. 474; Langenberger v. Kroeger, 48 Cal. 147. See Note 18, U.S. L ed. 725
612
1 Agbayani, Ibid., p. 304; citing Brannan's Neg. Inst. Law, 6th ed. p. 1041
B-58
and constituted a forgery, the original debt as well as the instrument is discharged." 613 (see material alterations
below)
(2) Want of delivery of incomplete instrument. 614 (see below)
(3) Duress amounting to forgery. Duress is ordinarily an equitable defense. However, if there is physical pressure,
as when the defendant himself moves the pen under coercion through such external facts as imprisonment or fear
of injury to life and limb or less serious pressure which actually overcomes his will, it is more than duress and
amounts to fo'rgery, and therefore, such duress is a legal or real defense. 615 But even so, it seems that the
negotiation of such an instrument would be "under such circumstances as amount to fraud," and still a holder in
due course should be protected. 616
(4) Fraud in factum or fraud in esse contractus. (see below)
(5) Minority. (see below)
(6) Marriage in the case of a wife. (1) Under the system of conjugal partnership of gains in which the husband has
administration of the conjugal property, marriage is a defense where, without the consent of the husband, the wife
issues an Instrument chargeable against the conjugal property; 617 and (2) under the system of absolute
community of property in which neither spouse can alienate any common property without the consent of the
other, marriage is also a defense where, without the consent of the husband, the wife issues an instrument
chargeable against the common property. 618 The defense of marriage is available to the husband or his heirs, not
to the wife. However, marriage is not a defense in the following cases: (1) Where the instrument is issued by the
wife chargeable against her paraphernal property, ownership of which she retains; (2) Where the instrument is
issued chargeable against the conjugal property, if she has express authority embodied in a public instrument to
administer same; 619 (3) Where separation of property is agreed upon in the marriage settlement and the
instrument issued by the wife is chargeable against her separate property; 620 (4) Where the wife is duly authorized
to engage in business. 621 Her property and the conjugal property are bound. As to marriage in case of husband.
(1) Under the system Of conjugal partnership of gains, marriage of the husband is defense available to the wife or
her heirs, where the instrument is issued for purposes other than those specified in Articles 161 and 162, New
Civil Code. Thus, in one case, 622 it was held that the wife's promissory note, in the absence of any allegation and
proof that the loan was a liability of the conjugal partnership, or that the wife incurred it with the husband's consent
or that the money on the note benefited the family, does not bind the conjugal partnership. (2) Under the system of
absolute community of property, marriage of the husband is also a defense available to the wife or heirs where the
husband issues an instrument chargeable against the common property without the consent of the wife. 623
(7) Insanity where the insane person has a guardian appointed by the court. 624 Contracts with a person who has
been adjudged judicially to be insane and for whom a committee or guardian has been appointed to care for his
interests are not valid and cannot be enforced if disaffirmed or avoided. This defense is available not only as
between immediate parties but also as against a holder in due course or a bona fide holder for value. In some
jurisdictions, if the insanity of a party to a contract is known, the contract is absolutely void. 625 But there is a
conflict of authority in the various jurisdictions as to whether one ignorant of the incompetency of a person with
whom he contracts will be protected. The better opinion would seem to be that he will be protected if he has acted
in good faith and taken no undue advantage of the afflicted person. 626
(8) Ultra vires act of corporation, where the corporation is absolutely prohibited by its charter or statute from issuing
any commercial paper under any circumstances. 627 (see below)
(9) Want of authority of agent. 628 (see below)
(10) Execution of instrument between public enemies. 629 Instruments executed between enemies in time of war are
void. 630 Hence, that an instrument is executed between enemies in time of war, is a legal or real defense. 631
(11) Illegality of contract where it is the contract or instrument itself which is expressly made illegal by statute. Where
it is the contract or instrument itself which is expressly made illegal by statute, not merely the manner of execution
thereof, or the consideration therefor, the illegality of the contract or instrument is a real or legal defense. But
illegality of contract is a personal or equitable defense where what the law declares to be illegal is not the
instrument itself but merely the manner of execution or the consideration given. 632 This is true even when the
consideration is in direct violation of the law. 633 In other words, a distinction is to be made between a consideration
simply illegal and one which, by statute, expressly makes the bill void. In the former case, a holder in due course
can recover; in the latter, even a holder in due course cannot recover. 634
(12) Forgery. 635 (see below)
a. minority and ultra vires acts (Sec. 22, NIL)
Section 22. Effect of indorsement by infant or corporation. -- The indorsement or assignment of the
instrument by a corporation or by an infant passes the property therein, notwithstanding that for want of
capacity, the corporation or infant may incur no liability thereon.
Indorsement of minor or corporation. Ordinarily, a minor cannot give consent to contracts and a contract entered
into by him is voidable. In the case of corporations, they cannot perform acts beyond the scope of their authority.
Such acts would be ultra vires acts. Nevertheless, if a minor or a corporation indorses an instrument, the indorsee
acquires title t it and can enforce it against the maker or acceptor or other parties prior to the minor. Such prior
parties cannot escape liability by setting up as a defense the incapacity of the indorser. 636 The maker, drawer and
the acceptor warrant not only the existence of the payee but also his then capacity to indorse. Hence, where the
payee is a minor, they cannot interpose as a defense his incapacity to indorse. 637
613
614
Section 15, NIL
615
1 Agbayani, Ibid., p. 305; referring to Ogden, 5th ed., p. 344; Brannan's Neg. Inst. Law, p. 623; 8 Am. Jur. 291
616
1 Agbayani, Ibid., p. 305; citing Brannan's Neg. Inst. Law, p. 623
617
Article 165, NCC
618
Article 207, NCC
619
Article 168, NCC
620
Article 212, NCC
621
1 Agbayani, Ibid., p. 307; referring to Articles 6, 7 and 9, Code of Commerce
622
1 Agbayani, Ibid., p. 307; referring to Manaois-Salonga v. Natividad, L-13927, Feb. 29, 1960; see also Acenas v. Sison, L-17011, Aug. 30, 1963
623
Art. 207, NCC
624
Art. 207, NCC
625
1 Agbayani, Ibid., p. 304; referring to Ogden, 5th ed., 320
626
1 Agbayani, Ibid., p. 308; citing Ogden, 5th ed., pp. 318-319
627
1 Agbayani, Ibid., p. 304; citing Root v. Goddard, 3 McClean 102
628
1 Agbayani, Ibid., p. 304; citing 8 C.J. 775-776
629
630
631
632
1 Agbayani, Ibid., p. 309; referring to 8 CJ 767
633
634
1 Agbayani, Ibid., p. 309; citing Whealer v. Russel, 17 Mass. 258; Vanmeter v. Spurrier, 94 Ky. 22, 21 S.W. 337; Whitman v. Freese, 23 Me. 185
635
Section 23, NIL
636
637
1 Agbayani, Ibid., p. 198; citing Sections 60 to 62, NIL
B-59
Minority. Minority is a real or legal defense. 638 A minor's contract is voidable. 639 But he may ratify it. 640 The defense
is available only to the minor 641 and his indorsement passes title to the indorsee 642 but it does not bind him so as to
make him liable thereon. The defense, however, is not total. Where the minor has kept the whole of the valuable
consideration received by him, he cannot interpose his minority as a defense. Where he has kept only a part, the
defense is only to the extent of the benefit received by the minor. 643
Ultra vires act of corporation in certain cases. Where the corporation is absolutely prohibited by its charter or
statute from issuing any commercial paper under any circumstance, such a paper cannot be enforced even by a
holder in due course. 644 However, an indorser can not set up the defense that the execution of the bill or note by a
corporation was ultra vires. 645
Want of authority or agent in certain cases. Where the agent is without authority, apparent or real, want of
authority of the agent is a legal or real defense, and the principal will not be bound beyond the authority given to the
agent. 646
Other instances where Section 22 is applicable. This section is also applicable to indorsements by lunatics,
imbeciles, and other incapacitated persons. 647
b. non-delivery of an incomplete instrument (Sec. 15, NIL)
Section 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.
Instrument not valid against party before delivery; even where holder is in due course; But indorsers, etc.
are liable. The non-delivery of an incomplete instrument is a valid defense, not only between the original parties but
also against a holder in due course. 648 The law does not make any distinction between a holder in due course and
one who is not a holder in due course. The law uses the phrase "any holder" which includes a holder in due course.
However, the invalidity of the instrument is only with reference to parties whose signatures appear on the instrument
prior to delivery. As to parties whose signatures appear on the instrument after delivery, the instrument may be valid.
649
Want of delivery of incomplete instrument as a defense. Where the instrument is mechanically incomplete and
undelivered, want of delivery is a real or legal defense. The defense is available to parties prior to the delivery. 650
It is a real defense. Under Section 15, the possible defense of a party whose signature appears on an instrument
prior to delivery is that, as against him, the instrument is not valid for having been incomplete and undelivered. This
defense may be called "want of delivery of a mechanically incomplete instrument." Such a defense can be
interposed not only against one who is not a holder in due course but also against a holder in due course, as the law
uses the term "any holder" which includes a holder in due course. It is, therefore, a real defense. 651
Delivery is not conclusively presumed where instrument is incomplete. Under Section 16, delivery is
conclusively presumed where an instrument is in the hands of a holder in due course, although possession is prima
facie evidence of delivery, the presumption can be rebutted. The provision of Section 16 that a valid delivery is
conclusively presumed when the instrument is in the hands of a holder in due course must be read in connection
with Section 15, and Section 16 does not apply in the case of an incomplete instrument completed and negotiated
without authority. 652 Section 16 applies to a mechanically complete instrument not delivered, while Section 15 applies
to a mechanically incomplete instrument not delivered. 653
But delivery presumed prima facie. But where an incomplete and undelivered instrument is in the hands of a
holder in due course there is prima facie presumption of delivery which the maker may rebut by proof of non-delivery.
654
This presumption must, however, be distinguished from the presumption where an undelivered mechanically
complete instrument is in the hands of a holder in due course, in which the presumption of valid delivery is not
merely prima facie but conclusive. 655 Furthermore, where the custody of the incomplete instrument has been
entrusted to another, who wrongfully completes and negotiates it to a holder in due course, delivery to the agent or
custodian is a sufficient delivery to bind the drawer or maker. 656
c. fraud in factum
Fraud in factum or fraud in esse contractus. Fraud in factum or fraud is esse contractus is considered a real or
legal defense. "The Negotiable Instruments Law has no provision as to fraud in factum. Such fraud was a real
defense at common law and is perhaps a real defense by the weight of present authority. x x x the maker may
however be estopped by negligence to deny knowledge of the character of the instrument which he has signed and if
he was not negligent, he is net liable. In some cases, it is reasoned that the use of which the signature was applied
was, in substance and effect, forgery and consequently analogous to forgery under Section 23 of the Negotiable
Instruments Law." 657 Fraud in factum exists in those cases in which a person, without negligence, has signed an
638
1 Agbayani, Ibid., p. 306; citing Dee Moines Ins. Co. v. Mcintire, 80 Iowa, 50, 68 N.W. 565; Howards v. Simpkins, 70 Ga. 322; Fitts v. Hall, 9 N.H. 441;
Monroe v. Birdsall, 1 Jobs. Cas. (N.Y.) 127. 1 Am. Dec. 105
639
Article 1390, NCC
640
Article 1393, NCC
641
1 Agbayani, Ibid., p. 307; citing Article 1397, NCC; Nightingale v. Withington, 15 Dec. 101; Hertness v. Thompson, 5 Johns (N.Y.) 160
642
1 Agbayani, Ibid., p. 306; referring to Section 22 NIL
643
Article 1341, paragraph 1, NCC
644
1 Agbayani, Ibid., p. 308; citing Scott v. Bankers' Union, 73 Ka. 575, 85 Pac. 604; Chillicothe Bank v. Dodge, 8 Barb. (N.Y.) 233; Root v. Godard, 3
McLean 102, Fed. Cas. No. 12, 037
645
1 Agbayani, Ibid., p. 308; referring to 8 CJ 778; See also Section 22, NIL
646
1 Agbayani, Ibid., p. 309; citing 8 C.J. 775-776
647
648
1 Agbayani, Ibid., p. 182; citing Ogden, 5th ed., 353
649
650
651
652
1 Agbayani, Ibid., p. 183; citing Linick v. Nutting & Co., 125 N.Y. Supp. 93
653
654
1 Agbayani, Ibid., p. 183; citing Melville M. Bigelow, The Law of Bills, Notes and Checks, 3rd ed. 1928
655
656
1 Agbayani, Ibid., p. 183; citing Melville M. Bigelow, 3rd ed. 1928
657
1 Agbayani, Ibid., p. 305; citing Ogden, 5th ed., 6. 346
B-60
instrument which was, in fact, a negotiable instrument, but was deceived as to the character of the instrument and
without knowledge of it. 658
Essential element of fraud in factum. An essential element is that the maker or indorser, as the case may be, must
have exercised ordinary diligence and in no manner contributed negligently to the imposition. In one case, the rule is
stated that the test as to whether an artifice or trick of this character constitutes forgery is whether the signature is
procured in such manner as to be the voluntary act of the signer. If it is procured in such manner that it is without the
assent of the signer and not a voluntary act on his part, he is not liable. 659
Reason for the rule. "The reason for holding such instruments invalid is on the theory that the instrument never
existed. It is treated as though the defendant had never in fact signed the instrument and since there is no
instrument, the defendant can not be liable upon that which does not exist and a statute cannot operate upon that
which does not exist." 660
d. forgery and want of authority, (Sec. 23, NIL)
Section 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.
Forgery as a defense. Forgery is a real or legal defense. An indorser cannot set up as a defense the forgery of the
signature of the maker, drawer, or indorsers prior or subsequent to him 661 because of his warranties. 662 Forgery of
the indorser's signature, in an instrument payable to order, is also available to the acceptor or drawer. 663
Effects in general. Section 23 of the Negotiable Instruments Law lays down three fundamental rules as to the effect
of a forged signature. They are:
(1) That the signature forged or made without authority is wholly inoperative;
(2) That no right to retain the instrument, or to give discharge therefor, or to enforce payment thereof against any
party thereto, can be acquired through or under such a signature forged or made without authority; and
(3) That, nevertheless, as against a party precluded from setting up the forgery or want of authority, the signature
forged or made without authority is operative, and, rights to retain the instrument, to give discharge therefor, or
to enforce payment thereof, can be acquired through or under the signature forged or made without authority. 664
Extent of the effect of forgery. It must be noted, however, that:

(1) Only the signature forged or made without authority is stated by the law to be inoperative but neither
the instrument itself is, nor the genuine signatures are, rendered inoperative. Proof that one of several
signatures to a note was forged or affixed without authority does not necessarily avoid the note as to those
whose signatures are genuine, it clearly would not render the note unenforceable against parties who actively
procured the forgery or acquiesced in it on full knowledge." 665
(2) The instrument can be enforced by holders to whose title over the instrument the forged signature is
not necessary, such as, an indorsement of an instrument which on its face is payable to bearer. Whether
an indorsement on a note, not necessary to the plaintiffs' title, is genuine or forged, is immaterial to the plaintiff's
right to recover. 666
(3) The instrument can be enforced against those who are precluded from setting up the defense of
forgery, even against those whose signatures are forged. Those precluded from setting up the defense of
forgery may be divided into two general classes, namely: (1) those who warrant or admit the genuineness of the
signature in question; and (2) those who, by their acts, silence or negligence, are estopped from setting up the
defense of forgery. Under the class of warrantors of genuineness are included: (1) indorsers, (2) persons
negotiating by delivery and (3) acceptors. 667
a. Indorsers as warrantors. Indorsers, whether qualified or general, warrant that the instrument indoi'sed by
them is genuine in all' respects what it purports to be. (Sec. 65 and 66). Consequently, they cannot
interpose the defense that signatures nrior to them are forged. 668
b. Persons negotiating by delivery as warrantors. Persons negotiating by mere delivery also warrant that
the instrument negotiated by them is genuine and an all respects what it purports to be, as per Section 65.
Consequently, they are also precluded from setting up the defense of forgery. 669
c. Acceptors as warrantors. Acceptors are also precluded from setting up the defense of the forgery of the
drawer's signature. Under Section 62, a drawee, by accepting the bill, admits the genuineness of the
signature of the drawer.670
d. Those estopped. "Precluded" includes those cases where there are estoppels against the party desiring
to set up the forgery. 671 "The word "precluded" is broad enough to include ratification; and the usual
argument against ratification of a forgery on grounds of public policy properly applies to criminal and not
civil liability. This is the better rule on the agency." 672
1. Estoppel as to forgery of instruments. The rule of estoppel stated in the New Rules of Court,
applied to forgery in negotiable instruments may be stated thus: Whenever a party has, by his own
declaration, act, or omission, intentionally and deliberately led another to believe that his or another's
signature in an instrument is genuine, and to act upon such belief, he cannot, in any litigation arising
out of such declaration, act, or omission, be permitted to set up the forgery of such signature or
signatures. As may be noted, the estoppel may arise from: (1) a declaration, (2) an act, or (3)
omission or negligence. 673
658
1 Agbayani, Ibid., pp. 305-306; citing Ogden, 5th ed., p. 344. Footnote 41 continues as “However, it is possible that such conduct is "fraud" within
Section 55, and hence causes merely a "defective" title, or that it is one of the "defenses" under Section 57. It might be considered want of delivery which under
Section 16 is an equitable defense. Furthermore, it is to be noted that the law covers the other (common law) real defenses, and a broad interpretation of Section
55, especially of the last clause "under such circumstances as amount to fraud" certainly includes all kinds of fraud in factum. (Brannan's Neg. Inst. Law, 6th
ed., p. 264). So, under this opinion, fraud in factum is merely an equitable defense.”
659
1 Agbayani, Ibid., p. 306; citing Maurmair v. National Bank of Commerce of Tulsa, 63 Okla. 283, 165 Pac. 413
660
661
662
663
664
665
1 Agbayani, Ibid., p. 205; citing Brannan's 7th ed. p. 438
666
1 Agbayani, Ibid., p. 205; citing Jett v. Standafer, 143 Kt. 787, 137 S.W. 513
667
668
669
670
671
1 Agbayani, Ibid., p. 206; citing Brannan's 7th ed., p. 455, and cases cited.
672
1 Agbayani, Ibid., pp. 206-207; citing Brannan's 7th ed., p. 455, but see Ogden 5th ed., p. 340, for contrary opinion
673
1 Agbayani, Ibid., p. 207; referring to Section 3, Rule 131
B-61
2. Estoppel by Omission; Unreasonable delay. "Unreasonable delay, after his discovery of the
forgery, on the part of one having the opportunity and duty to speak, in disclosing a forgery upon
commercial paper to the one who ought to be apprised thereof, estops the former from thereafter
asserting the forgery as against the latter where the latter is prejudiced by such delay or failure." 674
The requisites are: (1) that the delay be unreasonable and (2) that the one who ought to be apprised
of the forgery must have been prejudiced. What is reasonably prompt notice of a forgery depends
upon the circumstances of the case, and the situation of the parties with reference to the remedies
against any party is a proper element to enter into the estimate of the reasonableness of the notice. 675
A bank is prejudiced where, at the time one discovered that his attorney had forged his indorsement
to a draft in his favor, it had assets of the attorney m its possession to protect itself but at the time it
was notified of the forgery, it has parted with such assets. 676 But a bank is not prejudiced by the delay
of a partnership in notifying it of the forgery by the cashier of the partnership indorsements of its name
to checks payable to it, where, at no time after the discovery of the forgery by the partnership, did the
cashier have any property with which to indemnify the bank. 677
3. Estoppel by negligence in delivery. The omission may consist in negligence in the delivery of the
instrument. Thus, a drawer may be precluded from a defense of forgery of the payee's indorsement if
delivery by him to the payee is negligent. 678
Effects, Forged signature of drawer or payee. A forged signature, whether it be that of the drawer or the payee, is
wholly inoperative and no one can gain title to the instrument through it. A person whose signature to an instrument
was forged was never a party and never consented to the contract which allegedly gave rise to such instrument. 679
Section 23 does not avoid the instrument but only the forged signature. 680 A forged indorsement does not operate as
the payee's indorsement. 681
Effects, Forgery against indorsers. The exception to the general rule in Section 23 is where "a party against whom
it is sought to enforce a right is precluded from setting up the forgery or want of authority." Parties who warrant or
admit the genuineness of the signature in question and those who, by their acts, silence or negligence are estopped
from setting up the defense of forgery, are precluded from using this defense. Indorsers, persons negotiating by
delivery and acceptors are warrantors of the genuineness of the signatures on the instrument. 682
Written instrument in court; admission of due execution. When an action or defense is founded upon a written
instrument, such as a negotiable instrument, copied in or attached to the corresponding pleading, the genuineness
and due execution of the instrument shall be deemed admitted unless specifically denied under oath by the adverse
party. 683 Consequently, the genuineness and due execution of the written instrument or document copied in or
attached to the opponent's pleading as the basis of his claim or defense, should be denied specifically under oath,
otherwise they are deemed admitted 684 By the admission of the genuineness and due execution of a written
instrument or document, is meant that the party whose signature it bears admits: (1) that he signed it or that it was
signed by another for him and with his authority; (2) that at the time it was signed, it was in words and figures exactly
as set out in the pleading of the party relying upon it; and (3) that any formal requisites required by law, such as
swearing and acknowledgment, or revenue stamp which it requires, are waived by him. 685 Defenses, therefore,
which are inconsistent with the due execution and genuineness of the written instrument or document are cut off by
an admission implied from failure to make a verified specific denial, as, for instance: (1) the defense that the
signature is a forgery; (2) that it was unauthorized, as in the case of an agent signing for his principal, or one signing
on behalf of a partnership or a corporation or that in the case of the latter, that the corporation was not authorized
under its charter to sign the instrument; or (3) that the party charged signed the instrument in some other capacity
than that alleged in the pleading setting it out. But defenses or new matters which are not inconsistent with the
execution and genuineness of the instrument may be made such as payment, statute of limitations, illegality or want
of consideration, fraud, mistake, compromise, estoppel, coercion, imbecility, etc. 686
Forgery, defined and explained. "By forgery is meant the counterfeit making or fraudulent alteration of any
writing, and may consist in the signing of another's name, or the alteration of an instrument in the name,
amount, description of the person and the like, with intent to defraud." 687 The intent to defraud distinguishes
forgery from innocent alterations and spoliation. 688 Section 23 applies only to forged signatures or signatures
made without the authority of the person whose signature it purports to be. Consequently, if the forgery consists
of alteration in the amount, Section 23 does not apply. Such alterations are covered by Section 124. The other
forms of forgery are: (1) fraud, in factum; (2) duress amounting to forgery; and (3) fraudulent impersonation in
certain cases. 689
1. Fraud amounting to forgery. One obtains the signature of another by telling the latter that it is only for
autograph purposes, but actually writes above the signature a negotiable instrument. The fraud here
amounts to forgery. This is called fraud in factum or fraud in esse contractus. Here, there is no
intention to issue an instrument. As it amounts to forgery, it has the effect of forgery such that it is a real
defense. Hence, (1) The maker of a note, an old colored man who almost was blind, was induced to place
his signature on a piece of paper without knowing that it was a note and without negligence on his part. It
was held that he was not liable to a holder in due course. The fact amounted to a forgery. 690 (2) The
defendant signed a note in blank, having been fraudulently induced to believe that he was signing a sales
application. It was held that the subsequent completion of the instrument amounted to a forgery so that a
holder in due course could not recover. Fraud in factum must be distinguished from fraud in inducement,
which does not amount to forgery and which is only a personal defense. 691 Fraud in inducement is
committed when fraud was utilized to induce another to issue a check.
674
1 Agbayani, Ibid., p. 207; citing 25 A.L.R. 177, citing in turn many cases
675
1 Agbayani, Ibid., p. 208; citing A.L.R. citing U.S. v. National Bank, 2 Mackey (D.C.) 289
676
1 Agbayani, Ibid., p. 208; citing 25 A.L.R. citing Brown v. People's Nat. Bank, 40 L.R.A. (N.S.) 657, 136 NW 506
677
1 Agbayani, Ibid., p. 208; citing 25 A.L.R. citing Lidenthal v. Northwest State Batik, 221 III. App. 145
678
679
J. Campos & M. Lopez-Campos, Negotiable Instruments Law, 227-230 [4th ed., 1990]
680
1 A. Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines 198 (1989 ed.]
681
Associated Bank vs. Court of Appeals [GR 107382, 31 January 1996]
682
Associated Bank vs. Court of Appeals [GR 107382, 31 January 1996]; citing I A. Agbayani, Commentaries and Jurisprudence on the Commercial Laws
of the Philippines 199 (1989 ed.]
683
1 Agbayani, Ibid., p. 202; referring to Sec. 8, Rule 8, New Rules of Court
684
1 Agbayani, Ibid., p. 202; referring to Songco v. Sellner, 37 Phil. 264
685
1 Agbayani, Ibid., p. 202; citing Hibbard v. Rohde; 32 Phil. 476; Merchant v. International Banking Corp., 6 Phil. 314; Bough v. Cantiveros, 40 Phil. 209;
Choy v. Heredia, 12 Phil. 259; Ramirez v. Orientalist, Co., 38 Phil. 634, 648, cited in 1 Moran, 3rd ed., pp. 263-264
686
1 Agbayani, Ibid., p. 203; citing Hibbard v. Rohde, etc., Ibid.
687
1 Agbayani, Ibid., p. 198; citing Franklin vs. Seares, 4 Allen (Mass.) 336, 81 Am. Dec. 707
688
689
690
1 Agbayani, Ibid., p. 199; citing Harber v. Lincoln, 176 Okla. 221, F (2) 967
691
1 Agbayani, Ibid., p. 199; citing Commerce Securities Corporation v. Hays, 60 S.W. (2b) 335
B-62
2. Duress amounting to forgery. Ordinarily, duress is merely a personal defense. But where it amounts to
forgery, it is a real defense, as where one takes another's hand and forces him to sign his name. 692
3. Fraudulent Impersonation.
* Double intent. In fraudulent impersonation cases, the maker or drawer of the instrument may be said
to have a double intent. First, he intends to make the instrument payable to the person before him or
to the person writing at the other end of the line, in case the negotiation is by correspondence.
Second, he intends to make the instrument payable to the person whom he believes the stranger to
be." 693 The courts have almost unanimously held that the first is the controlling intent except where
the name of the payee was already known to the maker or drawer, 694 or was more particularly
identified in some manner, e.g., by some designation, description or title, 695 in which cases the courts
treat the second as the controlling intent. 696
* Theory of actual intent. The theory commonly invoked in support of the majority view which throws
the loss on the drawer - at least, in the absence of anything to show that the drawer had any doubt as
to identity of the person to whom he delivered the paper as payee - is that the drawee, in paying the
paper, or the holder, in taking it upon the indorsement of the impostor in the name of which the payee
was described, carries out the intention that the drawer entertained at the time of the delivery of the
paper to the impostor, although that intention was conceived in consequence of the fraud of the
impostor as to his identity and ownership of the property which represented the consideration. 697 This
is called the theory of actual intent.
* Theory of estoppel. Some cases which support the doctrine that throws the loss upon the drawer,
invoke in its support, generally, as an alternative or in addition to the theory of actual intent - the
theory of negligence or estoppel, or more broadly, the maxim that as between two innocent persons,
the one whose act was the cause of the loss should bear the consequences." 698 Thus, it was held
that it was drawer’s duty to use diligence to ascertain the identity of the party with whom he dealt.
Failing to make this discovery, he became the victim of a fraud. The impostor having succeeded in
this first and essential step in the practice of the fraud, the next was comparatively an easy one. The
drawee had a right to believe that drawer has acted with full knowledge of the party to whom he gave
the check for the money, and its duty to him was discharged when it satisfied itself that the payment
was intended to be made to the party who presented it. 699
* Rule qualified where impostor represents himself as agent of payee. "There is a well-defined
distinction between cases where the paper is delivered to the impostor as payee, in the belief that he
is the person to whom or upon whose indorsement it will be paid, and cases where the paper is
delivered to the impostor upon his representation, in the belief that he is agent of the person named
as payee, although the latter is a fictitious person, or at least a person who has no connection with
the transaction; and it is held with practically no conflict - at least, in the absence of negligence on
drawer's part - that as between the drawer and drawee, or between the drawer and a holder in due
course, the loss falls on the drawee or the purchaser, as the case may be, rather than on the drawer,
where the impostor upon whose indorsement the paper was purchased or paid, represented himself
to be the agent of the payee, and not to payee himself." 700 The "doctrine of actual intent" does not
apply because the drawer did not regard the individual to whom he delivered the check as the payee
but merely as the agent of the payee. 701
Cases of forgery in general. The cases of forgery may be divided as follows:

(1) Forgery of promissory notes which may be further subdivided into:
(a) forgery of an indorsement in the note; and
(b) forgery of the maker's signature;
(2) Forgery of bills of exchange which may be further subdivided thus:
(a) forgery of an indorsement on the bill; and
(b) forgery of the drawer's signature, either
(1) with acceptance by the drawee, or
(2) without such acceptance but the bill is paid by the drawee. 702
(1) forgery of maker's signature
Right of parties in forgery of maker's signature. Where the maker's signature is forged, he cannot be held
liable by any holder, whether the holder is in due course or not. The reason is that the purported maker is not a
party to the instrument as his forged signature is inoperative and no right to retain, enforce or discharge the
note, may be acquired against him. 703
(2) of indorser's signature
Defense, Forgery in order instruments. Where the instrument is payable to order at the time of the forgery,
the signature of its rightful holder is essential to transfer title to the same instrument. When the holder's
indorsement is forged, all parties prior to the forgery may raise the real defense of forgery against all parties
subsequent thereto. 704
Rights of parties in forgery of indorsement in note payable to order. In case the note is originally payable
to order, the party whose indorsement is forged and parties prior to him including the maker, cannot be held
liable by the holder, whether that holder is a holder in due course or not.
(1) The reason is that, inasmuch as the indorsement is forged, it is inoperative. But since the note is payable
to order, it can be negotiated only by indorsement completed by delivery, and, therefore, the forged
indorsement is the only means, together with the delivery of the note, through which the holder could
acquire any rights to it or its proceeds. In other words, the forged indorsement is the only source and the
basis of whatever rights the holder has in the note. But since the indorsement is inoperative, it can not
effect any transfer of any rights to the holder. Hence, the holder has wrongly acquired the note and has no
right to it or its proceeds.
692
1 Agbayani, Ibid., p. 199; citing Ogden, 5th ed., p.344
693
1 Agbayani, Ibid., p. 200; citing Brannan’s p. 476
694
1 Agbayani, Ibid., p. 200; citing Cundy v. Lindsay, 3 A.C. 459, and Rossi v. Nat. Bank, 71 Mo. App. 150
695
1 Agbayani, Ibid., p. 200; citing Mercantile Nat. Bank v. Silverman, 148 Appl. Div. 1, 132 N.Y. Supp. 1017
696
1 Agbayani, Ibid., p. 200; citing Brannan's, pp. 476-477
697
1 Agbayani, Ibid., p. 201; citing 22 A.L.R. 1234
698
699
700
701
1 Agbayani, Ibid., p. 201; citing Central Nat. Bank v. Nat. Metropolitan Bank, 17 L.R.A. (N.S.) 620, cited in 22 A.L.R. 1263
702
703
704
Associated Bank vs. Court of Appeals [GR 107382, 31 January 1996]; citing J. Vitug, Pandect of Commercial Law and Jurisprudence 51-53 [Rev. ed.,
1990]
B-63
(2) Moreover, the taw further provides that no right to retain the note, give discharge therefor, or enforce
payment thereof, could be acquired through and under the forged signature. Hence, the holder did not
acquire at least those three rights as against the party whose signature is forged and parties prior to him,
including the maker.
(3) Finally, from another viewpoint, in these cases the forger usually obtains possession of the note by
fraudulent or other unlawful means and, therefore, he has no right whatsoever in the note. As he is the
transferor to the holder or the predecessor of the holder, the transferee acquires whatever rights the forger
has in the note, but, as he has no rights whatever against prior parties, the transferee likewise acquires no
rights against such prior parties. 705
Warranty of an indorser of order instrument; no defense of forgery of signatures prior to him. An

indorser of an order instrument warrants "that the instrument is genuine and in all respects what it purports
to be; that he has a good title to it; that all prior parties had capacity to contract; and that the instrument is
at the time of his indorsement valid and subsisting." 706 He cannot interpose the defense that signatures
prior to him are forged. 707
Rights of parties in forgery of indorsement in note payable to bearer. In case the note is originally payable
to bearer, the party whose indorsement is forged and parties prior to him including the maker, may be held
liable by a holder in due course but not by one who is not a holder in due course provided that the note was
mechanically complete before the forgery. The reason is that the forged indorsement is not necessary to the
title of the holder since instruments payable to bearer can be negotiated by mere delivery. The defense in these
cases by the party whose indorsement is forged or of parties prior to him would be want of delivery of a
mechanically complete note instead of forgery. But under Section 16, want of delivery of a mechanically
complete instrument cannot be interposed against a holder in due course because valid and intentional delivery
to prior parties is conclusively presumed when such an instrument is in the hands of a holder in due course.
However, where the holder is not a holder in due course, he may not enforce the note against the party whose
indorsement is forged. In such cases, the defense of want of delivery is available against him. 708
Rights of parties in forgery of indorsement in bill payable to order. 709 In the absence of preclusion from
setting up forgery by warranty as in the case of indorsers, or by estoppel as in the case of negligence, the
following are the rights and liabilities of the parties:
(1) The drawer's account cannot be charged by the drawee for the amount paid and if his account is
charged, the drawer can recover the amount from the drawee 710 In an action by the drawee against
the drawer for the amount charged by the drawee against the account of the drawer where the drawee
paid a check on a forged indorsement, the drawee has no defense against the drawer, 711 and the drawer
may recover from the drawee for an instrument paid on a forged indorsement. 712 Thus, "the general rule
may be stated to be that where an employee or agent fraudulently procures his employer or principal to
issue checks payable to fictitious persons not known to the employer or principal to be fictitious, or to
persons not having interest in the proceeds of such checks, and cashes the same upon the forged
indorsement by him of the names of such persons, the loss falls upon the depository (drawee) cashing it."
713
This is on the theory that the depository (drawee) owes to the depositor (drawer) an absolute and
contractual duty to pay the check only to the person to whom it is made payable or upon his genuine
indorsement (cases cited). And the depository cannot relieve himself of this duty by any amount or degree
of care he may have exercised to determine that the indorsement is the genuine indorsement of the
payee." 714 In such cases, the drawer authorizes and directs the drawee to pay only to the payee or to the
order of the payee. It does not authorize or direct the drawee to pay the check to any other person. The
drawee bank has no legal right to pay the money of the drawer on deposit with it to anyone except the
drawer or its order. 715
(2) But the drawer has no right to recover from the collecting bank. The drawer has no right to recover
the amount paid from the collecting bank, as the duty of the collecting bank to exercise care in collection is
due only to the payee 716 and as the drawer suffers no damage since it can recover the amount paid from
the drawee bank which has no right to charge the drawer's account. 717
(3) The drawee bank can recover from the collecting bank. The drawee may recover from the recipient of
payment, such as the collecting bank, under a forged indorsement. 718 The reason for this is the same as
for the rule allowing the payee to recover from the recipient of the payment under a forged indorsement. 719
(4) The payee can recover from the drawer as he still retained his claim of debt against the drawer.
(5) Or, the payee can recover from the recipient of the payment, such as the collecting bank. According
to the general rule, a bank or other corporation or an Individual, who has obtained possession of a check,
upon an unauthorized or forged indorsement of the payee's 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
they have been paid to the person whom the check was obtained. 720
(6) The collecting bank, is liable to the payee. The theory of the rule set out has been expressed in
different ways, all of which may be summed up in the statement 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, 721 and the
proceeds are held for the rightful owners of the payment and, may be recovered by them. 722 The position
of the bank or other corporation or person taking the check on the forged or unauthorized indorsement is
the same as if he had taken the check and collected the money without indorsement at all, 723 and the act
705
706
Section 66, Negotiable Instruments Law
707
708
709
1 Agbayani, Ibid., p. 211; citing Great Eastern Life Insurance Co. v. Hongkong & Shanghai Banking Corp., 43 Phil. 678; Banca de Oro Savings &
Mortgage Bank v Equitable Banking Corp, Jan 20, 1988, 157 SCRA 188
710
1 Agbayani, Ibid., pp. 210-211; citing Calinog v. PNB (C.A.), 51 O.G. 4104
711
1 Agbayani, Ibid., p. 211; citing Great Eastern Life Insurance Co. v. Hongkong 8, Shanghai Banking Corp. and Phil. Nat. Bank, 43 Phil. 678, 682
712
1 Agbayani, Ibid., p. 211; citing Brannan 7th ed citing many cases
713
1 Agbayani, Ibid., p. 211; citing 99 ALR 440 citing many cases. See also Calinog v. PNB (C.A.) ..., (Jan. 31, 1955), 51054, holding that a "drawer has a
right of action against a bank encashing a forged instrument."
714
1 Agbayani, Ibid., pp. 211-212; citing 99 A.L.H. 441, citing many cases
715
1 Agbayani, Ibid., p. 212; citing Great Eastern Life ins. Co. v. Hongkong & Shanghai Banking Corp. et al., supra
716
1 Agbayani, Ibid., p. 212; citing First Nat. Bank of Bloomingdale v. North Jersey Trust Co., 14 A (2d) 765
717
1 Agbayani, Ibid., p. 212; citing Gen. Fire Ass. Co. v. State Bank, 164 N.Y. Supp, 871; LLavanier v. Cosmopolitan Bank, etc., 36 App. 285, 17 N.E. 216
718
1 Agbayani, Ibid., p. 212; citing Great Eastern etc. v Hongkong & Shanghai, etc. supra; Brannan, 7th ed., p. 448; Banco de Oro Savings & Mortgage
Bank v. Equitable Banking Corp., Jan 20, 1J88, 157 SCRA 188, 197. Reason is 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 presenting the check for payment to the drawee is an assertion that the
party making the presentment has done its duty to ascertain the genuineness of the endorsements.
719
720
1 Agbayani, Ibid., p. 213; citing 21 A.L.R. 1068. citing many cases
721
1 Agbayani, Ibid., p. 213; citing 31 A.L.R. 1070, citing many cases
722
1 Agbayani, Ibid., p. 213; citing U.S. Portland Co. v. U.S. Nat. Bank, L.R.A. 1917-A, 145, 146
723
B-64
of the bank amounts to conversion of the check. 724 Payment to depositor of forged signature of the payee,
or to drawee bank on the same forged signature give rise to an obligation to return the amounts received.
Section 2154 of the New Civil Code mandates that: if something is received when there is no right to
demand it, and it was unduly delivered through mistake, the obligation to return it arises. 725
(7) But the payee cannot collect from the drawee bank. The general rule is that an action cannot be
maintained by a payee of the check against the bank on which it is drawn unless the check has been
certified or accepted by the bank on which it is drawn, x x x without acceptance or certification, as provided
by statute, there is no privity of contract between the drawee bank and the payee, or holder of the check.
Neither is there an assignment pro tanto of the funds where the check is not drawn on a particular fund, or
does not show on its face that it is an assignment of a particular fund. 726
(8) The collecting bank bears the loss but can recover from the person to whom it has paid the check.
Collecting bank bound to scrutinize checks deposited with it to determine genuineness and regularity.
While the drawer generally owes no duty of diligence to the collecting bank, the law imposes a duty of
diligence on the collecting bank o 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 and the law holds it to a high standard of conduct. The collecting bank has privity with
the depositor who is the principal culprit. The bank know the depositor; her address and her history. The
depositor is its client. It has taken a risk on its depositor when it allowed her to collect on the crossed
check. 727
* Conversion, defined. Conversion means "an unauthorized assumption and exercise of the right of
ownership over goods or personal chattels belonging to another, to the alteration of their condition or
exclusion of the owner's right. "728
* As affected by question of delivery to payee. In the majority of the cases the check did not reach
the hands of the payee. The bearing of such absence of delivery is considered in some cases and
held not to be material. 729 It has been pointed out, however, that where there is no delivery to the
payee and no title vests in him, he ought not to be allowed to recover on the ground that he lost
nothing because he never became owner of the check and still retained his claim of debt against the
drawer. 730 Nevertheless, the drawer could recover from the bank and the latter from the purchaser
(such as the collecting bank), so that the case uses one action to reach, by a desirable short cut, the
person who ought, in any event, to be ultimately liable as among the innocent persons involved in the
transaction. 731
Rights of parties in forgery of indorsement in bill payable to bearer. The rules are the same as in
promissory notes. The holder can recover if he is a holder in due course but not if he is not a holder in due
course, for the same reasons. 732
Particular matters involving collecting bank as indorser.

* No defense of forgery against drawee bank. A collecting bank where a check is deposited and which
indorses the check upon presentment with the drawee bank, is such an indorser. So even if the
indorsement on the check deposited by the bank's client is forged, the collecting bank is bound by his
warranties as an indorser and cannot set up the defense of forgery as against the drawee bank. 733
* Guarantee stamp: “All prior and/or lack of endorsements guaranteed.” The stamp guaranteeing prior
indorsements is not an empty rubric which a bank must fulfill for the sake of convenience. A bank is not
required to accept all the checks negotiated to it. It is within the bank's discretion to receive a check for no
banking institution would consciously or deliberately accept a check bearing a forged indorsement. When a
check is deposited with the collecting bank, it takes a risk on its depositor. It is only logical that this bank
be held accountable for checks deposited by its customers. 734
* Risk of loss falling on the drawee bank due to forged indorsement; General Rule. The bank on which
a check is drawn, known as the drawee bank, is under strict liability to pay the check to the order of the
payee. The drawer's instructions are reflected on the face and by the terms of the check. Payment under a
forged indorsement is not to the drawer's order. When the drawee bank pays a person other than the
payee, it does not comply with the terms of the check and violates its duty to charge its customer's (the
drawer) account only for properly payable items. Since the drawee bank did not pay a holder or other
person entitled to receive payment, it has no right to reimbursement from the drawer. 735 The general rule
then is that the drawee bank may not debit the drawer's account and is not entitled to indemnification from
the drawer.736 The risk of loss must perforce fall on the drawee bank. 737
* Shifting responsibilities from drawee bank to drawer; Exceptions. If the drawee bank can prove a
failure by the customer/drawer to exercise ordinary care that substantially contributed to the making of the
forged signature, the drawer is precluded from asserting the forgery. 738 If at the same time the drawee
bank was also negligent to the point of substantially contributing to the loss, then such loss from the
forgery can be apportioned between the negligent drawer and the negligent bank. 739
* Collecting bank vis-à-vis drawee bank RE checks with forged indorsements. In cases involving
checks with forged indorsements, the chain of liability does not end with the drawee bank. The drawee
bank may not debit the account of the drawer but may generally pass liability back through the collection
chain to the party who took from the forger and, of course, to the forger himself, if available. 740 In other
words, the drawee bank can seek reimbursement or a return of the amount it paid from the presentor bank
or person.741 Theoretically, the latter can demand reimbursement from the person who indorsed the check
to it and so on. The loss falls on the party who took the check from the forger, or on the forger himself. 742
724
1 Agbayani, Ibid., p. 213; citing 31 A.L.R. 1071, citing cases
725
1 Agbayani, Ibid., p. 213; citing Banco de Oro Savings & Mortgage Bank Corp. v. Equitable Banking Corp., Jan 20, 1988, 157 SCRA 188
726
1 Agbayani, Ibid., p. 219; citing Phil. Nat. Bank v. Nat. City Bank, 63 Phil. ?11, 728, 729, quoting from First Nat. Bank of Wash. v. Whitman, 94 U.S.
343, 347; 24 L. ed. 229; See also Villanueva v. Phil. Nat. Bank, 40 O.G. No. 10, pp. 2116, 2119 quoting from the same case
727
1 Agbayani, Ibid., pp. 213- 214; citing Banco de Oro Savings and Mortgage Bank v. Equitable Banking Corporation G.R. No. L-74917, January 20,
1988, 157 SCRA 188
728
1 Agbayani, Ibid., p. 218; citing Bouvier's Law Dict., 669
729
1 Agbayani, Ibid., p. 218; citing 31 A.L.R. 1021-2
730
1 Agbayani, Ibid., pp. 218- 219; referring to 31 Mich. L. Rev. 819
731
1 Agbayani, Ibid., p. 219; citing Brannan, 7th ed., p. 453
732
733
734
735
S. Nickles, Negotiable Instruments and other related commercial paper 416 [2nd ed., 1993]
736
Great Eastern Life Insurance Co. v. Hongkong and Shanghai Banking Corp., 43 Phil. 678; Banco de Oro Savings and Mortgage Bank v. Equitable
Banking Corporation G.R. No. L-74917, January 20, 1988, 157 SCRA 188; Campos & Lopez-Campos, Negotiable Instruments Law, 283 [4th ed., 1990], citing
La Fayette v. Merchants Bank, 73 Ark 561; Wills v. Barney, 22 Cal 240; Wellington National Bank v. Robbins, 71 Kan 748
737
738
739
R. Jordan & W. Warren, Negotiable Instruments and Letters of Credit 216 [1992]
740
R. Jordan & W. Warren, Negotiable Instruments and Letters of Credit 216-235 [1992]; Pandect of Commercial Law and Jurisprudence, 1990 ed., p. 53
741
Banco de Oro v. Equitable Banking Corp., G.R. No. L-74917, January 20, 1988, 157 SCRA 188; Great Eastern Life Insurance Co. v. HSBC, 43 Phil.
678.
742
B-65
Where the checks were indorsed by the collecting bank to the drawee bank, the former will necessarily be
liable to the latter for the checks bearing forged indorsements. If the forgery is that of the payee's or
holder's indorsement, the collecting bank is held liable, without prejudice to the latter proceeding against
the forger. Since a forged indorsement is inoperative, the collecting bank had no right to be paid by the
drawee bank. The former must necessarily return the money paid by the latter because it was paid
wrongfully.743 More importantly, by reason of the statutory warranty of a general indorser in section 66 of
the Negotiable Instruments Law, a collecting bank which indorses a check bearing a forged indorsement
and presents it to the drawee bank guarantees all prior indorsements, including the forged indorsement. It
warrants that the instrument is genuine, and that it is valid and subsisting at the time of his indorsement.
Because the indorsement is a forgery, the collecting bank commits a breach of this warranty and will be
accountable to the drawee bank. This liability scheme operates without regard to fault on the part of the
collecting/presenting bank. Even if the latter bank was not negligent, it would still be liable to the drawee
bank because of its indorsement. The Court has consistently ruled 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 presenting the check for payment to the drawee is an assertion
that the party making the presentment has done its duty to ascertain the genuineness of the
endorsements." 744 The drawee bank is not similarly situated as the collecting bank because the former
makes no warranty as to the genuineness. of any indorsement. 745 The drawee bank's duty is but to verify
the genuineness of the drawer's signature and not of the indorsement because the drawer is its client.
Moreover, the collecting bank is made liable because it is privy to the depositor who negotiated the check.
The bank knows him, his address and history because he is a client. It has taken a risk on his deposit. The
bank is also in a better position to detect forgery, fraud or irregularity in the indorsement. Hence, the
drawee bank can recover the amount paid on the check bearing a forged indorsement from the collecting
bank. However, a drawee bank has the duty to promptly inform the presentor of the forgery upon
discovery. If the drawee bank delays in informing the presentor of the forgery, thereby depriving said
presentor of the right to recover from the forger, the former is deemed negligent and can no longer recover
from the presentor. 746
* CB Circular 580 vis-à-vis PCHC rule; 24-hour return rule. Under Section 4(c) of CB Circular 580, items
bearing a forged endorsement shall be returned within 24 hours after discovery of the forgery but in no
event beyond the period fixed or provided by law for filing of a legal action by the returning bank. Section
23 of the PCHC Rules deleted the requirement that items bearing a forged endorsement should be
returned within 24 hours. Central Bank circular 580 was in force for all banks until June 1980 when the
Philippine Clearing House Corporation (PCHC) was set up and commenced operations. Banks in Metro
Manila were covered by the PCHC while banks located elsewhere still had to go through Central Bank
Clearing. In any event, the 24-hour return rule was adopted by the PCHC until it was changed in 1982.
Bank branches in the province are therefore not covered by PCHC Rules but by CB Circular 580. The rule
mandates that the checks be returned within 24-four hours after discovery of the forgery but in no event
beyond the period fixed by law for filing a legal action. The rationale of the rule is to give the collecting
bank (which indorsed the check) adequate opportunity to proceed against the forger. If prompt notice is not
given, the collecting bank maybe prejudiced and lose the opportunity to go after its depositor. 747
(3) of drawer's signature
Liability of drawer bank on encashed forged check, where drawer’s signature was forged. In cases
involving a forged check, where the drawer's signature is forged, the drawer can recover from the drawee bank.
No drawee bank has a right to pay a forged check. If it does, it shall have to re-credit the amount of the check to
the account of the drawer. The liability chain ends with the drawee bank whose responsibility it is to know the
drawer's signature since the latter is its customer. 748
Rights of parties in forgery of drawer's signature where drawee has accepted bill. The drawee cannot set
up the defense of forgery because when he accepted the bill, he admitted the genuineness of the signature of
the drawer and therefore, he cannot thereafter be heard to say that the signature is a forgery. Consequently, he
stands to bear the loss and his remedy is against the forger. Thus "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." 749 Further, the purported drawer is not liable as his signature is inoperative and, therefore, he is
not a party to the bill. No right to retain the bill, give a discharge therefor or enforce payment thereon may be
acquired against him by any holder. Furthermore, since his signature is inoperative, his signature does not really
appear on the bill, and, therefore, he is not liable thereon. 750
Rights of parties in forgery of drawer's signature where drawee has not accepted bill but paid it. In the
absence of preclusion from setting up forgery by warranty as in the case of indorsers, or by estoppel as in the
case of negligence, the drawee bank cannot recover from the drawer or the recipient of the proceeds. In the
case of the payment of a forged check even without former acceptance, the drawee cannot recover from a
holder in due course not chargeable with any act or negligence or disregard of duty. 751 The rule is that, as
between equally innocent persons, the drawee who pays money on a check or draft the signature to which is
forged, can not recover the money from the one who received it. 752 The drawee so paying is considered as
being constructively negligent. A bank is bound to know the signature of its customers; and if it pays a forged
check, it must be considered as making the payment out of its own funds and can not ordinarily charge the
amount so paid to the account of the depositor whose name was forged. 753 This rule is absolutely necessary to
the circulation of drafts and checks and is based upon the presumed negligence of the drawee in failing to meet
its obligation to know the signature of its correspondent. Conditions would be intolerable if the retiring of
commercial paper, through its payment by the drawee, did not close the transaction but it was possible at an
indefinite time in the future to reopen the matter and recover the money, if the paper proved to have been
forged. No one would dare handle it, and it would pass out of use regardless of its convenience or necessity as
743
Article 2154 of the Civil Code provides: "If something is received when there is no right to demand it, and it was unduly delivered through mistake, the
obligation to return it arises." Banco de Oro v. Equitable Banking Corp., G.R. No. L-74917, January 20, 1988, 157 SCRA 188.
744
Bank of the Phil. Islands v. CA, G.R. No. 102383, November 26, 1992, 216 SCRA 51, 63 citing Banco de Oro v. Equitable Banking Corp., G.R. No. L-
74917, January 20, 1988, 157 SCRA 188; Great Eastern Life Insurance Co. v. HSBC, Great Eastern Life Insurance Co. v. HSBC, 43 Phil. 678
745
Campos & Lopez-Campos, Negotiable Instruments Law, 283 [4th ed., 1990]; citing Inter-state Trust Co. v. U.S. National Bank, 185 Pac. 260; Hongkong
and Shanghai Banking Corp. v. People's Bank and Trust Co., supra.
746
R. Jordan & W. Warren, Negotiable Instruments and Letters of Credit 217 [1992]; Campos & Lopez-Campos, Negotiable Instruments Law, 283 [4th ed.,
1990]
747
748
R. Jordan & W. Warren, Negotiable Instruments and Letters of Credit 216 [1992]
749
1 Agbayani, Ibid., p. 220; citing Phil. Nat. Bank v. Nat. City Bank, 63 Phil. 711, 721, 745
750
751
1 Agbayani, Ibid., p. 220; citing Phil. Nat. Bank v, Nat. City Bank, 63 Phil. 711, 746; see also San Carlos Milling v. Bank of the Philippine Islands, et al.,
59 Phil. 49.
752
753
1 Agbayani, Ibid., p. 221; citing San Carlos Milling v. Bank of the Philippine Islands, etc., 59 Phil. 49, 65
B-66
a part of the life of business. There is nothing inequitable in such a rule. If the paper comes to the drawee in the
regular course of business, and he, having the opportunity of ascertaining its character, pronounces it valid and
pays it, it is not only a question of payment under mistake but payment in neglect of the duty which the
commercial law places upon him, and the result of his negligence must rest upon him. 754 In a Philippine case,
755
it was held that the prime duty of a bank is to ascertain the genuineness of the signature of the drawer or the
depositor on the check being encashed. It is expected to use reasonable business prudence in accepting and
cashing a check presented to it. Accordingly where the drawer bank encashed a check in which the drawee's
signature is forged which shows marked variation from the genuine signature of the supposed drawer, said
bank is negligent, and should return to the drawer what it has debited the latter' s account. 756 Payment is not
equivalent to acceptance. The basis of the general rule is not that the drawee is precluded from setting up
forgery because, by paying the check, it has accepted the check and therefore admitted the genuineness of the
drawer's signature, as per Section 62, NIL. The basis is that by paying the check, the drawee is presumed
negligent or deemed constructively negligent. 757
Qualifications to the foregoing rules. It must be remembered that the foregoing rules are qualified by the
rules precluding the setting up of the defense of forgery by warranty, as in the case of parties negotiating an
instrument subsequent to the forgery, or by estoppel, as in the case of negligence.
* Indorsers and parties negotiating. Parties negotiating by indorsement and delivery, or by mere delivery
subsequent to the forgery, are precluded from setting up the defense of forgery and may be held liable
under their warranties or liabilities stated in Section 65 or 66.
* Drawer’s negligence in forgery of indorsements in bill. "A generally recognized or assumed
qualification of the general rule, however, is that it presupposes that the drawer himself was not negligent
or guilty of such conduct as would estop him from asserting the forged character of the indorsement as
against the depository (drawee), and that if he was negligent or guilty of such conduct, the loss must fall on
him." 758 But "the depositor's negligence or conduct which would estop him must be the proximate cause of
the payment by the depository upon the forged indorsement." 759 Thus, the (1) negligence of drawers in
making possible forged indorsements by their swindling clerks, and not discovering or reporting them
promptly, barred recovery from the drawee bank by the drawers, 760 as where there was negligence in
delivery. Likewise: (2) unreasonable delay in giving notice will bar recovery by the drawer from the drawee
bank. 761
* Possession of check with forged signature. In the absence of satisfactory explanation, one found in
possession of and who used a forged document is the forger or the one who caused the forgery and,
therefore, guilty of falsification. 762
* Extent of depositor's duty. With a few possible exceptions, the courts are generally agreed that the
depositor's (drawer's) duty does not extend to the examination and verification of the genuineness of the
indorsements on the checks, or to the discovery of forgeries therein because a depositor is not required
and may not be expected to know the signatures of the payee and of the various indorsers through whose
hands the check may pass, and therefore, even if the cancelled checks were examined by him, the
examination would not disclose the forgery; that duty of verifying the genuineness of the indorsements
rests on the depository (drawee) cashing the check; and that the depositor may rely upon its proper
performance of this duty at least in the absence of evidence that he was familiar with the signature of the
payee. 763
* But failure of depositor to make prompt reconciliation of the monthly bank statements
furnished by the bank constitutes negligence for which the bank cannot be blamed in case
depositor's checks are forged. "When a person opens a checking account with a bank, he is given
blank checks which he may fill out and used whenever he wishes. Each time he issues a check, he
should also fill out the check stub to which the check is usually attached. This stub, if properly kept,
will contain the number of the check, the date of its issue, the name of the payee and the amount
thereof. The drawer would therefore have complete record of the checks he issues. It is the custom of
banks to send to its depositor a monthly statement of the status of their accounts, together with the
cancelled checks which have been cashed by their respective holders. If the depositor has filled out
his check stubs properly, the comparison between them -and the cancelled checks will reveal any
forged checks not taken from his checkbook. It is the duty of the depositor to carefully examine the
bank's statement, his cancelled checks, his check stubs and other pertinent records within a
reasonable time, and to report any errors without any unreasonable delay. If his negligence would
cause the bank to honor a forged check or prevent it from recovering the amount it may have already
paid on such check, he cannot later complain should the bank refuse to recredit his account with the
amount of such check. 764
* Drawer's negligence in forgery of his signature. A depositor (drawer) is generally under a duty
toward his depository (drawee) to examine the returned vouchers and notify it within reasonable time
of any mistakes or inaccuracies in the amounts of check or forgeries of the depositor's signature. 765 It
is the duty of a depositor, on receiving from the bank a balanced pass book, statement of account, or
cancelled checks, to examine the same with reasonable promptness, and report to the bank any
error, forgery, or the like which he may discover. 766
* Payee's negligence in forgery of drawer's signature The payee in a check or draft may be supposed to
have knowledge of the circumstances under which it is drawn and, generally, of the person drawing it, and
is in a better situation to judge the genuineness of the paper than are indorsees. And there is a tendency
to place greater responsibility upon him and he is much more likely to be required to return the proceeds of
the paper than are the indorsees. 767 Without doubt, the same necessities of business which require the
drawee to know the signature of the drawer, and prevent his recovering money paid to an innocent holder
of the paper, require one who first negotiates the paper to take some precautions to learn whether or not it
is genuine, and if he, through indifference, or worse, assists the forger in committing the fraud, he should
not be permitted to retain the proceeds of the draft from the drawee whose sole fault was that he did not
discover the forgery before he paid the draft. 768
754
1 Agbayani, Ibid., p. 221; citing 12 A.L.R., 1901, citing many cases
755
1 Agbayani, Ibid., p. 221; referring to PNB v Quimpo, Mar 14, 1988, 158 SCRA 582, 585 citing PNB v National City Bank, 63 Phil 711, 712; Banco de
Oro Savings & Mortgage Bank v Equitable Bank Corp., GR No. 74917, Jan 20, 1988
756
757
758
1 Agbayani, Ibid., p. 222; citing 99 A.L.R.. 441
759
1 Agbayani, Ibid., pp. 222-223; citing 99 A.L.R.. 441
760
1 Agbayani, Ibid., p. 223; citing Osborn v. Corn Exch. Nat. Bank, 218 III. App. 28; Central Trust Co. v. Eureka Security Fire Ins. Co., 189 N.E. 62;
Defiance Lumber Co. v. Bank of Calif., 99 A.L.R. 426
761
762
1 Agbayani, Ibid., p. 223; citing Ranon v Court of Appeals, Mar 25, 1985, 135 SCRA 495; citing in turn numerous cases
763
1 Agbayani, Ibid., pp. 223-224; citing 99 A.L.R. 450
764
1 Agbayani, Ibid., p. 226; citing 99 Metropolitan Waterworks and Sewerage System v CA, July 14, 1986, citing American cases
765
1 Agbayani, Ibid., p. 226; citing 99 ALR 450
766
1 Agbayani, Ibid., p. 226; citing 15 ALR 159
767
768
B-67
* Application of doctrine of comparative negligence. The doctrine of comparative negligence
applies and the constructive negligence of the drawee bank is overcome by the active negligence of
the paying bank in not using the ordinary precautions which are used by banks, namely, demanding
identification of the person presenting the check and putting forth some inquiry as to its genuineness
before paying it and sending it on, dignified and accredited by its own indorsement, which would tend
to lull the suspicions and abate the watchfulness of the drawee. 769
* Indorser's negligence, (holder receiving payment). After a draft or check has once been negotiated so
that it is in circulation, there is little opportunity for negligence on the part of those through whose hands it
passes; but as to them, in most cases, the rule will apply that, as between innocent persons, the loss must
fall on the drawee. 770 Just the same, the 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. 771 So, if it appears that one to whom payment was made
was not an innocent sufferer but was guilty of negligence in not doing something which plain duty
demanded, and which if it had been done, would not have entailed loss on any one, he is not entitled to
retain the moneys paid through a mistake on the part of the drawee bank.772
* Duty of purchaser of check or bill. 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, and the drawee, who has, without actual negligence on his part, paid the forged demand, may
recover the money paid from such negligent purchaser. 773 Of course, the drawee must, in order to recover
back from the holder, show that he himself was free from fault. 774
Forgery of both drawer's and payee's signature. There is some difference of opinion. But under the
Negotiable Instruments Law, the indorser guarantees the genuineness of prior indorsements, and if the
indorsement of the payee is forged, the indorser is liable on his warranty to all to whom it runs. 775 But the
drawee is held not to be a holder in due course, and therefore, is not entitled to the benefit of the indorser's
warranty. The result is that, so far as the drawee is concerned, the situation is much the same as though the
paper bore no indorsements, but was payable to bearer, and the ordinary rules apply, making the right to
recover depend on the presence or absence of negligence on the part of the one who negotiated the paper, and
viewed in the light of subsequent negligence of the drawee which may have caused him to change his position
for the worse because of acts of the drawee. 776
Other rules - change of position. When negligence on the part of the one receiving the proceeds has been
established so as to entitle the drawee to recover the proceeds, con duct of the drawee may again intervene to
prevent his recovery. No matter how negligent the one receiving the proceeds has been, he is entitled to
receive prompt notice of the forgery so as to enable him to preserve whatever rights he may have against the
forger or other persons to whom he may be entitled to look for reimbursement, and if the drawee is negligent in
this respect, he may be prevented from recovering his money. 777
Paper forwarded for collection. The fact that the paper was not cashed and indorsed with unrestricted
indorsement but was taken for collection and forwarded for that pur pose under an indorsement giving notice of
that fact, may place a greater burden upon the drawee than it would otherwise bear. The mere fact that the
paper bears an indorsement `for collection' should warn the drawee that the responsibility of the genuineness of
the paper is placed upon it. 778
(4) forgery of bearer instruments
Defense, Forgery in bearer instruments. In bearer instruments, the signature of the payee or holder is
unnecessary to pass title to the instrument. Hence, when the indorsement is a forgery, only the person whose
signature is forged can raise the defense of forgery against a holder in due course. 779
(For criminal law matters, see Articles 171 and 172 of the Revised Penal Code)
e. material alteration (partial real defense) (Sec. 124 & 125, NIL)
Section 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.
Rights of one not holder in due course. "Where a negotiable instrument is materially altered without 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." Under this provision, where a negotiable instrument is materially altered, it is
avoided in the hands of one who is not a holder in due course as against any prior party who has not assented to the
alteration. 780
Where instrument not avoided as to holder not in due course. However, the law makes certain exceptions. The
instrument is not avoided as against (1) a party who has made the alteration, (2) a party who authorized or assented
to the alteration, and (3) subsequent indorsers. 781
Rights of holder in due course. "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." 782
769
1 Agbayani, Ibid., p. 229; referring to Canadian Bank v. Bingham, 60 L.R.A. 955, 71 Pac. 43
770
771
1 Agbayani, Ibid., p. 229; citing Phil. Nat Bank v. Nat. City Bank, 63 Phil. 711, 731, quoting Woods and Malone v. Colony Bank, 56 L.R.A. 929, 932
772
1 Agbayani, Ibid., p. 229; citing Phil. Nat. Bank v. Nat. City Bank, 63 Phil. 711, 733, citing cases
773
1 Agbayani, Ibid., pp. 229-320; citing Lisbon First Nat. Bank v. Uyndmere Bank, supra.
774
1 Agbayani, Ibid., p. 230; referring to 5 R.C.L. 556-558. Id., p. 734
775
1 Agbayani, Ibid., p. 230; referring to 12 A.L.R. 1112
776
1 Agbayani, Ibid., pp. 230-231; referring to 12 A.L.R. 1112
777
1 Agbayani, Ibid., p. 231; citing 12. A.L.R. 1105
778
1 Agbayani, Ibid., p. 231; citing 12. A.L.R. 1110
779
Associated Bank vs. Court of Appeals [GR 107382, 31 January 1996]; citing J. Vitug, Pandect of Commercial Law and Jurisprudence 51-53 [Rev. ed.,
1990]
780
781
782
B-68
No distinction between fraudulent and innocent alteration. At common law, there was a distinction between a
material alteration made fraudulently and one made innocently. If made fraudulently, the obligation was rendered
wholly void even in the hands of a bona fide holder. This has been changed, haw ever, by Section 124 of the
Negotiable Instruments Law. 783 The law now does not make the distinction. It seems to include innocent changes as
one changing innocently seems to be as much "a party to the alteration" as one changing fraudulently. 784
Accordingly, under the second sentence of Section 124, the rule now seems to be that a holder in due course can
enforce the instrument according to its original tenor regardless of whether the alteration was innocent or fraudulent.
785
Right to collect on original consideration. Where the instrument is materially altered, it is generally avoided.
When the alteration was not made fraudulently, it will not relieve the parties from their original obligation. Mr. Justice
A Lawrence, in the case of Elliott v. Blair, 786 said: "If the alteration was material but not fraudulently done, the party
may recover upon the original consideration." 787
Alteration as a crime. "The penalty of prision correccional in the medium and maximum periods and a fine of not
more than 5,000 pesos shall be imposed upon any private individual who shall commit any of the falsifications
enumerated in the preceding Article 171 in any x x x letter of exchange or any other kind of commercial paper; x x
x"788 The falsifications, pertinent to alteration of negotiable instruments, as enumerated in Article 171 are: "x x x (2)
causing it to appear that persons have participated in any act or proceeding when they did not in fact so participate; x
x x (5) altering true dates; (6) making any alteration or intercalation in a genuine document which changes its
meaning; x x x." 789
Section 125. What constitutes a 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.
Alteration, when material. An alteration is said to be material if it alters the effect of the instrument. 790 It means an
unauthorized changed in an instrument that purports to modify in any respect the obligation of a party or an
unauthorized addition of words or numbers or other changed to an incomplete instrument relating to the obligation of
a party.791 In other words, a material alteration is one which changes the items which are required to be stated under
Section 1 of the Negotiable Instrument 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." 792
A. Material Alterations:
(1) Substituting the words "or bearer" for "order."
(2) Writing "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 Nat'l 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.
(10) Substituting the address of the maker for the name of the co-maker. 793
B. Immaterial Alterations:
(1) Changing "I promise to pay" to "We 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) Filing in the date of the 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) Where there was a blank for the place of payment, filing in the blank with the place desired.
(9) Adding to an indorsee's 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.
783
1 Agbayani, Ibid., p. 397; referring to 8 Am. Jur. 326
784
1 Agbayani, Ibid., p. 397; referring to Brannan's Negotiable Instrument Law, 6th ed., 1042
785
786
47 III, 342
787
To the same effect may be cited the following cases: Clough v. Seay, 49 Iowa, III; Sullivan v Rudisil, Iowa, 158, 2 Corpus Juris, 1181; 32 Cyc. of Law
and Pri. 158; 186; Cambridge Savings Bank v. Hyde, 131 Mass. 77; 2 Cyc. of Law and Pri 103, cited in Bank of the Phil. Is. v. Charles D. Gooch & James R.
Redfern, 45 Phil. 514, 517
788
Article 172, RPC
789
790
Agbayani, Commentaries and Jurisprudence on the COMMERCIAL LAWS OF THE PHILIPPINES, Vol. 1, 1992 ed., p. 403
791
Nickles, Negotiable Instruments and other related Commercial Paper, 1993 2nd ed., p. 168
792
Vitug, Pandect of Commercial Law and Jurisprudence, 1990 ed., p. 55
793
Philippine National Bank vs. Court of Appeals [GR 107508, 25 April 1996]; citing Agbayani, Commentaries & Jurisprudence on the Commercial Laws
of the Philippines, Vol. 1, 1992 ed., pp. 403-404
B-69
(10) The indorsement in the 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 a holder of a note to the principal maker, without the consent of the surety
co-maker. 794
f. extinctive prescription
Prescription as a real defense. Prescription is a real defense that may be raised against a holder in due course.
The prescriptive period for the filing of a claim based on negotiable instruments is 10 years from the time the cause
of action accrued. In case of checks, the action of the depositor against his drawee bank commences to run from the
time he is given notice of payment. 795
3. Personal defenses:
Examples of personal defenses.

(1) Absence or failure of consideration, partial or total. 796 (See below)
(2) Want of delivery of complete instrument. 797 Where the instrument is mechanically complete and is not wanting
in any material particular, want of delivery is an equitable defense. As against persons not holders in due course, it
can be shown that no delivery was made, or that delivery was conditional or for a special purpose. Where the
instrument is stolen, the defense of want of delivery is equitable. 798 But where the stolen instrument is payable to
order, the thief will have to forge the payee's or indorsee's signature to negotiate it. In that case, the defense
would be forgery, which is a legal or real defense, not want of consideration. 799
(3) Insertion of wrong date in an instrument where it is payable at a fixed period after date and it is issued undated
or where it is payable at a fixed period after sight and the acceptance is undated. 800 (See below)
(4) Filling up of blank contrary to authority given or not within reasonable time, where the instrument is delivered.
801
(See below)
(5) Fraud in inducement. 802 (See below)
(6) Acquisition of instrument by force, duress, or fear. 803 (See below)
(7) Acquisition of the instrument by unlawful means 804
(8) Acquisition of the instrument for an illegal consideration. 805
(9) Negotiation in breach of faith. 806
(10) Negotiation under circumstances that amount to fraud. 807
(11) Mistake. 808 "In order that mistake may invalidate consent, it should refer to the substance of the thing which is the
object of the contract, or those conditions which have principally moved one or both parties to enter into the
contract. Mistake as to identity or qualifications of one of the parties will vitiate consent only when such identity or
qualifications have been the principal cause of the contract. A simple mistake of account shall give rise to its
correction." 809
(12) Intoxication according to better authority. 810 Drunkenness or intoxication so as to deprive the person sought to he
charged of the exercise of his understanding and reason is only an equitable defense. 811 This is supported by
better authority. 812 As against a bona fide holder, it has been determined in some jurisdictions that intoxication is
no defense. The reason underlying this rule is that, when a man has voluntarily put himself in such a condition that
a loss must fall on one of two innocent persons, it should fall on him who occasioned it. If drunkenness were a
defense, it would clog and embarrass the circulation of commercial paper. 813 There is, however, a contrary view. It
has been held that if the intoxication is complete, it is a defense even against a holder in due course. 814 If the
drunkenness were so complete as to suspend all rational thought, the prevailing opinion seems to be that any
instrument signed by the party would be utterly void even in the hands of a bona fide holder without notice. for,
although it may have been the party's own fault that such an aberration of mind was produced, when produced, it
suspends for the time being his capacity to consent, which is the first essential element of a contract. 815
(13) Ultra vires acts of corporations where the corporation has the power to issue negotiable paper but the issuance
was not authorized for the particular purpose for which it is issued . 816 Where the corporation has the power to
issue negotiable paper but the issuance was not authorized for the particular purpose for which it is issued, such
lack of particular authority is not a defense against a holder in due course. 817
(14) Want of authority of agent where he has apparent authority. 818 Where the agent is without authority, apparent or
real, want of authority of the agent is a legal or real defense, and the principal will not be bound beyond the
authority given to the agent. 819 Where the agent, although actually unauthorized, has apparent authority, the
actual want of authority of the agent is only an equitable defense. 820
(15) Insanity where there is no notice of insanity on the part of the one contracting with the insane person. 821
(16) Illegality of contract where form or consideration is illegal. 822
a. ante-dating or post-dating (Sec. 12, NIL)
794
Philippine National Bank vs. Court of Appeals [GR 107508, 25 April 1996]; citing Agbayani, Commentaries & Jurisprudence on the Commercial Laws
of the Philippines, Vol. 1, 1992 ed., pp. 404-405
795
Sundiang, Ibid., p. 123; citing Philippine Commercial International Bank vs. Court of Appeals, 350 SCRA 446 [2001]
796
Section 28, NIL
797
Section 16, NIL
798
799
800
Section 13, NIL
801
Section 14, NIL
802
Section 55, NIL
803
Section 55, NIL
804
Section 55, NIL
805
Section 55, NIL
806
Section 55, NIL
807
Section 55, NIL
808
1 Agbayani, Ibid., p. 299; citing 8 CJ 797
809
Article 1331, NCC
810
811
1 Agbayani, Ibid., p. 303; referring to See Burrough v. Richman, 13 N.S. L-233, 23 Am. Dec. 717; Stigler v. Anderson (Miss.). 12 So. 831; Gore v.
Gibson, 13 M & W 623
812
813
1 Agbayani, Ibid., p. 303; citing Miller v. Finley, 26 Mich. 248, 12 Am. Rep. 306; McSpencer v. Neeley, 91 Pa. St. 17; Smith v. Williamson, 8 Utah 219,
30 Pac. 753
814
1 Agbayani, Ibid., p. 303, foornote 20; referring to 8 C.J. 775
815
1 Agbayani, Ibid., p. 303, foornote 20; citing Caulkins v. Fry, 35 Conn. 170
816
817
1 Agbayani, Ibid., p. 303, referring to 8 CJ 778
818
819
1 Agbayani, Ibid., p. 303, citing 8 CJ 775-776
820
1 Agbayani, Ibid., p. 304, citing 8 CJ 776
821
1 Agbayani, Ibid., p. 299; citing Ogden, 5th ed., 318-319
822
B-70
Section 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.
Application of Article 12; Effects of ante-dating and post-dating. This section contemplates of instruments ante-
dated or post-dated by the parties in accordance with a mutual agreement to the effect. 823 The instrument is ante-
dated when the date written thereon is earlier than the true date of its issuance or delivery. An instrument is post-
dated when the date written thereon is later than the true date of its issuance or delivery. An ante-dated or post-
dated instrument is not rendered invalid or non-negotiable by that fact alone. It may be negotiated before or after the
date given as long as it is not negotiated after its maturity. The only limitation is that the ante-dating or postdating is
not done for illegal or fraudulent purposes. 824
When title is acquired. According to the law, the person to whom the instrument is delivered acquires title or
ownership over it, not as of the date written on the instrument, but as of the date of actual delivery. 825
b. insertion of wrong date (Sec. 13, NIL)
Section 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.
When date necessary. Under Section 6, the date is not necessary for the negotiability of the instrument. However,
the date may be necessary to determine the date of maturity (but not for negotiability). In the following cases, the
date is also necessary: (1) where interest is stipulated, to determine when interest is to run, but not to make the
instrument negotiable; and (2) to determine whether a party has acted within a reasonable time," but not to make the
instrument negotiable. 826 Where the instrument is payable at a fixed period after date, the date of the instrument is
necessary to determine the date of maturity. Under this section, the holder may infer the true date of issue. Where
the instrument is payable at a fixed period after sight, the date of maturity of the foregoing bill cannot be determined
unless the acceptance is dated. Under this section, the holder may insert the true date of acceptance. 827
Effect of insertion of wrong date. Knowingly inserting the wrong date in an undated instrument will avoid it as to
the party so inserting the wrong date. 828 It is implied in this section that the insertion makes the instrument void as to
the payee, who, having knowledge of the true date, made the wrong insertion. And under Section 12, it is also
implied that the instrument, as to the payee, if he inserted the wrong date in order to hasten the date of maturity, is
void because it was ante-dated for a fraudulent purpose. 829
Effect as to the holder in due course. Under the last sentence of this section, the insertion of a wrong date does
not avoid the instrument in the hands of a subsequent holder in due course. Furthermore, the date so inserted will be
regarded as the true date. 830
c. filling-up blanks beyond authority (Sec. 14, NIL)
Section 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.
Filling up of blank contrary to authority given as defense. Filling up an instrument in a material particular not
strictly in accordance with the authority given or not within reasonable time is a personal or equitable defense. In the
United States, one who takes a negotiable instrument knowing that it contained blanks when it was delivered, will not
thereby be put on inquiry as to the extent of the agent's authority to fill these blanks, and may recover
notwithstanding the authority given has been exceeded. This is true ever. when the blanks are filled up in the
transferee's presence, or by the transferee himself, by the agent's authority. 831
Scope of Section 14. There are two steps in the execution of a negotiable instrument, namely: (1) the act of
writing the instrument completely and in accordance with the Section 1 of the Negotiable Instrument Law, and
(2) the delivery of the instrument with the intention of giving effect to it. Bills of exchange and promissory notes
are sometimes executed in blank and delivered to another to fill in and negotiate either for his own benefit or
that of the maker. Such instruments are, therefore, incomplete but delivered. It is to such incomplete but
delivered instruments that Section 14 applies. 832
Prima facie authority to fill up blanks. Where the instrument is wanting in any material particular, the person
in possession thereof has a prima facie authority to complete it by filing up the blanks there' The material
particular referred to here may be: (1) a particular the omission of which will render the instrument non-
negotiable, such as, the name of the payee or the name of the drawer; or (2) a particular the omission of which
will not render the instrument non-negotiable, such as the date, rate of interest, place of payment. 833
823
1 Agbayani, Ibid., p. 175; citing Banes of Houston vs. Day, 145 Mo. App. 410, 122 S/W/ 756; Korte v. Land, 61 Land, 61 S.D. 267, 248 N.W. 253; Flynn
v. Currie, 130 Me. 461, 157 A 310
824
825
826
1 Agbayani, Ibid., pp. 176-177; referring to Section 171 and 144, NIL
827
828
1 Agbayani, Ibid., p. 177; citing Bank of Houston vs. Day, 145 Mo. App. 410, 122 S.W. 756
829
830
831
832
833
B-71
Facts from which prima facie authority presumed. The law presumes from two facts: (1) want of a material
particular in the instrument, and (2) possession thereof by a person, a third fact; (3) that such a person had
authority to fill up the blank. The law does not seem to require the delivery of the instrument with intent to have
it converted into a negotiable paper, with a signature in blank, for example. The law merely requires that it be in
the possession of a person other than the drawer or maker, and from such possession, together with the fact
that the instrument is wanting in a material particular, the law presumes agency to fill up the blanks. 834
Prima facie authority to fill up to any amount. A signature in a blank paper delivered by a 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. The law thus presumes the existence of the authority to fill the
instrument up to any amount from the following two facts: (1) a signature on a blank paper and (2) that the
person signing in blank delivers it in order that the paper may be converted into a negotiable instrument. Mere
possession by a person is not enough.835
Requisites to hold prior parties liable. In order that a subsequent holder who is not a holder in the due
course may enforce the instrument against a party prior to the completion of the note: (1) the blank must "be
filled up strictly in accordance with the authority given" and (2) it "must be filled up within a reasonable time." 836
Right of holder not in due course where blank wrongly filled. There are two views on this point:
(1) The first view is that one who is not a holder in due course cannot enforce the instrument against a party
prior to the completion of the instrument, if the instrument is not filled up strictly in accordance with the
authority given or within reasonable time.
(2) The second view is that, in such a case, the holder can enforce the instrument according to the authorized
tenor.
According to Agbayani, the better view seems to be the first one. The law provides that in order that one who is
not a holder in due course may enforce mechanically incomplete but delivered instrument, the two requisites
must exist. The implication is that when one or both of the requisites are absent, the instrument may not be
enforced. 837
Liability of parties negotiating after completion. Parties subsequent to the completion and, as indorsers,
they warrant the instrument is in all respects what it purports to be -- and, in addition, if they are general
indorsers, that the instrument is valid and subsisting -- they are estopped or precluded from claiming that the
note was not filled up strictly in accordance with the authority given. 838
Meaning of reasonable time. In determining what is a "reasonable time" or an "unreasonable time," regard is
had to the nature of the instrument, the usage of trade or business (if any) with respect to such instrument and
the facts of the particular case. In other words, the term is very relative. The decisions are not uniform as to
what constitutes reasonable time for completing instruments. 839 If the parties are ignorant or ill, 14 months from
the date of execution was held reasonable; 840 but a delay of 8 months has been held unreasonable. 841
Rights of holder in due course. A holder in due course can collect the amount from the maker under the last
sentence of the section. The note was negotiated after completion and he, being a holder in due course, the
instrument is "valid and effective 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." As to indorsers (and persons
negotiating by delivery), it is with greater reason that the holder in due course can enforce the instrument
against them. 842
It is a personal defense. Under this section, the defense of parties prior to the completion is that it is not filled
up strictly in accordance with the authority given or that it is not filled up within a reasonable time. However,
such a defense is available only against holders who are not holders in due course. The defense is not
available against a holder in due course because under the law, in the hands of such a holder, the complete but
delivered instrument is "valid and effective 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. The defense is, therefore, a
personal or equitable defense. 843
Summary of rules where instrument is incomplete but delivered. In the case of an instrument that is
incomplete and delivered, but completed contrary to the authority given, or not completed within reasonable
time:
(1) Where the holder is a holder in due course, he can enforce the instrument as completed against parties
prior or subsequent to the completion.
(2) Where the holder is not a holder in due course, he can enforce the instrument as completed only against
parties subsequent to the completion but not against those prior thereto.
It is to be noted that the holder of an instrument is either the payee or indorsee or bearer in possession thereof
who enforces an instrument. He would be the plaintiff in an action on the instrument. On the other hand, it is the
debtor, either the maker, acceptor, drawer or indorser, against whom an instrument is enforced. He would be
the defendant. 844
d. absence or failure of consideration (Sec. 28, NIL)
Section 28. Effect of want of consideration. -- 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 an ascertained and liquidated amount or otherwise.
Absence and failure of consideration as defenses. The law provides that "absence or failure of consideration is a
matter of defense as against any person not a holder in due course." The implication then is that they are not
834
835
836
837
1 Agbayani, Ibid., p. 180; referring to Clower v. Wynn, 59 Ga. 246; Wagner v. Diedrich, 50 No. 484; McCoy v. Gilmore, 7 Ohio 268
838
839
840
1 Agbayani, Ibid., p. 181; citing In re Ferrara, 156 Atl. 265
841
1 Agbayani, Ibid., p. 181; citing Madden v. Gaston, 121 N.Y.S. 951
842
843
844
B-72
defenses as against holders in due course. Failure or absence of consideration, whether total or partial, can,
therefore, be interposed as, a defense only against persons not holders in due course but not against holders in due
course. 845 These defenses are, therefore, only personal or equitable defenses.
Absence of consideration. It is a total lack of any valid consideration. The following are examples of absence
of consideration: (1) note given for future illicit cohabitation; 846 (2) note by husband to his wife, upon promise of
the wife to withdraw all opposition to proceedings for divorce instituted by him; 847 (3) a note given in
consideration of an agreement to stifle or hinder a public prosecution for a felony; 848 and (4) when the
consideration for commercial paper is clearly fraudulent. 849
Failure of consideration. It is the neglect or failure of one of the parties to give, to do or to perform the
consideration agreed upon. The following are examples of failure of consideration: (1) consideration for a bill or
note for the use of an invention fails where the patent is not obtained; 850 or (2) where the invention is non-
patentable. 851 But there is no failure of consideration where the use of the invention or its sale merely proves
unprofitable. 852
Absence and failure of consideration distinguished. Want or absence of consideration embraces

transactions where no consideration was intended to pass, while failure of consideration implies that the giving
of valuable consideration was contemplated but that it failed to pass. 853
To whom defense is raised. Hence, absence of consideration is an equitable defense. 854 In general, want of
consideration can be raised only as between immediate parties. 855 But the defense may also be raised against any
holder who takes the instrument with notice of the want or failure of consideration. 856 In a bill of exchange, the want
or failure of consideration may be interposed in an action brought by the payee against the drawer, or by the
indorsee against the payee indorsing, or by the drawer against the acceptor, but not in an action between the payee
and acceptor. 857 In the latter case, the defense is available only if there is no consideration received by the defendant
for his liability and plaintiff must have given no consideration for his title. 858
Effect of want of consideration between drawer and acceptor as to holder. "The drawee, by accepting
unconditionally the bill, becomes liable to the holder, and cannot allege want of consideration between him and the
drawer. The holder is a stranger as regards the transaction between the drawer and the drawee, and if the holder
has given value to the drawer and has no knowledge of any equity between the drawer and the drawee, he is in the
same situation as an indorsee in good faith. Hence, in an action brought by the holder against the acceptor, it is no
defense that the merchandise sent by the drawer and
which constituted the consideration for the drawing of the bill, is of inferior quality than was ordered by the drawee to
such a degree that it is not worth the value of the bill." 859
e. simple fraud, duress, intimidation, force or fear, illegality of consideration, breach of faith (Sec. 55, 56 & 57,
NIL)
Section 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.
(Section partially discussed in “Holders”)
Fraud in inducement. There is fraud when, through insidious words or machinations of one of the contracting
parties, the other is induced to enter into a contract which, without them, he would not have agreed to. 860 Fraud in
inducement is an equitable or personal defense as it is one of the modes of acquiring a defective title 861 from which a
holder in due course is free. 862 This type of fraud relates to the quality, quantity, value or character of the
consideration of the instrument. "Here the signer is led by deception to execute what he knows is a negotiable
instrument. In fraud in inducement, there is a misrepresentation of facts touching the inducement or desirability of the
contract. Such sort of fraud does not prevent contract; it only makes a case in which it is or may be probable that
there would have been no such contract as took place, had the state of things been known by the defendant. In fraud
in inducement as stated above, one knew that he was signing negotiable paper, and therefore necessarily signed
with knowledge that the instrument would probably pass into the hands of an innocent purchaser but was deceived
into signing for a larger amount than he intended, or on different terms. Unlike the former situation, he is here
consciously launching a negotiable instrument into the current of trade; and, as generally held, must at his peril see
to it, so far as innocent purchasers are concerned, that it properly represents his intention. Here, the deceit is not in
the character of the instrument but in its amount or its term." 863 The question of simple fraud is also largely one of
negligence. Did a person who has signed the instrument and let it get into the hands of other parties, or into
circulation, act with negligence? If he did so act, it is a personal defense. 864
Acquisition of instrument by force, duress or fear. Duress consists of depriving one of his will and understanding
by threats or unlawful means, so that a promissory note obtained from him is not his free and voluntary act. 865
845
1 Agbayani, Ibid., p. 240; referring to Tatum v. Commercial Bank, 185 Ala. 249, 6-1 So. 561; Anthony v. Valentine, 130 Mass. 119
846
1 Agbayani, Ibid., p. 239; citing Massey v. Wallance. 10 S.E. 937
847
1 Agbayani, Ibid., p. 239; citing Sayles v. Sayles, 69-Am. Dec. 208
848
1 Agbayani, Ibid., p. 239; citing Ricketts v. Harney, 6 N.E. 325
849
1 Agbayani, Ibid., p. 239; citing Hickson v. Early, 39 S.E. 782
850
1 Agbayani, Ibid., pp. 239-240; citing Chem Electric Light & Power Co. v. Howard, 20 N.E. 92
851
1 Agbayani, Ibid., p. 240; citing Hawthorn v. Wheelwright, 59 Atl. 517
852
1 Agbayani, Ibid., p. 240; citing Nash v. Lull, 3 Am. Rep. 435
853
1 Agbayani, Ibid., p. 240; citing Homer Bldg. & Loan Assn. v. Noble, 120 Pa. Super. 153, 18l Atl. 848
854
855
1 Agbayani, Ibid., p. 300; citing Wynne v. Wisehnant, 37 Ala. 46; Risley v. Gray, 98 Col. 40, 32 Pac. 884; Storm Luke, etc., Bank v. Felt,, 100 Iowa,
680, 69 N.W. 1057; Fitch v. Aedding, 4 Sand (N.Y.) 130
856
1 Agbayani, Ibid., p. 300; citing Russ Lumber etc. Co. v. Muscupiable Land etc. Co., 120 Col. 521; 52 Pac. 995, 65 Am. St. Rep. 186; Skinner v.
Raynor, 95 Iowa, 536, 64 N.W. 601; Hale v. Aldaffer, 5 Kan. App. 40, 5 Pac. 194
857
1 Agbayani, Ibid., p. 300; citing Russ Hoffmann v. Bank of Milwaukee, 12 Wall 191; Hunt v. Johnston, 96 Ala. 130, 11 So. 387; Nlerrill v. Packer, 80
Iowa, 542, 45 N.W. 1076
858
859
1 Agbayani, Ibid., pp. 240-241; citing Syll National Bank v. Picornell, 46 Phil. 716
860
1 Agbayani, Ibid., p. 301; citing Art. 1338, NCC
861
Section 55, NIL
862
Section 57, NIL
863
864
1 Agbayani, Ibid., p. 302; citing Garches v. Viley, 46 Oreg. 96
865
1 Agbayani, Ibid., p. 302; citing Sammuels Shoe Co. v Frensley, 151 Okla. 196, 3 P (2d); Segar v. Bailey, - Ariz.-, 145 P (2d) 520
B-73
Duress is an equitable defense. 866 It is one of the modes of acquiring a defective title. 867 from which a holder in due
course is free. 868
Section 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.
(Section discussed in “Holders”)
Section 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.
(Section discussed in “Holders”)
Other defenses. The following may also be set up as defenses against liability on instruments:
(1) blank signature;
(2) bankruptcy or insolvency;
(3) counterclaims and set-offs;
(4) discharge; and
(5) lack of revenue stamp. 869
Blank signatures. This is a case where a person signs a piece of paper in blank. Where there is no intention to issue a
negotiable instrument, it amounts to forgery and is a legal or real defense. 870 Where there is an intention to issue a
negotiable instrument but the blank signature is filled up contrary to authority or is not filled up within reasonble time, it is
an equitable defense. 871
Bankruptcy or insolvency.
1. of party primarily liable. There are two legal situations involving the defense of bankruptcy or insolvency. It may be
the (1) party primarily liable on the instrument, or (2) the one negotiating who is bankrupt or insolvent. In the first
case, where it is the party liable who is bankrupt or insolvent, it is no defense.
2. of party secondarily liable. Where the party who is inscivent or bankrupt is the one negotiating, it may or may not
be a defense depending upon the time of indorsement. Where the negotiation is made within thirty (30) days before
the filing of a petition for insolvency by or against him, the negotiation is void, 872 and no title is transferred to the
holder to whom the instrument is negotiated. Bankruptcy or insolvency in this case is a real defense. 873
Counterclaims and set-offs. It is opined that the better view seems to be that the term "defense"' as used in Section 58,
from which a holder who is not a holder in due course is not free, means technical defenses as distinguished from setoffs.
"Set-off, by the weight of authority, is not considered generally as a defense. Between the original parties, however, or
parties between whom there is a privity, that is, between maker and payee, drawer and acceptor, indorser and immediate
indorsee, a set-off may be pleaded to a negotiable instrument the same as it may be to a non-negotiable instrument." 874
But as between remote parties not holders in due course, the general rule - although there is considerable conflict of
authorities - is that, in an action by an indorsee, independent demands against the payee cannot be set-off, but only such
equities which arise out of the instrument itself. Set-off or counterclaim is not available against a holder in due course. 875
Discharge as defense between original parties. Before the adoption of the Negotiable Instruments Law, discharge was
treated as a defense but an author 876 opines that it is deemed best to submit to the new classification as adopted in the
law. If the instrument is discharged, anyone who has been a "party to it may set up against the holder a defense that it
has been extinguished as an existing contract and that the holder or payee holds it as a mere receipt or voucher." 877
Discharge is a good defense between original parties or between parties having only their rights, that is, remote parties
not holders in due course. 878 Accordingly, payment in due course, i.e., at or after the date of maturity by the principal
debtor, is a defense against any holder, as any holder who acquires the instrument after maturity is not a holder in due
course. But as against a holder in due course, where the party paying the instrument does not observe the precautions of
taking up the paper or of having the payment made indorsed thereon, it is not a defense. 879
Lack of revenue stamp. The National Internal Revenue Code requires the placing of documentary stamps "on each bank
check, draft, or certificate of deposit not drawing interest, or order for the payment of any sum of money drawn upon or
issued by any bank, trust company, or any person or persons, companies or corporations, at sight or on demand on all
bills of exchange (between points within the Philippines), drafts, or certificates of deposit drawing interest, or orders for the
payment of any sum of money otherwise than at sight or on demand, or on all negotiable promissory note, except bank
notes issued for circulation, and on each renewal of any such note upon any acceptance of payment of any bill of
exchange or order for the payment of money purporting to be drawn in a foreign country but payable in the Philippines";
and "on all foreign bills of exchange and letters of credit including orders, by telegraph or otherwise, for the payment of
money issued by express or steamship companies or by any person or persons drawn in but payable out of the
Philippines in a set of three or more according to the custom of merchants and bankers." 880
Effect of failure to stamp. Section 238 of the National Internal Revenue Code provides that "an instrument, document, or
paper which is required by law to be stamped and which has been signed, issued, accepted, or transferred, without being
duly stamped, shall not be recorded, nor shall it or any copy thereof or any record of transfer of the same be admitted or
used in evidence in any court until the requisite stamp or stamps shall have been affixed thereto and cancelled."
Furthermore, "no notary public or other officer authorized to administer oaths shall add his jurat or acknowledgment to any
document subject to documentary stamp tax unless the proper documentary stamps are affixed thereto and cancelled."
The effect, therefore, seems to be to make the instrument unenforcable. An unstamped commercial paper cannot be
866
1 Agbayani, Ibid., p. 302; referring to 8 C.J. 761-762
867
Section 55, NIL
868
Section 57, NIL
869
870
1 Agbayani, Ibid., p. 311; referring to Section 14, fraud in factum, Sec. 23, 8 CJ 734
871
1 Agbayani, Ibid., p. 311; referring to Section 14; 8 CJ 833
872
Section 70, Insolvency Law
873
874
1 Agbayani, Ibid., p. 312; citing Ogden, 5th ed., p. 381; see also 8 C.J. 803
875
876
877
1 Agbayani, Ibid., pp. 312-313; citing Ogden, 5th ed., pp. 359-360
878
879
880
B-74
proved, as without the stamp it is inadmissible in evidence. But this defect may be cured by affixing the stamp at the time
the instrument is presented in evidence. 881
!!! Case(s)
25 Crisologo-Jose vs. CA, Sept. 15, 1989
26 Salas vs. CA, January 22, 1990
27 Philippine National Bank vs. CA, 256 SCRA 491
28 Associated Bank vs. CA, January 31, 1996
29 Great Eastern Life Insurance Co. vs. Hongkong & Shanghai Banking Corporation, GR 18657, August 23, 1922
30 Republic vs. Ebrada, July 31, 1975
31 Philippine National Bank vs. Quimpo, March 14, 1988
32 Gempesaw vs. CA, February 9, 1993
33 Philippine Commercial International Bank vs. Court of Appeals, 350 SCRA 446
34 Papa vs. A.U. Valencia, 284 SCRA 643
---------------------------------------------------------------------CASE(S)---------------------------------------------------------------
25 Crisologo-Jose vs. Court of Appeals [GR 80599, 15 September 1989]

Second Division, Regalado (J): 3 concur, 1 took no part
Facts: In 1980, Ricardo S. Santos, Jr. was the vice-president of Mover Enterprises, Inc. in-charge of marketing and sales; and the
president of the said corporation was Atty. Oscar Z. Benares. On 30 April 1980, Atty. Benares, in accommodation of his clients, the
spouses Jaime and Clarita Ong, issued Check 093553 drawn against Traders Royal Bank, dated 14 June 1980, in the amount of
P45,000.00 payable to Ernestina Crisologo-Jose. Since the check was under the account of Mover Enterprises, Inc., the same was
to be signed by its president, Atty. Oscar Z. Benares, and the treasurer of the said corporation. However, since at that time, the
treasurer of Mover Enterprises was not available, Atty. Benares prevailed upon Santos to sign the aforesaid check as an alternate
signatory. Santos did sign the check. The check was issued to Crisologo-Jose in consideration of the waiver or quitclaim by
Crisologo-Jose over a certain property which the Government Service Insurance System (GSIS) agreed to sell to the clients of Atty.
Benares, the spouses Ong, with the understanding that upon approval by the GSIS of the compromise agreement with the spouses
Ong, the check will be encashed accordingly. However, since the compromise agreement was not approved within the expected
period of time, the aforesaid check for P45,000.00 was replaced by Atty. Benares with another Traders Royal Bank check bearing
379299 dated 10 August 1980, in the same amount of P45,000.00, also payable to Crisologo-Jose. This replacement check was
also signed by Atty. Benares and by Santos When Crisologo-Jose deposited this replacement check with her account at Family
Savings Bank, Mayon Branch, it was dishonored for insufficiency of funds. A subsequent redepositing of the said check was likewise
dishonored by the bank for the same reason. Hence, Crisologo-Jose through counsel was constrained to file a criminal complaint for
violation of Batas Pambansa 22 (BP22) with the Quezon City Fiscal's Office against Atty. Benares and Santos The investigating
Assistant City Fiscal, Alfonso Llamas, accordingly filed an amended information with the court charging both Benares and Santos for
violation of BP 22 (Criminal Case Q-14867) of then Court of First Instance of Rizal, Quezon City.
Meanwhile, during the preliminary investigation of the criminal charge against Benares and Santos, before Assistant City Fiscal
Llamas, Santos tendered cashier's check CC 160152 for P45,000.00 dated 10 April 1981 to Crisologo-Jose, the complainant in that
criminal case. Crisologo-Jose refused to receive the cashier's check in payment of the dishonored check in the amount of
P45,000.00. Hence, Santos encashed the aforesaid cashier's check and subsequently deposited said amount of P45,000.00 with
the Clerk of Court on 14 August 1981. Incidentally, the cashier's check adverted to above was purchased by Atty. Benares and
given to Santos to be applied in payment of the dishonored check. After trial, the court a quo, holding that it was "not persuaded to
believe that consignation referred to in Article 1256 of the Civil Code is applicable to this case," rendered judgment dismissing
Santos' complaint for consignation and Crisologo-Jose's counterclaim. On appeal and on 8 September 1987, the appellate court
reversed and set aside said judgment of dismissal and revived the complaint for consignation, directing the trial court to give due
course thereto. Crisologo-Jose filed the petition.
Issue [1]: Whether Santos, as an accommodation party, is liable thereon under the Negotiable Instruments Law.
Held [1]: Section 29 (Liability of accommodation party) of the Negotiable Instruments Law provides that "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." Consequently, to be considered an
accommodation party, a person must (1) be a party to the instrument, signing as maker, drawer, acceptor, or indorser, (2) not
receive value therefor, and (3) sign for the purpose of lending his name for the credit of some other person. 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 accommodation, in whatever capacity such accommodation party signed the instrument, whether primarily or secondarily.
Thus, it has been held that in lending his name to the accommodated party, the accommodation party is in effect a surety for the
latter.
Issue [2]: Whether Mover Enterprises, Inc. may be held liable on the accommodation instrument, i.e. the check issued in favor of
Crisologo-Jose.
Held [2]: The 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 parties. This is because the issue or indorsement of negotiable paper by a
corporation without consideration and for the accommodation of another is ultra vires. Hence, one who has 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 recover against the corporation
thereon.
Issue [3]: Whether Santos, who signed the check in question in a representative capacity as vice-president of Mover Enterprises
Inc., is liable thereon under the Negotiable Instruments Law.
Held [3]: 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 only if specifically authorized to do so. Corollarily, 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 matters 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.
Issue [4]: Whether the lack of capacity of the corporation absolved the signatories of the instrument.
881
1 Agbayani, Ibid., p. 301; citing Del Castillo vs. Madrilena, 49 Phil. 749, 752
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Held [4]: The fact that for lack of capacity the corporation is not bound by an accommodation paper does not thereby absolve, but
should render personally liable, the signatories of said instrument where the facts show that the accommodation involved was for
their personal account, undertaking or purpose and the creditor was aware thereof. Crisologo-Jose was evidently charged with the
knowledge that the check was issued at the instance and for the personal account of Atty. Benares who merely prevailed upon
Santos to act as co-signatory in accordance with the arrangement of the corporation with its depository bank. That it was a personal
undertaking of said corporate officers was apparent to Crisologo-Jose by reason of her personal involvement in the financial
arrangement and the fact that, while it was the corporation's check which was issued to her for the amount involved, she actually
had no transaction directly with said corporation. There should be no legal obstacle, therefore, to Crisologo-Jose's claims being
directed personally against Atty. Benares and Santos, president and vice-president, respectively, of Mover Enterprises, Inc.
26 Salas vs. Court of Appeals [GR 76788, 22 January 1990]

Third Division, Fernan (CJ): 4 concur
Facts: On 6 February 1980, Juanita Salas bought a motor vehicle from the Violago Motor Sales Corporation (VMS) for P58,138.20
as evidenced by a promissory note. This note was subsequently endorsed to Filinvest Finance & Leasing Corporation (Fininvest)
which financed the purchase. Salas defaulted in her installments beginning 21 May 1980 allegedly due to a discrepancy in the
engine and chassis numbers of the vehicle delivered to her and those indicated in the sales invoice, certificate of registration and
deed of chattel mortgage, which fact she discovered when the vehicle figured in an accident on 9 May 1980. This failure to pay
prompted Filinvest to initiate Civil Case 5915 for a sum of money against Salas before the Regional Trial Court of San Fernando,
Pampanga. In its decision dated 10 September 1982, the trial court rendered judgment ordering Salas to pay Philinvest the sum of
P28,414.40 with interest thereon at the rate of 14% from 2 October 1980 until the said sum is fully paid; and the further amount of
P1,000.00 as attorney's fees. The court dismissed Salas' counterclaim. Both Salas and Filinvest appealed the aforesaid decision to
the Court of Appeals. Imputing fraud, bad faith and misrepresentation against VMS for having delivered a different vehicle to Salas,
the latter prayed for a reversal of the trial court's decision so that she may be absolved from the obligation under the contract. On 27
October 1986, the Court of Appeals rendered its decision, modifying the trial court's decision. The appellate court ordered Salas to
pay Philinvest the sum of P54,908.30 at 14% per annum from 2 October 1980 until full payment, with costs against Salas. Salas'
motion for reconsideration was denied. Salas filed the petition for review on certiorari.
Issue: Whether the promissory note in question is a negotiable instrument which will bar completely all the available defenses of
Salas against Philinvest.
Held: Salas' liability on the promissory note, the due execution and genuineness of which she never denied under oath was, under
the factual milieu, as inevitable as it was clearly established. The records revealed that what was involved was not a simple case of
assignment of credit as Salas would have it appear, where the assignee merely steps into the shoes of, is open to all defenses
available against and can enforce payment only to the same extent as, the assignor-vendor. Herein, the basis of Filinvest's claim
against Salas is a promissory note which bears all the earmarks of negotiability. The questioned promissory note is a negotiable
instrument, having complied with the requisites under the law as follows: [a] it is in writing and 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 payable on the 21st 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. It was negotiated by indorsement in writing on the instrument itself payable to the Order of Filinvest Finance
and Leasing Corporation and it is an indorsement of the entire instrument. Under the circumstances, there appears to be no
question that Filinvest is a holder in due course, having taken the instrument under the following conditions: [a] it is complete and
regular upon its face; [b] it became the holder thereof before it was overdue, and without notice that it had previously been
dishonored; [c] it took the same in good faith and for value; and [d] when it was negotiated to Filinvest, the latter had no notice of
any infirmity in the instrument or defect in the title of VMS Corporation. Accordingly, Filinvest 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. This being so, Salas cannot set up against Filinvest the defense of nullity of the contract of
sale between her and VMS.
27 Philippine National Bank vs. Court of Appeals [GR 107508, 25 April 1996]
First Division, Kapunan (J): 4 concur
Facts: A check with serial number 7-3666-223-3, dated 7 August 1981 in the amount of P97,650.00 was issued by the Ministry of
Education Culture (now Department of Education, Culture and Sports [DECS]) payable to F. Abante Marketing. This check was
drawn against Philippine National Bank (PNB). On 11 August 1981, Abante Marketing, a client of Capitol City Development Bank
(Capitol), deposited the questioned check in its savings account with said bank. In turn, Capitol deposited the same in its account
with the Philippine Bank of Communications (PBCom) which, in turn, sent the check to PNB for clearing. PNB cleared the check as
good and thereafter, PBCom credited Capitol's account for the amount stated in the check. However, on 19 October 1981, PNB
returned the check to PBCom and debited PBCom's account for the amount covered by the check, the reason being that there was
a "material alteration" of the check number. PBCom, as collecting agent of Capitol, then proceeded to debit the latter's account for
the same amount, and subsequently, sent the check back to petitioner. PNB, however, returned the check to PBCom. On the other
hand, Capitol could not in turn, debit Abante Marketing's account since the latter had already withdrawn the amount of the check as
of 15 October 1981. Capitol sought clarification from PBCom and demanded the re-crediting of the amount. PBCom followed suit by
requesting an explanation and re-crediting from PNB. Since the demands of Capitol were not heeded, it filed a civil suit with the
Regional trial Court of Manila against PBCom which in turn, filed a third-party complaint against PNB for reimbursement/indemnity
with respect to the claims of Capitol. PNB, on its part, filed a fourth-party complaint against Abante Marketing. On 3 October 1989;
the Regional Trial Court rendered its decision, ordering PBCom to re-credit or reimburse Capitol the amount of P97,650.00, plus
interest of 12% thereto from 19 October 1981 until the amount is fully paid; PNB to reimburse and indemnify PBCom for whatever
amount PBCom pays to Capitol; F. Abante Marketing to reimburse and indemnify PNB for whatever amount PNB pays to PBCom.
On attorney's fees, the trial court ordered PBCom to pay Capitol attorney's fees in the amount of P10,000.00; but that PBCom is
entitled to reimburse/indemnify from PNB; and PNB to be, in turn, reimbursed or indemnified by F. Abante Marketing for the same
amount. The court dismissed the counterclaims of PBCom and PNB; without pronouncement as to costs. An appeal was interposed
before the Court of Appeals which rendered its decision on 29 April 1992, which modified the appealed judgment by exempting
PBCom from liability to Capitol for attorney's fees and ordering PNB to honor the check for P97,650.00, with interest as declared by
the trial court, and pay Capitol attorney's fees of P10,000.00. After the check shall have been honored by PNB, the court ordered
PBCom to re-credit Capitol's account with it the amount; without pronouncement as to costs. A motion for reconsideration of the
decision was denied by the appellate Court in its resolution dated 16 September 1992 for lack of merit. PNB filed the petition for
review on certiorari.
Issue: Whether the change in the serial number of the check may be considered a change that alters the effect of the instrument,
and thus is a material alteration.
Held: The present case 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. The check's serial number is
not the sole indication of its origin. The name of the government agency which issued the subject check was prominently printed
therein. The check's issuer was therefore insufficiently identified, rendering the referral to the serial number redundant and
inconsequential. If the purpose of the serial number is merely to identify the issuing government office or agency, its alteration had
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no material effect whatsoever on the integrity of the check. The identity of the issuing government office or agency was not changed
thereby and the amount of the check was not charged against the account of the another government office or agency which had no
liability under the check. The owner issuer of the check is boldly and clearly printed on its face, second line from the top: "MINISTRY
OF EDUCATION AND CULTURE," and below the name of the payee are the rubber-stamped words: "Ministry of Educ. & Culture."
These words are not alleged to have been falsely or fraudulently intercalated into the check. The ownership of the check is
established without the necessity of recourse to the serial number. Neither is there any proof that the amount of the check was
erroneously charged against the account of a government office or agency other than the Ministry of Education and Culture. Hence,
the alteration in the number of the check did not affect or change the liability of the Ministry of Education and Culture under the
check and, therefore, is immaterial. The genuineness of the amount and the signatures therein of then Deputy Minister of Education
Hermenegildo C. Dumlao and of the resident Auditor, Penomio C. Alvarez are not challenged. Neither is the authenticity of the
different codes appearing therein questioned. PNB, thus cannot refuse to accept the check in question on the ground that the serial
number was altered, the same being an immaterial or innocent one.
28 Associated Bank vs. Court of Appeals [GR 107382, 31 January 1996]; also Philippine National Bank vs. Court of Appeals
[GR 107612]
Second Division, Romero (J): 3 concur
Facts: The Province of Tarlac maintains a current account with the Philippine National Bank (PNB) Tarlac Branch where the
provincial funds are deposited. Checks issued by the Province are signed by the Provincial Treasurer and countersigned by the
Provincial Auditor or the Secretary of the Sangguniang Bayan. A portion of the funds of the province is allocated to the Concepcion
Emergency Hospital. The allotment checks for said government hospital are drawn to the order of "Concepcion Emergency Hospital,
Concepcion, Tarlac" or "The Chief, Concepcion Emergency Hospital, Concepcion, Tarlac." The checks are released by the Office of
the Provincial Treasurer and received for the hospital by its administrative officer and cashier. In January 1981, the books of account
of the Provincial Treasurer were post-audited by the Provincial Auditor. It was then discovered that the hospital did not receive
several allotment checks drawn by the Province. On 19 February 1981, the Provincial Treasurer requested the manager of the PNB
to return all of its cleared checks which were issued from 1977 to 1980 in order to verify the regularity of their encashment. After the
checks were examined, the Provincial Treasurer learned that 30 checks amounting to P203,300.00 were encashed by one Fausto
Pangilinan, with the Associated Bank acting as collecting bank. It turned out that Fausto Pangilinan, who was the administrative
officer and cashier of payee hospital until his retirement on 28 February 1978, collected the checks from the office of the Provincial
Treasurer. He claimed to be assisting or helping the hospital follow up the release of the checks and had official receipts. Pangilinan
sought to encash the first check with Associated Bank. However, the manager of Associated Bank refused and suggested that
Pangilinan deposit the check in his personal savings account with the same bank. Pangilinan was able to withdraw the money when
the check was cleared and paid by the drawee bank, PNB. After forging the signature of Dr. Adena Canlas who was chief of the
payee hospital, Pangilinan followed the same procedure for the second check, in the amount of P5,000.00 and dated 20 April 1978,
as well as for 28 other checks of various amounts and on various dates. The last check negotiated by Pangilinan was for P8,000.00
and dated 10 February 1981. All the checks bore the stamp of Associated Bank which reads "All prior endorsements guaranteed
Associated Bank." Jesus David, the manager of Associated Bank, alleged that Pangilinan made it appear that the checks were paid
to him for certain projects with the hospital. He did not find as irregular the fact that the checks were not payable to Pangilinan but to
the Concepcion Emergency Hospital. While he admitted that his wife and Pangilinan's wife are first cousins, the manager denied
having given Pangilinan preferential treatment on this account. On 26 February 1981, the Provincial Treasurer wrote the manager
of the PNB seeking the restoration of the various amounts debited from the current account of the Province. In turn, the PNB
manager demanded reimbursement from the Associated Bank on 15 May 1981. As both banks resisted payment, the Province
brought suit against PNB which, in turn, impleaded Associated Bank as third-party defendant. The latter then filed a fourth-party
complaint against Adena Canlas and Fausto Pangilinan. After trial on the merits, the lower court rendered its decision on 21 March
1988, on the basic complaint, in favor of the Province and against PNB, ordering the latter to pay to the former, the sum of
P203,300.00 with legal interest thereon from 20 March 1981 until fully paid; on the third-party complaint, in favor of PNB and against
Associated Bank ordering the latter to reimburse to the former the amount of P203,300.00 with legal interests thereon from 20
March 1981 until fully paid; on the fourth-party complaint, the same was ordered dismissed for lack of cause of action as against
Adena Canlas and lack of jurisdiction over the person of Fausto Pangilinan as against the latter. The court also dismissed the
counterclaims on the complaint, third-party complaint and fourth-party complaint, for lack of merit. PNB and Associated Bank
appealed to the Court of Appeals. The appellate court affirmed the trial court's decision in toto on 30 September 1992. Hence the
consolidated petitions which seek a reversal of the appellate court's decision.
Issue: Whether PNB was at fault and should solely bear the loss because it cleared and paid the forged checks.
Held: The present case concerns checks payable to the order of Concepcion Emergency Hospital or its Chief. They were properly
issued and bear the genuine signatures of the drawer, the Province of Tarlac. The infirmity in the questioned checks lies in the
payee's (Concepcion Emergency Hospital) indorsements which are forgeries. At the time of their indorsement, the checks were
order instruments. Checks having forged indorsements should be differentiated from forged checks or checks bearing the forged
signature of the drawer. Where the instrument is payable to order at the time of the forgery, such as the checks in the case, the
signature of its rightful holder (here, the payee hospital) is essential to transfer title to the same instrument. When the holder's
indorsement is forged, all parties prior to the forgery may raise the real defense of forgery against all parties subsequent thereto. An
indorser of an order instrument warrants "that the instrument is genuine and in all respects what it purports to be; that he has a good
title to it; that all prior parties had capacity to contract; and that the instrument is at the time of his indorsement valid and subsisting."
He cannot interpose the defense that signatures prior to him are forged. A collecting bank where a check is deposited and which
indorses the check upon presentment with the drawee bank, is such an indorser. So even if the indorsement on the check deposited
by the banks' client is forged, the collecting bank is bound by his warranties as an indorser and cannot set up the defense of forgery
as against the drawee bank. The bank on which a check is drawn, known as the drawee bank, is under strict liability to pay the
check to the order of the payee. The drawee bank is not similarly situated as the collecting bank because the former makes no
warranty as to the genuineness of any indorsement. The drawee bank's duty is but to verify the genuineness of the drawer's
signature and not of the indorsement because the drawer is its client. Moreover, the collecting bank is made liable because it is privy
to the depositor who negotiated the check. The bank knows him, his address and history because he is a client. It has taken a risk
on his deposit. The bank is also in a better position to detect forgery, fraud or irregularity in the indorsement. Hence, the drawee
bank can recover the amount paid on the check bearing a forged indorsement from the collecting bank. However, a drawee bank
has the duty to promptly inform the presentor of the forgery upon discovery. If the drawee bank delays in informing the presentor of
the forgery, thereby depriving said presentor of the right to recover from the forger, the former is deemed negligent and can no
longer recover from the presentor. Herein, PNB, the drawee bank, cannot debit the current account of the Province of Tarlac
because it paid checks which bore forged indorsements. However, if the Province of Tarlac as drawer was negligent to the point of
substantially contributing to the loss, then the drawee bank PNB can charge its account. If both drawee bank-PNB and drawer-
Province of Tarlac were negligent, the loss should be properly apportioned between them. The loss incurred by drawee bank-PNB
can be passed on to the collecting bank-Associated Bank which presented and indorsed the checks to it. Associated Bank can, in
turn, hold the forger, Fausto Pangilinan, liable. If PNB negligently delayed in informing Associated Bank of the forgery, thus
depriving the latter of the opportunity to recover from the forger, it forfeits its right to reimbursement and will be made to bear the
loss. The Court finds that the Province of Tarlac was equally negligent and should, therefore, share the burden of loss from the
checks bearing a forged indorsement. The Province of Tarlac permitted Fausto Pangilinan to collect the checks when the latter,
having already retired from government service, was no longer connected with the hospital. With the exception of the first check
(dated 17 January 1978), all the checks were issued and released after Pangilinan's retirement on 28 February 1978. After nearly
three years, the Treasurer's office was still releasing the checks to the retired cashier. In addition, some of the aid allotment checks
were released to Pangilinan and the others to Elizabeth Juco, the new cashier. The fact that there were now two persons collecting
the checks for the hospital is an unmistakable sign of an irregularity which should have alerted employees in the Treasurer's office
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of the fraud being committed. There is also evidence indicating that the provincial employees were aware of Pangilinan's retirement
and consequent dissociation from the hospital. Hence, due to the negligence of the Province of Tarlac in releasing the checks to an
unauthorized person (Fausto Pangilinan), in allowing the retired hospital cashier to receive the checks for the payee hospital for a
period close to three years and in not properly ascertaining why the retired hospital cashier was collecting checks for the payee
hospital in addition to the hospital's real cashier, the Province contributed to the loss amounting to P203,300.00 and shall be liable
to the PNB for 50% thereof. In effect, the Province of Tarlac can only recover 50% of P203,300.00 from PNB. The collecting bank,
Associated Bank, shall be liable to PNB for 50% of P203,300.00. It is liable on its warranties as indorser of the checks which were
deposited by Fausto Pangilinan, having guaranteed the genuineness of all prior indorsements, including that of the chief of the
payee hospital, Dr. Adena Canlas. Associated Bank was also remiss in its duty to ascertain the genuineness of the payee's
indorsement.
29 The Great Eastern Life Insurance Co. vs. Hongkong & Shanghai Banking Corp. [GR 18657, 23 August 1922]
En Banc, Johns (J): 8 concur
Facts: The Great Eastern Life Insurance Co. (GELIC) is an insurance corporation, while Hongkong & Shanghai Banking Corp.
(HSBC) and Philippine National Bank (PNB) are banking corporations, and each is duly licensed to do its respective business in the
Philippine Islands. On 3 May 1920, GELIC drew its check for P2,000 on HSBC 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 PNB where the amount of the check was placed to his credit. After having paid the check,
and on the next day, PNB endorsed the check to HSBC, which paid it, and charged the amount of the check to the account of
GELIC. In the ordinary course of business, HSBC rendered a bank statement to GELIC showing that the amount of the check was
charged to its account, and no objection was then made to the statement. About 4 months after the check was charged to the
account of GELIC, it developed that 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 PNB. With this knowledge, GELIC
promptly made a demand upon HSBC that it should be given credit for the amount of the forged check, which the bank refused to
do, and GELIC commenced the action to recover the P2,000 which was paid on the forged check. On the petition of HSBC, PNB
was made defendant. HSBC denies any liability, but prays that, if a judgment should be rendered against it, in turn, it should have
like judgment against PNB which denies all liability to either party. Upon the issued being joined, a trial was had and judgment was
rendered against GELIC and in favor HSBC and PNB from which GELIC appealed.
Issue: Whether GELIC can recover inasmuch as Melicor’s indorsement was forged.
Held: GELIC's check was drawn on HSBC payable to the order of Melicor. In other words, GELIC authorized and directed HSBC 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 GELIC estopped or bound by the bank statement, which was made to it by HSBC. This is not a case where
GELIC's own signature was forged to one of its checks. 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
GELIC 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. Section 23 of the Negotiable Instruments Law is square in point. The money was on deposit in
HSBC, and it had no legal right to pay it out to anyone except GELIC or its order. Here, GELIC ordered HSBC to pay the P2,000 to
Melicor, and the money was actually paid to Maasim and was 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 HSBC has no defense to the present action. It is admitted that PNB cashed the check upon a forged signature, and
placed the money to the credit of Maasim, who was the forger. That PNB then endorsed the check and forwarded it to HSBC by
whom it was paid. PNB had no license or authority to pay the money to Maasim or anyone else upon a forged signature. It was its
legal duty to know that Melicor's endorsement was genuine before cashing the check. Its remedy is against Maasim to whom it paid
the money. The Supreme Court reversed the lower court's judgment, and entered another in favor of GELIC and against HSBC for
P2,000, with interest thereon from 8 November 1920, at the rate of 6% per annum, and the costs of the action, and a corresponding
judgment will be entered in favor of HSBC against PNB for the same amount, together with the amount of its costs in the action.
30 Republic Bank vs. Ebrada [GR L-40796, 31 July 1975]

First Division, Martin (J): 4 concur
Facts: On or about 27 February 1963, Mauricia T. Ebrada, encashed Back Pay Check 508060 dated 15 January 1963 for
P1,246.08 at the main office of the Republic Bank at Escolta, Manila. The check was issued by the Bureau of Treasury. Republic
Bank was later advised by the said bureau that the alleged indorsement on the reverse side of the aforesaid check by the payee,
"Martin Lorenzo" was a forgery since the latter had allegedly died as of 14 July 1952. Republic Bank was then requested by the
Bureau of Treasury to refund the amount of P1,246.08. To recover what it had refunded to the Bureau of Treasury, Republic Bank
made verbal and formal demands upon Ebrada to account for the sum of P1,246.08, but Ebrada refused to do so. So Republic Bank
sued Ebrada before the City Court of Manila. On 11 July 1966, Ebrada filed her answer denying the material allegations of the
complaint and as affirmative defenses alleged that she was a holder in due course of the check in question, or at the very least, has
acquired her rights from a holder in due course and therefore entitled to the proceeds thereof. She also alleged that the Republic
Bank has no cause of action against her; that it is in estoppel, or so negligent as not to be entitled to recover anything from her. On
the same date, Ebrada filed a Third-Party complaint against Adelaida Dominguez who, in turn, filed on 14 September 1966 a Fourth-
Party complaint against Justina Tinio. On 21 March 1967, the City Court of Manila rendered judgment for the Republic Bank against
Ebrada; for Ebrada against Dominguez, and for Dominguez against Tinio. From the judgment of the City Court, Ebrada took an
appeal to the Court of First Instance of Manila, where a partial stipulation of facts was submitted. Based on the stipulation of facts
and the documentary evidence presented, the trial court rendered a decision, ordering Ebrada to pay Republic Bank the amount of
P1,246.08, with interest as the legal rate from the filing of the complaint on 16 June 1966, until fully paid, plus the costs in both
instances against Ebrada; reserving therein the right of Ebrada to file whatever claim she may have against Dominguez in
connection with the case, as well as the right of the estate of Dominguez to file the fourth-party complaint against Tinio. Ebrada
appealed.
Issue [1]: Whether the existence of one forged signature in a negotiable instrument will render void all the other negotiations of the
check with respect to the other parties whose signature are genuine.
Held [1]: In 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,
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 the check in question from Martin Lorenzo, 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 Ebrada who did not know of the forgery, should be considered valid
and enforceable, barring any claim of forgery.
Issue [2]: Whether the drawee bank recover from the one who encashed the check 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.
Held [2]: In the case of State v. Broadway Mut. Bank, 282 S.W. 196, 197, 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
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payee 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 the 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 encasher is that "Every one with even 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 the loss. Why should he be permitted to shift the loss due to his
own fault in assuming the risk, upon the drawee, simply because of the accidental circumstance that the drawee afterwards failed to
detect the forgery when the check was presented?" Herein, Ebrada, 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 Republic Bank for
payment. Her failure to do so makes her liable for the loss and the Republic Bank may recover from her the money she received for
the check. 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. As held in the Great Eastern Life Insurance Company case, "Where 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, and its only remedy is against the person to whom it paid the money." Hence, the Republic Bank should suffer the loss when
it paid the amount of the check in question to Ebrada, but it has the remedy to recover from the latter the amount it paid to her.
Although Ebrada to whom the Republic Bank paid the check was not proven to be the author of the supposed forgery, yet as last
indorser of the check, she has warranted that she has good title to it even if in fact she did not have it because the payee of the
check was already dead 11 years before the check was issued. The fact that immediately after receiving the cash proceeds of the
check in question in the amount of P1,246.08 from the Republic Bank, Ebrada immediately turned over said amount to Dominguez
who in turn handed the amount to Tinio on the same date would not exempt her from liability because by doing so, she acted as an
accommodation party in the check for which she is also liable under Section 29 of the Negotiable Instruments Law.
31 Philippine National Bank vs. Quimpo [GR L-53194, 14 March 1988]

First Division, Gancayco (J): 4 concur
Facts: On 3 July 1973, Francisco S. Gozon II, who was a depositor of the Caloocan City Branch of the Philippine National Bank
(PNB), went to the bank in his car accompanied by his friend Ernesto Santos whom he left in the car while he transacted business in
the bank. When Santos saw that Gozon left his check book he took a check therefrom, filled it up for the amount of P5,000.00,
forged the signature of Gozon, and thereafter he encashed the check in the bank on the same day. The account of Gozon was
debited the said amount. Upon receipt of the statement of account from the bank, Gozon asked that the said amount of P5,000.00
should be returned to his account as his signature on the check was forged but the bank refused. Upon Gozon’s complaint on 1
February 1974 Ernesto Santos was apprehended by the police authorities and upon investigation he admitted that he stole the
check of Gozon, forged his signature and encashed the same with the Bank. Gozon filed the complaint for recovery of the amount of
P5,000.00, plus interest, damages, attorney's fees and costs against the bank in the CFI Rizal (Branch XIC, Hon. Romulo S.
Quimpo presiding). After the issues were joined and the trial on the merits ensued, a decision was rendered on 4 February 1980, by
the Court, ordering the bank to return the amount of P5,000 which it had unlawfully withheld, with interest at the legal rate from 22
September 1972 until the amount is fully delivered. The bank was further condemned to pay Gozon the sum of P2,000.00 as
attorney's fees and to pay the costs of the suit. The bank filed a petition for review on certiorari.
Issue: Whether the act of Gozon in putting his checkbook containing the forged check into the hands of Santos was the proximate
cause of the loss, precluding him from setting up the defense of forgery.
Held: The prime duty of a bank is to ascertain the genuineness of the signature of the drawer or the depositor on the check being
encashed. It is expected to use reasonable business prudence in accepting and cashing a check presented to it. 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 change the amount so paid to the account of the depositor whose name was forged. This rule is
absolutely necessary to the circulation of drafts and checks, and is based upon the presumed negligence of the drawee in failing to
meet its obligation to know the signature of its correspondent. There is nothing inequitable in such a rule. If the paper comes to the
drawee in the regular course of business, and he, having the opportunity ascertaining its character, pronounces it to be valid and
pays it, it is not only a question of payment under mistake, but payment in neglect of duty which the commercial law places upon
him, and the result of his negligence must rest upon him. The act of Gozon in leaving his checkbook in the car while he went out for
a short while can not be considered negligence sufficient to excuse PNB from its own negligence. It should be borne in mind that
when Gozon left his car, Santos, a long time classmate and friend remained in the same. Gozon could not have been expected to
know that the said Santos would remove a check from his checkbook. Gozon had trust in his classmate and friend. He had no
reason to suspect that the latter would breach that trust.
32 Gempesaw vs. CA, February 9, 1993

see case entry 15
33 Philippine Commercial International Bank (PICB; formerly Insular Bank of Asia and America) vs. Court of Appeals [GR
121413, 29 January 2001]; also Ford Philippines vs. Court of Appeals [GR 121479], and Ford Philippines v.s Citibank N.A.
[GR 128604]
Second Division: Quisumbing (J): 4 concur
Facts: [GRs 121413 and 121479] On 19 October 1977, Ford Philippines drew and issued its Citibank Check SN-04867 -- a crossed
check in that, on its face were two parallel lines and written in between said lines was the phrase "Payee's Account Only" -- in the
amount of P4,746,114.41, in favor of the Commissioner of Internal Revenue as payment of Ford's percentage or manufacturer's
sales taxes for the third quarter of 1977. The aforesaid check was deposited with the Insular Bank of Asia and America (IBAA) and
was subsequently cleared at the Central Bank. Upon presentment with Citibank N.A., the proceeds of the check was paid to IBAA
as collecting or depository bank. The proceeds of the same Citibank check of Ford was never paid to or received by the payee
thereof, the Commissioner of Internal Revenue. The amount of P4,746,114.41 was debited in Ford's account with Citibank and the
check was returned to Ford. Upon verification, Ford discovered that its Citibank Check SN-04867 in the amount of P4,746,114.41
was not paid to the Commissioner of Internal Revenue. In separate letters dated 26 October 1979, addressed to Citibank and IBAA,
Ford notified the latter that in case it will be re-assessed by the BIR for the payment of the taxes covered by the said checks, then
Ford shall hold Citibank and IBAA liable for reimbursement of the face value of the same. IBAA and Citibank denied liability and
refused to pay. In a letter dated 28 February 1980 by the Acting Commissioner of Internal Revenue addressed to Ford officially
informing the latter, among others, that its check in the amount of P4,746,114.41 was not paid to the government or its authorized
agent and instead encashed by unauthorized persons, hence, Ford has to pay the said amount within 15 days from receipt of the
letter. Upon advice of Ford's lawyers, Ford, on 11 March 1982, paid to the BIR the amount of P4,746,114.41, representing payment
of its percentage tax for the third quarter of 1977. Said second payment of Ford in the amount of P4,746,114.41 was duly received
by the BIR. As a consequence of Citibank's refusal to reimburse Ford of the payment it had made for the second time to the BIR of
its percentage taxes, Ford filed on 20 January 1983 its original complaint before the court. On 24 December 1985, IBAA was
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merged with the Philippine Commercial International Bank (PCIB) with the latter as the surviving entity. It was learned during an
investigation by the National Bureau of Investigation (NBI) that Citibank Check SN-04867 was recalled by Godofredo Rivera, the
General Ledger Accountant of Ford. He purportedly needed to hold back the check because there was an error in the computation
of the tax due to BIR. With Rivera's instruction, PCIB replaced the check with two of its own Manager's Checks (MCs). Alleged
members of a syndicate later deposited the two MCs with the Pacific Banking Corporation (PBC). Ford, with leave of court, filed a
third-party complaint before the trial court impleading PBC and Rivera, as third party defendants. But the court dismissed the
complaint against PBC for lack of cause of action. The court likewise dismissed the third-party complaint against Rivera because he
could not be served with summons as the NBI declared him as a "fugitive from justice". On 15 June 1989, the trial court rendered its
decision, ordering Citibank and IBAA/PCIB to solidarily pay Ford the amount of P4,746,114.41 representing the face value of Ford's
Citibank Check SN-04867, with interest thereon at the legal rate starting 20 January 1983, the date when the original complaint was
filed until the amount is fully paid, plus costs; ordering IBAA/PCIB to reimburse Citibank for whatever amount the latter has paid or
may pay to Ford; with costs against Citibank and IBAA. Not satisfied with the said decision, Citibank and PCIB, elevated their
respective petitions for review on certiorari to the Court of Appeals. On 27 March 1995, the appellate court issued its judgment
affirming the trial court's decision with modifications; dismissing the complaint in Civil Case 49287 insofar as Citibank was
concerned; ordering IBAA/PCIB to pay Ford the amount of P4,746,114.41 representing the face value of Ford's Citibank Check SN-
04867, with interest thereon at the legal rate starting 20 January 1983. the date when the original complaint was filed until the
amount is fully paid; with costs against IBAA/PCIB. PCIB moved to reconsider the decision of the Court of Appeals, while Ford filed
a "Motion for Partial Reconsideration." Both motions were denied for lack of merit. Separately, PCIBank and Ford filed before the
Supre,e Court, petitions for review by certiorari under Rule 45.
[GR 128604] Ford drew Citibank Check SN-10597 on 19 July 1978 in the amount of P5,851,706.37 representing the percentage tax
due for the second quarter of 1978 payable to the Commissioner of Internal Revenue. A BIR Revenue Tax Receipt 28645385 was
issued for the said purpose. On 20 April 1979, Ford drew another Citibank Check SN-16508 in the amount of P6,311,591.73,
representing the payment of percentage tax for the first quarter of 1979 and payable to the Commissioner of Internal Revenue.
Again a BIR Revenue Tax Receipt A-1697160 was issued for the said purpose. Both checks were "crossed checks" and contain
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, CIR. Thus, in a letter dated 28 February 1980, the BIR, Region 4-B, demanded for the said tax payments
the corresponding periods above-mentioned. As far as the BIR is concerned, the said two BIR Revenue Tax Receipts were
considered "fake and spurious". This anomaly was confirmed by the NBI upon the initiative of the BIR. The findings forced Ford to
pay the BIR anew, while an action was filed against Citibank and PCIBank for the recovery of the amount of Citibank Check
Numbers SN-10597 and 16508. On 9 December 1988, Regional Trial Court of Makati, Branch 57, held drawee-bank Citibank liable
for the value of the two checks while absolving PCIB from any liability. Both Ford and Citibank appealed to the Court of Appeals
which affirmed, in toto, the decision of the trial court. Hence, the petition for review.
[1] GRs 121413 and 121479
Issue [a]: Whether the forgery committed by the drawer-payor’s confidential employees precludes Ford from recovering the
amount of its checks.
Held [a]: NO. Although the employees of Ford initiated the transactions attributable to an organized syndicate, their actions
were not the proximate cause of encashing the checks payable to the CIR. The degree of Ford's negligence, if any, could not
be characterized as the proximate cause of the injury to the parties. The Board of Directors of Ford did not confirm the request
of Godofredo Rivera to recall Citibank Check SN-04867. Rivera's instruction to replace the said check with PCIB's Manager's
Check was not in the ordinary course of business which could have prompted PCIB to validate the same. As to the preparation
of Citibank Checks SN-10597 and 16508, it was established that these checks were made payable to the CIR. Both were
crossed checks. These checks were apparently turned around by Ford's employees, who were acting on their own personal
capacity. Given these circumstances, the mere fact that the forgery was committed by a drawer-payor's confidential employee
or agent, who by virtue of his position had unusual facilities for perpetrating the 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 drawer. This rule likewise applies to the checks fraudulently negotiated or diverted by the confidential employees
who hold them in their possession.
Issue [b]: Whether the collecting bank (PCIB) was negligent in preparing two manager’s check to replace Citibank Check SN-
04867, on orders of persons besides the CIR.
Held [b]: YES. Citibank Check SN-04867 was deposited at PCIB through its Ermita Branch. It was coursed through the
ordinary banking transaction, sent to Central Clearing with the indorsement at the back "all prior indorsements and/or lack of
indorsements guaranteed," and was presented to Citibank for payment. Thereafter PCIB, instead of remitting the proceeds to
the CIR, prepared two of its Manager's checks and enabled the syndicate to encash the same. On record, PCIB failed to verify
the authority of Mr. Rivera to negotiate the checks. The neglect of PCIB employees to verify whether his letter requesting for
the replacement of the Citibank Check SN-04867 was duly authorized, showed lack of care and prudence required in the
circumstances. Furthermore, it was admitted that PCIB is authorized to collect the payment of taxpayers in behalf of the BIR.
As an agent of BIR, PCIB is duty bound to consult its principal regarding the unwarranted instructions given by the payor or its
agent. As agent of the BIR, IBAA/PCIB should receive instructions only from its principal BIR and not from any other person
especially so when that person is not known to IBAA/PCIB. It is very imprudent on the part of IBAA/PCIB to just rely on the
alleged telephone call of one (Rivera) and in his signature to the authenticity of such signature considering that the Ford is not
a client of IBAA/PCIB.
[2] GR 128604
Issue [a]: Whether PCIB is liable for fraud (embezzlement) committed by PCIB employees while the checks were in transit for
clearing.
Held [a]: YES. Even if PCIB had no official act in the ordinary course of business that would attribute to it the case of the
embezzlement of Citibank Check Numbers SN-10597 and 16508, because PCIB did not actually receive nor hold the two Ford
checks at all; that the switching operation (involving the checks while in transit for "clearing") were the clandestine or hidden
actuations performed by the members of the syndicate in their own personal, covert and private capacity and done without the
knowledge of PCIB; as a general rule, however, a banking corporation is liable for the wrongful or tortuous acts and
declarations of its officers or agents within the course and scope of their employment. A bank will be held liable for the
negligence of its officers or agents when acting within the course and scope of their employment. It may be liable for the
tortuous acts of its officers even as regards that species of tort of which malice is an essential element. Herein, although a
situation exist where the PCIB appears also to be the victim of the scheme hatched by a syndicate in which its own
management employees had participated; a bank holding out its officers and agents as worthy of confidence will not be
permitted to profit by the frauds these officers or agents were enabled to perpetrate in the apparent course of their
employment; nor will it be permitted to shirk its responsibility for such frauds, even though no benefit may accrue to the bank
therefrom. For the general rule is that a bank is liable for the fraudulent acts or representations of an officer or agent acting
within the course and apparent scope of his employment or authority. And if an officer or employee of a bank, in his official
capacity, receives money to satisfy an evidence of indebtedness lodged with his bank for collection, the bank is liable for his
misappropriation of such sum. Moreover, Section 5 of Central Bank Circular 580, Series of 1977 provides that any theft
affecting items in transit for clearing, shall be for the account of sending bank, which in this case is PCIB.
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Issue [b]: Whether Citibank can raise the defenses that it has no knowledge of any infirmity in the issuance of the checks in
question amd that the endorsement of the Payee or lack thereof was guaranteed by IBAA/PCIB and thus, it has the obligation
to honor and pay the same; among others.
Held [b]: NO. Citibank as drawee bank was likewise negligent in the performance of its duties. Citibank failed to establish that
its payment of Ford's checks were made in due course and legally in order. As ruled by the Court of Appeals, Citibank must
likewise answer for the damages incurred by Ford on Citibank Checks Numbers SN 10597 and 16508, because of the
contractual relationship existing between the two. Citibank, as the drawee bank breached its contractual obligation with Ford
and such degree of culpability contributed to the damage caused to the latter. Citibank should have scrutinized Citibank Check
Numbers SN 10597 and 16508 before paying the amount of the proceeds thereof to the collecting bank of the BIR. The
clearing stamps at the back of Citibank Check SN 10597 and 16508 do not bear any initials. Citibank failed to notice and verify
the absence of the clearing stamps. Had this been duly examined, the switching of the worthless checks to Citibank Checks
10597 and 16508 would have been discovered in time. For this reason, Citibank had indeed failed to perform what was
incumbent upon it, which is to ensure that the amount of the checks should be paid only to its designated payee. The fact that
the drawee bank did not discover the irregularity seasonably constitutes negligence in carrying out the bank's duty to its
depositors. The point is that as a business affected with public interest and because of the nature of its functions, the bank is
under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their
relationship.
34 Papa vs. Valencia [GR 105188, 23 January 1998]

Facts: Sometime in June 1982, A.U. Valencia and Co., Inc. and Felix Peñarroyo, filed with the Regional Trial Court of Pasig, Branch
151, a complaint for specific performance against Myron C. Papa, in his capacity as administrator of the Testate Estate of one
Angela M. Butte. The complaint alleged that on 15 June 1973, Myron C. Papa, acting as attorney-in-fact of Angela M. Butte, sold to
Peñarroyo, through Valencia, a parcel of land, consisting of 286.60 square meters, located at corner Retiro and Cadiz Streets, La
Loma, Quezon City, and covered by Transfer Certificate of Title 28993 of the Register of Deeds of Quezon City; that prior to the
alleged sale, the said property, together with several other parcels of land likewise owned by Butte, had been mortgaged by her to
the Associated Banking Corporation (now Associated Citizens Bank); that after the alleged sale, but before the title to the subject
property had been released, Butte passed away; that despite representations made by Valencia to the bank to release the title to
the property sold to Peñarroyo, the bank refused to release it unless and until all the mortgaged properties of the late Butte were
also redeemed; that in order to protect his rights and interests over the property, Peñarroyo caused the annotation on the title of an
adverse claim as evidenced by Entry No. PE. — 6118/T-28993, inscribed on 18 January 1977. The complaint further alleged that it
was only upon the release of the title to the property, sometime in April 1977, that Valencia and Peñarroyo discovered that the
mortgage rights of the bank had been assigned to one Tomas L. Parpana (now deceased), as special administrator of the Estate of
Ramon Papa. Jr., on 12 April 1977; that since then, Papa had been collecting monthly rentals in the amount of P800.00 from the
tenants of the property, knowing that said property had already been sold to Valencia and Peñarroyo on 15 June 1973; that despite
repeated demands from said respondents, Papa refused and failed to deliver the title to the property. Valencia and Peñarroyo
prayed that Papa be ordered to deliver to Peñarroyo the title to the subject property (TCT 28993); to turn over to the latter the sum
of P72,000.00 as accrued rentals as of April 1982, and the monthly rental of P800.00 until the property is delivered to Peñarroyo; to
pay Valencia and Peñarroyo the sum of P20,000.00 as attorney's fees; and to pay the costs of the suit. Upon his motion, Delfin Jao
was allowed to intervene in the case. Making common cause with Valencia and Peñarroyo, Jao alleged that the subject lot which
had been sold to Peñarroyo through Valencia was in turn sold to him on 20 August 1973 for the sum of P71,500.00, upon his paying
earnest money in the amount of P5,000.00. For his part, Papa, as administrator of the Testate Estate of Butte, filed a third-party
complaint against spouses Arsenio B. Reyes and Amanda Santos, the winning bidders in public auction sale held by the City
Treasurer of Quezon City when the estate of Butte was not able to pay the real estate tax of said property. On 29 June 1987, the
trial court rendered a decision, allowing Papa to redeem from the Reyes spouses and ordering the spouses to allow the former to
redeem the property in question, by paying the sum of P14,000.00 plus legal interest of 12% thereon from 2 January 1980; ordering
Papa to execute a Deed of Absolute Sale in favor of Peñarroyo covering the property in question and to deliver peaceful possession
and enjoyment of the said property to Peñarroyo, free from any liens and encumbrances, and that should that be impossible, for any
reason not attributable to Papa, said Papa was ordered to pay to Peñarroyo the sum of P45,000.00 plus legal interest of 12% from
15 June 1973; ordering Peñarroyo to execute and deliver to intervenor a deed of absolute sale over the same property, upon the
latter's payment to the former of the balance of the purchase price of P71,500.00, and that should that be impossible, Peñarroyo
was ordered to pay Jao the sum of P5,000.00 plus legal interest of 12% from 23 August 1973; and ordering Papa to pay Valencia
and Peñarroyo the amount of P5,000.00 for and as attorney's fees and litigation expenses. Papa appealed the aforesaid decision of
the trial court to the Court of Appeals, alleging among others that the sale was never "consummated" as he did not encash the
check (in the amount of P40,000.00) given by Valencia and Peñarroyo in payment of the full purchase price of the subject lot. He
maintained that what Valencia and Peñarroyo had actually paid was only the amount of P5,000.00 (in cash) as earnest money. The
Reyes spouses, likewise, appealed the above decision. However, their appeal was dismissed because of failure to file their
appellants' brief. On 27 January 1992, the Court of Appeals rendered a decision, affirming with modification the trial court's decision,
by ordering Papa to deliver to Valencia and Peñarroyo the owner's duplicate of TCT 28993 of Angela M. Butte and the peaceful
possession and enjoyment of the lot in question or, if the owner's duplicate certificate cannot be produced, to authorize the Register
of Deeds to cancel it and issue a certificate of title in the name of Peñarroyo; withh costs against Papa. Papa filed the petition for
review on certiorari.
Issue: Whether the alleged sale of the subject property had been consummated, on the presumption that the check in the amount of
P40,000 was encashed.
Held: Valencia and Peñarroyo had given Papa the amounts of P5,000.00 in cash on 24 May 1973, and P40,000.00 in check on 15
June 1973, in payment of the purchase price of the subject lot. Papa himself admits having received said amounts, and having
issued receipts therefor. Papa's assertion that he never encashed the aforesaid check is not substantiated and is at odds with his
statement in his answer that "he can no longer recall the transaction which is supposed to have happened 10 years ago." After more
than 10 years from the payment in part by cash and in part by check, the presumption is that the check had been encashed. He
even waived the presentation of oral evidence. Granting that Papa had never encashed the check, his failure to do so for more than
10 years undoubtedly resulted in the impairment of the check through his unreasonable and unexplained delay. While it is true that
the delivery of a check produces the effect of payment only when it is cashed, pursuant to Article 1249 of the Civil Code, the rule is
otherwise if the debtor is prejudiced by the creditor's unreasonable delay in presentment. The acceptance of a check implies an
undertaking of due diligence in presenting it for payment, and if he from whom it is received sustains loss by want of such diligence,
it will be held to operate as actual payment of the debt or obligation for which it was given. It has, likewise, been held that if no
presentment is made at all, the drawer cannot be held liable irrespective of loss or injury unless presentment is otherwise excused.
This is in harmony with Article 1249 of the Civil Code under which payment by way of check or other negotiable instrument is
conditioned on its being cashed, except when through the fault of the creditor, the instrument is impaired. The payee of a check
would be a creditor under this provision and if its non-payment is caused by his negligence, payment will be deemed effected and
the obligation for which the check was given as conditional payment will be discharged. Considering that Valencia and Peñarroyo
had fulfilled their part of the contract of sale by delivering the payment of the purchase price, they, therefore, had the right to compel
Papa to deliver to them the owner's duplicate of TCT 28993 of Angela M. Butte and the peaceful possession and enjoyment of the
lot in question.
B-81
G. ENFORCEMENT OF LIABILITY
1. Parties primarily liable and parties secondarily liable
Primarily liable
1. The maker is liable the moment he makes the instrument. Section 60, NIL, provides that the maker by making the
promissory note “engages to pay the instrument according to its tenor.”
2. A drawee becomes liable the moment A drawee becomes liable the moment he accepts the instrument. Section 62
provides that the "acceptor, by accepting the instrument, engages that he will pay it according to the tenor of his
acceptance." 882
Secondarily liable
Necessary steps to charge persons secondarily liable in bills of exchange. If one of the following steps is not taken,
the persons secondarily liable are discharged and only the person primarily liable is left to answer for the payment of the
instrument:
(1) In the three cases required by law, presentment for acceptance to the drawee or negotiation within reasonable time
after acquisition883 unless excused. 884 In other cases aside from the three, there is no need for presentment for
acceptance.
(2) If the bill is dishonored by non-acceptance,
(a) notice of dishonor by non-acceptance must be given to persons secondarily liable 885 unless excused886 and, in
case of foreign bills,
(b) protest for dishonor by non-acceptance must be made887 unless excused 888
(3) But if the bill is accepted, or if the bill is not required to be presented for acceptance, it must be presented for
payment to the persons primarily liable889 unless excused. 890
(4) If the bill is dishonored by non-payment,
(a) a notice of dishonor by non-payment must also be given to person secondarily liable 891 unless excused, and, in
case of foreign bill:
(b) a protest for dishonor by non-acceptance must be made892 unless excused.
Necessary steps to charge persons secondarily liable in promissory notes.

(1) Presentment for payment must be made within the period required 893 to the person primarily liable unless excused; 894
and
(2) if the note is dishonored by non-payment, notice of dishonor by non-payment must be given to the persons
secondarily liable895 unless excused.896
Necessary steps to charge persons secondarily liable in other cases.

(1) Protest for non-payment by drawee is necessary to charge an acceptor for honor 897 or a referee in case of need; 898
and
(2) protest for non-payment by the acceptor for honor is also required. 899
Or simply, (1) Protest for non-payment by the drawee. 900
2. General steps in enforcing liability
a. promissory notes
(1) Presentment for payment must be made within the required period to the maker;
(2) Notice of dishonor should be given, if promissory note is dishonored by non-payment by the maker. 901
(1) presentment for payment (Sec. 70, NIL)
Section 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.
Meaning of presentment for payment. "By presentment is meant the production of a bill of exchange to the
drawee for his acceptance, or to the drawee or acceptor for payment or the production of a promissory note to
the party liable far payment of the same." 902 Presentment for payment consists of a (1) personal demand for
payment at the proper place (2) with the bill or note in readiness to exhibit it if required, and to receive payment
and surrender it if the debtor is willing to pay. 903 "A mere informal talk asking payment of a note, not
accompanied with a-presentment of it or intended as .a formal presentment and demand, is not sufficient to put
the note in dishonor. A demand over the telephone is not a sufficient presentment to charge the indorser unless
the maker, by word or conduct, waives the right to ask for an exhibition of the note." 904
882
883
Sections 143 and 144, NIL
884
Agbayani’s comments on Section 148, NIL
885
Section 80, NIL
886
887
Section 152, NIL
888
889
Section 71, NIL
890
891
Section 80, NIL
892
Section 152, NIL
893
Section 71, NIL
894
895
Section 80, NIL
896
897
Sections 165 and 167, NIL
898
Section 167, NIL
899
Section 17, NIL
900
Sundiang, Ibid., p. 129; citing Section 165, NIL
901
Sundiang, Ibid., p. 128; citing Sections 70 and 89, NIL
902
1 Agbayani, Ibid., p. 344; citing Windham Bank v. Norton, 22 Conn. 213, 56 Am. Dec. 379
903
1 Agbayani, Ibid., p. 344; referring to Greese v. Le Monte, 162 N.Y.S. 982
904
1 Agbayani, Ibid., p. 344; citing Gilpin v. Savage, 201 N .Y. 107, 94 N.E. 656
B-82
1. Presentment not necessary to charge persons primarily liable. Presentment for payment is not
necessary in order to charge the person primarily liable. 905 Presentment for payment is not necessary to
charge the person primarily liable on the instrument. This rule applies also to the maker. It can not be
validly claimed that it is the presentment for payment of the bill to the acceptor which is the operative act
that makes the acceptor liable under his acceptance. Before he accepts, the drawee is a stranger to the
bill but from the moment of his acceptance, he becomes bound as a party primarily liable on the
instrument. 906 He is bound according to the tenor of his acceptance and he can not show, as against the
payee, that there was a subsequent agreement between him and the drawer modifying the terms of the
acceptance. 907
* Payable at a special place. This does not mean that the instrument is payable at a specified city, 908
but at, say a bank. 909
* Rule applicable to demand notes. The rule that presentment for payment is not necessary to
charge the person primarily liable on the instrument applies to instruments payable on demand. 910
2. Presentment necessary to charge persons secondarily liable. Presentment for payment to the person
primarily liable is necessary to charge person secondarily liable. Otherwise, they are discharged except as
otherwise provided for. Section 71, read in connection with the last sentence of Section 70 which provides
that "But, except as herein otherwise provided, presentment for payment is necessary in order charge the
drawer and indorsers, simply means that the instrument must be presented for payment on the date and
period therein mentioned to charge the persons secondarily liable such as drawers and indorsers. And the
instrument must be presented on the date of maturity, if it is payable on a fixed date, or within a
reasonable time after issue, if it is a promissory note, or within a reasonable time after last negotiation, if it
is a bill of exchange, otherwise the drawer and indorsers are discharged from liability. 911
Section 51. Right of holder to sue; payment. -- The holder of a negotiable instrument may sue
thereon in his own name; and payment to him in due course, discharges the instrument.
Rights of holder in general. The following are the rights of a holder in general: (1) he may sue on the
instrument in his own name; and (2) he may receive payment and if the payment is in due course, the
instrument is discharged.912
Right to sue. The holder of a negotiable instrument may sue in his own name, even if he be a holder only for
collection, 913 or as a pledge of the instrument. 914 A holder of a bill of exchange can file an action in his own
name. 915
Right of transferee of unindorsed instrument. There is a conflict of opinion as to whether the possessor of
an unindorsed instrument payable to order may sue in his own name. 916 It is believed, however, that such a
possessor may sue in his own name if the transferor could have done so. Under Section 49, a transfer for
value, but without indorsement, of an instrument which is payable to order vests in the transferee such title as
the transferor had therein. 917
Effect of payment to the holder. The payment in due course to the holder of an instrument discharges the
instrument. Payment in due course is payment "made (1) at or after the maturity of the instrument (2) to the
holder thereof (3) in good faith and without notice that his title is defective." 918
(2) notice of dishonor (Sec. 89, NIL)
Section 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.
Meaning of notice. By notice of dishonor is meant bringing either verbally or by writing, to the knowledge of the
drawer or indorser of an instrument, the fact that a specified negotiable instrument, upon proper proceedings
taken, has not, been accepted or has not been paid, and that the party notified is expected to pay it. 919
Necessity and purpose of notice. When an instrument is dishonored by (1) non-acceptance (bill) or (2) non-
payment (both bill and note), notice of such dishonor must he given to persons secondarily liable, namely, the
drawer, (in a bill), and indorsers, as the. case may be (in both a bill and a note) . Otherwise, such parties are
discharged. 920
Burden of proof. Under the law of procedure, it will be incumbent upon the plaintiff who seeks to enforce the
defendant's liability upon a negotiable instrument 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 instrument in question had
been dishonored. Where these facts are not proven, the plaintiff does not sufficiently establish the defendant's
liability. Where there is no proof in the record tending to show that plaintiff gave any notice whatsoever to the
defendant that the instrument in question had been dishonored, said plaintiff has not established its cause of
action. 921
Persons primarily liable need not be notified. Persons primarily liable, such as, makers or acceptors, need
not be given notice of dishonor because they are the very ones who dishonor the instrument. Thus, a joint
905
1 Agbayani, Ibid., p. 344; citing last sentence. Sec. 70; Clark v. Sellner, 42 Phil. 384
906
1 Agbayani, Ibid., pp. 344-345; citing Union Guaranty Co. v. Jing Kee & Co. 44 Phil. 533 ; Anglo, etc. Nat. Bank v. Jacobson Co. 1187 N.Y. Supp. 508
907
1 Agbayani, Ibid., p. 345; citing Prudential Bank & Trust Co. v. Ramesh Trading Co., C.A. 32908-R, pt. !0, 1964, citing Mason v. Graff, 35 Pa. 488;
McClendon v. Bank, 188 0. App. 417; 147 S.W. 203; cited in Tolentino, supra.
908
1 Agbayani, Ibid., p. 345; citing Corbett v. Ulsaker Printing Co., 190 N.W. 75, 24 A.L.R. 1047
909
1 Agbayani, Ibid., p. 345; citing Maddach v. McDonald, 277 Pac. 463
910
1 Agbayani, Ibid., p. 345; citing Shuman v. Citizens' State Bank, 147 N.W. 388, L.R.A. 1915-A, 728
911
1 Agbayani, Ibid., pp. 345-346; citing Prudential Bank & Trust Co. v. Ramesh Trading Co., C.A. 39208-R, Sept. 10, 1964
912
913
1 Agbayani, Ibid., p. 278; citing Brannan , 7th ed., p. 667, citing cases
914
1 Agbayani, Ibid., p. 278; citing Brannan , 7th ed., p. 666, citing Flourney vs. Sprage, 214 SW 183; and other cases.
915
1 Agbayani, Ibid., p. 278; citing Westminister Bank Ltd. Vs. Torres, 57 Phil. 422
916
1 Agbayani, Ibid., p. 278; citing American Soda Fountain Co. vs. Rogue, 116 NW 339, 17 LRA (NS) 1113; Palmer vs. Brook, 39 NWS 511
917
1 Agbayani, Ibid., p. 278; referring to Brannan. 7th ed., pp. 676-674
918
919
1 Agbayani, Ibid., p. 362; citing Martin v. Browns, 75 Ala. 442; Ticonic Bank v. Stackpole, 41 Me. 321, 66 Am. Dec. 246. As to notice of demand, non-
payment, and protest m general, see note 5 U.S.L. Ed. 215; see also notes under Sec. 96, NIL. 28 See summary under Sec. 70.
920
1 Agbayani, Ibid., p. 362.
921
1 Agbayani, Ibid., pp. 362-363; referring to Asia Banking Corporation v. Juan Javier, 44 Phil. 777, 779
B-83
maker, though a surety, is not an indorser and is primarily liable, and therefore, is not entitled also to notice of
dishonor. 922 Even an accommodation maker is not entitled to notice. 923
Instrument payable in installments. Whether failure to give notice of the dishonor of a previous installment to
persons secondarily liable, also discharge them on the succeeding installments, depends upon whether the
instrument contains an acceleration clause or not. 924
1. Rule where no acceleration clause. Where the instrument contains no acceleration clause, failure to give
notice of dishonor on a previous installment does not discharge drawers and indorsers as to the
succeeding installments, and therefore, the holder can file an action against them for such succeeding
installment provided that, as to such succeeding installments, notice is given. 925 The reason is that each
installment is equivalent to a separate note. 926
2. Rule where instrument contains acceleration clause. Where the instrument contains an acceleration
clause, it depends upon whether the clause is optional or automatic. Where the acceleration clause is not
optional but automatic, failure to give notice of dishonor as to a previous installment will discharge the
persons secondarily liable as to the succeeding installments. 927 Where the acceleration clause is optional
and it is not exercised, the rule would be the same as where there is no acceleration clause. If it is
exercised, the rule would be the same as where the installment contains an automatic acceleration clause.
928
Exceptions to requirement of notice. The law provides for some exceptions to the rule that failure to give
notice to the drawer and indorser will discharge them. 929
b. bills of exchange
(1) Presentment for acceptance or negotiation within a reasonable time after it was acquired - should be made only
in the instance, required in Section 143.
(2) If dishonored by non-acceptance:
(i) Notice of Dishonor should be given to the indorsers and drawer.
(ii) the bill is a foreign bill, there must be protest for dishonor by non-acceptance.
(3) If the bill is accepted:
(i) presentment for payment to the acceptor should be made.
(ii) If the bill is dishonored upon presentment for payment.
(a) Notice of dishonor must be given to person secondarily liable.
(b) If the bill is a foreign bill, protest for dishonor by non-acceptance must be made. 930
(1) presentment for acceptance (Sec. 143, NIL)
Section 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.
Presentment for acceptance, defined. It is the production of a bill of exchange to the drawee for his
acceptance. 931 Presentment for acceptance consists of exhibiting the bill to the drawee and demanding that he
accepts it, i.e. signify his assent to the order or command of the drawer. It is required only in certain kinds of
bills of exchange.932
Payment not equivalent to acceptance or certification. The payment of a forged check does not include or
imply its acceptance in the sense that this word is used in Section 62 of the Negotiable Instruments Law. 933
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. 934
General rule as to presentment for acceptance. The general rule stated in these sections is that presentment
for acceptance is not necessary to render any party to the bill liable except in the three cases enumerated in
Section 143. In those three cases, to charge persons secondarily liable, it is necessary (1) to make presentment
for acceptance or (2) to negotiate the bill within reasonable time. So, even when no presentment for acceptance
is made. if the bill is negotiated within a reasonable time, the persons secondarily liable thereon are not
discharged. Of course, there is nothing wrong in making a presentment for acceptance in the other cases.
Indeed, it is a usual course to present such bills for acceptance. And if the bill is dishonored by non-acceptance,
the holder may treat the bill as if it had required acceptance. 935 Section 143 may be illustrated as the following:
(1) Where the bill is payable after sight. A bill is payable 30 days after sight. The law requires this bill to be
presented for acceptance. The date of maturity will not be fixed if the bill is not presented.
(2) Where there is express stipulation. The bill contains a stipulation that it must be presented for acceptance.
Such a bill must be presented for acceptance.
(3) Where bill is drawn elsewhere than at the residence of drawee. 936
922
1 Agbayani, Ibid., p. 363; citing Rouse v. Wooten, 53 S.E. 430
923
1 Agbayani, Ibid., p. 363; citing Folker v. Botaman's Bank, 225 S.W. 306
924
925
1 Agbayani, Ibid., p. 363; citing Hopkins v. Merrill, 66 Atl. 174
926
1 Agbayani, Ibid., p. 363; citing Elworhty v. Hess, 9th App. 200
927
1 Agbayani, Ibid., p. 363; citing Bellenbach v. Ludlum, 201 Pac. 982
928
1 Agbayani, Ibid., p. 363; citing Anderson v. Sperry, 284 Pac. 102
929
1 Agbayani, Ibid., pp. 363-364. These exceptions are those stated in Sees. 109, 112, 114, 115, 116, 117.
930
931
1 Agbayani, Ibid., p. 430; citing Windham Bank vs. Norton, 22 Conn. 213, 56 Am. Dec. 397.
932
933
1 Agbayani, Ibid., p. 221; citing Phil. Nat. Bank v. Nat. City Bank, 63 Phil. 711, 745; see also 69 A..L.R. 1076, 1077, quoted on p. 721
934
Ibid., p. 722
935
1 Agbayani, Ibid., pp. 430-431; citing Champion v. Gorden. 10 Am. Rep. 581
936
B-84
(a) how made (Sec. 132-135 & 137, NIL)
Acceptance. Acceptance is the signification by the drawee of his assent to the order of the drawer, as per
Section 132. It is an act by which a person on whom the bill of exchange is drawn (drawee) assents to the
request of the drawer to pay it. 937 It is usually done in writing across the face of the bill the word
“accepted,” followed by the signature of the drawee. The term “acceptance” has therefore a technical
meaning under the NIL. It should not be used as the equivalent of “receive.” As to checks, the y are
generally certified instead of being accepted. The certification of a check is usually done by stamping on
the check the word “certified” and underneath it is written the signature of the proper officer of the bank.
Certification is equivalent to acceptance, as per Section 187 NIL.938
Section 132. Acceptance; how made and so forth. -- The acceptance of a bill is the
signification by the drawee of his assent to the order of the drawee. 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.
Requisites of actual acceptance. Actual acceptance must be (1) in writing, and (2) signed by the
drawee. In addition, (3) it must not express that the drawee will perform his promise by any other means
than the payment of money. and (4) it must be communicated or delivered to the holder. 939
Acceptance must be in writing. The acceptance can not be made orally. The reason is that: "sound
public policy requires some substantial and tangible evidence of contract, and more reliable in its nature
than the statement or recollection of witnesses." 940 An oral acceptance is not binding on the drawee. 941
Thus, acceptance by telephone is not acceptance. 942
Acceptance, how made. It is usually done by writing across the face of the bill the word "accepted"
followed by the signature of the drawee. But any words written by the drawee not negativing directly the
order of the drawer, would constitute sufficient acceptance, such as, "holder," "presented," or "seen"; 943 or
"honored' or "I will pay this bill" or the signature of the drawee, without more. 944 Acceptance by telegram
has been held sufficient. 945 And such acceptance by telegram when the bill is properly identified seems
entirely unobjectionable and accords with the best interest of the business world . 946
When acceptance not required. In general, acceptance in the sense in which the term is used in the
Negotiable Instruments Law is not required for checks, for the same are payable on demand . 947
The drawee must sign. Without the signature of the drawee, he would not be bound, pursuant to the
principle enunciated in Section 18. 948
949
Payment in money. The acceptance must be expressed to be payable in money only.
Necessity of delivery. The acceptance is incomplete until delivery or notification. 950 And the acceptor or
drawee who has not communicated his acceptance or transmitted the accepted bill to the holder, may
revoke an acceptance before delivery and cancel the written acceptance. 951
Effect of acceptance. Upon acceptance, the drawee becomes liable on the bill. 952 The bill becomes in
effect a note, the acceptor standing in the place of the maker, and the drawer, in the place of the first
indorser. 953 But should the drawee refuse to accept, the payee or other holder has no recourse against him
but only against the drawer and indorsers, if any. 954
Payment not acceptance. Payment is not equivalent to acceptance. The payment of a check does not
include or imply its acceptance in the sense that this word is used in Section 62 of the Negotiable
Instruments Law. 955 In general, "acceptance" in the sense in which this term is used in the Negotiable
Instruments Law, is not required for checks, for the same are payable on demand. Indeed, "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" 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 check, is the 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
drawee's obligation to pay the aforementioned sum, but also a compliance with such obligation. 956
Section 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.
Section 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.
937
1 Agbayani, Ibid., p. 421; citing Swope vs. Ross, 40 Pa. St. 186, 80 Am. Dec. 567
938
939
940
1 Agbayani, Ibid., p. 422; citing Selma Sav. Bank v. Webster Country Bank, 206 S.W. 87
941
1 Agbayani, Ibid., p. 422; citing Brannan, 7th ed., 1229, citing Bank of Magazine v. Triddle, 14 S.W. 2d 238, and other cases
942
1 Agbayani, Ibid., p. 422; citing Dean v. Eastern Shore Trust Co., 150 Atl. 797
943
1 Agbayani, Ibid., p. 422; citing Spear v. Pratt, 38 Am. Dec. 600, Alvares v. Vargas, 35 Phil. 1
944
1 Agbayani, Ibid., p. 422; citing Lawless v. Temple, 150 N.E. 176
945
1 Agbayani, Ibid., p. 422; citing Florence Bank v. Clark, 61 Md. 400, 48 Am. Rep. 114; Garrettsan v. North Atchison Bank, 39, 163, 7 L.R.A. 428. See
also note 4 U.S.L. Ed. 185
946
947
1 Agbayani, Ibid., p. 422; citing PNB v. Court of Appeals, et. al., L-26001, Oct. 29, 1968, 25 SCRA 693, 697; PNB v. National City Bank of New York,
63 Phil. 711; Wachtel v. Rosen, 249 N.Y. 386, 164 N.E. 326
948
949
950
1 Agbayani, Ibid., p. 422; citing First Nat. Bank of Murfreesboro v. First National Bank of Nashville, 127 Tenn. 205, 154 S.W. 965
951
1 Agbayani, Ibid., pp. 422-423; citing Robbins v. Lambeth, 2 Rob. (La.) 304; lrving bank v. Wetherald, 36 N.Y. 335; German Nat. Bank v. Farmers Dept.
Nat. Bank, 118 Pa. St.. 294, 12 Atl. 303; Guthrie Nat. Bank v. Gill, 7 Okla., 560, 54 Pac. 434
952
953
1 Agbayani, Ibid., p. 423; citing Schirone v. Hecheiser & Weisberg, Inc., 262 N.Y.S. 763
954
1 Agbayani, Ibid., p. 423; citing Phil. Nat. Bank v. Nat. Citv Bank. 63 Phil. 711, 745
955
1 Agbayani, Ibid., p. 423; citing Phil. Nat. Bank v. Court of Appeals, 25 SCRA 698 (1968)
956
B-85
Section 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.
Where acceptance may be written. Acceptance may be made

(1) on the bill itself, or
(2) on a separate paper; and if on a separate paper
(a) it may be acceptance as to an existing bill; or
(b) it may be an acceptance as to a non-existing bill. If the bill is non-existent, the acceptance on a
separate paper must comply with the following requirements:
(1) That the contemplated drawee shall describe the bill to be drawn, and promise to accept it.
(2) That the bill shall be drawn within a reasonable time after such promise is written; and
(3) That the holder shall take the bill upon the credit of the promise." 957
Right to require acceptance on bill. Under Section 133, the holder has the right to require that the
acceptance must be written on the bill itself. If the drawee refuses, the holder may treat the bill as
dishonored, and he must, therefore, give notice of dishonor. Otherwise, persons secondarily liable are
discharged. This section is not confined to sight bills but is applicable to all bills of exchange. 958
Section 134. The section is complied with it the payee of a bill writes to the drawee, asking him whether
he would accept the bill; with drawee writing back (or telegraphs) stating that he accepts the bill. But a
telegram that a draft "is good" in answer to a telegram asking a bank if it would pay the draft is not an
acceptance nor an agreement to accept. 959 The court reasons that "good" constitutes an acceptance if
written on the bill or check but not when written in a collateral document such as a telegram. 960 So also, a
telegram by a drawee bank that it had funds to pay a specified draft was held not to be an acceptance of
that draft . 961
Section 135. Before the bill is drawn, a prospective payee, writes to the prospective drawee, if the latter
would accept the former's bill. The prospective drawee writes (or telegraphs) "yes". The promise to accept
must be in writing. But although the acceptance of a bill may be conditional, a collateral written promise to
accept a bill upon a condition is not an acceptance. 962
Variance between Sections 134 and 135. The variance in wording between Sections 134 and 135
should be noted. Section 134 provides that an extrinsic acceptance must be in writing and is good only to
persons to whom it is shown; while Section 135 provides that a promise to accept is good to any person
who "upon faith thereof receives the bill for value." Accordingly, under Section 135, it does not seem
necessary that the separate acceptance be shown. It is enough if the separate acceptance is that the bill is
received on faith of the separate acceptance. 963
Section 137. Liability of drawee retaining 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.
Constructive acceptance. Section 137 treats of constructive acceptance. This class of acceptance is not
in writing. There is constructive acceptance (1) where the drawee to whom the bill is delivered for
acceptance destroys it; or (2) where the drawee refuses, within 24 hours after such delivery, or within such
time as is given him, to return the bill accepted or not accepted. In any of these cases, the drawee will be
deemed to have accepted the bill even if there is no actual written acceptance by him. Accordingly, the
drawee will be primarily liable as an acceptor. 964
Drawee not entitled to keep bill. The drawee is not entitled to keep the bill while he makes up his mind.
Section 136 makes no such provision. The bill is at all times the property of the holder and he is entitled to
have it when he wants it, and Section 137 so provides. If the holder should demand its return before
twenty-four hours, the drawee would be required to comply on pain of being held as an acceptor; but
return within twenty-four hours unaccepted would not be a dishonor. The drawee could still accept by
notification within the twenty-four hours. Here, an extrinsic acceptance under Section 134 would play an
important part. If the drawee, after returning the bill, still refused to act after the expiration of the time
allowed, the holder then would be required to treat the bill as dishonored or lose his rights against prior
parties. 965
Mere retention is equivalent to acceptance. There is a conflict of authority as to whether mere retention
of a bill by the drawee is acceptance or not. But the overwhelming weight of authority is to the effect that
mere failure to return the bill within twenty-four hours is an acceptance. 966 Thus, it has been held that 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. 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 bank
for payment was an acceptance of the check upon which the holder could recover against the bank,
although the delay was due to the neglect of the notary public to whom the check was handed by the
drawee bank to protest on the day of its receipt by the bank. 967
Sections 136 and 137 cover presentment for acceptance and payment. Sections 136 and 137
expressly cover only presentment for acceptance and presentment for payment is not mentioned. But it
does not necessarily follow that because the law is silent as to presentment for payment that the result
should be different from the case of presentment for acceptance. The considerations involved in both
cases are the same. 968 Although the law is silent on the point of how long the drawee may take to pay, the
rule of the Wisner case fills this gap by requiring promptness on the part of the drawee. Thus, he must
return the instrument or be liable for its face value as acceptor. This rule forces uniform treatment of
957
1 Agbayani, Ibid., p. 423; citing Ogden. 5th ed., p. 170
958
1 Agbayani, Ibid., p. 423; referring to Nat. Park Bank v. Saitta, 1111 N.Y. Supp. 927
959
1 Agbayani, Ibid., p. 424; citing Colcord by Banco des Tamaulipas, 168 N.Y. Supp, 710. Decision is adversely criticized
960
1 Agbayani, Ibid., p. 424; referring to Brannan, 1237
961
1 Agbayani, Ibid., p. 424; citing Night & Day Bank v. First Nat. Bank, 91 S.O. 405
962
1 Agbayani, Ibid., p. 424; citing Muller v. Kling, 133 N. Y., Supp. 614
963
1 Agbayani, Ibid., p. 425; Agbayani stating that This has been considerably criticized by legal writers. Brannan, 7th ed., 1239.
964
965
966
1 Agbayani, Ibid., p. 426; citing Branhan. 7th ed., 1249
967
1 Agbayani, Ibid., p. 426; citing Wisner v. First Nat. Bank, 68 Atl. 955
968
1 Agbayani, Ibid., p. 426; referring to Sections 136, 137, 150, 155, 103, and 104
B-86
instruments whether presented for payment or acceptance and establishes certain and predictable results
where it is not clear for which purpose the instrument was presented. 969
(b) time to accept (Sec. 136, NIL)
Section 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.
The time allowed begins from the time of delivery and not after demand for a return of the bill and the time
for returning the bill to the holder does not begin to run from the demand for its return but from the date of
its delivery. 970
Section 136 not applicable to checks. But a drawee bank is not entitled to 24 hours to decide whether to
pay a check or not since a check is presented for payment, not acceptance. 971 But, of course, if the check
is presented for certification, this ruling will not apply, as certification is equivalent to acceptance. 972
Negligence of Drawee. The drawee bank contends that the collecting bank is guilty of negligence in not
discovering that the signatures of the drawer are forged. Assuming this to be true, the drawee bank is
guilty of a greater degree of negligence because it had a previous and formal notice from the drawer that
the check had been lost, with the request that payment thereof be stopped. The collecting bank did not
cash the check upon its presentation by the last indorser; it merely deposited it in the current account of
the indorser and on the same day sent it for clearing through the Central Bank. The drawee bank did not
return the check and said failure to return the check implied that it considered the check good and would
honor it, as it in fact did honor and pay. The drawee bank may not recover from the collecting bank. 973
(c) rule when incomplete bill is accepted (Sec. 138, NIL)
Section 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 non-payment. But when a bill payable
after sight is dishonored by 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.
When acceptance may be made. Acceptance may lm made

(1) before the bill has been signed by the drawer;
(2) even when the bill is otherwise incomplete;
(3) even when the bill is overdue; or
974
(4) even after it has been dishonored by non-acceptance or by non-payment.
(d) kinds of acceptance (Sec. 139-142, NIL)
Section 139. Kinds of acceptance. -- An acceptance is either general or qualified. A general

acceptance assents without qualification to the order of the drawer. A qualified acceptance in
express terms varies the effect of the bill as drawn.
Section 140. What constitutes a general acceptance. -- An acceptance to pay at a particular

place is a general acceptance unless it expressly states that the bill is to be paid there only
and not elsewhere.
Section 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.
Kinds. Acceptance may be (1) actual, (2) constructive, 975 (3) general or (4) qualified. 976 A general
acceptance is one that "assents without qualification to the order of the drawer.” A qualified acceptance is
one “which in express terms varies the effect of the bills drawn.” 977
Section 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 is taken, the drawer and
indorsers are discharged from liability on the bill, unless they 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.
969
1 Agbayani, Ibid., p. 426; referring to Brannan, 7th ed., 1250-1251
970
1 Agbayani, Ibid., p. 425; citing Wisner v. Bank of Gallitzin, 220 Pa. 21
971
1 Agbayani, Ibid., p. 425; referring to Guardian Nat. Bank v. Huntington County State Bank, 178 N.E. 574.
972
973
1 Agbayani, Ibid., p. 426; citing Phil. Nat. Bank v. Court of Appeals, 25 SCRA 698 (1968)
974
975
976
977
1 Agbayani, Ibid., p. 428; citing third sentence, Section 139, NIL
B-87
Right of holder to require general acceptance. The holder has the right to require the drawee to accept
the bill without qualification. If the drawee refuses, the holder can treat the bill as dishonored by non-
acceptance. 978 Accordingly, the holder must give notice of dishonor.
Effect of taking qualified acceptance. Where the holder takes a qualified acceptance, the drawer and
indorsers are discharged. The reason for this is that the drawer and the indorsers warrant that the bill
would be paid as drawn, or as indorsed by them, and a qualified acceptance would vary their contract
without their consent. But, of course, if the drawer and the indorsers expressly or impliedly give their
consent to the qualified acceptance, they, are not discharged. And a drawer or an indorser will be
considered to have consented if, after receiving notice of the qualified acceptance, he does not express his
dissent thereto within a reasonable time. 979
(2) if dishonored by non-acceptance
(a) notice of dishonor (Sec. 89, NIL)
Section 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.
(discussed above in same chapter)
(b) rule in case of foreign bills (See provisions on protest)
Section 152. In what cases protest necessary. -- Where a foreign bill appearing on its face to be
such is dishonored by non-acceptance, it must be duly protested for non-acceptance, and where
such bill which has not previously been dishonored by non-acceptance is dishonored by non-
payment, it must be duly protested for non-payment. 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.
Necessity of protest. Protest is required only for foreign bills, but not for inland bills or notes. However, they
may also be protested if desired. Omission of protest, where protest is required, will discharge the drawer and
the indorsers. 980 Protest is required: (1) where the foreign bill is dishonored by non-acceptance; (2) where the
foreign bill is dishonored by non-payment, it not having been previously dishonored by non-acceptance; (3)
where the bill has been accepted for honor, it must be protested for non-payment before it is presented for
payment to the acceptor for honor; or (4) where the bill contains a referee in case of need, it must be protested
for non-payment before it is presented for payment to the referee in case of need; as per Section 167, NIL.
Meaning of protest. "By protest is meant a formal statement in writing made by a notary under his seal of
office at the request of the holder of a bill or note, in which it is declared that the same was on a certain day
presented for payment (or acceptance as the case may be), and such payment (or acceptance) was refused,
whereupon the notary protests against all parties to such instrument and declares that they will be held
responsible for all loss or damage arising from its dishonor." 981 In its popular sense, "it means all the steps or
acts accompanying the dishonor of a bill or note necessary to charge an indorser." 982
Section 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.
Procedure for protest. Where the instrument is presented for payment and payment is refused, the instrument
may be taken by a notary public to the party and the party may state that he refuses to pay it; the notary makes
a statement to that effect and attaches his seal that it has been dishonored, and that he has protested it for non-
payment. The notary keeps this or he may send his sworn statement, one copy to one person and one to the
other. 983 This is the protest. It is not the notice of protest. The protest is a solemn declaration made by the
notary public that the paper has been dishonored. 984
Certificate of protest as evidence. When suit is brought on the paper, it is absolutely necessary that proof be
shown. So when one comes to prove his case as the holder of an instrument he must prove that there has been
a protest of the instrument, that it has been presented for payment or acceptance to the person liable and that it
has been refused. That is part of his case. And at the trial, this statement of the protest by the notary is a part of
his case. It is the same as a deposition. It can go in as evidence anywhere and will prove the case, just as the
same as a deposition. This certificate is generally accepted as evidence of the facts set forth in its terms, and its
production obviates the necessity of proof of these facts by witnesses in open court. The main purpose of the
protest, therefore, is to furnish to the holder legal testimony of presentment, demand, and notice of dishonor, to
be used in an action against the drawer and indorsers. And the notary's certificate of protest is only evidence of
those facts which are stated therein which it is the duty of the notary to note in making presentment and
demand for payment. Collateral facts noted by the certificate must be proved by other evidence. 985
Notice of protest. After the notary protests the instrument, he sends notice to all the parties on the instrument.
He can do this in several ways. He might send it to the person who sent the paper in for collection. Then the
978
1 Agbayani, Ibid., p. 429; referring also to Section 133 where acceptance on the bill itself is refused.
979
980
1 Agbayani, Ibid., p. 435; referring to N. O. Behn Meyer & Co. v. Corp., R. L-537, May 29, 1953
981
1 Agbayani, Ibid., pp. 435-436; citing Ocoll Bank v. Huges, 42 (Co1dw.) 52; Williams v. Parks, 62 Neh. 747, 89 N.W. 395, 56 L.R.A. 759
982
1 Agbayani, Ibid., p. 436; citing 8 C.J. 622
983
1 Agbayani, Ibid., p. 436; citing Leftley v. Mills, 4 T.R. 170; Gale v. Walsh, 5 T.R. 170; Rogers v. Stephens, 2 T.R. 713. As to what facts certificate of
notary is evidence, see note 2 U.S. L. ed. 102
984
1 Agbayani, Ibid., p. 436; citing Swayze v. Britton. 17 Kan. 625. As to protest as sufficient evidence, see note 36 Am. St. Rep. 685
985
B-88
notary public would send his notice of protest for the other parties on the instrument, to the last person on the
instrument, and he would say, “Notices enclosed herewith to be sent to the other parties.” If the holder has sent
notice to all the parties he is entitled to come in and recover because he has performed his contract. He has
sent notice to all the parties on the instrument that he intends to recover against them. If the indorsee sent
notice to all the other indorsers, he can proceed against all or any one of them. A prior indorser gets the notice
and he sends out notices to those who preceded him and that holds them but they will be held already by the
notices sent them by the other party. It is just performing the contract which was entered into in the way a
merchant would do it. It is performing the contract which was entered into originally so that he may come within
its terms. 986
Reasons for requiring protest. Protest is required: (1) for uniformity in international transactions because
most countries 'require it and (2) in order to furnish authentic and satisfactory evidence of the dishonor to the
drawer who, from his residence abroad, may experience difficulty in verifying the matter and may be forced to
rely on the representations of the holder. 987
Measure of damages. As the Negotiable Instruments Law does not fix the damages, under Section 196, the
law merchant will govern. Under the law merchant, the damages are: (1) the face value of the bill; (2) interest
thereon; (3) protest fees; (4) re-exchange, being the additional expense of procuring a new bill for the same
amount payable in the same place on the day of dishonor. 988
Section 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.
Section 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.
Meaning of "duly noted" By the term "duly noted" is meant that the notary public jots down a note on the bill,
or a paper attached thereto, or in his registry book, consisting of his initials or signature and those matters
required to be stated in Section 153. The noting must be made on the day of dishonor but it may be extended
into a formal protest afterwards. The protest may even be made at the trial. 989
Section 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 non-acceptance, 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.
Place for making protest. Generally, the protest must be made at the place where the instrument is
dishonored. The exception is where the bill is payable at a place other than the residence of the drawee. 990
Section 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.
Protest for non-payment optional after protest for non-acceptance. Where a bill has already been
protested for non-acceptance, protest for non-payment is merely optional. Under Section 151, after a bill has
been dishonored by nonpayment, acceptance for presentment for is not necessary. 991
Section 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.
Protest for better security. One made by the holder against the drawer and indorsers 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. Such a protest is not necessary to charge the drawer and the indorsers. It is optional on the part of the
holder. 992
When protest for better security made. A protest for better security must be made: (1) after acceptance, (2)
but before the date of maturity, and (3) when the acceptor has been adjudged bankrupt or insolvent or has
made an assignment for the benefit of creditors. 993
Purpose of protest for better security. When the acceptor is declared bankrupt, he probably would not be
able to pay for the bill. The protest for better security is to give notice to the drawer and the indorsers of this fact
in order to enable them to make the necessary arrangements so that they will not be held liable thereon and
prevent loss of reexchange. 994
Section 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.
986
987
1 Agbayani, Ibid., p. 439; referring to Ogden, supra
988
1 Agbayani, Ibid., p. 439; citing Pavestedt v. N.X. Life Ins. Co., 96 N.E. 104
989
1 Agbayani, Ibid., p. 440; referring to Daniel on Neg. Inst. par. 939
990
991
1 Agbayani, Ibid., p. 441; referring to Section 152
992
993
994
B-89
Protest of a check payable abroad is dispensed with if the drawer has no fund with the drawee bank to pay the
check. 995 Neither is protest necessary where the drawee was a non-existent bank 996 or the drawer has
countermanded payment. 997 But protest of a check payable abroad is not dispensed with if the drawer bona fide
believed a sufficient credit had been established at the drawee bank to pay the check . 998
Section 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.
Effect of loss or destruction of bill. Loss or destruction of the bill does not excuse the making of protest. In a
case, checks indorsed without restriction and deposited in the defendant bank which credited the amount to the
depositor's account and mailed them to its correspondent for collection, were lost and not found until after the
drawer became bankrupt. They were not dishonored due to the failure of defendant to attempt to collect them
as lost paper. It was held that the bank must stand the loss and cannot charge the amount of the checks to the
depositor's account. 999
(3) If accepted:
(a) presentment for payment to acceptor

(b) rule if dishonored upon presentment for payment
(c) rule in case of foreign bill
3. Presentment for payment
Presentment for payment consists of exhibiting the instrument to the person primarily liable thereon and demanding
payment from him on the date of maturity. This is required for all kinds of negotiable instruments. 1000
a. Concept of presentment
b. Requisites for sufficiency (Sec. 72, NIL)
Section 72. What constitutes a 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.
Application of Section 72. This section establishes the requisites for a sufficient presentment for payment. If the
presentment made does not comply with any of these requisites, it is not sufficient. The effect is the same as if no
presentment is made, namely, the persons secondarily liable are discharged. 1001
Who makes presentment. Presentment for payment must be made by the holder of the instrument or by some
person authorized to receive payment on his behalf. A presentment for payment of a promissory note by a bank
having it for collection is sufficient. 1002
Time for making presentment. Presentment must be made "at a reasonable hour on a business day." What is
reasonable hour on a business day depends upon the general custom at the place of the particular transaction. 1003
Presentment for payment cannot be made on a Sunday or holiday. 1004
Where presentment is made. The proper place is as clarified in Section 73. 1005
To whom presentment is made. Presentment for payment is to be made to the maker, if a note, or to the acceptor,
if a bill, not to the person secondarily liable. A clerk found at the counting room of the acceptor or promissor is a
competent party for presentment for payment to be made to without special authority given him. 1006 So also where a
note is payable at a certain store, presentment for payment at such a store to a person connected therewith is
sufficient and no personal demand an the maker is necessary. 1007
(1) date of presentment (Sec. 71, NIL)
Section 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, but in the case of a bill of exchange, presentment for payment will be sufficient
if made within a reasonable time after the last negotiation thereof.
When payable at a fixed or determined time. When must presentment for payment be made. It depends
upon whether the instrument is payable at a fixed or determinable future time or on demand. Where the
instrument is payable at a fixed or determinable future time, the presentment must be made on the date of
maturity. 1008
995
1 Agbayani, Ibid., pp. 441-442; citing Ellenbogen v. State Bank, 197 N.Y. Supp, 278
996
1 Agbayani, Ibid., p. 442; citing Lewis v. Chelsea Exch. Bank, 421 N.Y. Supp, 639
997
1 Agbayani, Ibid., p. 442; citing First National City Bank v, Korn, 179 S.W, 721
998
1 Agbayani, Ibid., p. 442; citing Kardynal v. Grezenzsinski, 382 N.W. 213
999
1 Agbayani, Ibid., p. 442; citing Heinrich v. First National Bank of Middletown 113 N.E. 531; See also Arts. 448 and 449, Code of Commerce., supra
1000
1001
1002
1 Agbayani, Ibid., p. 348; citing Caine v. Foreman, 289 Pac. 929
1003
1 Agbayani, Ibid., p. 348; citing Columbia Banking Co. v. Brown, 114, 541
1004
1005
1006
1 Agbayani, Ibid., p. 349; citing Steward v. Eden, 2 Canines (N.Y.); Draper v. Clemeno, 4 Mo. 52; Stainback v. Clemeno, 11 Gratt (Va.) 260
1007
1 Agbayani, Ibid., p. 349; citing Nelson v. Grandahl, 1 N.W. 1093
1008
B-90
When payable on demand in case of notes. Where the instrument is payable on demand, the time for
presentment depends upon whether the instrument is a bill or a note. If the instrument is a note, it must be
presented for payment within reasonable time for issue. 1009
When payable on demand in case of bills. If the instrument is a bill, it must be presented for payment within
reasonable time from last negotiation, not from issue, as in the case of notes. The last negotiation means the
last transfer for value, and subsequent transfers between banks for purposes of collection are not negotiations
within this section. Consequently, the requirement of reasonable time begins to run from the last taking for
value. 1010
(a) rule in determining maturity date (Sec. 85, NIL)
Section 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
instrument is payable on the next succeeding business day. Instruments falling due or
becoming payable on Saturday are to be presented for payment on the next succeeding
business day, except instruments payable on demand which 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.
Payment where instrument payable at fixed time. Where the instrument is payable on a fixed date, no
grace is to be granted. Hence, presentment must be made on that date. But where the fixed date falls on a
Sunday or a holiday, it is payable on Monday or the succeeding business day. Presentment must,
therefore, be made on that succeeding business day. Where a bill is payable on a fixed date, which
happens to be a Saturday, the bill is said to be instrument falling due on a Saturday. Where a bill is
payable on a fixed date, which falls on a Friday, and supposing that Friday is a holiday, the bill is said, to
have become payable on a Saturday. Where the instrument falls due on a Saturday or becomes payable
on a Saturday, the time for making presentment depends upon whether the instrument is payable at a
fixed or determinable future time or on demand. Where the instrument is payable at a fixed or
determinable future time, in both cases, presentment must be made on the next succeeding business day.
Where the instrument is payable on demand, in both cases, presentment must be made on Saturday
before noon or on the Monday thereafter, at the option of the holder. 1011
(b) rule in computing time (Sec. 86, NIL)
Section 86. Time; how commuted. -- When the instrument is payable at a fixed period after
date, after sight, or after that 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.
It must be remembered that on the day of payment, the party liable is entitled to the whole of that day
within which to make payment. 1012
(c) rule if payable at a bank (Sec. 75, NIL)
Section 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.
Application of Section 75. This section applies to an instrument which is payable at a bank. The banking
hours are from 9:00 A.M. to 2:30 P.M. from Monday to Friday. There are no banking hours on Saturday.
Consequently, presentment for payment must be made between 9:00 A.M. to 2:30 P.M. on ordinary days.
Otherwise, the presentment would not be sufficient, and persons secondarily liable on the bill are discharged.
But 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 funds there enough to pay it, a
demand earlier in the day is premature. 1013
When presentment may be made after banking hours. But where the drawee has no funds sufficient to meet
the bill on the day of presentment, the presentment may be made before 4:00 P.M., and such presentment
would be sufficient, as at any rate, the bill cannot be paid even if presented during banking hours. 1014
(2) place of presentment (Sec. 73 NIL)
Section 73. Place of presentment. -- Presentment for payment is made at the proper place:
a. Where a 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.
Place specified. Where the name of the bank on the check has been changed, presentment for payment at the
bank the name of which had been substituted and not at the original named bank, is also sufficient. 1015 But
1009
1 Agbayani, Ibid., p. 347; referring to Murray v. 3rd Nat. Bank, 234 Fed. Rep. 481; Baker v. Valentine, 288 S.W. 771; Andersen v. lst Nat. Bank, 122
N.E. 918
1010
1011
1012
1013
1 Agbayani, Ibid., p. 351; citing German American Bank v. Milliman, 65 N.Y. Supp. 242
1014
1015
1 Agbayani, Ibid., p. 349; citing Sweeney Drilling Co. v. Adams & Co., 284 S.W. 337
B-91
where a note is payable at a designated branch of a trust company, presentment at the principal office or at any
other branch of the company is not sufficient. 1016
Sections 76 to 78 not applicable where place specified. It is to be noted that the rules stated in all of these
section apply to cases where no place for presentment is specified. If there is a place specified, these sections
are inapplicable and presentment should be made at the place specified.1017
(a) rule if payable at a special place (Sec. 70, NIL)
Section 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.
(discussed above, in the same chapter)
(3) presentment to the party primarily liable
(a) how presentment made (Sec. 74, NIL)
Section 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.
Necessity of exhibition of instrument. Presentment includes not only demand for payment but also the
exhibition of the instrument. The purpose of exhibition is to enable the debtor: (1) to determine the
genuineness of the instrument and the right of the holder to receive payment; and (2) to enable him to
reclaim possession upon payment. 1018 "No valid presentment and demand can be made by any person
without having the note in his possession at the time, so that the maker may receive it in case he pays the
amount due unless special circumstances, such as the loss of the note or its destruction, are shown to
excuse its absence." 1019
Demand by telephone. Demand by telephone is not sufficient because exhibition of the instrument is not
possible. 1020 Where a holder, merely demands payment from the acceptor, without exhibiting the bill, there
is no presentment for payment, and the drawer and indorsers are discharged. 1021
When exhibition excused. Actual exhibition is not necessary in the following cases:
(1) When the debtor does not demand to see the instrument but refuses payment on some other
grounds, 1022 and
(2) When the instrument is lost or destroyed. 1023
(b) rule in case party primarily liable is already dead (Sec. 76, NIL)
Section 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.
Where person primarily liable dead. In the case of the death of the person primarily liable, presentment
for payment may be made to his executor or administrator, (1) if there be one, and (2) if he can be found.
The holder must use diligence to find the personal representative, if there be one. Although the indorser
himself be the personal representative, presentment has been held necessary. And, 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. 1024
(c) presentment to partners (Sec. 77, NIL)
Section 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 of them, even though there has been a dissolution of the
firm.
Where persons primarily liable are partners. Presentment for payment may be made to any one of the
partners, even if their partnership has been dissolved. The reason is that each partner is an agent of the
partnership. Accordingly, in case of death of one of the makers who are partners, presentment shall not be
made to his personal representative but to the surviving partner.1025
(d) presentment to joint debtors (Sec. 78, NIL)
Section 78. Presentment to joint debtors. -- Where there are several persons not partners,
primarily liable on the instrument, and no place of payment is specified, presentment must be
made to them all.
Where persons primarily liable are joint debtors. But if the persons primarily liable are not partners,
presentment must be made to all of them. Thus, an informal demand on one of the joint makers is not a
1016
1 Agbayani, Ibid., p. 349; citing Ironclad Mfg. Co. v. Sacking, 114 N.Y. Supp. 43
1017
1018
1 Agbayani, Ibid., p. 350; citing Waring v. Betts, 90 Va. 56, 51
1019
1 Agbayani, Ibid., p. 350; citing Arnold v. Dresses, 90 Mass (8 Allen) 435
1020
1 Agbayani, Ibid., p. 350; citing Robinson v. Lancaster Foundry Co., 136 Atl. 58, and other cases
1021
1022
1 Agbayani, Ibid., p. 350; citing Greenstein v. Kucharaski, 140 Atl. 48
1023
1 Agbayani, Ibid., p. 350; citing Cuddy v. Sarandea, 161 Atl. 297
1024
1 Agbayani, Ibid., p. 352; citing Reed v. Spear, 94 N.Y. Supp. 1007
1025
1 Agbayani, Ibid., p. 352; citing Cayuga City Bank v. Hunt, 2 Hill N.Y. 635
B-92
basis for charging indorsers. 1026 Of course, if one of them is duly authorized by the others for the purpose,
presentment to him would be sufficient. 1027
c. Instances where presentment is excused (Sec. 79 & 82, NIL)
Section 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.
Application of Sections 79 and 80. These sections give two exceptions to the general rule that if no presentment
for payment is made, the persons secondarily liable are discharged. However, the exceptions herein stated are
relative. Only the drawer or indorser referred to in these sections is not discharged, but all other parties secondarily
liable are relieved of their liability. Where the drawer, withdraws his funds from the drawee, so that they are not
sufficient to pay the bill, he has no right to expect or require that the drawee or acceptor would pay the instrument.
1028
Accordingly, where the holder does not make a presentment to the drawee, the drawer would not be discharged
by such failure. But the other parties secondarily liable are discharged. Where, however, the drawer made
arrangement with the drawee for the payment of the bill, presentment is still necessary to charge him. 1029
Presentment is not required to charge the drawer in the following cases:
(1) In case of a check upon which payment has been stopped. 1030
(2) Where the drawer's balance is less than the amount of the check. 1031 However, the mere fact that the drawer
has no funds in the "drawee's" hands at the time he draws, does not render presentment unnecessary if he still
has reasonable grounds to believe that the instrument will be paid, particularly when provision has been made
for payment of any bill drawn by the drawer on the drawee. 1032
(3) Where the drawer of a bill containing the words "Pay from balance" had no money on deposit with the drawee
but expected to arrange with the broker to cover drafts. 1033
When indorser need not be given notice. When one makes a note for accommodation of a payee, the
accommodated party is the person primarily liable. 1034 Hence, following the rule that failure to make presentment for
payment will not discharge the persons primarily liable, 1035 the accommodated payee-indorser, being in effect the
person primarily liable, is not discharged even if no presentment for payment is made. 1036
Section 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, expressed or implied.
Application of Section 82. Under this section, what is excused is the failure to make presentment far payment, not
mere delay, as under Section 81. Under Section 82, the law does not require presentment at any time. Under
Section 81, the law requires presentment when the cause of the delay has ceased. 1037
Reasonable diligence exercised. Where the bill is payable in the United States, after the occupation of the
Philippines by Japan, presentment for payment is dispensed with. No amount of reasonable diligence will enable the
holder to make presentment for payment under these circumstances. Reasonable diligence implies active search. 1038
In other words, the holder must take all steps likely to discover the whereabouts of the party to whom presentment is
to be made. For example, he must inquire of the indorsers or other parties to the instrument 1039 So that the testimony
of a constable that he failed to locate the maker of a note under a warrant for his arrest is not sufficient evidence that
presentment of the note could not reasonably be made, when the holder offered no testimony that he was ignorant of
the maker's whereabouts or that he made any effort to find him. 1040 An insolvency of the maker, even if known to the
indorser, will not excuse presentment for payment. 1041
Where drawee fictitious. Presentment for payment is not required as there is no one to whom presentment is to be
made. 1042
Waiver. Waiver may be express or implied. Where the maker expressly waived "demand, presentment, protest and
notice of protest and non-payment" of the note, he cannot question the failure of the holder to exhibit to him his
promissory note. 1043
* Implied waiver. Implied waiver of presentment may be manifested by any language or conduct or any
agreement between the parties reasonably calculated to lead the holder to believe that presentment is waived
or to mislead or prevent him from treating the bill as he otherwise would. 1044 The following constitutes implied
waiver:
(1) Declarations, acts or conduct which mislead the holder and induce him from taking the necessary steps to
make presentment. 1045
(2) The drawer tells the holder that he will take care of collecting the bill. This is waiver on the drawer's part, and
if he fails to make presentment, the drawer is not discharged . 1046
1026
1 Agbayani, Ibid., p. 352; citing St. of N.Y. Nat. Bank v. Kennedy, 130 N.Y. Supp. 104
1027
1028
1 Agbayani, Ibid., p. 353; citing Gilman v. F. O. Bailey Carriage Co., Inc., 141 Atl. 321
1029
1030
1 Agbayani, Ibid., p. 353; citing Severe v. Thomas, 166 Ill. App. 422; Manes v. Eassy, 117 S.E. 222
1031
1 Agbayani, Ibid., p. 353; citing Jillman v. F. O. Bailey Carriage Co., 141 Atl. 321
1032
1 Agbayani, Ibid., p. 353; citing Sirmonoff v. Granite City Nat. Bank. 116 N.E. 636
1033
1 Agbayani, Ibid., p. 353; citing Slayman v. First Nat. Bank of Welch, 139 S.E. 750
1034
1 Agbayani, Ibid., p. 354; citing Bergon v. Trumble, 101 Atl. 137
1035
1036
1037
1038
1 Agbayani, Ibid., p. 355; citing Cuddy v. Sarandea, 161 Atl. 297
1039
1 Agbayani, Ibid., p. 355; citing Smith v. Fisher, 24 Pa. S.E. 222
1040
1 Agbayani, Ibid., p. 355; citing Carter v. Jenings, 134 Miss. 263, 98 So. 687
1041
1 Agbayani, Ibid., p. 355; citing Cristina v. Mattenberger, (Cal. App.) 289 Pac. 934
1042
1043
1 Agbayani, Ibid., p. 355; citing Ansaldo v Court of Appeals, Aug 29, 1989, 177 SCRA 8
1044
1 Agbayani, Ibid., p. 355; citing Simonoff v. Granite City Nat. Bank. 279 111. 248. 116 N.E. 636
1045
1 Agbayani, Ibid., p. 356; referring to Torbert v. Mattenberger, (Cal. App.), 289 Pac. 934
1046
1 Agbayani, Ibid., p. 356; referring to Martin v. Treaxler Real Estate Co., 139 S.E. 165
B-93
(3) Holder failed to make presentment to the drawee. Thereafter, the drawer paid part of the bill and promised
orally to pay the rest. This is implied waiver of presentment. 1047
(4) Where the maker, before maturity of the note, was adjudged a bankrupt partly upon his written admission of
inability to pay the debts with a willingness that he be adjudged a bankrupt. 1048
(5) Where the indorsers of a note payable at a bank had assured the holder that it could not be paid at maturity
and knew that the maker, a corporation, had no money to pay for it.
(6) Where the indorser assured the holder, before maturity of the note, that a note for the same amount with his
indorsement will be given in renewal, such assurance, if relied by the holder. 1049
(7) When the maker an the day of maturity of the note telephoned the holder that he could not then pay the note
and the holder then telephoned the maker consenting in giving further time to the maker. 1050
Summary of rules as to presentment for payment.

(1) Presentment for payment is not necessary to charge persons primarily liable.
(2) But it is necessary to charge person secondarily liable except:
(a) as to drawer, under Section 79;
(b) as to indorser, under Section 80;
(c) when dispensed with under Section 82; and
(d) when the instrument has been dishonored by non-acceptance. 1051
d. When delay in presentment excused (Sec. 81, NIL)
Section 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.
Application of Section 81. What is excused here is not the making of presentment but only the delay in making
presentment. After the cause of delay ceases, presentment must be made with reasonable diligence. Excusable
circumstances are "those events which could not be foreseen, or which, though foreseen, are inevitable. 1052
Excuses for delay. Delay in presentment is excused by overwhelming calamity, malignant diseases, interruption of
trade negotiations by political circumstances, war between maker's and holder's countries, suspension of commercial
intercourse by public enemy, occupation of country where parties reside or where instrument is payable, or by public
and positive interdictions and prohibitions of state, and impracticability of finding maker or his place of residence. 1053
4. Notice of dishonor
When a negotiable instrument has been dishonored by non-acceptance or non-payment, a notice o dishonor must be
given to the drawer and to each indorser, and any drawer of indorser to whom such notice is not given is discharged. The
purpose is to notify the drawer and the indorsers that the instrument has not been accepted by the drawee, or that it has
not been paid by the acceptor, in the case of bills, or by the maker, in the case of notes. 1054
a. when dishonor of the instrument occurs:
(1) dishonor by non-payment (Sec. 83, NIL)
Section 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.
Where the instrument is presented for payment, and payment is refused or cannot be obtained, or where
presentment for payment is excused, and the instrument is overdue and unpaid, it is said to be “dishonored by
non payment.”1055
When payment refused, etc. Under this paragraph: (1) the instrument must be duly presented for payment;
and (2) payment is either refused or cannot be obtained. 1056
When presentment excused. Under paragraph (b), it is necessary that (1) presentment for payment be
excused; (2) the instrument be overdue; and (3) it be unpaid. But if presentment is not excused, the bill is not
dishonored by the mere fact that the bill is overdue and unpaid. 1057
(2) dishonor by non-acceptance (Sec. 149, NIL)
Section 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 can not be obtained;
b. When presentment for acceptance is excused, and the bill is not accepted.
Where the bill is presented for acceptance, and acceptance is refused by the drawee, or cannot be obtained, or
where presentment for acceptance is excused, and the bill is not accepted, it is said to be “dishonored by non-
1047
1 Agbayani, Ibid., p. 356; citing Mary Courts v. Samuels. 59 S.W. (2d) 358
1048
1 Agbayani, Ibid., p. 356; citing W. O. Bannon Ca. v. Rurran, 129 App. Div. 90, 113
1049
1 Agbayani, Ibid., p. 356; citing Seetser v. Hordan, 16 Mass. 350, 103 N.E. 950
1050
1 Agbayani, Ibid., p. 356; citing Moll v. Roth Co., 77 Oreg. 593, 152 Pac. 235
1051
1 Agbayani, Ibid., p. 356; citing Section 151
1052
1 Agbayani, Ibid., p. 354; citing Article 1174, NCC
1053
1 Agbayani, Ibid., p. 354; citing Viles v. S. D. Warren, Co., 132 Me. 277. 170 Atl 501
1054
1055
1056
1057
1 Agbayani, Ibid., p. 357; citing Carter v. Jennings, 98 So. 687
B-94
acceptance.”1058 An illustration of paragraph (a) is where the drawee refuses to accept on the bill itself, 1059
or
refuses to give a general acceptance. 1060
b. who should give notice

(1) holder
(2) agent
(3) party who may be compelled to pay
By whom notice is given. Notice of dishonor may be given by: (1) the holder; or (2) another in behalf of the holder;
or (3) any party to the instrument who may be compelled to pay it to the holder. However, such a party cannot give
notice of dishonor to everybody. He can give notice only to another party against whom he has a right of
reimbursement should such party giving notice pay the instrument; and (4) another person in behalf of such party. 1061
c. form of notice (Sec. 43 & 44, NIL)
Section 43. Indorsement where name is misspelled, and so forth. -- Where the name of a payee or
indorsee is wrongly designated or misspelled, he may indorse the instrument as therein described
adding, if he thinks fit, his proper signature.
Section 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.
(discussed under Negotiation)
d. to whom notice is given
(1) party secondarily liable or agent (Sec. 97, NIL)
Section 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.
Parties to be given notice. Notice may be given (1) to the party himself, or (2) to his agent in that behalf.
Accordingly, an accommodation indorser is entitled to notice. 1062 An irregular indorser must also be given
notice if he is to be charged. And if notice is to be given to an agent, he must be duly authorized to receive
notice of dishonor. If he is not, the notice is not valid. 1063
Agent distinguished from person present in absence of party. Notice to agent must be distinguished from
notice attempted to be given to the party himself where he is absent at his place of business or residence. In
such a case, the notice may be left with anyone found in charge therein. 1064 Notice left with a clerk or person in
charge at the party's place of business, in his absence or his place of business, without proof as to the person
with whom it was left, is sufficient, and proof that such person was not the party's agent has been held
irrelevant, notice being left at the right place. Hence, leaving it with his private secretary at his public office is
sufficient. If service be sought on the party at his dwelling, it is sufficient to leave notice with his wife or with any
other person on his premises. 1065
(2) notice where party is dead (Sec. 98, NIL)
Section 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.
Requisites for notice to representative. When the person to be given notice of dishonor is dead, notice must
be given to his personal representative, provided that:
(1) his death is known to the party giving notice;

(2) there is a personal representative; and
(3) if with reasonable diligence he could be found.
Accordingly, where the holder knew the indorser to be dead, he must use reasonable diligence to find out the
indorser's personal representative and his identity. 1066 And a notice mailed in due course to the indorser in care
of the executor at his address with postage prepaid, after the party or his agent received information that the
indorser was dead, was held to be a proper notice although it was not the correct address of the executor
named in the will. 1067
When notice may be sent to last residence or place of business. But although the party is dead,
(1) if his death is not known to the party giving notice,

(2) or although his death is known to the party giving notice but there is no personal representative, or
(3) if there be one but he cannot be found with reasonable diligence, then notice may be sent to the last
residence or last place of business of the deceased.
Thus, it has been held where the notary did not know of the death of the indorser and the notice was sent to the
last residence of the deceased, the notice is sufficient. 1068
(3) notice to partners (Sec. 99, NIL)
1058
1059
1060
1061
1062
1 Agbayani, Ibid., p. 369; citing Donnelly v. Garvan, 151 Atl. 168; Pitman v. Bell, 144 S.E. 522
1063
1064
1 Agbayani, Ibid., p. 369; citing Amer. Exch. Nat. Bank v. Amer. Hotel, 92 N.Y. Supp. 1006
1065
1 Agbayani, Ibid., pp. 369-370; citing Mercantile Bank v. McCarthy, 7 1410. App, 318
1066
1 Agbayani, Ibid., p. 370; citing In re Marqitz Estate, 133 Atl. 220
1067
1 Agbayani, Ibid., p. 370; citing Second Nat. Bank v. Smith, 102 Atl. 862
1068
1 Agbayani, Ibid., p. 370; citing First Nat. Bank of Belmar v. Carpenter, 130 Atl. 435
B-95
Section 99. Notice of partners. -- When the parties to be notified are partners, notice to any one
partner is notice to the firm, even though there has been a dissolution.
Reason for rule. The reason for the rule stated in this section is that each partner is an agent of the partnership
of which he is a member. Accordingly, notice to one is notice to the others. 1069
(4) notice to persons jointly liable (Sec. 100, NIL)
Section 100. Notice to persons jointly liable. -- Notice to joint parties who are not partners must be
given to each of them, unless one of them has authority to receive such notice for the others.
Application of Section 100. The provisions of this section do not apply to joint payees or joint indorsees who
indorse as, under Section 68 of the Negotiable Instruments Law, such joint indorsers are deemed jointly and
severally liable, and joint indorsers to whom notice of dishonor has been given are not discharged by reason of
failure to give notice to the other joint indorsers. 1070 Accordingly, this section applies to joint parties other than
joint payees and joint indorsees who indorse, such as, to drawers who sign a bill jointly, or to joint
accommodation indorsers who are not jointly and severally liable under Section 68 as they are neither payees
nor indorsee. 1071
(5) notice to bankrupt (Sec. 101, NIL)
Section 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.
Application of Section 101. This section contemplates any of the following situations: (1) where the party
secondarily liable has been declared a bankrupt or an insolvent; and (2) where he has made an assignment of
his properties for the benefit of creditors. In such cases, notice may be given either (1) to the party himself, or
(2) to his trustee or assignee. 1072
e. time and place of notice (Sec. 103-108, NIL)
Section 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 sent by mail, it must be deposited in the post-office in time to reach him in usual course on the
day following.
Section 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 that 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.
Time for giving notice in general. The law provides a different period for giving notice of dishonor depending upon
whether: (1) the party giving notice and the party to receive notice reside in the same place, as per Section 103 or (2)
the party giving notice and the party to receive notice reside in different places, as per section 104. 1073
Meaning of "the same place." The same place refers to the corporate limits of a town or city where the
presentment is made or where the holder resides."" Under this, if the parties reside in Manila, they are said to reside
in the same place. But If one resides in Manila and the other resides in Quezon City, even if they are neighbors, they
do not reside in the same place. 1074
Effect of notice given out of time. Unless excused, notice given out of time would be considered not to have been
given. Hence, the party to receive notice would be discharged. 1075
Section 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.
Application of Section 105. A party giving notice is deemed to have given due notice where: (1) the notice of
dishonor is duly addressed, and (2) deposited in the post-office, even when there is miscarriage of mail. The notice
must be properly addressed, stamped and mailed. Otherwise, the notice, even though mailed, is not proper, and the
indorser will be discharged from liability, 1076 such as, where a notice addressed to other than the one given on the
note, or without sufficient postage prepaid.
Whether the presumption is conclusive. It has been held that when the notice by letter is duly stamped,
addressed and mailed, the sender is deemed to have given due notice which is presumed to be received by the
addressee, notwithstanding, any miscarriage in the mails, and the addressee's (indorsers) evidence that he had not
received the notice will be excluded 1077 But, in a Philippine case, it was held that where copy of the protest is sent by
mail in good season addressed to the drawer, "the presumption is now conclusive that the latter received it, not
1069
1070
1 Agbayani, Ibid., p. 371; citing Doherty v. First Nat. Bank, 186 S.W. 629
1071
1 Agbayani, Ibid., p. 371; citing Case v. McKinnes, 213 Pac. 422
1072
1073
1074
1075
1076
1 Agbayani, Ibid., p. 375; citing People's Bank &. Trust Co. v. Allen, 110 Atl. 704
1077
1 Agbayani, Ibid., p. 375; citing First Nat. Bank v. Daloney, 98 Atl. 1042
B-96
having been rebutted, or at least, contradicted." 1078 It would seem, therefore, that the presumption is conclusive if not
rebutted, or at least, contradicted.
Section 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.
Deposit in letter box. The letter box must be under the control of the post-office department. Otherwise, notice
would not deemed to have been deposited in the post-office. Thus, a notice of protest properly addressed and left in
a place in the notary's office where mail was usually collected by the postman, was held not a mailing of the notice
as required by the statute. 1079
Section 107. Notice of 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.
Section 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 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.
Where address added to signature. A notice addressed to an indorser at a place which at the time of the execution
of the note was stated by him to be his residence was sufficient 1080 The same is true where the notice is addressed
at the place where the note was dated and where the indorser lived although he moved from said place sometime
not stated. 1081
f. when notice is excused or unnecessary (Sec. 109-112, 114-115, NIL)
Section 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.
When waiver may be made. Waiver of notice of dis992.honor may be made (1) before the time of giving notice,
such as express waiver in the body of the instrument or added to the signature of a party; or (2) after omission to
give due notice. Waiver is the intentional abandonment of a right. It may be expressed or implied. 1082
Section 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.
Whom affected by waiver in general. The person affected by waiver depends upon whether the waiver is in the
instrument itself or is written above the signature of an indorser. If the waiver is embodied in the instrument itself, it is
binding upon all parties. If the waiver is written above the signature of an indorser, it binds him only. 1083
Waiver on back of instrument. A printed waiver on the back of the instrument above the indorsements is a waiver
embodied in the instrument itself. 1084 The effect is to make all the subsequent indorsers unconditionally liable and, in
this sense, unconditional debtors. 1085 But such a waiver does not make the indorsers liable as co-makers since their
obligation to pay is still a contingent liability. 1086 Accordingly, all indorsers appearing below it are bound and the
holder need not give them notice to hold them liable. 1087
Section 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.
Application of Section 111. Under this section, where protest is waived, the following are included and are deemed
waived also: (1) presentment, and (2) notice of dishonor. Where presentment for payment is waived, notice of
dishonor is also waived. 1088 But where notice of dishonor is waived, presentment is not waived. 1089
Section 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 to be charged.
When noticed excused. When political disturbances interrupt and obstruct the ordinary negotiations of trade, they
constitute a sufficient excuse for want of presentment or notice, upon the same principle that controls in cases of
military operations or interdictions of commerce.1090 So, the prevalence of a malignant, contagious, or infectious
disease, such as the cholera, yellow fever, the plague, or smallpox, which has become so extensive as to suspend
all commercial business and intercourse or to render it very hazardous to enter into the infected districts, is
1078
1 Agbayani, Ibid., p. 375; citing Phil. Nat. Bank v. Picornell, 46 Phil. 725
1079
1 Agbayani, Ibid., p. 376; citing Friedman v. Maltinsky, 103 Atl. 731
1080
1 Agbayani, Ibid., p. 376; citing Johnson, 127 Pac. 134
1081
69 N.Y. 1046
1082
1083
1084
1 Agbayani, Ibid., p. 378; citing Costello Bros. v. Buckley, 148 Atl. 414
1085
1 Agbayani, Ibid., p. 378; citing Atkins v. Dixie Fair Co., 65 So. 762
1086
1 Agbayani, Ibid., p. 378; citing McPherson v. Evart State Bank, 214 N.W. 971
1087
1 Agbayani, Ibid., p. 378; referring to Brannan, p. 160
1088
1 Agbayani, Ibid., p. 379; citing Baumeister v. Knutz, 42 So. 886
1089
1 Agbayani, Ibid., p. 379; citing Hayward v. Empire State, 93 N.Y. Supp. 449
1090
1 Agbayani, Ibid., p. 379; citing Peters v. Hobbs, 25 Ark. 67, 91 Am. Dec. 526; House v. Adams, 48 Pa. St. 261, 86 Am. Dec. 426; Bay v. Smith, 17 Wall
(U.S.) 411, 21 L. ed., 66
B-97
recognized by the text writers as a sufficient excuse for not doing any act which would require an entry into such
districts. 1091
Section 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;
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.
Section 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 a 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.
When notice relatively excused. The rules established under Sections 114 and 115 may be generalized as follows:
As to a particular person secondarily liable on an instrument, such as the drawer or an indorser, notice of dishonor to
him is not necessary: (1) where he has knowledge of the dishonor by means other than through a formal notice, as
when he is both the drawee and drawer or when presentment is made to him; and (2) where he has no reason to
expect that. the instrument will be honored, as when he has countermanded payment or where the drawee is
fictitious or without capacity to contract. These sections apply only to the drawer or indorser concerned. Failure to
give due notice to the other parties secondarily liable will discharge them. 1092
No right to require or expect payment as to drawer. The drawer has no right to expect or require payment, in the
following cases: (1) where the drawer of a check has no account with the drawee bank; 1093 (2) when the drawer of a
check payable abroad has no funds with the drawee bank to meet it;1094 and (3) when the knowledge that previous
drafts on the same consignee had been dishonored. 1095 In the foregoing cases, the drawer has no right to a notice of
dishonor.
Drawer has countermanded payment. An allegation that payment of a check had been countermanded is
sufficiently set out where the check was set forth with the indorsement across the face, "Pyt. stopped." 1096
Drawee fictitious, etc. as to indorsers. The indorser must be aware of the fact that the drawee is fictitious or one
not having capacity to contract. Otherwise, notice of dishonor must be given to such. indorser to charge him. But the
fact that the indorser knew the maker to be insolvent 1097 or that the instrument was dishonored 1098 does not dispense
with the necessity of notice.
Illustrative cases where section not applicable. Section 115 does not apply in the following cases:
(1) Where the maker of the instrument is a partnership and the indorser sought to be charged is a member thereof;
1099
(2) Where no presentment was actually made; 1100

(3) Where the indorser was treasurer of the maker corporation, not active in its management, and signed the note
in behalf of the corporation. 1101
Accordingly, in the foregoing cases, the indorser is entitled to notice of dishonor and is discharged if not notified.
g. when delay in giving notice excused (Sec.. 113, NIL)
Section 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.
When delay in giving notice excused. Delay caused by making inquiries as to the address of the party to receive
notice is excusable where the holder does not know the address. 1102 But where the holder's agent called at the
defendant's place of business to give him notice of dishonor but he was absent from the city, delay will not be
excused since notice by mail was practicable. 1103
!!! Case(s)
35 Far East Realty Investment, Inc. vs. CA, 166 SCRA 256
36 Wong vs. CA, February 2, 2001
37 International Corporate Bank vs. Sps. Gueco, February 12, 2001
38 Far East Realty vs. CA, October 5, 1988
39 State Investment House vs. CA, 217 SCRA 32
40 Asia Banking Corporation vs. Javier, 44 Phil 777
41 Nyco Sales Corporation vs. BA Finance Corporation, 200 SCRA 637
1091
1 Agbayani, Ibid., p. 379; citing Tunno v. Lague, 2 Johns Cas (N.Y.) 1, 1 Am. Dec. 141; Hanover v. Anderson, 16 Lea (Teen.) 340
1092
1093
1 Agbayani, Ibid., p. 381; citing Demateis v. Vezu, 193 Pac. 793
1094
1 Agbayani, Ibid., p. 381; citing Ellenbogen v. State Bank, 197 N.Y. Supp. 278
1095
1 Agbayani, Ibid., p. 381; citing Jones v. Caroline Nat. Bank, 103 S.E. 27
1096
1097
1 Agbayani, Ibid., p. 382; citing Morcarty v. Howard, 80 S.W. (2) 526
1098
1 Agbayani, Ibid., p. 382; citing Nat. Life & Accident Ins. Co. v. Varner, 100 S.W. (2d) 662
1099
1 Agbayani, Ibid., p. 383; citing Midwest Trust Co. v. Pioneer Cattle Loan Co., 240 Pac. 587
1100
1 Agbayani, Ibid., p. 383; citing P. B. Wilson Co. v. Finley Farms Co., 275 S.W. 222
1101
1 Agbayani, Ibid., p. 383; citing Maynard Trust Co. v. Furbush, 137 N.E. 270. at par. (c), Sec. 115
1102
1 Agbayani, Ibid., p. 380; citing The Elmville, p. 319
1103
1 Agbayani, Ibid., p. 380; citing Price v. Warner, 118 Pac. 173
B-98
---------------------------------------------------------------------CASE(S)---------------------------------------------------------------
35 Far East Realty Investment Inc. vs. Court of Appeals [GR L-36549, 5 October 1988]
Second Division, Paras (J): 4 concur
See case entry 38
Facts: In its complaint dated May 9, 1968, filed with the City Court of Manila, (Civil Case 170859) against Dy Hian Tat, Siy Chee
and Gaw Suy An for the collection and payment of P4,500.00 representing the face value of an unpaid and dishonored check, Far
East Realty Investment Inc. (FERII) alleged, among others, that on 13 September 1960, Dy et al. approached FERII at its office in
Manila and asked the latter to extend to them an accommodation loan in the sum of P4,500.00, which they needed in their business,
and which they promised to pay, jointly and severally, in one month time; that they proposed to pay FERII interest thereon at the
rate of 14% per annum, as in fact they delivered to FERII the China Banking Corporation (ChinaBank) Check VN-915564, dated 13
September 1960, for P4,500.00, drawn by Dy, and signed by them at the back of said check, with the assurance that after one
month from 13 September 1960, the said check would be redeemed by them by paying cash in the sum of P4,500.00, or the said
check can be presented for payment on or immediately after one month and said bank would honor the same; that, in order to
accommodate Dy et al., FERII agreed and actually extended to Dy et al. an accommodation loan in the sum of P4,500.00 under the
aforesaid conditions proposed by Dy et al., which amount was delivered to the later; that on 5 March 1964, the aforesaid check was
presented for payment to the ChinaBank, but said check bounced and was not cashed by said bank, for the reason that the current
account of the drawer thereof had already been closed; and that subsequently, FERII demanded from Dy et al. the payment of their
aforesaid loan obligation, but the latter failed and refused to pay notwithstanding repeated demands therefor. Gaw and Dy filed their
answers, while on 31 March 1970, Siy was declared in default. After hearing, the City Court of Manila rendered its decision in favor
of FERII, ordering Dy et al. to pay FERII, jointly and severally, the sum of P4,500.00 with interest thereon at the legal rate from 13
September 1960 until the said amount is fully paid; plus the sum of P500.00 by way of attorney's fees, plus the costs of suit. The
decision of the city court was appealed by Dy et al. to the Court of First Instance of Manila, where the case was heard de novo for
lack of transcript of stenographic notes taken in the city court. After trial, the Court of First Instance of Manila, Branch IX, rendered a
decision in Civil Case 80583, dated 15 October 1971, affirming the decision of the city court, ordering Dy et al. to pay, jointly and
severally, FERII the sum of P4,500.00, plus interest at the rate of 14% per annum, from 13 September 1960, until fully paid, plus the
sum of P1,000.00 in the concept of attorney's fees; and costs of suit. Dy et al. filed a petition for review with the Court of Appeals.
On 12 February 1973, the appellate court, finding that the questioned check was not given as collateral to guarantee a loan secured
by Dy et al. who allegedly came as a group to FERII on 13 September 1960, but passed through other hands before reaching FERII
and the said check was not presented within a reasonable time and after its issuance, reversed the decision of the Court of First
Instance. Its motion for reconsideration having been denied, FERII filed the petition for review.
Issue: Whether presentment for payment and notice of dishonor of the questioned check were made within reasonable time.
Held: NO. 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 issue, except that in the case of a bill of exchange,
presentment for payment will be sufficient if made within a reasonable time after the last negotiation thereof. Notice may be given as
soon as the is dishonored; and unless delay is excused must be given within the time fixed by the law. No hard and fast
demarcation line can be drawn between what may be considered as a reasonable or an unreasonable time, because "reasonable
time" depends upon the peculiar facts and circumstances in each case. "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 Herein, it is obvious that
presentment and notice of dishonor were not made within a reasonable time. The check in question was issued on 13 September
1960, but was presented to the drawee bank only on 5 March 1964, and dishonored on the same date. After dishonor by the drawee
bank, a formal notice of dishonor was made by FERII through a letter dated 27 April 1968. Under these circumstances, FERII
undoubtedly failed to exercise prudence and diligence on what he ought to do as required by law. FERII likewise failed to show any
justification for the unreasonable delay.
36 Wong vs. Court of Appeals [GR 117857, 2 February 2001]

Second Division, Quisumbing (J): 4 concur
Facts: Luis S. Wong was an agent of Limtong Press Inc. (LPI), a manufacturer of calendars. LPI would print sample calendars, then
give them to agents to present to customers. The agents would get the purchase orders of customers and forward them to LPI. After
printing the calendars, LPI would ship the calendars directly to the customers. Thereafter, the agents would come around to collect
the payments. Wong, however, had a history of unremitted collections, which he duly acknowledged in a confirmation receipt he co-
signed with his wife. Hence, Wong's customers were required to issue postdated checks before LPI would accept their purchase
orders. In early December 1985, Wong issued 6 postdated checks totaling P18,025.00, all dated 30 December 1985 and drawn
payable to the order of LPI. These checks were initially intended to guarantee the calendar orders of customers who failed to issue
post-dated checks. However, following company policy, LPI refused to accept the checks as guarantees. Instead, the parties agreed
to apply the checks to the payment of Wong's unremitted collections for 1984 amounting to P18,077.07. LPI waived the P52.07
difference. Before the maturity of the checks, Wong prevailed upon LPI not to deposit the checks and promised to replace them
within 30 days. However, Wong reneged on his promise. Hence, on 5 June 1986, LPI deposited the checks with Rizal Commercial
Banking Corporation (RCBC). The checks were returned for the reason "account closed." The dishonor of the checks was
evidenced by the RCBC return slip. On 20 June 1986, LPI through counsel notified Wong of the dishonor. Wong failed to make
arrangements for payment within 5 banking days. On 6 November 1987, Wong was charged with 3 counts of violation of BP 22
under three separate Informations for the three checks amounting to P5,500.00, P3,375.00, and P6,410.00 (Criminal Case CBU-
12055, 12057, and 12058. Upon arraignment, Wong pleaded not guilty. Trial ensued. On 30 August 1990, the trial court issued its
decision, finding Wong guilty beyond reasonable doubt of the offense of Violations of Section 1 of BP 22 in 3 Counts and sentencing
Wong to serve an imprisonment of 4 months for each count; to pay Limtong the sums of P5,500.00, P6,410.00 and P3,375.00
corresponding to the amounts indicated in Allied Banking Checks 660143451, 66[0]143464 and 660143463 all issued on 30
December 1985 together with the legal rate of interest from the time of the filing of the criminal charges in Court and pay the costs.
Wong appealed his conviction to the Court of Appeals. On 28 October 1994, it affirmed the trial court's decision in toto. Wong filed
the petition for review on certiorari.
Issue: Whether the presumption of knowledge of lack of funds under Section 2 of BP 22 should not apply to Wong, as he avers that
LPI deposited the checks 157 days after the 30 December 1985 maturity date, and that he should not be expected to keep his bank
account active and funded beyond the 90-day period.
Held: Section 2 (Evidence of knowledge of insufficient funds) of BP 22 provides that "The making, drawing and issuance of a check
payment of which 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, shall be prima facie evidence of knowledge of such insufficiency of funds or credit unless such
maker or drawer pays the holder thereof the amount due thereon, or makes arrangements for payment in full by the drawee of such
check within five (5) banking days after receiving notice that such check has not been paid by the drawee." 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 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 5 banking days from receipt of the notice of dishonor,
B-99
the maker or drawer makes arrangements for payment of the check by the bank or pays the holder the amount of the check.
Contrary to Wong's assertions, nowhere in 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 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 Wong from his duty to maintain sufficient funds in the account within a
reasonable time thereof. Under Section 186 of the Negotiable Instruments Law, "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."
By current banking practice, a check becomes stale after more than 6 months, or 180 days. LPI deposited the checks 157 days after
the date of the check. Hence said checks cannot be considered stale. Only the presumption of knowledge of insufficiency of funds
was lost, but such knowledge could still be proven by direct or circumstantial evidence. LPI did not deposit the checks because of
the reassurance of Wong that he would issue new checks. Upon his failure to do so, LPI was constrained to deposit the said checks.
After the checks were dishonored, Wong was duly notified of such fact but failed to make arrangements for full payment within 5
banking days thereof. There is sufficient evidence that Wong had knowledge of the insufficiency of his funds in or credit with the
drawee bank at the time of issuance of the checks.
37 The International Corporate Bank (now Union Bnak of the Philippines) vs. Spouses Gueco [GR 141968, 12 February
2001]
Facts: Spouses Francis S. Gueco and Ma. Luz E. Gueco obtained a loan from petitioner International Corporate Bank (now Union
Bank of the Philippines) to purchase a car — a Nissan Sentra 1600 4DR, 1989 Model. In consideration thereof, the Spouses
executed promissory notes which were payable in monthly installments and chattel mortgage over the car to serve as security for
the notes. The Spouses defaulted in payment of installments. Consequently, the Bank filed on 7 August 1995 a civil action (Civil
Case 658-95) for "Sum of Money with Prayer for a Writ of Replevin" before the Metropolitan Trial Court of Pasay City, Branch 45.
On 25 August 1995, Dr. Francis Gueco was served summons and was fetched by the sheriff and representative of the bank for a
meeting in the bank premises. Desi Tomas, the Bank's Assistant Vice President demanded payment of the amount of P184,000.00
which represents the unpaid balance for the car loan. After some negotiations and computation, the amount was lowered to
P154,000.00, However, as a result of the non-payment of the reduced amount on that date, the car was detained inside the bank's
compound. On 28 August 1995, Dr. Gueco went to the bank and talked with its Administrative Support Auto Loans/Credit Card
Collection Head, Jefferson Rivera. The negotiations resulted in the further reduction of the outstanding loan to P150,000.00. On 29
August 1995, Dr. Gueco delivered a manager's check in the amount of P150,000.00 but the car was not released because of his
refusal to sign the Joint Motion to Dismiss. It is the contention of the Gueco spouses and their counsel that Dr. Gueco need not sign
the motion for joint dismissal considering that they had not yet filed their Answer. the Bank, however, insisted that the joint motion to
dismiss is standard operating procedure in their bank to effect a compromise and to preclude future filing of claims, counterclaims or
suits for damages. After several demand letters and meetings with bank representatives, the Gueco spouses initiated a civil action
for damages before the Metropolitan Trial Court of Quezon City, Branch 33. The Metropolitan Trial Court dismissed the complaint for
lack of merit. On appeal to the Regional Trial Court, Branch 227 of Quezon City, the decision of the Metropolitan Trial Court was
reversed. In its decision, the RTC held that there was a meeting of the minds between the parties as to the reduction of the amount
of indebtedness and the release of the car but said agreement did not include the signing of the joint motion to dismiss as a
condition sine qua non for the effectivity of the compromise. The court further ordered the bank to return immediately the subject car
to the spouses in good working condition; and to pay the spouses the sum of P50,000.00 as moral damages; P25,000.00 as
exemplary damages, and P25,000.00 as attorney's fees, and to pay the cost of suit. In other respect, the court affirmed the decision
of the Metropolitan Trial Court Branch 33. The case was elevated to the Court of Appeals, which on 17 February 2000, issued the
decision, denying the petition for review on certiorari and affirming the Decision of the RTC of Quezon City, Branch 227, in Civil
Case Q-97-31176, in toto; with costs against the bank. The bank filed the petition for review on certiorari with the Supreme Court.
(Short facts: In the meeting of 29 August 1995, Dr. Gueco delivered a manager's check representing the reduced
amount of P150,000.00. Said check was given to Mr. Rivera, a representative of the bank However, since Dr. Gueco
refused to sign the joint motion to dismiss, he was made to execute a statement to the effect that he was withholding the
payment of the check. Subsequently, in a letter addressed to Ms. Desi Tomas, vice president of the bank, dated 4
September 1995, Dr. Gueco instructed the bank to disregard the "hold order" letter and demanded the immediate release
of his car, to which the former replied that the condition of signing the joint motion to dismiss must be satisfied and that
they had kept the check which could be claimed by Dr. Gueco anytime. While there is controversy as to whether the
document evidencing the order to hold payment of the check was formally offered as evidence by the bank, it appears
from the pleadings that said check has not been encashed.)
Issue: Whether the bank was negligent in opting not to deposit or use the manager’s check.
Held: NO. 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. When 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 time after the last
negotiation thereof. A check must be presented for payment within a reasonable time after its issue, and 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. The test is whether the payee employed such diligence as a 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. In a
case, a check payable on demand which was long overdue by about two and a half (2-1/2) years was considered a stale check.
Failure of a payee to encash a check for more than 10 years undoubtedly resulted in the check becoming stale. Thus, even a delay
of 1 week or two (2) days, under the specific circumstances of the certain cases constituted unreasonable time as a matter of law.
Herein, the check involved is not an ordinary bill of exchange but a manager's check. A manager's check is one drawn by the bank's
manager upon the bank itself. It is similar to a cashier's check both as to effect and use. A cashier's check is a check of the bank's
cashier on his 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 bank's 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 its written promise to pay
upon demand. The mere issuance of it is considered an acceptance thereof. If treated as promissory note, the drawer would be the
maker and in which case the holder need not prove presentment for payment or present the bill to the drawee for acceptance. Even
assuming that presentment is needed, failure to present for payment within a reasonable time will result to the discharge of the
drawer only to the extent of the loss caused by the delay. Failure to present on time, thus, does not totally wipe out all liability. In
fact, the legal situation amounts to an acknowledgment of liability in the sum stated in the check. In this case, the Gueco spouses
have not alleged, much less shown that they or the bank which issued the manager's check has suffered damage or loss caused by
the delay or non-presentment. Definitely, the original obligation to pay certainly has not been erased. It has been held that, if the
check had become stale, it becomes imperative that the circumstances that caused its non-presentment be determined. Herein, the
bank held on the check and refused to encash the same because of the controversy surrounding the signing of the joint motion to
dismiss. The Court saw no bad faith or negligence in this position taken by the Bank.
38 Far East Realty vs. CA, October 5, 1988

See case entry 35
B-100
39 State Investment House Inc. vs. Court of Appeals [GR 101163, 11 January 1993]
First Division, Bellosillo (J): 2 concur, 1 took no part
Facts: Nora B. Moulic issued to Corazon Victoriano, as security for pieces of jewelry to be sold on commission, 2 post-dated
Equitable Banking Corporation checks in the amount of P50,000 each, one dated 30 August 1979 and the other, 30 September
1979. Thereafter, the payee negotiated the checks to the State Investment House Inc. (SIHI). 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, SIHI 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, SIHI 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 SIHI to pay Moulic P3,000.00 for attorney's fees. SIHI 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 SIHI did serve such notice on Moulic within the reglementary
period it would be of no consequence as the checks should never have been presented for payment. SIHI filed the petition for
review.
Issue [1]: Whether the alleged issuance of the post-dated checks as security is a ground for the discharge of the instrument as
against a holder in due course.
Held [1]: Section 119 of the Negotiable Instrument Law outlined the grounds in which an instrument is discharged. The provision
states that "A negotiable instrument is discharged: (a) By payment in due course by or on behalf of the princiWhether the post-dated
checks, issued as security, is a ground for the discharge of the instrument as against a holder in due course. pal 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." 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 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 Section 119 does not specify what these acts are, e.g., Art.
1231 of the Civil Code which enumerates the modes of extinguishing obligations. Again, none of the modes outlined therein is
applicable in the instant case as Section 119 contemplates of a situation where the holder of the instrument is the creditor while its
drawer is the debtor. Herein, 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 holder in due
course.
Issue [2]: Whether the requirement that SIHI should give Notice of Dishonor to MOULIC is indispensable.
Held [2]: The need for notice is not absolute; there are exceptions under Section 114 of the Negotiable Instruments Law. Section
114 (When notice need not be given to drawer) provides that "Notice of dishonor is not required to be given to the drawer in the
following cases: (a) Where the drawer and the drawee are the same person; (b) When the drawee is a 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 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 expected to pay it. 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 aside in order to meet the necessities in a single case.
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 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. Herein, such withdrawal renders the drawer, Moulic, liable to SIHI, a holder in due course of the checks. SIHI could not
expect payment as MOULIC left no funds with the drawee bank to meet her obligation on the checks, so that Notice of Dishonor
would be futile.
40 Asia Banking Corporation vs. Javier [GR 19051, 4 April 1923]

First Division, Avancena (J): 4 concur, 1 voted for reversal, 1 took no part
Facts: On 10 May 1920, Salvador B. Chaves drew a check on the Philippine National Bank (PNB) for P11,000 in favor of La Insular,
a concern doing business in this city. This check was endorsed by the limited partners of La Insular, and then deposited by Salvador
B. Chaves in his current account with Asia Banking Corporation. The deposit was made on 14 July 1920. On 25 June 1920,
Salvador B. Chaves drew another check for P18,785.30 on PNB, in favor of La Insular. This check was also endorsed by the limited
partners of La Insular, and was likewise deposited by Chaves in his current account with Asia Banking, on 6 July 1920. The amount
represented by both checks was used by Chaves after they were deposited in Asia Banking, by drawing checks on the latter.
Subsequently these checks were presented by Asia Banking to PNB for payment, but the latter refused to pay on the ground that
the drawer, Chaves, had no funds therein. Asia Banking brought the action against Juan Javier, as endorser, for the payment of the
value of both checks. The lower court sentenced Javier to pay Asia Banking P11,000, upon the check of 10 May 1920, with interest
thereon at 9% per annum from 10 July 1920, and P18,778.34 on the check of 25 June 1920, with interest thereon at 9% per annum
from 5 August 1920. From this judgment the defendant appealed.
Issue: Whether Javier’s liability as endorsed of the checks in question was extinguished.
Held: Section 89 of the Negotiable Instruments Law (Act No. 2031) provides that, when a negotiable instrument is dishonored for
non-acceptance or non-payment, notice thereof must be given to the drawer and of each of the endorsers, and those who are not
notified that the document was dishonored. Then, under the general principle of the law of procedure, it will be incumbent upon Asia
Banking, who seeks to enforce Javiwe's liability upon these checks as endorser, to establish said liability by proving that notice was
given to Javier 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, Asia Banking has not sufficiently established Javier'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 therefore it has not
established its cause of action. The Supreme Court reversed the judgment appealed from and absolved Javier from the complaint
without special pronouncement as to costs.
B-101
41 Nyco Sales Corporation vs. BA Finance Corp. [GR 71694, 16 August 1991]
Second Division, Paras (J): 4 concur
Facts: Nyco Sales Corporation whose president and general manager is Rufino Yao, is engaged in the business of selling
construction materials with principal office in Davao City. Sometime in 1978, the brothers Santiago and Renato Fernandez, both
acting in behalf of Sanshell Corporation, approached Rufino Yao for credit accommodation. They requested Nyco, thru Yao, to grant
Sanshell discounting privileges which Nyco had with BA Finance Corporation. Yao apparently acquiesced, hence on or about 15
November 1978, the Fernandezes went to Yao for the purpose of discounting Sanshell's post-dated check which was a BPI-Davao
Branch Check 499648 dated 17 February 1979 for the amount of P60,000.00. The said check was payable to Nyco. Following the
discounting process agreed upon, Nyco, thru Yao, endorsed the check in favor of BA Finance. Thereafter, BA Finance issued a
check payable to Nyco which endorsed it in favor of Sanshell. Sanshell then made use of and/or negotiated the check.
Accompanying the exchange of checks was a Deed of Assignment executed by Nyco in favor of BA Finance with the conformity of
Sanshell. Nyco was represented by Rufino Yao, while Sanshell was represented by the Fernandez brothers. Under the said Deed,
the subject of the discounting was the aforecited check. At the back thereof and of every deed of assignment was the Continuing
Suretyship Agreement whereby the Fernandezes unconditionally guaranteed to BA Finance the full, faithful and prompt payment
and discharge of any and all indebtedness of Nyco. The BPI check, however, was dishonored by the drawee bank upon
presentment for payment. BA Finance immediately reported the matter to the Fernandezes who thereupon issued a substitute check
dated 19 February 1979 for the same amount in favor of BA Finance. It was a Security Bank and Trust Company check bearing the
number 183157, which was again dishonored when it was presented for payment. Despite repeated demands, Nyco and the
Fernandezes failed to settle the obligation with BA Finance, thus prompting the latter to institute an action in court. Nyco and the
Fernandezes, despite having been served with summons and copies of the complaint, failed to file their answer and were
consequently declared in default. On 16 May 1980, the lower court ruled in favor of BA Finance ordering them to pay the former
jointly and severally, the sum of P65,536.67 plus 14% interest per annum from 1 July 1979 and attorney's fees in the amount of
P3,000.00 as well as the costs of suit. Nyco, however, moved to set aside the order of default, to have its answer admitted and to be
able to implead Sanshell. The prayer was granted through an order dated 23 June 1980, wherein the decision of the court was set
aside only as regards Nyco. Trial ensued once more until the court reached a second decision, ordering Nyco to pay BA Finance
P60,000.00 as principal obligation, plus interest thereon at the rate of 14% per annum from 1 February 1979 until fully paid; the
amount of P10,000.00 as and for attorney's fees; and one-third (1/3) of the costs of the suit. With respect to the Fernandezes, the
decision of 16 May 1980 stood. On appeal, the appellate court also upheld BA Finance but modified the lower court's decision by
ordering that the interest should run from 19 February 1979 until paid and not from 1 February 1979. Nyco's subsequent motion for
reconsideration was denied. Nyco filed the petition for review on certiorari.
Issue: Whether Nyco was actually discharged of its liability over the SBTC check when BA Finance failed to give it a notice of
dishonor.
Held: NO. Nyco's pretension that it had not been notified of the fact of dishonor is belied not only by the formal demand letter but
also by the findings of the trial court that Rufino Yao of Nyco and the Fernandez Brothers of Sanshell had frequent contacts before,
during and after the dishonor. More importantly, it fails to realize that for as long as the credit remains outstanding, it shall continue
to be liable to BA Finance as its assignor. The dishonor of an assigned check simply stresses its liability and the failure to give a
notice of dishonor will not discharge it from such liability. This is because the cause of action stems from the breach of the
warranties embodied in the Deed of Assignment, and not from the dishonoring of the check alone.
H. DISCHARGE OF INSTRUMENTS
1. Concept of discharge
A negotiable instrument is usually discharged “by payment in due course by or on behalf of the principal debtor, as per
Section 119, NIL. But where the one paying is a party secondarily liable on the instrument, it is not discharged, as per
Section 121, NIL.1104
2. How instrument is discharged (Sec. 119, NIL)
Section 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.
a. payment in due course (Sec. 88, NIL)
Summary of discharge by payment. One textwriter summarizes discharge by payment under Sections 119 and
121 as follows:
(1) Payment by the person ultimately liable, whatever his position on the paper, is a discharge of the instrument.
(2) Payment by an accommodation party is not a discharge of the instrument, whatever his position thereon - i.e.,
whether as sole or joint maker or acceptor (parties primarily liable) - and whether the indorsement be regular or
anomalous.
(3) Payment by the (non-accommodation) drawer or indorser (parties secondarily liable) is not a discharge of the
instrument. 1105
Section 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.
Requisites for payment in due course. There are three requisites: (1) payment must be made at or after the date
of maturity; (2) payment must be to the holder; and (3) payment must be made by the debtor in good faith and
without notice that the holders' title is defective. Thus:
1104
1105
1 Agbayani, Ibid., p. 386; citing Bigelow on Bills, Notes and Checks, (3rd Ed.), 464
B-102
(1) If payment is made before maturity, it would constitute a negotiation back to the person primarily liable and he
can re-negotiate it. The payment does not discharge the instrument. 1106
(2) Payment to indorsee who is not in possession of the instrument is not payment in due course, as he is not a
holder. So that the payment to a person other than the holder is at the risk of the party so paying if the person
was not authorized by the holder to receive payment. 1107 So also, the payment to the original payee after the
note had been transferred by him to a holder in due course does not discharge the note. 1108
(3) Payment to a person by the debtor who knows that such person stole it, is not payment in due course, as such
payment is not in good faith. The maker of a note or the acceptor of a bill must satisfy himself, when it is
presented for payment, that the holder traces his title through genuine indorsements, and if there is a forged
indorsement, it is a nullity and no right passes by it. 1109
Payment must be made to possessor of instrument. The party making payment must insist on the presentment
of the paper by the party demanding payment in order to make sure that it is at the time in his possession and not
outstanding in another. 1110 A receipt taken will be no protection. If at the time he makes payment, the instrument is
outstanding and held by a holder in due course, he will be liable to pay it again. 1111 The possession of notes by the
maker is presumptive evidence that the notes are paid. 1112 But the payee's possession of the instrument raises the
presumption that they are not paid. 1113
Medium of payment. The New Civil Code provides that: "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
have been impaired. In the meantime, the action derived from the original obligation shall be held in abeyance." 1114
"In case of extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency
at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the
contrary." 1115
Payment in other than legal tender. When payment of a bill or note is made by giving another note or bill other
than notes treated as legal tender, as a general rule, such payment will not be considered absolute until the paper
given in payment has been itself paid except where the parties expressly or impliedly agree that the claim shall be
discharged by such payment. 1116 A new bill or note given in renewal. of an old one retained-by the payee also
constitutes but a suspension of the old one until the new one is paid. The authorities agree that the taking of a
renewal note is not a payment of the original.1117
Payments through banks. A bank to which a note is sent for collection is the agent of the owner. It is immaterial
that the maker has requested the holder to send the note to this bank for collection. 1118
Crediting of account constitutes payment. Where a check is presented by the payee or holder to the bank on
which it is drawn, and received as a deposit and credited to his ac count, this amounts, in the absence of fraud, to a
payment of the checks, just as if currency had been paid over the counter and immediately redeposited. 1119
(1) by the principal debtor (Sec. 119 [a]).
a. By payment in due course by or on behalf of the principal debtor;
xxx
Payment by principal debtor. In order to discharge the instrument; the payment must be (1) a payment in due
course; (2) a payment made by the principal debtor. If payment is made before the date of maturity, the
instrument is not discharged as the payment is not in due course. It will merely constitute a negotiation back to
the principal debtor who can renegotiate the instrument. Where payment is made by a party who is not the
primary obligor or an accommodation party, his payment only conceals his own liability and those who are
obligated after him. All prior parties primarily or secondarily liable on the bill, are liable to such a payer, and the
payer may cancel indorsements subsequent to his own and re-issue the paper, and it will be valid as against
the prior parties. 1120
Payment by third person. If payment is made by a third person, the instrument is not discharged because
payment is not made by the person principally liable. When one who is not a party to a negotiable paper pays
his money for it and takes up the paper, the presumption is that he has bought it and not paid it off. 1121 It must
be understood that not any one who desires may pay the instrument and then recover of the maker. He must be
a person who has in some way made himself liable for the payment of the instrument. There is however one
exception to this, and that is where an instrument has been protested and some one voluntarily makes
“payment supra protest” or “for honor.” 1122 And if the intention was to give the money in payment, the instrument
is discharged. 1123 Under the New Civil Code, a third person can make payment for an obligor. 1124
Meaning of principal debtor. The better view is that the term "principal debtor" refers to the person ultimately
bound to pay the debt. This is true whether he is a party to the instrument or not, or whether he appears to be
liable primarily or secondarily in the instrument. 1125
1106
1 Agbayani, Ibid., p. 360; citing Chase v. Commerce Trust Co., 224 Pac. 148
1107
1 Agbayani, Ibid., p. 360; citing Henry Knight & Sons v. Shall, 9 La. App. 98, 119 So. 80
1108
1 Agbayani, Ibid., p. 360; citing Kerg v. Lawson, 134 Okla. 163. 278 Pac. 645
1109
1 Agbayani, Ibid., p. 360; citing Harter v. Mechanics' Nat. Bank, 44 Atl. 715
1110
1 Agbayani, Ibid., p. 360; citing City Nat. Bank v. Adams, 266 Mass. 239.
1111
1 Agbayani, Ibid., p. 360; citing Williard v. Bristol, 251 Ill. App. 234
1112
1 Agbayani, Ibid., p. 360; citing Watson v. Rollings, 118 Ala
1113
1 Agbayani, Ibid., p. 360; citing Hale v. Hale, 34 Ga. App. 314, 129 S.E. 445
1114
Article 1249, NCC
1115
Article 1250, NCC
1116
1 Agbayani, Ibid., p. 361; citing Stanley v. Macharath, 86 Cal. 449
1117
1 Agbayani, Ibid., p. 361; citing Hammond v. Frost, 127 Neb. 72
1118
1 Agbayani, Ibid., p. 361; citing Bank of Hatch v. Mossman, 25 N.M. 547, 185 Pac. 275
1119
1 Agbayani, Ibid., p. 361; citing Yek Tong Lin Fire & Marine Insurance Co. v. Phil. Nat. Bank, No. L-14271, April 29, 1960
1120
1121
1 Agbayani, Ibid., p. 386; citing Cantrell v. Davidson, 180 Mo. App. 410, 168 S.W. 271
1122
1123
1 Agbayani, Ibid., p. 386; referring to Stark v. Scherf, 207 S.W. 863
1124
1125
1 Agbayani, Ibid., p. 386; referring to Beutal. "The Meaning of `Principal Debtor' as used iii the NIL", 19 Pa. Bar. 206 (1934), Faton
B-103
Payment by check or other negotiable paper. The delivery of mercantile documents shall produce the effect
of payment only (1) when they have actually been cashed or (2) when, through the fault of the creditor, they
have been impaired. 1126 A creditor is not bound to accept a check in satisfaction of his demand because a
check, even if good when offered, does not meet the requirements of a legal tender. 1127
Waiver of objection to tender of payment by check. It is the general rule that an objection to a tender must,
to be available to the creditor, be made in good time and that the grounds for objection must be specified; and
that an objection to tender on one ground is a waiver of all other objections which could have been made at that
time. 1128 It is ordinarily required of one to whom payment is offered in the form of check, that he makes his
objection at the time to the offer of a check, instead of an offer of payment in money. 1129 "Payment by check has
become so generally recognized as acceptable in business transactions that it has been held that omission to
make objection to a check as tender of payment is regarded as a waiver of the right to demand payment in
money. x x x"1130 Thus, where the plaintiff refused tender of payment made by check on the ground that it
believed that it could not be forced to accept the payment prior to the date specified in the contract, but did not
refuse payment by check as tendered, for insufficiency of funds in the bank, or on account of the medium in
which payment was made, it is deemed to have waived such grounds. 1131 The reason for this rule is to afford
the debtor an opportunity to secure the specific money which the law prescribes shall be accepted in payment
of debts. Undoubtedly, the non-observance of this duty would mislead the debtor and might inflict a loss which
could be avoided if the creditor had objected to the form and character of the tender. 1132 Considering the fact
that the great bulk of business is transacted through the medium of checks, draft, and other negotiable
instruments, it would be a dangerous rule, which could easily be turned into an engine of oppression, that a
tender of payment, especially where it involves the maturing of obligations not then due, could not be made by
check where no question was raised as to the value of the check tendered. 1133
(2) by the accommodated party (Sec. 119[b])
xxx
b. By payment in due course by the party accommodated, where the instrument is made or
accepted for his accommodation;
xxx
Payment by accommodated party. As between the accommodation party and the accommodated party, the
one ultimately liable on the accommodation instrument is the latter. Hence, his payment in due course
discharges the instrument as if payment was made by the principal debtor under paragraph (a). 1134
b. intentional cancellation
Meaning of cancellation. Cancellation signifies not only the drawing of criss-cross lines but also tearing,
obliterations, erasures, or burning. 1135 It may be made by any other means by which the intention to cancel the
instrument may be evident. 1136
Intentional cancellation. The cancellation must be (1) intentional and (2) made by the holder. Cancellation may be
done by tearing the instrument up, burning it or writing across it the word "cancelled." Thus, where the payee of a
note bears it up with the intention of destroying and canceling it, this is a discharge of the note. 1137 Thus, also, where
the note was intentionally burned by an agent of the payee, the note is discharged. 1138
Cancellation must be intentional. There must be an intention to cancel the negotiable instrument by the holder
thereof as such intention is an essential element of discharge on a negotiable instrument and a negotiable note in a
torn condition is presumed cancelled by the holder thereof. 1139 Thus, the instrument is not discharged where the
cancellation is made under a mistaken belief that it has been fully paid when as a matter of fact there is a failure of
such payment, 1140 or where cancellation is induced by fraud. 1141
(1) rule in case of unintentional cancellation (Sec. 123, NIL)
Section 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.
When cancellation is inoperative. Cancellation is inoperative (1) when made unintentionally, (2) when made
under mistake, or (3) when made without the authority of the holder. The following respectively illustrate the
foregoing: (1) cancellation is unintentional where the notes were physically mutilated by the payee who acted in
an outburst of temper without intent to cancel the said notes. 1142 (2) Cancellation is made under a mistake
where the note was cancelled under the supposition that it was fully paid when in fact it is not. 1143 And (3)
cancellation is made without authority where an agent for collection, without authority, accepted from the
acceptor of the bill less than the amount claimed by the holder and allowed the acceptor to cancel his signature.
1144
1126
1127
1 Agbayani, Ibid., p. 386; citing Belisario v. Natividad, 60 Phil. 156, cited in Villanueva v. Santos, 67 Phil. 648, 651
1128
1 Agbayani, Ibid., p. 387; citing 52 Am. Jur. 221-222
1129
1 Agbayani, Ibid., p. 387; citing Bunby v. Ingrem, 36 L.R.A. (N.S.) 232; Williston, Contr., Sec. 1819
1130
1 Agbayani, Ibid., p. 387; citing Bount v. Alabama B. Oil Co. A.L.R. 1279, 1282
1131
1 Agbayani, Ibid., p. 387; citing Lachica v. Gregorio Araneta Inc., infra
1132
1 Agbayani, Ibid., p. 387; citing A.L.R. 1288
1133
1 Agbayani, Ibid., p. 387; citing Lachica v. Gregorio Araneta, Inc. (1949), 47 O.G. (No. 11) 5699.
1134
1135
1 Agbayani, Ibid., p. 396; citing See Citizen's Nat. Bank v. Hileman, 82 Atl. 770
1136
1 Agbayani, Ibid., p. 396; citing Booth v. Smith, 3 Woods (U.S.) 19, 2 Fed. Cas. No. 1649
1137
1 Agbayani, Ibid., p. 388; citing Montgomery v. Schwald, 177 Mo. App. 75, 166 S.W. 831; Wilkins v. Shaglund, 127 Neb. 589, 256 N.W. 31
1138
1 Agbayani, Ibid., p. 388; citing Henson v. Henson, 268 S.W. 378
1139
1 Agbayani, Ibid., p. 388; citing Negotiable Instrument Law, Sec. 123; In re Lock's Will, N.Y. Sur, 64 N.Y.S. (2d) 206
1140
1 Agbayani, Ibid., p. 388; citing Egan v. Louisville & Southern Indiana Traction Co., 103 N.E. 423
1141
1 Agbayani, Ibid., p. 389; citing Liesemer v. Brug, 72 N.W. 999
1142
1 Agbayani, Ibid., p. 396; citing Green v. Poz, 182 N.Y. Supp 900
1143
1 Agbayani, Ibid., p. 396; citing Bladgett v. Pickfor, 73 Am. Dec. 334
1144
1 Agbayani, Ibid., p. 396; citing Dominion Bank v. Anderson, 15 Sess. Cas. 408
B-104
Burden of proof. But where an instrument or signature thereon appears to have been cancelled, the party
claiming that the cancellation is inoperative must prove his allegations. Thus, where it appeared that the date
and the signature of the maker of a note were destroyed by burning, the presumption was that the burning was
intentional and done for the purpose of canceling the instrument, and the burden was on the holder to prove the
contrary. 1145
c. any act that discharge simple contracts
Any other act. Under Section 196, the acts which will discharge a simple contract are to be determined by existing
legislation, as Section 119 does not specify those acts. 1146 Novation would discharge the instrument. 1147 It has,
however, been opined as being the best reasoning that paragraph (d) of Section 119 is meaningless and inoperative
in the light of the other inclusive provisions of Section 119, and that consequently the provision has not altered the
unwritten rule as to discharge of negotiable instruments, either as between the parties or with respect to holders in
due course. 1148
Whether an extension of time granted by the holder to the debtor will discharge the instrument. An extension
of time granted by the holder to the debtor will not discharge the instrument, according to the majority view. Because
while this ground is not omitted in Section 120, it is omitted in Section 119. This shows the legislative intent to that an
extension of time by the holder will not discharge the instrument. 1149
d. principal debtor becomes a holder
Principal debtor acquires instrument. In order to discharge an instrument under paragraph (e), reacquisition must
be (1) by the principal debtor, (2) in his own right, and (3) at or after the date of maturity. 1150
Meaning of "in his own right" This has been interpreted to mean "not in a representative capacity." 1151 So if the
maker buys from the last indorsee his own note, not in his own behalf but as agent of a third person, this would not
discharge the instrument. 1152 Thus, also the instrument is not discharged if the maker or acceptor becomes the
executor of the holder of the instrument, though the executor had to account for the amount as assets of the estate;
1153
or where the note was transferred to the maker as collateral for a separate debt due the maker; 1154 or where the
maker of a note reacquires the old note in exchange of a new note in payment thereof if the new note proves to be
invalid. 1155
When instrument reacquired before maturity. A reacquisition by the principal debtor in his own right but before
maturity will not discharge the instrument. It will merely constitute a negotiation back to the principal debtor who,
under authority of Section 50, may renegotiate the instrument. 1156
Discharge by operation of law. An instrument may be discharged by operation of law. If a judgment is obtained an a bill
or note, the bill or note is thereby extinguished and merged in the judgment. 1157 But the judgment alone, without actual
satisfaction, is not extinguishment as between the plaintiff and other parties not jointly liable with the original defendant,
whether those parties be prior or subsequent to the defendant. 1158 A discharge in bankruptcy, unless otherwise provided
by statute, releases a bankrupt from all his provable debts, and therefore will discharge the bankrupt. on all bills accepted,
or notes made by him but will not discharge the other parties. 1159
3. Discharge of persons secondarily liable (Sec. 120, NIL)
Section 120. When persons secondarily liable on the instrument are discharged. -- A 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 party secondarily liable, or unless the
right of recourse against such party is expressly reserved.
Effect of Section 120 in suretyship. The cases and authorities are at variance as to the matter of the extent to which the
principles of suretyship of the law merchant have been modified or abrogated by the Negotiable Instrument Law. It
appears that generally the courts regard Section 120 of the Negotiable Instruments Law as exclusive, that is, as a
complete codification of the law of discharge of secondary parties by the six methods therein set forth. It seems that this
interpretation is sound in the light of the general purpose of the law to protect the rights of a holder in due course. 1160
Acts discharging instrument. Any of the acts that will discharge an instrument under Section 119 will discharge the
parties secondarily liable thereon, such as, by payment in due course by the maker. This discharges the indorsers of the
note. 1161
1145
1 Agbayani, Ibid., p. 396; citing first and last sentence of Section 124, NIL
1146
1 Agbayani, Ibid., p. 389; referring to Article 1231 of the New Civil Code for the modes of obligations
1147
1 Agbayani, Ibid., p. 389; citing Farmer's State Bank v. Gottingham, 251 S.W. 426
1148
1 Agbayani, Ibid., p. 389; referring to Ogden, 5th ed., p. 449, citing Bigelow Bills, (3rd ed.) 472
1149
1 Agbayani, Ibid., p. 389; citing Union Trust Co. v. McCurty, 98 N.E. 679
1150
1151
1 Agbayani, Ibid., p. 389; citing Schwartzman v. Post, 84 N. Y . Supp. 992
1152
1 Agbayani, Ibid., p. 389; referring to People's State Bank v. Dayton, 1137 Pac. 928
1153
1 Agbayani, Ibid., pp. 389-390; citing Chalmers on Bills of Exchange, 8th ed., 242
1154
1 Agbayani, Ibid., p. 390; citing Swings Lumber Co. v. Marlowe, 76 So. 926
1155
1 Agbayani, Ibid., p. 390; citing Wade v. Hall, 166 Pac. 720
1156
1157
1 Agbayani, Ibid., p. 390; citing Claxton v. Swift, 2 Show (Eng.) 329
1158
1 Agbayani, Ibid., p. 390; citing Claxton v. Swift, 2 Show (Eng.) 441
1159
1 Agbayani, Ibid., p. 390; referring to Dean v. Justice of Municipal Court, 173 Mass. 453, 53 N.E. 893, 2 Am. B. R. 163
1160
1161
1 Agbayani, Ibid., p. 391; referring to Paul Revers Trust Co. v. Castle, 120 N.E. 352
B-105
Discharge by operation of law not included. It should, however, be noted that the discharge of a prior party referred to
herein must be one that arises from the act of the holder. It does not refer to a discharge by operation of law, such as (1) a
discharge by reason of bankruptcy; 1162 (2) a discharge of a party not given due notice of dishonor; 1163 (3) a discharge by
the Statute of Limitations. 1164 Each of these is a discharge by operation of law.
Valid tender of payment. Tender of payment means the act by which one produces and offers to a person holding a
claim or demand against him the amount of money which he considers and admits to be due, in satisfaction of such claim
or demand without any stipulation or condition. 1165 But where an instrument is payable at a bank and the indorser waived
protest, the fact that the maker had money on deposit in the bank at maturity was held not sufficient tender under Sections
70 and 87 to discharge an indorser. Notice of that fact must be brought to the holder. 1166
Release must be act of holder. As under paragraph (c), the release must be a voluntary act of the holder, not by
operation of law. 1167
Release must be for value. And if the release is not for value, it is not a discharge of secondary parties. 1168
Effect of release on accommodation maker or acceptor. As to an accommodation maker or acceptor, the general rule
is that he is not discharged by the holder's release of the principal debtor even if the release be made with knowledge of
the true relation of the parties and, conversely, the release of an accommodation maker or acceptor does not discharge
the principal debtor though the latter occupies the position of a party "secondarily liable" on the instrument. 1169
Extension of time. If the holder agrees to extend the time of payment, the indorsers are discharged. The following,
however, are exceptions: (1) where the extension of time is consented to by the party secondarily liable, he is not
discharged, and (2) where the holder expressly reserves his right of recourse against the party secondarily liable, the
latter is not discharged. 1170
Requisites of agreement for extension of time. The following are the requisites of the agreement for extension of time
in order to discharge the parties secondarily liable: (1) it must be a binding contract, supported by a valuable
consideration, and for a definite period; 1171 and (2) it must be made with the principal debtor, not with a third party. 1172
I. CHECKS
1. Checks defined (Sec. 185, NIL)
Section 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.
A check is defined by law as a bill of exchange drawn on a bank payable on demand. 1173 Thus, a check 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. 1174 A check is a bill
of exchange of a special kind. 1175
Rules applicable. 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. 1176
2. Distinguished from draft
Draft. A written order by the first party, called the drawer, instructing a second party, called the drawee (such as a bank),
to pay money to pay money to a third party, called the payee. An order to pay a sum certain in money, signed by the
drawer, payable on demand or at a definite time, and to order or bearer. 1177 An unconditional order to pay money drawn
by drawer on drawee to the order of the payee; same as a bill of exchange. 1178
Distinction with a bill of exchange. 1179

1. A check is always drawn upon a bank or banker, whereas, an ordinary bill may or may not be drawn against a bank,
as per Section 158.
2. A check is always payable on demand, whereas, an ordinary bill may be payable on demand or at a fixed or
determinable future time, as per Section 185.
3. It is not necessary that a check be presented for acceptance as in the case of a bill of exchange. 1180 Checks are not
to be accepted but presented at once for payment. 1181 However, if the holder requests, and the banker desires, he
may accept.
4. A check is drawn on a deposit while the ordinary bill of exchange is not. 1182 It is not necessary that a drawer of a bill
of exchange should have funds in the hands of a drawee, but in the case of a check, it would be fraud. 1183
5. The death of a drawer of a check, with knowledge by the banks, revokes the authority of the banker to pay, while the
death of the drawer of the ordinary bill of exchange does not.1184 But there are some decisions to the contrary.
6. An ordinary bill of exchange may be presented for payment within a reasonable time after its last negotiation. But a
check must be presented for payment within a reasonable time after its issue, as per Sections 71 and 186.
1162
1 Agbayani, Ibid., p. 391; citing Silverman v. Rubenstein, 162 N.Y. Supp. 733
1163
1 Agbayani, Ibid., p. 391; citing West River Bank v. Taylor, 34 N.Y. 128
1164
1 Agbayani, Ibid., p. 392; citing Romero v. Hopewell, 210 Pac. 281
1165
1 Agbayani, Ibid., p. 392; citing Tompkins v. Batie, 7 N.W. 747
1166
1 Agbayani, Ibid., p. 392; citing Appleman v. Pepis, 246 Pac. 225
1167
1168
1 Agbayani, Ibid., p. 392; citing Bigelow, Bills Notes and Checks (Life's 1928 ed.), Sec. 597
1169
1 Agbayani, Ibid., pp. 392-393; citing Bigelow, Bills, Notes and Checks (Life's 3rd 1938), Sec. 603a
1170
1171
1 Agbayani, Ibid., p. 393; referring to Cape Charles Bank v. Farmer's Mutual Exchange, 92 S.E. 9918
1172
1 Agbayani, Ibid., p. 393; citing Broesemer v. Broesemer, 162 N.Y. Supp. 1067
1173
Sec 185, NIL
1174
Moran vs. Court of Appeals [GR 105836, 7 March 1994]; citing Martin, Philippine Commercial Laws, Vol. I, 1985 Ed., 375
1175
1 Agbayani, Ibid., p. 104.
1176
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]
1177
Black’s Law Dictionary, Sixth edition, p. 493; citing People vs. Norwood, 26 Cal. App. 3d 148, 103 cal Rptr. 7, 11
1178
Black’s Law Dictionary, Sixth edition, p. 493; citing U.C.C. § 3-104
1179
1180
1 Agbayani, Ibid., p. 105; citing In RE Brown, 2 Story (US) 502; Bower vs. Newell, 5 Sandf (NY) 326
1181
1 Agbayani, Ibid., p. 105; citing PNB vs. National City Bank, 63 Phil. 711, 716
1182
1 Agbayani, Ibid., p. 105; citing Champion vs. Gordon. 10 Am. Rep. 681.
1183
1 Agbayani, Ibid., p. 105; citing Bull vs. Kasson First National Bank, 123 US 105
1184
1 Agbayani, Ibid., p. 105; citing Nasano vs. Toulomme Country Bank, 130 Pac. 29; and other cases
B-106
3. Relationship between drawer, drawee and payee
To whom payable. An instrument may be made or drawn payable to (1) bearer, i.e. (a) when it is expressly to be so
payable, or (b) when it is payable to a person named therein or bearer; or (2) order, i.e. when it is expressed to be
payable (a) to the order of a specified person, or (2) to a specified person or his order. It may also be payable to (3) a
specified person. When a person is payable to a specified person, it is not negotiable because it is neither payable to
bearer nor payable to order. 1185
a. Dynamics as to forged checks, or payment by mistake
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. 1186 The responsibility of the drawer's 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.1187 If it appears that the one to whom payment was made was not an innocent sufferer, but was guilty of
negligence in not an innocent sufferer, but was guilty of negligence in not doing something, which plain duty
demanded, and which, if it had been done, would have avoided entailing loss of any one, he is not entitled to retain
the moneys paid through a mistake on the part of the drawee bank. 1188 In other words, to entitle the holder of a forged
check to retain the money obtained thereon, 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. 1189 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 probability have been detected and the fraud defeated. 1190 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 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. 1191 Where a loss, which must be borne by one of two parties alike innocent of
forgery, can be traced to the neglect or fault of either, it is reasonable that it would be borne by him, even if innocent
of any intentional fraud, through whose means it has succeeded. 1192 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. 1193Most 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.1194 Of course, the drawee must, in order to recover back the holder, show that he himself
was free from fault.1195 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. 1196
A holder cannot profit by a 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 attributable 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 actual 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 not 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. 1197 The rule that one who first negotiates forged paper without taking some precaution to learn
whether or not it is genuine should not be allowed to retain the proceeds of the draft or check from the drawee,
whose sole fault was that he did not discover the forgery before he paid the draft or check, has been followed by the
later cases. 1198 Where 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 it mistake in having failed to detect the forgery, since its mistake did not mislead the purchaser or bring about a
change in position.1199 Also, a drawee bank could recover from another bank the portion of the proceeds of a forged
check cashed by the latter and deposited by the forger 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
1185
1 Agbayani, Ibid., pp. 105-106.
1186
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing Woods and Malone vs. Colony Bank [1902], 56
L.R.A., 929, 932
1187
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]l citing National Bank of America vs. Bangs, 106 Mass.,
441; 8 Am. Rep., 349; Woods and Malone vs. Colony Bank, supra; De Feriet vs. Bank of America, 23 La. Ann., 310; B.B. Ford & Co. vs. People's Bank of
Orangeburg, 74 S.C., 180; 10 L.R.A. [N.S.], 63
1188
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing 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
1189
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing 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
1190
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing First National Bank of Lisbon vs. Bank of
Wyndmere, 15 N.D., 209; 10 L.R.A. [N.S.], 49
1191
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing National Bank of America vs. Bangs, supra; First
National Bank vs. Indiana National Bank, 30 N.E., 808-810; Woods and Malone vs. Colony Bank, supra; First National Bank of Danvers vs. First Nat. Bank of
Salem, 151 Mass., 280
1192
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing 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
1193
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing 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
1194
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing Lisbon First National Bank vs. Wyndmere Bank,
supra
1195
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; referring to R.C.L., pp. 556-558
1196
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing Security Commercial & Sav. Bank vs. Southern
Trust & C. Bank [1925], 74 Cal. App., 734;241 Pac., 945
1197
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]l citing First National Bank vs. United States National Bank
([1921], 100 Or., 264; 14 A.L.R., 479; 197 Pac., 547
1198
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing Security Commercial & Savings Bank vs. Southern
Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945; Hutcheson Hardware Co. vs. Planters State Bank [1921], 26 Ga. App., 321; 105 S.E., 854;
[Annotation at 71 A.L.R., 337]
1199
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing Security Commercial & Savings Bank vs. Southern
Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945
B-107
drawer, where the purchasing bank was negligent in taking the check, and was not injured by the drawee's
negligence in discovering and reporting the forgery as to the amount left on deposit, since it was not a purchaser for
value. 1200 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 drawer and payee, without making any 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. 1201
If in such a transaction between the drawee and the holder of a check both are without fault, no recovery may be had
of the money so paid. 1202 Or the rule may be more accurately state that, where the drawee pays the money, he
cannot stated that, where the drawee pays the money, he cannot recover it back from a holder in good faith, for
value and without fault. If, on the other hand, the holder acts in bad faith, or is guilty of culpable negligence, a
recovery may be had by the drawee of such holder. 1203 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, holder, or presenter of the forged paper has himself been in default, if he has himself been guilty of a
negligence prior to that of the banker, or if by any act of his own he has at all contributed to induce the banker's
negligence, then he may loss his right to cast the loss upon banker. The courts have shown a steadily increasing
disposition to extend the application of this rule over the new conditions of fact which from time to time arise, until it
can now rarely happen that the holder, payee, or presenter can escape the imputation of having been in some
degree contributory towards the mistake. Without any actual change in the abstract doctrines of the law, which are
clear, just, and simple enough, the gradual but sure tendency and effect of the decisions have been to put as heavy
a burden of responsibility upon the payee as upon the drawee, contrary to the original custom." 1204
Any person taking checks made payable to a corporation, which can act only by agents, does so at his peril, and
must abide by the consequences if the agent who indorses the same is without authority. 1205
The correct rule recognizes the fact that, in case of payment without a prior acceptance or certification, the holder
takes the paper upon the credit of the prior indorsers and the credit of the drawer, and not upon the credit of the
drawee; that the drawee, in making payment, has a right to rely upon the assumption that the payee used due
diligence, especially where such payee negotiated the bill or check to a holder, thus representing that it had so fully
satisfied itself as to the identity and signature of the maker than it was willing to warrant as relates thereto to all
subsequent holders.1206 Such correct rule denies the drawee the right to recover when the holder was without fault or
when there has been some change of position calling for equitable relief. When a holder of a bill of exchange uses all
due care in the taking of bill or check and the drawee thereafter pays same, the transaction is absolutely closed —
modern business could not be done on any other basis. While the correct rule promotes the fluidity of two recognized
mediums of exchange, those mediums by which the great bulk of business is carried on, checks and drafts, upon the
other hand it encourages and demands prudent business methods upon the part of those receiving such mediums of
exchange. 1207
If the holder has been negligent in paying the forged paper, or has by his conduct, however innocent, misled or
deceived the drawee to his damage, it would be unjust for him to be allowed to shield himself from the results of his
own carelessness by asserting that the drawee was bound in law to know his drawer's signature. 1208 A drawee of a
check, who is deceived by a forgery of the drawer's 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 discover of the forgery
had been made on presentation. 1209 Forgeries often deceived the eye of the most cautions experts; and when a bank
has been so deceived, it is a harsh rule which compels it to suffer although no one has suffered by its being
deceived. 1210
b. Dynamics as to sufficiency of funds
Drawer’s responsibility. 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 certain checks he previously issued. A check, as distinguished from an ordinary bill of exchange, is supposed to
be drawn against a previous deposit of funds for it is ordinarily intended for immediate payment. 1211
Banks’ inducement on drawer to make good the latter’s account. A bank performs its full duty where, upon the
receipt of a check drawn against an account in which there are insufficient funds to pay it in full, it endeavors to
induce the drawer to make good his account so that the check can be paid, and failing in this, it protests the check
on the following morning and notifies its correspondent bank by the telegraph of the protest. It cannot, therefore, be
held liable to the payee and holder of the check for not protesting it upon the day when it was received. The bank did
more than it was required to do by making an effort to induce the drawer to deposit sufficient money to make the
check good, and by notifying its correspondent of the dishonor of the check by telegram. 1212
No partial payment by bank on checks. A bank is under no obligation to make part payment on a check, up to only
the amount of the drawer's funds, where the check is drawn for an amount larger than what the drawer has on
deposit. Such a practice of paying checks in part has never existed. Upon partial payment, the check holder could
not be called upon to surrender the check, and the bank would be without a voucher affording a certain means of
showing the payment. The rule is based on commercial convenience, and any rule that would work such manifest
1200
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing First State Bank & T. Co. vs. First Nat. Bank [1924],
314 Ill., 269; 145 N. E., 382
1201
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing 71 A.L.R., p. 340
1202
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing Deposit Bank of George town vs. Fayette National
Bank, supra, and cases cited
1203
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing Louisa National Bank vs. Kentucky National Bank,
39 S.W. [2nd], 497, 501
1204
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing 2 Morse on Banks and Banking, 5th ed., secs. 464
and 466, pp. 82-85 and 86,87
1205
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing Insular Drug Co. vs. National Bank, 58 Phil., 684
1206
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing Uniform Act, secs. 65 and 66
1207
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing Pennington County Bank vs. First State Bank, 110
Minn., 263;26 L.R.A. [N.S.], 849;136 Am. St. Rep., 496;125 N.W., 119; First National Bank vs. State Bank, 22 Neb., 769; 3 Am. St. Rep., 294;36 N.W., 289;
Bank of Williamson, vs. McDowell County Bank, 66 W. Va., 545;36 L.R.A. [N.S.], 605;66 S.E., 761; Germania Bank vs. Boutell, 60 Minn., 189;27 L.R.A.,
635;51 Am. St. Rep., 519;62 N.W., 327; American Express Co. vs. State National Bank, 27 Okla., 834;33 L.R.A. [N.S.], 188;113 Pac., 711; Farmers' National
Bank vs. Farmers' & Traders Bank, L.R.A., 1915A, 77, and note [159 Ky., 141;166 S.W., 986]
1208
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing Woods and Malone vs. Colony Bank, 56 L.R.A.,
929, 932
1209
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing 5 R.C.L., p. 559;2 Daniel on Negotiable Instruments,
1538
1210
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing 17 A.L.R., 891;5 R.C.L., 559
1211
Moran vs. CA [GR 105836, 7 March 1994]; De Leon, The Law on Negotiable Instruments, 1989 Ed., 230-231
1212
Moran vs. CA [GR 105836, 7 March 1994]; citing Whitman vs. First National Bank, 35 Pa. Super Ct., 125 [1907]
B-108
inconvenience should not be recognized. 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. 1213
4. Kinds of check
There are a variety of checks, the more popular of which are the memorandum check, cashier's check, traveler's check
and crossed check. 1214
a. cashier's and manager's check (See BSP Circulars 259, series of 2000 & 291, series of 2001)
CIRCULAR NO. 259

Series of 2000
Pursuant to Monetary Board Resolution No. 1494 dated 1 September 2000, additional anti-money
laundering rules and regulations for banks are hereby issued as follows:
Section 1. Issuance of Cashier’s, Manager’s or Certified Checks. Banks shall not issue cashier’s,
manager’s or certified checks or other similar instruments payable to cash, bearer, fictitious payee or
numbered account.
When the person purchasing the above-mentioned instruments is not a regular bank client, the issuing
bank shall require the purchaser to present his/her proof of residence together with his/her driver’s
license, passport, employment I.D. or other photo identification card. A register for cashier’s, manager’s
or certified checks issued shall be maintained by the bank.
Section 2. Sanction. Any violations of the provision of this Circular shall be subject to a fine of
P30,000 per transaction.
This Circular shall take effect immediately.
CIRCULAR NO. 291

Series of 2001
The Monetary Board, in its Resolution No. 707 dated 10 May 2001 decided to authorize the issuance of
cashier’s, manager’s or certified checks or other similar instruments in blank or payable to cash, bearer
or numbered account as an exception from the provisions of Circular no. 259, subject to the following
conditions:
a. That the amount of each check shall not exceed P10,000.00;
b. That the buyer of the check is properly identified as required under Circular No. 259 dated 29
September;
c. That a register of said checks shall be maintained with the following minimum information:
1. Date issued;
2. Amount;
3. Name of buyer;
4. Date paid;
5. If the aggregate instruments purchased by the same person within any thirty (30) day period
amounts to at least fifty thousand pesos (P50,000), the purpose of the buyer should be stated.
d. That banks which issue as well as those which accept as deposits, said cashier’s, manager’s or
certified checks or other similar instruments issued in blank or payable to cash, bearer or
numbered account shall take such measure(s) as may be necessary to ensure that said
instruments are not being used/resorted to by the buyer or depositor in furtherance of a money-
laundering activity.
e. That the deposit of said instruments shall be subject to the same requirements/scrutiny applicable
to cash deposits.
f. That transactions involving said instruments should be accordingly reported to the Bangko Sentral
ng Pilipinas if there is reasonable ground to suspect that said transactions are being used to
launder funds of illegitimate origin.
This Circular shall take effect immediately.
FOR THE MONETARY BOARD:
AMANDO M. TETANGCO JR.

Officer-in-Charge
16 August 2001
Cashier’s check. A bank’s own check drawn on itself and signed by the cashier or other authorized official. It is a
direct obligation of the bank. One issued by an authorized officer of a bank directed to another person, evidencing
that the payee is authorized to demand and receive upon presentation from the bank the amount of money
represented by the check. A form of a check by which the bank lends its credit to the purchaser of the check, the
purpose being to make it available for immediate use in banking circles. A bill of exchange drawn by a bank upon
itself, and accepted by the act of issuance. In its legal effect, it is the same as a certificate of deposit, certified check
or draft. An acknowledgment of a debt drawn by bank upon itself. 1215
b. certified check (Sec. 187-189, NIL)
1213
Moran vs. CA [GR 105836, 7 March 1994]; O. E. Eads vs. Commercial National Bank of Phoenix, 62 A. L. R. 183.
1214
Bataan Cigar and Cigarette Factory vs. Court of Appeals [GR 93048, 3 March 1994]
1215
Black’s Law Dictionary, Sixth edition, p. 237
B-109
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 an acceptance.
Certified check. The check of a depositor drawn on a bank on he face of which the bank has written or stamped the
words “accepted” or “certified” with the date and signature of a bank official. The check then becomes an obligation
of the bank. The certification of a check is a statement of fact, amounting to an estoppel of the bank to deny liability;
a warranty that sufficient funds are on deposit and have been set aside. It means that bank holds money to pay
check and is liable to pay it to proper party. Certification of a check is acceptance of check by drawee bank. Where
a holder procures certification the drawer and all prior indorsers are discharged. Unless otherwise agreed a bank has
no obligation to certify a check. A bank may certify a check before returning it for lack of proper indorsement. If it
does so the drawer is discharged. 1216
Certification of check. A certification is an agreement whereby the bank against whom a check is drawn,
undertakes to pay it at any future time when presented for payment. But a bank is not obligated to the depositor to
certify checks. 1217 And the drawee is not liable to the holder for refusal of the bank to certify a check. The refusal of a
bank does not dispense with the requirement of presentment for payment since a check is of right presentable only
for payment at the bank on which it is drawn. 1218
Form of certification. No particular form is required but it must be in writing. 1219 So, a telephone message is not a
good certification. But a telegram sent by a bank that it would pay a certain check has been held to be a certification.
1220
The usual method, by stamping on the check the word "certified" and underneath it the signature of the cashier,
or by writing upon the check the word "good" with the date of certification and signature of the officer of the bank
having the express or implied authority to certify checks, has been held to be a sufficient certification. 1221 But the
letters "O. K.", with the initials of the cashier of a bank do not constitute a sufficient certification under modern
banking practice. 1222
Effect of certification. Certification (1) is equivalent to acceptance and is the operative act that makes the drawee
bank liable, as per Sections 187 and 188, NIL. Furthermore, (2) it operates as an assignment of the funds of the
drawer in the hands of the drawee bank, as per Section 189, NIL; and, (3) if obtained by the holder, it discharges
persons secondarily liable thereon, as per Section 188, NIL. 1223
Certification equivalent to acceptance. Certification is equivalent to acceptance in that the drawee bank is bound
on the instrument upon certification. And it is immaterial to such liability in favor of a holder in due course whether the
drawer had funds or not in bank 1224 or the drawer was indebted to the bank for more than the amount of the check.
1225
Thus a certifying bank has all the liabilities stated in Section 62. 1226
Implication of certification of check. By the law merchant, the certificate of the bank of a check 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
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 the depositor, or any other obligation it can
assume. The object of certifying a check, as regards both pal-ties, 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
advisable also to perform its important function 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 and 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 it in a certified
check account, and, when the check is paid, to debit that account with the amount. Nothing can be simpler or safer
than this process. 1227 Further, the bank virtually says, that check is good; we have the money of the drawer here
ready to pay it. We will pay it now if you will 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
payment, and for his own convenience has the money appropriated to that check subject to its future presentment at
any time within the statute of limitations. 1228
Function of certified checks. Although a check does not call for 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 bankers, thus marked
and 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. In the great commercial centers, they make up no inconsiderable portion of the circulation and thus
perform a useful, valuable, and an almost indispensable office. 1229
Purpose of procuring checks to be certified. 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. The check
becomes a basis of credit - an easy mode of passing money from hand to hand and answers the purposes of money.
1230
1216
Black’s Law Dictionary, Sixth edition, p. 227; citing U.C.C. § 3-411
1217
1 Agbayani, Ibid., p. 489; referring to Watchel v. Rosen, 221 N.Y. Supp. 710
1218
1 Agbayani, Ibid., p. 489; citing Watchell v. Rosen, 249 N.F. 286, 164 N.E. 326, 62 A.L,.R. 374
1219
1 Agbayani, Ibid., p. 489; citing Ewing Citizen's Nat. Bank, 172 S.W. 955
1220
1 Agbayani, Ibid., p. 489; citing Henrietta Bank v. State Bank, 16 S.W. 321
1221
1 Agbayani, Ibid., p. 489; referring to Freedy v. Green, 22 S.W. 243; see also Phil. Nat. Bank v. Nat. City Bank, 63 Phil. 711, 719; Liberty Trust Co. vs.
Haggerty, 113 Atl. 596
1222
1 Agbayani, Ibid., p. 489; citing Panlilio v. David, 50 Phil. 105
1223
1224
1 Agbayani, Ibid., pp. 489-490; citing Security v. State Bank, 154 N.W. 282
1225
1 Agbayani, Ibid., p. 490; referring to Nat. Bank v. Schmelz Nat. Bank, 116 S.E. 880
1226
1 Agbayani, Ibid., p. 490; citing Title Guaranty v. Emadee Realty Corp., 240 N.Y. 36
1227
1 Agbayani, Ibid., p. 490; citing PNB vs. Nat. City Bank of New York, 63 Phil. 711, 718-719
1228
1 Agbayani, Ibid., pp. 490-491; citing PNB v. Nat. City Bank of New York, supra, 719-720, citing 1 Morse on Banks & Banking, 920
1229
1 Agbayani, Ibid., p. 491; citing PNB v. Nat. city Bank of New York. supra
1230
1 Agbayani, Ibid., p. 491; citing PNB v. Nat. City Bank of New York, supra, citing 5 R.C.L. 516-517
B-110
Payment neither includes nor implies acceptance. 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. 1231 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. 1232 The rule supported by the majority of the cases, that payment of a
check on a forged or unauthorized indorsement of the payee's name, and charging the same to the drawer's
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. 1233
Right of holder to sue drawer where check not certified. The drawer of a check contracts that it will be paid on
presentment but not that it will be certified. This is the theory on which the law discharging the drawer and indorsers
upon certification is based. 1234 Accordingly, certification differs from acceptance in that the refusal of the drawee
bank to certify does not amount to a dishonor of the check. There is, therefore, no necessity of notice of dishonor by
non-acceptance or non-certification, and it is still necessary to make presentment for payment which is not
necessary in the case of non-acceptance.1235 But the case is adversely criticized.
Section 188. Effect where the holder of check procures it to be accepted or certified. -- Where the
holder of a check procures it to be accepted or certified, the drawer and all indorsers are discharged
from liability thereon.
Effect where holder obtains certification. When the certification is obtained by the holder, the drawer and the
indorsers are discharged. The certification has the same effect as if the holder had drawn the money redeposited it
and taken a certificate of deposit for it. 1236 Only the indorsers at the time of the certification are discharged. Indorsers
subsequent to the certification are not discharged. 1237 In the Philippines, the practice is to certify only at the request
of the drawer. The reason for the rule that a certification obtained by the holder discharges the drawer and indorsers
is that the moment the check is certified the funds cease to be under the control of the original depositors and pass
under the control of the person who procures the certification of the check drawn in his favor. 1238
Effect where certification obtained by others. Where the certification is not obtained by the holder but by others
such as the drawer and indorsers, they are not discharged. Thus, in the following cases, the drawers and indorsers
are not discharged:
(1) Where the certification is obtained by the drawer, 1239 even when the drawer procures the certification at the
instance of the payee; 1240 or
(2) Where the certification is obtained by a person who is neither holder nor drawer. 1241
Section 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.
Certification operates as assignment of funds. When the holder procures the check to be certified “the check
operates as an assignment of a part of the funds to the credit of the drawer with the bank.” 1242
Duration of transfer of fund. By the certification of a check, 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 payee or holder
becomes the depositor of the drawee bank with rights and duties of one in such relation. But where the certification
states the check is to be "void if not presented for payment within 90 days from date of acceptance," the transfer of
the corresponding funds from the credit of the depositor to that of the payee is co-extensive with the life of the check,
which in this case is 90 days. If the check is not presented for payment within that period, it becomes invalid and the
funds are automatically restored to the credit of the drawer though not as a current deposit but as a special deposit.
1243
Uncertified check not assignment of funds. A check of itself is not an assignment of the funds of the drawer in the
bank. It has been held in a Philippine case 1244 that "general deposit in a bank is so much money to the depositor's
credit; it is a debt to him by the bank, payable on demand to his order, not property capable of identification and
specific appropriation. A check drawn upon the bank in the usual form, not accepted or certified by its cashier to be
good, does not constitute a transfer of any money to the credit of the holder; it is simply an order which may be
countermanded and payment forbidden by the drawer at any time before it is actually cashed. It creates no lien on
the money which the holder can enforce against the bank. It does not of itself operate as an equitable assignment."
Drawee bank not liable to holder on check unless accepted or certified. Before acceptance or certification, the
bank is not liable and the holder has no right to sue the drawee bank on the check. The general rule is that an action
cannot be maintained by a payee of the check against the bank on which it is drawn, unless the check has been
certified or accepted by the bank in compliance with the statute, even though at the time the check is that an action
cannot be maintained by a payee of the drawer of the check out of which the check is legally payable; and that the
payment of the check by the bank on which it is drawn, even though paid on the unauthorized indorsement of the
name of the holder (without notice of the defect by the bank) ; does not constitute a certification thereof, neither is it
an acceptance thereof; and without acceptance or certification, as provided by statute, there is no privity of contract
between the drawee bank and the payee, or holder of the check. Neither is there an assignment pro tanto of the
funds where the check is not drawn on a particular fund, or does not show on its face that it is an assignment of a
particular fund. The above rule as stated seems to have been the rule in the majority of the states even before the
passage of the Uniform Negotiable Instruments Act in the several states. 1245
Relation between depositor and bank. The contract between a banker and a depositor is that of deposit. It is a
separate contract from that stated in the check that may be drawn by the depositor against the depository bank. "The
1231
1 Agbayani, Ibid., p. 491; citing PNB v. Nat. city Bank of New York, supra, 721
1232
1 Agbayani, Ibid., pp. 491-492; citing PNB v. Nat. city Bank of New York, supra, 72
1233
1 Agbayani, Ibid., p. 492; citing PNB v. Nat. city Bank of New York, supra, citing in turn Ann, 69 A.L.R. 1076, 1077
1234
1 Agbayani, Ibid., p. 492; citing Lipten v. Columbia Trust Co., 194 App. Div. 384,185 N.Y. Supp. 198
1235
1 Agbayani, Ibid., p. 492; referring to Watchel v. Rosea, 221 N.Y. Supp. 170
1236
1 Agbayani, Ibid., p. 492; referring to Times Square v. Rutherford Nat. Bank, 73 Atl. 479
1237
1 Agbayani, Ibid., p. 492; citing Felin v. Petix. 167 N.Y.S. 1 (73)
1238
1 Agbayani, Ibid., pp. 492-493; citing First Nat. Bank v. Leach, 52 N.Y. 350, It Am. Rep. 708
1239
1 Agbayani, Ibid., p. 493; referring to Deal v. Atl. Coast Line A. Co., 86 A.L.R. 455, 144 So. 81
1240
1 Agbayani, Ibid., p. 493; referring to Randolph Nat. Bank v. Hornblower, 35 N.E. 850
1241
1 Agbayani, Ibid., p. 493; referring to State Bank v. Mid City Trust and Sav. Bank, 129 N.E. 489
1242
1 Agbayani, Ibid., p. 493; citing Phil. Nat. Bank v. Nat. City Bank, 63 Phil. 711, 717
1243
1 Agbayani, Ibid., pp. 493-494; referring to Gregorio Araneta, Inc. v. Tuason de Paterno, G.R. No. L-2886, Aug. 22, 1952, 49 O.G. (No. 1) 59
1244
Bryan, Landon & Co. v. Amer. Bank, 7 Phil. 255
1245
1 Agbayani, Ibid., pp. 494-495; citing PNB v. City Bank of New York, 63 Phil. 711, 728, 729
B-111
Civil Code contains provisions regarding compensation (set off) and deposit. 1246 These portions of Philippine law
provide that compensation shall take place when two persons are reciprocally creditor and debtor of each other. In
this connection, it has been held that the relation existing between a depositor and a bank is that of creditor and
debtor. The implied contract between them being that the bank shall discharge the indebtedness by honoring such
checks as the latter may draw upon it and cannot debit the depositor's account with payment not made by his order
or direction. 1247
Duties owed by the bank to the depositor. By virtue of the contract of deposit between a banker and its depositor,
the banker agrees to pay checks drawn by the depositor pro vided that the said depositor has money in the hands of
the bank. And 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. 1248 And the depositor may maintain an action against the bank not only for a breach of contract but also for a
tort; in the latter case, he would be entitled to recover damages for injury to his credit or any other injury that he
might have suffered 1249
When drawer of dishonored check entitled only to temperate damages and attorney's fees, but not to moral
damages. The drawee is not liable on a check as until accepted or certified by him, he is not a party to instrument.
However, on the basis of the contractual relation between him as drawee (depository) and the drawer (depositor),
the drawee is obligated to pay the persons designated by the drawer to be paid by the drawee. Accordingly, if the
drawee dishonors the check issued by the drawer, without justifiable cause, the drawee is liable to the drawer for
damages. But where a drawer issues a check that is dishonored by the drawee bank upon a mistake but rectifies the
mistake within four hours and the payee was paid in full, the drawer is not entitled to moral damages. Temperate or
moderate damages are proper not for indemnification of loss suffered but for the vindication or recognition of a right
violated or invaded. 1250
Banks not obliged to make part payment. But a bank is under no obligation to make part payment to the amount
of the funds on deposit, on a check drawn by the depositor for an amount in excess of such funds, nor has the payee
of such a check any right to the actual balance on deposit to the credit of the drawer. 1251 All of the checks presented
to a bank for payment in a bundle through a clearing house must be paid, or none, and, if funds to pay all are
insufficient, the payer bank may not select checks for payment, thus permitting preference. 1252 In practice, the holder
of the check sometimes deposits sufficient amount of his funds to the drawer's account in order to have sufficient on
deposit in the drawer's name so that the latters' check will be honored by the bank. 1253
Summary of rights and liabilities of parties. Thus, where the drawee bank refuses to certify, or accept, or pay a
check:
(1) The holder has no action against it as a check is of itself not an assignment of the funds of the drawer in the
hands of the drawee bank, and the drawee bank is not liable on the check until it has accepted or certified it.
(2) Neither has the holder a right of action against the drawer where the drawee bank refuses to accept or certify
the check but he has a right of action against the drawer where the drawee bank refuses to pay.
(3) And while the holder has no right of action against the drawee bank which refuses to pay, accept or certify a
check, the drawer has a right of action against the drawee bank so refusing. Such right of action, however, is
not based on the check drawn but on the original contract of deposit between them. 1254
Duty of depositor to bank. Where a drawer of a check has prepared his check so negligently that it can be easily
altered without giving the instrument a suspicious appearance and alterations are afterwards made, he can blame no
one but- himself and in such case he cannot hold the bank liable for the consequences of his own negligence in that
respect; but negligence of the depositor in drawing a check will not excuse the paying bank unless it is misled by
such negligent act, and, if the drawer of a check is first in fault and if his negligence contributes directly to its
wrongful and fraudulent appropriation, he is not entitled to recover. 1255
Duty of depositor where passbook returned to him. The "weight of authority, and perhaps of reason, supports the
view that when a depositor's passbook has been written up and returned to him with cancelled checks which have
been charged to his account, it is his duty to examine such checks within a reasonable time, and if they disclose
forgeries or alterations, to report them to the bank, and failing in which he cannot, if his failure results in detriment to
the bank, dispute the correctness of payments thereafter made by it on similar checks." 1256 This rule, however,
assumes that the bank itself has not been guilty of negligence in making the payment for when, by the exercise of
proper care, it could have discovered the alteration or forgery, it must bear the loss notwithstanding that the
depositor failed in his duty to examine the accounts. 1257
Stopping payment. As a check of itself does not operate as an assignment of the funds to the credit of the drawer,
the latter may countermand payment before its acceptance or certification. 1258 The order to stop payment must be
communicated to the bank before the check to which it refers has been paid; and in the absence of a rule of the bank
that stop orders must be in writing, a verbal notice is sufficient. 1259
When stopping payment constitutes crime. Stopping of the payment of a check would constitute crime of estata
where the accused issues a check and receives money, not goods, for them from the offended party, and where, at
the time the accused received the money for the check from the offended party, he has the intention of stopping
payment on it. This is different from a case where goods or effects are bought and then payment stopped on checks
given for goods. 1260
c. crossed check (Art. 541, Code of Commerce)
1246
1 Agbayani, Ibid., p. 495; citing Articles 1195 et seq., 1758 et seq., now Arts. 1728 and 1962, respectively, NCC.
1247
1 Agbayani, Ibid., p. 495; citing Gullas v. PNB, 62 Phil. 519 citing Fulton Iron Works Co. v. China Banking Corp. (1930), 55 Phil. 208; San Carlos
Milling Co. v. Bank of P. I. and China Banking Corp. (1933). 59 Phil. 68; Chief of Staff Armed Forces of the Phil. v. PNB, No. 16972-R, May 23, 1960 (C.A.)
1248
1 Agbayani, Ibid., p. 495; citing Callahan v. Bank of Anderson (1904), 2 Ann. Cases 303
1249
1 Agbayani, Ibid., p. 495; citing Ht. Sterling Nat. Bank v. Greene, 89 Ky. 262, 35 S.W. 911, 32 L.R.A. 134. As to right to stop payment of check, see note
30 L.R.A. 845
1250
1 Agbayani, Ibid., p. 496; citing Manila Banking Corporation v Intermediate Appellate Court, Aug 22, 1984, 131 SCRA 271, 276. The Intermediate
Appellate Court awarded P10,000.00 as temperate damages, and Pi5,000.00 as attorney's fees and eliminated actual damages as not having been proved. The
Supreme Court held that the sum of P5,000.00 as temperate or moderate damages would suffice, plus attorneys fees of P5,000.00.
1251
1 Agbayani, Ibid., p. 496; citing Eads v. Commercial Nat. Bank, 33 Ariz. 599, 266 Pac. IA, 62 A.L.R.. 183; See annotation in 62 A.L.R. 183 which
considers rights and duties where a check is presented to u bank which exceeds balance on deposit.
1252
1 Agbayani, Ibid., p. 496; citing Louisville & N. K. Co. v. Federal Reserve Bank, 357 Tenn. 497, 10 S.W. (2d) 683, 61. A.L.R. 354
1253
1254
1255
1 Agbayani, Ibid., p. 497; citing London Joint Stock Bank v. MacMillan (1918), A.C. 777, Court of Appeals
1256
1257
1 Agbayani, Ibid., pp. 497-498; citing Glassell Development Co. v. Citizens' Nat. Bank, 191 Cal. 375, 216 Pac. 1012
1258
1 Agbayani, Ibid., p. 498; citing Stenier v. Germantown Trust, 158 Atl. 180
1259
1 Agbayani, Ibid., p. 498; citing Brandt v. Public Bank, 139 N.Y. App. Div. 173, 123 N.Y. Supp. 207
1260
1 Agbayani, Ibid., p. 498; citing U.S. v. Lee Cheng, 39 Phil. 466
B-112
Article 541, Code of Commerce -- 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".
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 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. 1261
(1) effects of crossing a check
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. 1262
d. memorandum and traveller's check
Memorandum Check. A check given by a borrower to a lender, for the amount of short loan, with 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 is evidenced by writing the word “Mem.” on the check. 1263
Traveler’s Check. An instrument purchased from bank, express company, or the like, in various denominations,
which can be used as cash upon second signature by purchaser. It has the characteristics of a cashier’s check on
the issuer. 1264 It requires the signature of the purchaser at the time he buys it and also at the time when he uses it 1265
5. when required to be presented for payment (Sec. 185, NIL)
Section 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.
Acceptance generally unnecessary. In view of the fact that acceptance is a step unnecessary in so far as bills of
exchange payable on demand are concerned, 1266 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 a 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. When 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.1267 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, as
against the drawer, to do anything but pay it.1268 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. 1269
Nothing against law to allow presentation of checks for acceptance before being paid. 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 "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.1270 When the holder of a check procures it to be accepted or certified, the drawer will perform his promise by any
other means than the payment of money. 1271 When the holder of a check procedures it to be accepted or certified, the
drawer and all indorsers are discharged from liability thereon, 1272 and then the check operates as an assignment of a part
of the funds to the credit of the drawer with the bank. 1273 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. 1274
Purpose of certification. Although a check does not call for 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 bankers, thus marked and certified, enter
1261
Bataan Cigar and Cigarette Factory vs. Court of Appeals [GR 93048, 3 March 1994]
1262
Bataan Cigar and Cigarette Factory vs. Court of Appeals [GR 93048, 3 March 1994]; citing 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, G.R. No. 72764, 175 SCRA 310
1263
1264
Black’s Law Dictionary, Sixth edition, p. 1500; citing Pines v. United States, C. C. A. Iowa, 123 F.2d 825, 828
1265
1266
Section 143, NIL
1267
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing 1 Bouvier's Law Dictionary, 476
1268
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing 5 R.C.L., p. 516, par. 38
1269
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing 1 Morse on Banks and Banking, 6th ed., pp. 898,
899
1270
Section 132, NIL
1271
Ibid.
1272
Section 188, NIL
1273
Section. 189, NIL
1274
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing 1 Morse on Banks and Banking, pp. 898, 899; 5
R.C.L., p. 520
B-113
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. In the great
commercial centers, they make up no inconsiderable portion of the circulation, and thus perform a useful, valuable, and
an almost indispensable office. 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. The check becomes a basis of credit — an easy
mode of passing money from hand to hand, and answers the purposes of money. 1275
Acceptance of check. 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 the purposes of money.
Thus it continues to perform its important functions until 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 it in a certified check account, and, when the check is paid, to
debit that account with the amount. Nothing can be simpler or safer than this process. 1276
Certification of check, how made. 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.1277 The bank virtually says, that check is good; we have the money of the drawer here ready to pay it. We will pay it
now if you will 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 subject to its future presentment at any time within the statute of limitations. 1278
Acceptance and payment different. 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. 1279 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 of the check is discharged by acceptance, certification, or
payment. But clearly the statute does not says that the contract of warranty of the negotiator, created by section 65, is
discharged by these acts. 1280 Payment of a check on a forged or unauthorized indorsement of the payee's name, and
charging the same to the drawer's 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. 1281 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. 1282
6. effect of death of drawer
7. pertinent Philippine Clearing House Corporation rules
!!! Case(s)
42 New Pacific Timber vs. Hon. Seneris,, December 19, 1980
43 PNB vs. National City Bank of New York, 63 Phil 711
44 Bataan Cigar vs.CA, 230 SCRA 648
45 Sps. Moran vs. CA, 230 SCRA 799
---------------------------------------------------------------------CASE(S)---------------------------------------------------------------
42 New Pacific Timber & Supply Company vs. Seneris [GR L-41764, 19 December 1980]
Second Division, Concepcion Jr. (J): 4 concur
Facts: New Pacific Timber & Supply Company, Inc. (NPTSCI) is the defendant in a complaint for collection of a sum of money filed
by Ricardo A. Tong. On 19 July 1974, a compromise judgment was rendered by Judge Alberto V. Seneris in accordance with an
amicable settlement entered into by the parties the terms and conditions of which are (1) that NPTSCI will pay to Tong the amount
of P54,500.00 at 6% interest per annum to be reckoned from 25 August 1972; (2) that NPTSCI will pay to Tong the amount of
P6,000.00 as attorney's fees for which P5,000.00 had been acknowledged received by Tong under Consolidated Bank and Trust
Corporation Check 16-135022 amounting to P5,000.00 having a balance of P1,000.00; (3) that the entire amount of P54,500.00
plus interest, plus the balance of P1,000.00 for attorney's fees will be paid by NPTSCI to Tong within 5 months from 19 July 1974;
and (4) that failure on the part of NPTSCI to comply with any of the conditions, a writ of execution may be issued by the Court for the
satisfaction of the obligation. For failure of NPTSCI to comply with his judgment obligation, Judge Seneris, upon motion of Tong,
issued an order for the issuance of a writ of execution on 21 December 1974. Accordingly, writ of execution was issued for the
amount of P63,130.00 pursuant to which, the Ex-Officio Sheriff (Hakim S. Abdulwahid) levied upon personal properties of NPTSCI,
i.e. a unit of American Lathe 24", 1 Unit of American Lathe 18" Cracker Wheeler, and 1 Unit Rockford Shaper 24"; and set the
1275
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing 5 R.C.L., pp. 516, 517
1276
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing Merchants' Bank vs. States Bank, 10 Wall., 604, at
p. 647; 19 Law. ed., 1008, 1019
1277
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing 1 Morse, Banks and Banking, 915; 1 Bouvier's Law
Dictionary, 476
1278
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing 1 Morse on Banks and Banking, p. 920
1279
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing National Bank vs. First National Bank [1910], 141
Mo. App., 719; 125 S. W., 513; citing Annotation at 12 A.L.R., 1090 [1921]
1280
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing First National Bank vs. Brule National Bank [1917],
12 A.L.R., 1079, 1085
1281
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing Cases cited, Annotation at 69 A.L.R., 1076, 1077,
[1930]
1282
Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]; citing Anderson vs. Tacoma National Bank [1928], 146
Wash., 520; 264 Pac., 8; Annotation at 69 A.L.R., 1077 [1930]
B-114
auction sale thereof on 15 January 1975. The auction sale was then postponed on the following day, 16 January 1975 at 10:00 a.m.
In the course of the proceedings, Deputy Sheriff Castro sold the levied properties item by item to Tong as the highest bidder in the
amount of P50,000.00. As a result thereof, the Ex-Officio Sheriff declared a deficiency of P13,130.00. Thereafter, on 16 January
1975, the Ex-Officio Sheriff issued a "Sheriff's Certificate of Sale" in favor of Tong for the total amount of P50,000.00 only.
Subsequently, on 17 January 1975, NPTSCI filed an ex-parte motion for issuance of certificate of satisfaction of judgment. This
motion was denied by Judge Seneris in his order dated 28 August 1975. In view thereof, NPTSCI filed the petition for certiorari with
preliminary injunction.
Issue: Whether Tong can validly refuse acceptance of the payment of the judgment obligation made by NPTSCI consisting of
P50,000.00 in Cashier's Check and P13,130.00 in cash which it deposited with the Ex-Officio Sheriff before the date of the
scheduled auction sale.
Held: The check deposited by NPTSCI 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 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 of one in such situation. Where 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 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 to use it as money." When the holder
procures the check to be certified, "the check operates as an assignment of a part of the funds to the creditors". Hence, the
exception to the rule 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 the present case. Considering that the whole amount deposited by NPTSCI consisting of
Cashier's Check of P50,000.00 and P13,130.00 in cash covers the judgment obligation of P63,000.00 as mentioned in the writ of
execution, then, the Court sees no valid reason for Tong to have refused acceptance of the payment of the obligation in his favor.
The auction sale, therefore, was uncalled for. NPTSCI's motion for the issuance of a certificate of satisfaction of judgment is clearly
meritorious and Judge Seneris gravely abused his discretion in not granting the same under the circumstances.
43 Philippine National Bank vs. National City Bank of New York [GR 43596, 31 October 1936]
En Banc, Recto (J): 6 concur
Facts: On April 7 and 9, 1933, an unknown person or persons negotiated with Motor Service Company, Inc. (MSCI), two checks in
payment for automobile tires purchased from MSCI's stores, purporting to have been issued by the 'Pangasinan Transportation Co.,
Inc. (Pantranco) by J.L. Klar, Manager and Treasurer', against the Philippine National Bank (PNB) and in favor of the International
Auto Repair Shop, for P144.50 and P215.75. Said checks were indorsed by said unknown persons in the manner indicated at the
back thereof, the MSCI, believing at the time that the signatures of J.L. Klar, Manager and Treasurer of Pantranco on both checks
were genuine. The checks were then indorsed for deposit by MSCI at the National City Bank of New York and the former was
accordingly credited with the amounts thereof, or P144.50 and P215.75. On April 8 and 10, 1933, the said checks were cleared at
the clearing house and PNB credited the National City Bank for the amounts thereof, believing at the time that the signatures of the
drawer were genuine, that the payee is an existing entity and the endorsements at the bank thereof regular and genuine. The PNB
then found out that the purported signatures of J.L. Klar, as Manager and Treasurer of Pantranco were forged when so informed by
the said Company, and it accordingly demanded from the National City Bank and MSCI and the reimbursement of the amounts for
which it credited the National City Bank at the clearing house and for which the latter credited MSCI, but MSCI and National City
Bank refused, and continue to refuse, to make such reimbursements. Pantranco objected to have the proceeds of said check
deducted from their deposit. PNB filed the case in the municipal court of Manila against National City Bank and MSCI. Upon PNB's
motion, the case was dismissed before trial as to the National City Bank. A decision was thereafter rendered giving PNB judgment
for the total amount of P360.25, with interest and costs. From this decision MSCI appealed.
Issue [1]: Whether the payment of the checks in question made by the drawee bank constitutes an "acceptance", and,
consequently, the case should be governed by the provisions of section 62 of the Negotiable Instruments Law.
Held [1]: 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, 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 a 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. When 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. 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, as against the drawer, to do anything but pay it. 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.
Issue [2]: Whether the law or business practice prevents the presentation of checks for acceptance before they are paid.
Held [2]: There is nothing in the law or in business practice against the presentation of checks for acceptance, before they are paid,
in which case there is a "certification" equivalent to "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. When the holder
of a check procures it to be accepted or certified, the drawer will perform his promise by any other means than the payment of
money. When the holder of a check procedures it to be accepted or certified, the drawer and all indorsers are discharged from
liability thereon, and then the check operates as an assignment of a part of the funds to the credit of the drawer with the bank. 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.
B-115
Issue [3]: Whether MSCI's negligence in purchasing the checks in question is such as to give PNB the right to recover upon said
checks, and on the other hand, whether PNB was not itself negligent, except for its constructive fault in now knowing the signature
of the drawer and detecting the forgery.
Held [3]: Check number 637023-D was dated 6 April 1933, whereas check number 637020-D and is dated 7 April 1933. Therefore,
the later check, which is prior in number to the former check, is however, issued on a later date. This circumstance must have
aroused at least the curiosity of MSCI. MSCI further accepted the two checks from unknown persons. Furthermore, check 637023-D
was indorsed by a subagent of the agent of the payee, International Auto Repair Shop. MSCI made no inquiry whatsoever as to the
extent of the authority of these unknown persons. Check 637020-D, aside from having been indorsed by a supposed agent of the
International Auto Repair Shop is crossed generally. The existence of two parallel lines transversally drawn on the face of this check
was a warning that the check could only be collected through a banking institution. Yet MSCI accepted the check in payment for
merchandise. The facts of case do not make it one between two equally innocent persons, the drawee bank and the holder. Section
23 of the Negotiable Instruments Act provides 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." It not appearing that PNB did not warrant
to MCSI the genuineness of the checks in question, by its acceptance thereof, nor did it perform any act which would have induced
MSCI to believe in the genuineness of said instruments before MSCI purchased them for value, it can not be said that PNB is
precluded from setting up the forgery and, therefore, MSCI is not entitled to retain the amount of the forged check paid to it by PNB.
Issue [4]: Whether the drawee bank should be allowed recovery, as MSCI's position would not become worse than if the drawee
had refused the payment of these checks upon their presentation.
Held [4]: A drawee of a check, who is deceived by a forgery of the drawer's 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 discover of the forgery had
been made on presentation. Forgeries often deceived the eye of the most cautions experts; and when a bank has been so
deceived, it is a harsh rule which compels it to suffer although no one has suffered by its being deceived. Herein, MSCI has lost
nothing by anything which the drawee has done. It had in its hands some forged worthless papers. It did not purchase or acquire
these papers because of any representation made to it by the drawee. It purchased them from unknown persons and under
suspicious circumstances. It had no valid title to them, because the persons from whom it received them did not have such title.
MSCI could not have compelled the drawee to pay them, and the drawee could have refused payment had it been able to detect the
forgery. By making a refund, MSCI would only be returning what it had received without any title or right. And when MCSI pays back
the money it has received it will be entitled to have restored to it the forged papers it parted with. There is no good reason why the
accidental payment made by PNB should inure to the benefit of MSCI. If there were injury to MCSI said injury was caused not by the
failure of PNB to detect the forgery but by the very negligence of MCSI in purchasing commercial papers from unknown persons
without making inquiry as to their genuineness.
(The court held in the case (1) That where a check is accepted or certified by the bank on which it is drawn, the bank is
estopped to deny the genuineness of the drawer's 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 word is used in section 62 of the Negotiable Instruments Law; (4) That in the
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 not preclude his recovery from 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 issue 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 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 PNB is no more chargeable with the knowledge of the drawer's
signature than MCSI is, as the drawer was as much the customer of MSCI as of PNB, the presumption that a drawee
bank is bound to know more than any indorser the signature nature of its depositor does not hold; (1) that according to the
undisputed facts of the case MSCI 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 PNB's constructive negligence in failing to detect the forgery; and (11) that under the circumstances of the
case, if PNB is allowed to recover, there will be no change of position as to the injury or prejudice of MCSI.)
44 Bataan Cigar vs.CA, 230 SCRA 648

See case entry 18
45 Moran vs. CA [GR 105836, 7 March 1994]

Second Division, Regalado (J): 4 concur
Facts: George and Librada Moran are the owners of the Wack-Wack Petron gasoline station located at Shaw Boulevard, corner Old
Wack-Wack Road, Mandaluyong, Metro Manila. They regularly purchased bulk fuel and other related products from Petrophil
Corporation on cash on delivery (COD) basis. Orders for bulk fuel and other related products were made by telephone and
payments were effected by personal checks upon delivery. The Morans maintained 3 joint accounts, namely 1 current account (37-
00066-7) and 2 savings accounts, (1037002387 and 1037001372) with the Shaw Boulevard branch of Citytrust Banking
Corporation. As a special privilege to the Morans, whom it considered as valued clients, the bank allowed them to maintain a zero
balance in their current account. Transfers from Savings Account 1037002387 to their current account could be made only with their
prior authorization, but they gave written authority to Citytrust to automatically transfer funds from their Savings Account
1037001372 to their Current Account 37-00066-7 at any time whenever the funds in their current account were insufficient to meet
withdrawals from said current account. Such arrangement for automatic transfer of funds was called a pre-authorized transfer (PAT)
agreement. On 12 December 1983, the Morans, through Librada, drew a check (Citytrust 041960) for P50,576.00 payable to
Petrophil Corporation. The next day, 13 December 1983, the Morans, again through Librada, issued another check (Citytrust
041962) in the amount of P56,090.00 in favor of the same corporation. The total sum of the two checks was P106,666.00. On 14
December 1983, Petrophil deposited the two aforementioned checks to its account with the Pandacan branch of the Philippine
National Bank (PNB), the collecting bank. In turn, PNB Pandacan branch presented them for clearing with the Philippine Clearing
House Corporation in the afternoon of the same day. The records show that on 14 December 1983, Current Account 37-00066-7
had a zero balance, while Savings Account 1037001372 (covered by the PAT) had an available balance of P26,104.30 and Savings
Account 1037002387 had an available balance of P43,268.39. At about 10 a.m. of the following day, 15 December 1983, George
Moran went to the bank, as was his regular practice, to personally oversee their daily transactions with the bank. He deposited in
B-116
their Savings Account 1037002387 the amounts of P10,874.58 and P6,754.25, 8 and he likewise deposited in their Savings Account
1037001372 the amounts of P5,900.00, P35,100.00 and 30.00. The amount of P40,000.00 was then transferred by him from Saving
Account 1037002387 to their current account by means of a pro forma withdrawal form (a debit memorandum), which was provided
by the bank, authorizing the latter to make the necessary transfer. At the same time, the amount of P66,666.00 was transferred from
Savings Account 1037001372 to the same current account through the pre-authorized transfer (PAT) agreement. Sometime on
December 15 or 16, 1983 George Moran was informed by his wife Librada, that Petrophil refused to deliver their orders on a credit
basis because the two checks they had previously issued were dishonored upon presentment for payment. Apparently, the bank
dishonored the checks due to "insufficiency of funds." The non-delivery of gasoline forced the Morans to temporarily stop business
operations, allegedly causing them to suffer loss of earnings. In addition, Petrophil cancelled their credit accommodation, forcing
them to pay for their purchases in cash. George Moran, furious and upset, demanded an explanation from Raul Diaz, the branch
manager. Failing to get a sufficient explanation, he talked to a certain Villareal, a bank officer, who allegedly told him that Amy Belen
Ragodo, the customer service officer, had committed a "grave error". On December 16 or 17, 1983, Diaz went to the Moran
residence to get the signatures of the petitioners on an application for a manager's check so that the dishonored checks could be
redeemed. Diaz then went to Petrophil to personally present the checks in payment for the two dishonored checks. In a chance
meeting around May or June, 1984, George Moran learned from one Constancio Magno, credit manager of Petrophil, that the latter
received from Citytrust, through Diaz, a letter dated 16 December 1983, notifying them that the two checks were "inadvertently
dishonored . . . due to operational error." Said letter was received by Petrophil on 4 January 1984. On 24 July 1984, or a little over
six months after the incident, petitioners, through counsel, wrote Citytrust claiming that the bank's dishonor of the checks caused
them besmirched business and personal reputation, shame and anxiety, hence they were contemplating the filing of the necessary
legal actions unless the bank issued a certification clearing their name and paid them P1,000,000.00 as moral damages. The bank
did not act favorably on their demands, hence the Morans filed a complaint for damages on 8 September 1984, with the RTC Pasig
(Branch 159, Civil Case 51549). In turn, Citytrust filed a counterclaim for damages, alleging that the case filed against it was
unfounded and unjust. After trial, a decision dated 9 October 1989 was rendered by the trial court dismissing both the complaint
and the counterclaim. On appeal, the Court of Appeals rendered judgment in CA-GR CV 25009 on 9 October 1989 affirming the
decision of the trial court.
Issue [1]: Whether a bank is not liable for its refusal to pay a check on account of insufficient funds, but wherein a deposit may be
made later in the day.
Held [1]: Fixed savings and current deposits of money in banks and similar institutions shall be governed by the provisions
concerning simple loan. In other words, the relationship between the bank and the depositor is that of a debtor and creditor. 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. Hence, where the bank possesses funds of a depositor, it is bound
to honor his checks to the extent of the amount of his deposits. 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. 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.
Issue [2]: Whether the Spouses Moran had sufficient funds in their accounts when the bank dishonored the checks in question.
Held [2]: The available balance on 14 December 1983 was used by the bank in determining whether or not there was sufficient
cash deposited to fund the two checks, although what was stamped on the dorsal side of the two checks in question was "DAIF/12-
15-83," since 15 December 1983 was the actual date when the checks were processed. When the Morans' checks were dishonored
due to insufficiency of funds, the available balance of Savings Account 1037001372, which was the subject of the PAT agreement,
was not enough to cover either of the two checks. On 14 December 1983, when PNB, Pandacan branch presented the checks for
collection, the available balance for Savings Account 1037001372 was only P26,104.30 while Current Account 37-0006-7 had no
available balance. It was only on 15 December 1983 at around 10:00 a.m. that the necessary funds were deposited, which
unfortunately was too late to prevent the dishonor of the checks.
Issue [3]: Whether the bank is required to give notice before dishonoring checks drawn upon insufficient funds.
Held [3]: If ever the spouses Moran on previous occasions were given notices every time a check was presented for clearing and
payment and there were no adequate funds in their accounts, these were, at most, mere accommodations on the part of CityTrust. It
was not a requirement or a general banking practice, hence non-compliance therewith could not lay the bank open to blame or
rebuke. Legally, the bank had all the right to dishonor the checks because there were no sufficient funds to speak of in the first
place. If the demand is by check, a drawer must have to his credit enough to cover the demand. If his credit with the bank is less
than the amount on the face of the check, the bank may lawfully refuse payment.
20060115/MVMG
B-117

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Commercial Law Review

Negotiable Instruments Law

2. Concept of negotiable instrument

Incidents in “life” of negotiable instrument.

3. Classes of negotiable instrument

4, Functions of negotiable instrument

According to Miravite, the commercial functions of a negotiable paper are :

5. Characteristics of negotiable instrument

Determination. The negotiability of an instrument is to be determined by

b. accumulation of secondary contracts

6. Negotiable instruments compared with other papers

Negotiable Instruments Negotiable documents of title

e. postal money order

7. Legal tender character

Issue: Whether the postal money order is a negotiable instrument.

2 Tibajia vs. Court of Appeals [GR 100290, 4 June 1993]

4 Sesbreno vs. Court of Appeals [GR 89252, 24 May 1993]

B. Form and interpretation of negotiable instruments

1. Requisites of negotiability (Sec. 1, NIL)

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

a. 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

(1) promise or order to pay must be unconditional

Section 3. When promise is unconditional. -- An unqualified order or promise to pay is

a. An indication of a particular fund out of which reimbursement is to be made, or a particular

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.

(a) reference to transaction (Sec. 3, NIL)

(b) source or payment or account to be debited

(2) payable in sum certain in money

(a) provisions which do not affect certainty of sum payable

d. With exchange, whether at a fixed rate or at the current rate; or

(b) payment of interest (Sec. 2, NIL)

(c) payment by installments (Sec. 2, NIL)

(d) acceleration clause (Sec. 2, NIL)

(e) payment with exchange (Sec. 2, NIL)

(f) payment of attorney's fees (Sec. 2, NIL)

c. payable on demand or at a fixed or determinable future time

(1) when payable on demand (Sec. 7, NIL)

Section 7. When payable on demand. -- An instrument is payable on demand --

a. When it is expressed to be so payable on demand, or at sight, or on presentation; or

b. In which no time for payment is expressed.

(2) when payable at determinable future time (Sec. 4, NIL)

Section 4. Determinable future time; what constitutes. -- An instrument is payable at a

a. At a fixed period after date or sight; or

b. On or before a fixed or determinable future time specified therein; or

d. payable to order or bearer

(1) when payable to bearer (Sec. 9, NIL)

Section 9. When payable to bearer. -- The instrument is payable to bearer --

a. When it is expressed to be so payable; or

b. When it is payable to a person named therein or bearer; or

e. When the only or last indorsement is an indorsement in blank.

(a) rule when instrument is payable to a fictitious person

Requisites. In general, there are two requisites:

(2) when payable to order