Law Syllabus Bar

8/20/2019 Law Syllabus Bar

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jCASE OUTLINE IN MERCANTILE LAW

Dean Nilo T. Divina

I. Letters of Credit

A.

Definition and Nature of Letter of Credit

Usage and customs apply in commercial transactions in the absence of any particularprovision in the Code of Commerce, as provided in Article 2 of the same Code. Hence,the rule that all parties concerned in documentary credit operations deal in documentsand not in goods bind the parties in a letter of credit transaction. (Bank of the PhilippineIslands vs. De Reny Fabric Industries, Inc. 35 SCRA 253 (1970))

An order of the court releasing the proceeds of an irrevocable letter of credit to theapplicant, which was issued to pay for tobacco purchased from the beneficiary of theletter of credit, violates the irrevocable nature of the letter of credit. An irrevocable

letter of credit cannot, during its lifetime, be cancelled or modified without the expresspermission of the beneficiary. (Philippine Virginia Tobacco Administration vs. De LosAngeles, 164 SCRA 543 (1988))

The primary purpose of the letter of credit is to substitute for and therefore support, theagreement of the buyer/importer to pay money under a contract or other arrangement.Hence, the failure of a buyer/importer to open a letter of credit as stipulated amountsto a breach of contract which would entitle the seller/exporter to claim damages forsuch breach. (Reliance Commodities, Inc. Vs. Daewoo Industrial Co., Ltd., 228 SCRA 545(1993))

In a letter of credit transaction, there are three separate and distinct relationships: a)between the account party (buyer/importer) and the beneficiary (seller/exporter),which may be a contract of sale or non-sale; b) between the account party and theissuing bank, where the former applies to the latter for a specified L/C and agrees toreimburse the bank for amounts paid by it pursuant to the L/C; and c) between theissuing bank and the beneficiary where the former, upon presentation of stipulateddocuments, pays the latter the amount under the L/C. Such relationships areinterrelated but independent of one another. (Rodzssen Supply Company, Inc. vs. FarEast Bank and Trust Company, 357 SCRA 618 (2001))

Commercial letters of credit involve the payment of money under a contract of salewherein the seller-beneficiary presents to the issuing bank documents that would show

that he has taken affirmative steps to comply with the sales agreement. On the otherhand, standby letters of credit are used in non-sale setting where the beneficiarypresents documents that would show that the obligor has not complied with hisobligation. (Transfield Philippines, Inc. vs. Luzon Hydro Corp. 443 SCRA 307 (2004))

The stay order issued by the rehabilitation court pursuant to the Interim Rules ofCorporate Rehabilitation does not apply to the beneficiary of the letter of credit againstthe banks that issued it because the prohibition on the enforcement of claims against


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the debtor, guarantors or sureties of the debtors does not extend to the claims againstthe issuing bank in a letter of credit. Letters of credit are primary obligations and notaccessory contracts and while they are security arrangements, they are not therebyconverted into contracts of guaranty.

(MWSS vs. Hon. Daway, 432 SCRA 559 (2004))

B. Parties to a Letter of Credit

1. Rights and Obligations of Parties

A buyer who applied for a letter of credit to pay for imported dyestuffs must reimbursethe issuing bank which paid the beneficiary, even if the shipment contained coloredchalks. Banks are not required to investigate if the contract underlying the letter ofcredit has been fulfilled or not because in a transaction involving letter of credit, banksdeal only with documents and not with goods. (Bank of the Philippine Islands vs. De RenyFabric Industries, Inc. 35 SCRA 253 (1970))

The issuing bank’s (IBAA) obligation under an Irrevocable Standby Letter of Credit

executed to secure a contract of loan cannot be reduced by the direct payments madeby the principal debtors to the creditor. Although a letter of credit is a securityarrangement, it is not converted thereby into a contract of guaranty; the obligation ofthe bank under the letter of credit is original and primary. (Insular Bank of Asia & Americavs. Intermediate Appellate Court, 167 SCRA 450 (1988))

The mere fact that a letter of credit is irrevocable does not necessarily imply that thecorrespondent bank, in accepting the instructions of the issuing bank, has alsoconfirmed the letter of credit. The petitioner, as a notifying bank, assumes no liabilityexcept to notify the beneficiary of the existence of the letter of credit; it does not givean absolute assurance to the beneficiary that it will undertake the issuing bank’s

obligation as its own according to the terms and conditions of the credit. (Feati Bank &Trust Company vs. Court of Appeals, 196 SCRA 576 (1991))

Drafts drawn by the beneficiary need not be presented to the applicant for acceptancebefore the issuing bank can seek reimbursement. Once the issuing bank has paid thebeneficiary after the latter’s compliance with the terms of the letter of credit, the issuingbank becomes entitled to reimbursement. (Prudential Bank & Trust Company vs. IAC,216 SCRA 257 (1992))

When the notifying bank entered into a discounting arrangement with the beneficiary,it acts independently as a negotiating bank. As such, the negotiating bank has a right torecourse against the issuer bank and until reimbursement is obtained, the beneficiary,

as the drawer of the draft, continues to assume a contingent liability thereon. (Bank ofAmerica vs. Court of Appeals, 228 SCRA 357 (1993))

A notifying or advising bank does not incur any liability arising from a fraudulent letterof credit as its obligation is limited only to informing the beneficiary of the existence ofthe letter of credit. Such notifying bank does not warrant the genuineness of the letterof credit but is bound only to check its apparent authenticity. (Bank of America vs. Courtof Appeals, 228 SCRA 357 (1993))


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While a marginal deposit, a collateral security, earns no interest in favor of theapplicant, the bank is not only able to use the same for its own purposes, interest-free,but it is also able to earn interest on the money loaned to the applicant. Thebuyer/importer's marginal deposit should then be set off against his debt, for it wouldbe onerous to compute interest and other charges on the face value of the letter ofcredit which the bank issued, without first crediting or setting off the marginal depositwhich the importer paid to the bank. (Abad vs. Court of Appeals, 181 SCRA 191 (1990);Consolidated Bank & Trust Corporation vs. Court of Appeals, 356 SCRA 671 (2001))

An issuing bank which paid the beneficiary of an expired letter of credit can recoverpayment from the applicant which obtained the goods from the beneficiary to preventunjust enrichment. (Rodzssen Supply Company, Inc. vs. Far East Bank and Trust Company,357 SCRA 618 (2001))

C.

Basic Principles of Letter of Credit

1.

Doctrine of Independence

Where the applicant entered into a contract, the performance of which is secured by astandby letter of credit, the resort to arbitration by the applicant/contractor, in theabsence of a stipulation that any dispute must first be settled through arbitration beforethe beneficiay can draw on the letter of credit, does not preclude the beneficiary todraw on the letter of credit upon its issuance of a certificate of default. The claim offraud will not be sufficient to support an injunction against payment by reason of the“independence principle” which assures the beneficiary of prompt paymentindependent of any breach of the main contract and precludes the issuing bank fromdetermining whether the main contract is actually accomplished or not. (Transfield

Philippines, Inc. vs. Luzon Hydro Corp. 443 SCRA 307 (2004))

The issuing bank is not liable for damages even if the shipment did not conform to thespecifications of the applicant. Under the “independence principle”, the obligation of

the issuing bank to pay the beneficiary arises once the latter is able to submit thestipulated documents under the letter of credit. Hence, the bank is not liable fordamages even if the shipment did not conform to the specifications of the applicant.(Land Bank of the Philippines vs. Monet’s Export and Manufacturing Corp., 453 SCRA 173

(2005))

Where the trial court rendered a decision finding the buyer solely liable to pay the sellerand omitted by inadvertence to insert in its decision the phrase “ without prejudice tothe decision that will be made against the issuing bank “ , the bank can not evaderesponsibility based on this ground. The seller who is entitled to draw on the credit lineof the buyer from a bank against the presentation of sales invoices and official receiptsof the purchases and who obtained a court judgment solely against the buyer eventhough the suit is against the bank and the buyer may still enforce the liability of thesame bank under a letter of credit issued to secure the credit line. The so-called"independence principle" in a letter of credit assures the seller or the beneficiary of


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prompt payment independent of any breach of the main contract and precludes theissuing bank from determining whether the main contract is actually accomplished ornot. Philippine National Bank vs. San Miguel Corporation. No. 186063, January 15, 2014.

2.

Fraud Exception Principle

The untruthfulness of a certificate accomplanying a demand for payment under a standyletter of credit may qualify as fraud sufficient to support injunction against payment.However, under the “fraud exception principle”, this must constitute fraud in relationto the independent purpose or character of the letter of credit and not only fraud underthe main agreement; moreover, irreparable injury will be suffered if injunction will notbe granted. (Transfield Philippines, Inc. vs. Luzon Hydro Corp. 443 SCRA 307 (2004))

3. Doctrine of Strict Compliance

When the letter of credit required the submission of a certification that theapplicant/buyer has approved the goods prior to shipment, the unjust refusal of theapplicant/buyer to issue said certification is not sufficient to compel the bank to pay thebeneficiary thereof. Under the doctrine of strict compliance, the documents tenderedmust strictly conform to the terms of the letter of credit, otherwise, the bank whichaccepts a faulty tender, acts on its own risks and may not be able to recover from theapplicant/buyer.(Feati Bank & Trust Company vs. Court of Appeals, 196 SCRA 576 (1991))

I. Trust Receipts Law

A. Definition/Concept of a Trust Receipt Transaction

1. Loan/Security Feature

The Trust Receipts Law punishes the dishonesty and abuse of confidence in the handlingof money or goods to the prejudice of another regardless of whether the latter is theowner or not. The law does not seek to enforce payment of the loan, thus, there is noviolation of the constitutional provision against imprisonment for non-payment of debt.(People vs. Hon. Nitafan and Betty Sia Ang, 207 SCRA 726 (1992))

Compensation shall not be proper when one of the debts consists in civil liability arisingfrom a penal offense; moreover, any compromise relating to the civil liability does notautomatically extinguish the criminal liability of the accused. The mere failure of theentrustee to deliver the proceeds of the sale or the goods if not sold, constitutes acriminal offense that causes prejudice not only to another, but more to the publicinterest. (Metropolitan Bank & Trust Company vs. Tonda, 338 SCRA 254 (2000))

A trust receipt is a security transaction intended to aid in financing importers and retaildealers who do not have sufficient funds or resources to finance the importation orpurchase of merchandise, and who may not be able to acquire credit except throughutilization, as collateral of the merchandise imported or purchased. Under a letter of


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credit-trust receipt arrangement, a bank extends a loan covered by a letter of credit,with the trust receipt as a security for the loan; hence, the transaction involves a loanfeature represented by a letter of credit, and a security feature which is in the coveringtrust receipt which secures an indebtedness.

(Lee vs. Court of Appeals, 375 SCRA 579

(2002))

2.

Ownership of the Goods, Documents and Instruments under a Trust Receipt

The transaction is a simple loan when the goods subject of the agreement had beenpurchased and delivered to the supposed entrustee prior to the execution of the trustreceipt agreement. The acquisition of ownership over the goods before the executionof the trust receipt agreement makes the contract a simple loan, regardless of thedenomination of the contract. (Colinares vs. Court of Appeals, 339 SCRA 609 (2000))

Respondent Corporation is not an importer which acquired the bunker fuel oil for re-sale; it needed the oil for its own operations. More importantly, at no time did title overthe oil pass to petitioner bank, but directly to respondent Corporation to which the oil

was directly delivered long before the trust receipt was executed; thus, the contractexecuted by the parties is a simple loan and not a trust receiptagreement. (Consolidated Bank & Trust Corp. vs. Court of Appeals, 356 SCRA 671 (2001))

In a trust receipt transaction, the entrustee has neither absolute ownership, free disposalnor the authority to freely dispose of the articles subject of the agreement. Since thegoods could not have been subjected to a valid mortgage, there can also be no validforeclosure especially when the mortgagee who subsequently foreclosed and purchasedthe said goods were in bad faith, having knowledge of the inclusion of such articles in atrust receipt agreement. (DBP vs. Prudential Bank, 475 SCRA 623 (2005))

B.

Rights of the Entruster

1. Validity of the Security Interest as Against the Creditors of the Entrustee/InnocentPurchaser for Value

The security interest of the entruster pursuant to the written terms of a trust receipt shallbe valid as against all creditors of the entrustee for the duration of the trust receiptagreement, including among others, the laborers of the entrustee. The only exceptionto the rule is when the properties are in the hands of an innocent purchaser for valueand in good faith. (Prudential Bank vs. National Labor Relations Commission, 251 SCRA412 (1995))

C.

Obligation and Liability of the Entrustee

Commercial invoices attached to the applications for letters of credit and of trustreceipts, which only provide for the list of items sought to be purchased and their priceswill not prove delivery of the goods to the entrustee. Hence, criminal liability will notattach and the accused should be acquitted in the estafa cases. (Ramos vs. Court ofAppeals, 153 SCRA 276 (1987))


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While the presumption found under the Negotiable Instruments Law may notnecessarily be applicable to trust receipts and letters of credit, the presumption ofconsideration applies on the drafts drawn in connection with the letters of credit.Hence, the drafts signed by the beneficiary/suppliers in connection with thecorresponding letters of credit proved that said suppliers were paid by the bank(entruster) for the account of the entrustee. (Lee vs. Court of Appeals, 375 SCRA 579(2002))

When there is a violation of the Trust Receipts Law, what is being punished is thedishonesty and abuse of confidence in the handling of money or goods to the prejudiceof another regardless of whether the latter is the owner. However, failure to complywith the obligations due to serious liquidity problems and after the entrustee was placedunder rehabilitation does not amount to dishonesty and abuse of confidence, thus, theentrustee cannot be said to have violated the law. (Pilipinas Bank vs. Ong, 387 SCRA 37(2002))

1.

Payment/Delivery of Proceeds of Sale or Disposition of Goods, Documents or

Instruments

When the goods subject of the transaction, such as chemicals and metal plates, werenot intended for sale or resale but for use in the fabrication of steel communicationtowers, the agreement cannot be considered a trust receipt transaction but a simpleloan. P.D. No. 115 punishes the entrustee for his failure to deliver the price of the sale,or if the goods are not sold, to return them to the entruster, which, in the present case,is absent and could not have been complied with; therefore, the liability of the entrusteeis only civil in nature. (Anthony L. Ng vs. People of the Philippines, G.R. No. 173905, April23, 2010)

Under the Trust Receipts Law, intent to defraud is presumed when (1) the entrustee failsto turn over the proceeds of the sale of goods covered by the trust receipt to theentruster; or (2) when the entrustee fails to return the goods under trust, if they are notdisposed of in accordance with the terms of the trust receipts. When both parties knowthat the entrustee could not have complied with the obligations under the trust receiptwithout his fault, as when the goods subject of the agreement were not intended for saleor resale, the transaction cannot be considered a trust receipt but a simple loan, wherethe liability is limited to the payment of the purchase price. (Land Bank of the Philippinesvs. Perez, G.R. No. 166884, June 13, 2012)

When both parties entered into an agreement knowing fully well that the return of thegoods subject of the trust receipt is not possible even without any fault on the part of

the trustee, it is not a trust receipt transaction penalized under Sec. 13 of PD 115 inrelation to Art. 315, par. 1(b) of the RPC, as the only obligation actually agreed upon bythe parties would be the return of the proceeds of the sale transaction. This transactionbecomes a mere loan, where the borrower is obligated to pay the bank the amount spentfor the purchase of the goods. (Hur Tin Yang vs. People of the Philippines, G.R. No.195117, August 14, 2013)

2. Return of Goods, Documents or Instruments in Case of Non-Sale


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A trust receipt transaction is a security agreement, pursuant to which the entrusteracquires a security interest in the goods, which are released to the possession of theentrustee who binds himself to hold the goods in trust for the entruster and to sell orotherwise dispose of the goods or to return them in case of non-sale. The return of thegoods to the entruster however, does not relieve the entrustee of the obligation to paythe loan because the entruster is not the factual owner of the goods and merely holdsthem as owner in the artificial concept for the purpose of giving stronger security forthe loan. (Vintola vs. Insular Bank of Asia and America, 150 SCRA 140 (1987))

3. Liability for Loss of Goods, Documents or Instruments

Under the Trust Receipts Law, the loss of the goods subject of the trust receiptregardless of the cause and period or time it occurred, does not extinguish the civilobligation of the entrustee. Hence, the fact that the entrustee attempted to make atender of goods to the bank and as a consequence of the latter’s refusal, the goods werestored in the entrustee’s warehouse and thereafter gutted by fire, the liability of the

entrustee still subsists; the principle of res perit domino will not apply to the bank whichholds only a security of interest over the goods. (Rosario Textile Mills Corp. vs. HomeBankers Savings and Trust Company, 462 SCRA 88 (2005))

4. Penal Sanctions if Offender is a Corporation

Recognizing the impossibility of imposing the penalty of imprisonment on acorporation, it was provided that if the entrustee is a corporation, the penalty shall beimposed upon the directors, officers, employees or other officials or persons responsiblefor the offense. However, the person signing the trust receipt for the corporation is notsolidarily liable with the entrustee-corporation for the civil liability arising from the

criminal offense unless he personally bound himself under a separate contract of suretyor guaranty.(Ong vs. Court of Appeals, 401 SCRA 649 (2003))

When the entrustee is a corporation, the director, officer, employee, or any personresponsible for the violation of the Trust Receipts Law is held criminally liable withoutprejudice to the civil liability, which is imposed upon the entrustee-corporation. Thefact that the officer signed in his official capacity means that the corporation is the onecivilly liable; however, when such officer also signed a trust receipt in his personalcapacity, he will also be held civilly liable together with the corporation, with the scopeof liability depending on whether he signed as a surety or as a guarantor. (Tupaz IV vs.Court of Appeals, 475 SCRA 398 (2005))

The fact that the officer who signed the trust receipt on behalf of the entrustee-corporation signed in his official capacity without receiving the goods as he had nevertaken possession of such nor committing dishonesty and abuse of confidence intransacting with the entrustor, is immaterial. The law specifically makes the director,officer, employee or any person responsible criminally liable precisely for the reasonthat a corporation, being a juridical entity, cannot be the subject of the penalty ofimprisonment. (Alfredo Ching vs. Secretary of Justice, 481 SCRA 609 (2006))


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D. Remedies Available

After the infomation is filed in court, compromise of the estafa case arising fromviolation of the Trust Receipts Law will not amount to novation and will not extinguishthe criminal liability of the accused.

(Ong vs. Court of Appeals, 124 SCRA 578 (1983))

Although the surrender of the goods to the entruster results in the acquittal of theaccused in the estafa case, it is not a bar to the institution of a civil action for collectionbecause of the loan feature (civil in nature) of the trust receipt transaction, which isentirely distinct from its security feature (criminal in nature). Accordingly, Article 31 ofthe New Civil Code provided that when the civil action is based on an obligation notarising from the act or omission complained of as a felony, such civil action may proceedindependently of the criminal proceedings and regardless of the result of the latter.(Vintola vs. Insular Bank of Asia and America, 150 SCRA 140 (1987))

The entruster’s repossession of the subject machinery and equipment, not for the

purpose of transferring ownership to the entruster but only to serve as security to the

loan, cannot be considered payment of the loan under the trust receipt and letter ofcredit. Payment would legally result only after PNB had foreclosed on said securities,sold the same and applied the proceeds thereof to TCC's loan obligation. (PhilippineNational Bank vs. Pineda, 197 SCRA 1 (1991))

When the entrustee defaults on his obligation, the entruster has the discretion to availof remedies which it deems best to protect its right. The law uses the word “may” ingranting to the entruster the right to cancel the trust and take possession of the goods;hence, the option is given to the entruster. (South City Homes, Inc. vs. BA FinanceCorporation, 371 SCRA 603 (2001))

A civil case filed by the entruster against the entrustees based on the failure of the latterto comply with their obligation under the Trust Receipt agreement is proper becausethis breach of obligation is separate and distinct from any criminal liability for misuseand/or misappropriation of goods or proceeds realized from the sale of goods releasedunder the trust receipts. Being based on an obligation ex contractu and not ex delicto ,the civil action may proceed independently of the criminal proceedings institutedagainst the entrustees regardless of the result of the latter. (Sarmiento vs. Court ofAppeals, 394 SCRA 315 (2002))

Novation may take place either by express and unequivocal terms or when the old andnew obligations cannot stand together and are incompatible on every point. Theexecution of the Memorandum of Agreement, which provided for principal conditions

incompatible with the trust agreement, extinguished the obligation under the trustreceipts without prejudice to the debtor’s civil liability. (Pilipinas Bank vs. Ong, 387 SCRA

37 (2002))

As provided under Section 7, P.D. No. 115, in the event of default of the entrustee, theentruster may cancel the trust and take possession of the goods subject of the trust orof the proceeds realized therefrom at any time; the entruster may, not less than five daysafter serving or sending of notice of intention to sell, proceed with the sale of the goods


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at public or private sale where the entrustee shall receive any surplus but shall be liableto the entruster for any deficiency. This is by reason of the fact that the initialrepossession by the bank of the goods subject of the trust receipt did not result in thefull satisfaction of the entrustee’s loan obligation. (Landl & Company vs. MetropolitanBank, 435 SCRA 639 (2004))

E.

Warehouseman’s Lien

Notwithstanding the right of PNB over the stocks of sugar as the endorsee of thequedans, delivery to it shall be effected only upon payment of the storage fees. Thewarehouseman may demand payment of his lien prior to the delivery of the stocks ofsugar because under Section 29 of the Warehouse Receipts Law, the warehousemanloses his lien upon the goods by surrendering possession thereof. (Philippine NationalBank vs. Se, Jr., 256 SCRA 380 (1996))

A warehouseman may enforce his lien under the following instances: 1) he may refuseto deliver the goods until his lien is satisfied; 2) he may sell the goods and apply the

proceeds thereof to the value of the lien; and 3) by other means allowed by law to acreditor against his debtor, for the collection from the depositor of all charges andadvances which the depositor expressly or impliedly contracted with thewarehouseman; or such remedies allowed by law for the enforcement of a lien againstpersonal property. (Philippine National Bank vs. Sayo, Jr., 292 SCRA 202 (1998))

The refusal of the warehouseman to deliver the sugar to the endorsee of the quedanson the ground that it has claimed ownership over the sugar by reason of non-paymentof its buyer, not being one of the remedies available to the warehouseman to enforcehis lien, caused the loss of the warehouseman’s lien. Nevertheless, the loss did not

extinguish the obligation to pay the warehouseman’s fees but merely caused the fees

and charges to cease to accrue from the date of the rejection by the warehouseman toheed the previous lawful demand for the release of the goods.(Philippine National Bank

vs. Sayo, Jr., 292 SCRA 202 (1998))

III. Negotiable Instruments Law

A. Forms and Interpretation

1. Requisites of Negotiability

A check which reads “Pay to the EQUITABLE BANKING CORPORATION Order of A/C

OF CASVILLE ENTERPRISES, INC.” is not negotiable because the payee ceased to be

indicated with reasonable certainty in contravention of Section 8 of the NegotiableInstruments Law. As worded, it could be accepted as deposit to the account of the partynamed after the symbols "A/C," or payable to the Bank as trustee, or as an agent, forCasville Enterprises, Inc., with the latter being the ultimate beneficiary. (EquitableBanking Corporation vs. the Honorable Intermediate Appellate Court and The Edward J.Nell Co., G.R. No. 74451 May 25, 1988)


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Without the words "or order or "to the order of", the instrument is payable only to theperson designated therein and is therefore non-negotiable. Any subsequent purchaserthereof will not enjoy the advantages of being a holder of a negotiable instrument, butwill merely "step into the shoes" of the person designated in the instrument and will thusbe open to all defenses available against the latter.

(Juanita Salas vs.

Hon. Court of

Appeals and First Finance & Leasing Corporation, G.R. No. 76788 January 22, 1990)

The indication of Fund 501 as the source of the payment to be made on the treasurywarrants makes the order or promise to pay "not unconditional" and the warrantsthemselves non-negotiable. (Metropolitan Bank & Trust Company vs. Court Of Appeals,Golden Savings & Loan Association, Inc., Lucia Castillo, Magno Castillo and Gloria

Castillo, G.R. No. 88866 February 18, 1991)

When the documents provide that the amounts deposited shall be repayable to thedepositor, such instrument is negotiable because it is payable to the "bearer." Thedocuments do not say that the depositor is Angel de la Cruz and that the amountsdeposited are repayable specifically to him, but the amounts are to be repayable to the

bearer of the documents or, for that matter, whosoever may be the bearer at the timeof presentment. [Caltex (Philippines), Inc. vs. Court of Appeals and Security Bank andTrust Company, G.R. No. 97753, August 10, 1992]

The language of negotiability which characterizes a negotiable paper as a creditinstrument is its freedom to circulate as a substitute for money. This freedom innegotiability is totally absent in a certificate indebtedness as it merely to pay a sum ofmoney to a specified person or entity for a period of time. (Traders Royal Bank vs. Courtof Appeals, Filriters Guaranty Assurance Corporation and Central Bank of the Philippines,

G.R. No. 93397, March 3, 1997)

Under the fictitious payee rule, a check made expressly payable to a non-fictitious andexisting person is not necessarily an order instrument if the payee is not the intendedrecipient of the proceeds of the check. There is, however, a commercial bad faithexception to this rule which provides that a showing of commercial bad faith on the partof the drawee bank, or any transferee of the check for that matter, will work to strip itof this defense. (Philippine National Bank vs. Erlando T. Rodriguez and Norma Rodriguez,G.R. No. 170325, September 26, 2008)

Under the Negotiable Instruments Law, a check made payable to cash is payable to thebearer and could be negotiated by mere delivery without the need of an indorsement.However, the drawer of the post-dated check can not be liable for estafa to the personwho did not acquire the instrument directly from drawer but through negotiation of

another by mere delivery. This is because the drawer did not use the check to defraudthe holder/private complainant.

PEOPLE OF THE PHILIPPINES VS. GILBERT REYES

WAGAS. G.R. No. 157943, September 4, 2013

2. Kinds of Negotiable Instruments

Postal money orders are not negotiable instruments, the reason being that inestablishing and operating a postal money order system, the government is not engaged


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in the commercial transactions but merely exercises a governmental power for thepublic benefit. Some of the restrictions imposed upon money orders by postal laws andregulations are inconsistent with the character of negotiable instruments. For instance,such laws and regulations usually provide for not more than one endorsement; paymentof money orders may be withheld under a variety of circumstances.

(Philippine Education

Co., inc. vs. Mauricio A. Soriano, et al., G.R. No. L-22405, June 30, 1971)

Bank withdrawal slips are non-negotiable and the giving of immediate notice ofdishonor of negotiable instruments does not apply in this case. Since the withdrawalslips deposited with petitioner’s current account with Citibank were not checks,

Citibank was not bound to accept the withdrawal slips as a valid mode of deposit, buthaving erroneously accepted them as such, Citibank – and petitioner as account-holder– must bear the risks attendant to the acceptance of these instruments. (Firestone Tire& Rubber Company of the Philippines vs. Court of Appeals and Luzon Development Bank,

G.R. No. 113236, March 5, 2001)

A check is “a bill of exchange drawn on a bank payable on demand” which may either

be an order or a bearer instrument. Under Section 9(c) of the NIL, a check payable to aspecified payee may nevertheless be considered as a bearer instrument if it is payableto the order of a fictitious or non-existing person like checks issued to “Prinsipe Abante”or “Si Malakas at si Maganda,” who are well-known characters in Philippine mythology.(Philippine National Bank vs. Erlando T. Rodriguez and Norma Rodriguez, G.R. No.

170325, September 26, 2008)

A certificate of deposit is defined as a written acknowledgement by a bank of the receipt ofa sum of money on deposit which the bank promise to pay to the depositor or the order ofthe depositor or to some other person or his order whereby the relation of debtor andcreditor between the bank and the depositor is created. A document to be considered a

certificate of deposit need not be in a specific form. Thus, a passbook of an interest-earningdeposit account issued by a bank is a certificate of deposit drawing interest because it isconsidered a written acknowledgment by a bank that it has accepted a deposit of a sum ofmoney from a depositor. Thus, it is subject to documentary stamp tax. Prudential Bank v.Commissioner of Internal Revenue (CIR) G.R. No. 180390, July 27, 2011

B. Completion and Delivery

The 17 original checks, completed and delivered to petitioner, are sufficient bythemselves to prove the existence of the loan obligation of the respondents topetitioner. Sec. 16 of the NIL provides that when an instrument is no longer in thepossession of the person who signed it and it is complete in its terms "a valid and

intentional delivery by him is presumed until the contrary is proved. (Ting Ting Pua vs.Spouses Benito Lo Bun Tiong and Caroline Siok Ching Teng, G.R. No. 198660, October 23,

2013)

1. Insertion of Date

2. Completion of Blanks


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In any case, it is no defense that the promissory notes were signed in blank as Section 14of the Negotiable Instruments Law concedes the prima facie authority of the person inpossession of negotiable instruments to fill in the blanks. (Quirino Gonzales LoggingConcessionaire, Quirino Gonzales and Eufemia Gonzales vs. the Court of Appeals (CA) and

Republic Planters Bank, G. R. No. 126568, April 30, 2003)

3. Incomplete and Undelivered Instruments

4. Complete but Undelivered Instruments

As Assistant City Fiscal, the source of the salary of the payee is public funds which hereceives in the form of checks from the Department of Justice. Since the payee of anegotiable interest acquires no interest with respect thereto until it is delivered, suchchecks, as a necessary consequence of being public fund, may not be garnished becausesuch funds do not belong to him.

(Loreto D. de la Victoria, as City Fiscal of Mandaue City

and in his personal capacity as garnishee vs. Hon. Jose P. Burgos, Presiding Judge, RTC, Br.

XVII, Cebu City, and Raul H. Sesbreño, G.R. No. 111190, June 27, 1995)

If the post-dated check was given to the payee in payment of an obligation, the purposeof giving effect to the instrument is evident, thus title or ownership the check wastransferred to the payee. However, if the PDC was not given as payment, then there wasno intent to give effect to the instrument and ownership was not transferred. Theevidence proves that the check was accepted, not as payment, but in accordance withthe policy of the payee to cover the transaction ( purchase of beer products ) and in themeantime the drawer was to pay for the transaction by some other means other than thecheck. This being so, title to the check did not transfer to the payee; it remained withthe drawer. The second element of the felony of theft was therefore notestablished. Hence, there is no probable cause for theft.- San Miguel Corporation vs.

Puzon, Jr. G.R. No. 167567, 22 September 2010

The fact that a person, other than the named payee of the crossed check, was presentingit for deposit should have put the bank on guard. It should have verified if the payeeauthorized the holder to present the same in its behalf or indorsed it to him. The bank’s reliance on the holder’s assurance that he had good title to the three checks constitutesgross negligence even though the holder was related to the majority stockholder of thepayee. While the check was not delivered to the payee, the suit may still prosperbecause the payee did not assert a right based on the undelivered check but on quasi-delict. Equitable Banking Corporation vs Special Steel Products, June 13, 2012

C. Signature

1. Signing in Trade Name

2. Signature of Agent

Under Section 20 of the Negotiable Instruments Law, where the instrument contains ora person adds to his signature words indicating that he signs for or on behalf of a


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principal or in a representative capacity, he is not liable on the instrument if he was dulyauthorized; but the mere addition of words describing him as an agent or as filing arepresentative character, without disclosing his principal, does not exempt him frompersonal liability. In the instant case, an inspection of the drafts accepted by thedefendant shows that nowhere has he disclosed that he was signing as a representativeof the Philippine Education Foundation Company and such failure to disclose hisprincipal makes him personally liable for the drafts he accepted. (The Philippine Bank ofCommerce vs. Jose M. Aruego, G.R. Nos. L-25836-37, January 31, 1981)

3. Indorsement by Minor or Corporation

4. Forgery

As a general rule, a bank or corporation who has obtained possession of a check uponan 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 orother owner, notwithstanding that the amount has been paid to the person from whom

the check was obtained. The theory of the rule is that the possession of the check on theforged or unauthorized indorsement is wrongful and when the money had beencollected on the check, the proceeds are held for the rightful owners who may recoverthem. The payee ought to be allowed to recover directly from the collecting bank,regardless of whether the check was delivered to the payee or not. (Westmont Bank(formerly Associated Banking Corp.) vs. Eugene Ong, G.R. No. 132560, January 30, 2002)

The possession of a check on a forged or unauthorized indorsement is wrongful, andwhen the money is collected on the check, the bank can be held ‘for moneys had andreceived.’ The proceeds are held for the rightful owner of the payment and may be

recovered by him. The position of the bank taking the check on the forged or

unauthorized indorsement is the same as if it had taken the check and collected withoutindorsement at all. The act of the bank amounts to conversion of the check. (Associated

Bank and Conrado Cruz, vs. Hon. Court of Appeals, and Merle V. Reyes, doing business

under the name and style Melissa’s RTW, G.R. No. 89802, May 7, 1992)

It is a rule that when a signature is forged or made without the authority of the personwhose signature it purports to be, the check is wholly inoperative and no right to retainthe instrument, or to give a discharge therefor, or to enforce payment thereof againstany party, can be acquired through or under such signature. However, the rule doesprovide for an exception, namely: "unless the party against whom it is sought to enforcesuch right is precluded from setting up the forgery or want of authority." In the instantcase, it is the exception that applies as the petitioner is precluded from setting up the

forgery, assuming there is forgery, due to his own negligence in entrusting to hissecretary his credit cards and checkbook including the verification of his statements ofaccount. (Ramon K. Ilusorio vs. Hon. Court of Appeals, G.R. No. 139130, November 27,2002)

A forged signature is a real or absolute defense, and a person whose signature on anegotiable instrument is forged is deemed to have never become a party thereto and tohave never consented to the contract that allegedly gave rise to it. The counterfeiting


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of any writing, consisting in the signing of another’s name with intent to defraud, is

forgery. (Bank of the Philippine Islands vs. Casa Montessori Internationale and LeonardoT. Yabut, G.R. No. 149454, May 28, 2004)

Even if the bank performed with utmost diligence, the drawer whose signature wasforged may still recover from the bank as long as he or she is not precluded from settingup the defense of forgery. After all, Section 23 of the Negotiable Instruments Law plainlystates that no right to enforce the payment of a check can arise out of a forged signature.Since the drawer is not precluded by negligence from setting up the forgery, the generalrule should apply. (Samsung Construction Company Philippines, Inc. vs. Far East Bank andTrust Company and Court Of Appeals, G.R. NO. 129015, August 13, 2004)

As between a bank and its depositor, where the bank’s negligence is the proximatecause of the loss and the depositor is guilty of contributory negligence, the greaterproportion of the loss shall be borne by the bank. The bank was negligent because it didnot properly verify the genuineness of the signatures in the applications for manager’s checks while the depositor was negligent because it clothed its accountant/bookkeeper

with apparent authority to transact business with the Bank and it did not examine itsmonthly statement of account and report the discrepancy to the Bank. the courtallocated the damages between the bank and the depositor on a 60-40 ratio.–PhilippineNational Bank vs. FF Cruz and Company, G.R. No. 173259, July 25, 2011

While its manager forged the signature of the authorized signatories of clients in theapplication for manager’s checks and forged the signatures of the payees thereof, thedrawee bank also failed to exercise the highest degree of diligence required of banks inthe case at bar. It allowed its manager to encash the Manager’s checks that were plainlycrossed checks. A crossed check is one where two parallel lines are drawn across its faceor across its corner. Based on jurisprudence, the crossing of a check has the following

effects: (a) the check may not be encashed but only deposited in the bank; (b) the checkmay be negotiated only once — to the one who has an account with the bank; and (c)the act of crossing the check serves as a warning to the holder that the check has beenissued for a definite purpose and he must inquire if he received the check pursuant tothis purpose; otherwise, he is not a holder in due course. In other words, the crossing ofa check is a warning that the check should be deposited only in the account of the payee.When a check is crossed,it is the duty of the collecting bank to ascertain that the checkis only deposited to the payee’s account. Philippine Commercial International Bank vs.Balmaceda,G.R. No. 158143, September 21, 2011

D. Consideration

A check which is regular on its face is deemed prima facie to have been issued for avaluable consideration and every person whose signature appears thereon is deemed tohave become a party thereto for value. Thus, the mere introduction of the instrumentsued on in evidence prima facie entitles the plaintiff to recovery. Further, the rule isquite settled that a negotiable instrument is presumed to have been given or indorsedfor a sufficient consideration unless otherwise contradicted and overcome by other


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competent evidence. (Travel-On, Inc. vs. Court of Appeals and Arturo S. Miranda, G.R.No. L-56169, June 26, 1992)

In actions based upon a negotiable instrument, it is unnecessary to aver or proveconsideration, for consideration is imported and presumed from the fact that it is anegotiable instrument. The presumption exists whether the words "value received"appear on the instrument or not. (Remigio S. Ong vs. People of the Philippines and Courtof Appeals, G.R. No. 139006, November 27, 2000)

Letters of credit and trust receipts are not negotiable instruments, but drafts issued inconnection with letters of credit are negotiable instruments. While the presumptionfound under the Negotiable Instruments Law may not necessarily be applicable to trustreceipts and letters of credit, the presumption that the drafts drawn in connection withthe letters of credit have sufficient consideration applies. (Charles Lee, Chua Siok Suy,Mariano Sio, Alfonso Yap, Richard Velasco and Alfonso Co vs. Court of Appeals and

Philippine Bank of Communications, G.R. NO. 117913, February 1, 2002)

When promissory notes appear to be negotiable as they meet the requirements ofSection 1 of the Negotiable Instruments Law, they are prima facie deemed to have beenissued for consideration unless sufficient evidence was adduced to show otherwise.(Quirino Gonzales Logging Concessionaire, Quirino Gonzales and Eufemia Gonzales vs.

the Court of Appeals (CA) and Republic Planters Bank, G. R. No. 126568, April 30, 2003)

Upon issuance of a negotiable check, in the absence of evidence to the contrary, it ispresumed that the same was issued for valuable consideration which may consist eitherin some right, interest, profit or benefit accruing to the party who makes the contract,or some forbearance, detriment, loss or some responsibility, to act, or labor, or servicegiven, suffered or undertaken by the other side. Under the Negotiable Instruments

Law, it is presumed that every party to an instrument acquires the same for aconsideration or for value. As petitioner alleged that there was no consideration forthe issuance of the subject checks, it devolved upon him to present convincing evidenceto overthrow the presumption and prove that the checks were in fact issued withoutvaluable consideration. Petitioner, however, has not presented any credible evidence torebut the presumption, as well as North Star’s assertion, that the checks were issued aspayment for the US$85,000 petitioner owed to the corporation and not to the managerwho facilitate the fund transfer. - Cayanan v. North Star International Travel Inc.,G.R. No.172954, October 5, 2011

E. Accommodation Party

Section 29 of the Negotiable Instruments Law by clear mandate makes theaccomodation party "liable on the instrument to a holder for value, notwithstanding thatsuch holder at the time of taking the instrument knew him to be only an accommodationparty." It is not a valid defense that the accommodation party did not receive anyvaluable consideration when he executed the instrument. It is not correct to say that theholder for value is not a holder in due course merely because at the time he acquiredthe instrument, he knew that the indorser was only an accommodation party. (Ang Tiong


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vs. Lorenzo Ting, doing business under the name & style of Prunes Preserves MFG., &

Felipe Ang, G.R. No. L-26767, February 22, 1968)

When a promissory note which is payable to GSIS is not payable to bearer or order, suchinstrument is non-negotiable. As such, third party mortgagor who mortgaged hisproperty to secure the obligation of another is not liable as an accommodation partybut liable under Article 2085 of the Civil Code to the effect that third persons who arenot parties to the principal obligation may secure the latter by pledging or mortgagingtheir own property. (GSIS vs. Court of Appeals, G.R. No. L-40824, February 23, 1989)

When the checks are dishonored for lack of funds, the party who indorsed those checksas accommodation endorser is liable for the payment of the checks. (People vs. Maniego,148 SCRA 30, 1987)

When a married couple signed a promissory note in favor of a bank to enable the sisterof the husband to obtain a loan, they are considered as accommodation parties who areliable for the payment of said loan.

(Town Saving and Loan Bank, Inc. vs. Court of Appeals,

223 SCRA 459, 1993)

While a maker who signed a promissory note for the benefit of his co-maker ( whoreceived the loan proceeds ) is considered an accommodation party, he is, nevertheless,entitled to a written notice on the default and the outstanding obligation of the partyaccommodated. There being no such written notice, the Bank is grossly negligent interminating the credit line of the accommodation party for the unpaid interest duesfrom the loans of the party accommodated and in dishonoring a check drawn againstthe such credit line. Gonzales vs Phillippine Commercial and International Bank, GR No.180257, February 23, 2011

F. Negotiation

1. Distinguished from Assignment

If an assigned promissory note had already been extinguished because its maker issimilarly indebted to the assignor, then the defense of set-off or legal compensationcould also be invoked against the assignee of the note. The debtor’s consent is not

needed to effectuate assignment of credit and negotiation. (Sesbreno vs. Court ofAppeals, 222 SCRA 466, 1993)

2. Modes of Negotiation

Where a check is made payable to the order of ’cash’, the word ‘cash’does not purportto 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 personpresenting it without any indorsement. (Ang Tek Lian vs. the Court of Appeals, G.R. No.L-2516, September 25, 1950)

Under the Negotiable Instruments Law, an instrument is negotiated when it istransferred from one person to another in such a manner as to constitute the transferee


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the holder thereof, and a holder may be the payee or indorsee of a bill or note, who is inpossession of it, or the bearer thereof. In case of a bearer instrument, mere deliverywould suffice. [Caltex (Philippines), Inc. vs. Court of Appeals and Security Bank and TrustCompany, G.R. No. 97753, August 10, 1992]

3. Kinds of Indorsements

G. Rights of the Holder

1. Holder in Due Course

Where the payee acquired the check under circumstances that should have put it toinquiry as to the title of the holder who negotiated the check to him, the payee has theduty to present evidence that he acquired the check in good faith. As holder's title wasdefective or suspicious, it cannot be stated that the payee acquired the check withoutknowledge of said defect in holder's title, and for this reason the presumption that it isa holder in due course or that it acquired the instrument in good faith does not exist.

(Vicente R. De Ocampo & Co. vs. Anita Gatchalian, et al., G.R. No. L-15126, November30, 1961)

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 enforcepayment of the instrument for the full amount thereof. This being so, petitioner cannotset up against respondent the defense of nullity of the contract of sale between her andVMS. (Juanita Salas vs. Hon. Court of Appeals and First Finance & Leasing Corporation,G.R. No. 76788 January 22, 1990)

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 themeaning of the law. It gives rise to no liability on the part of the maker or drawer andindorsers. (Stelco Marketing Corporation vs. Hon. Court of Appeals and SteelweldCorporation of the Philippines, Inc., G.R. No. 96160 June 17, 1992)

It is then settled that crossing of checks should put the holder on inquiry and upon himdevolves 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 negligenceamounting to legal absence of good faith, contrary to Sec. 52(c) of the NegotiableInstruments Law, and as such the consensus of authority is to the effect that the holderof the check is not a holder in due course. (Bataan Cigar and Cigarette Factory, Inc. vs.the Court of Appeals and State Investment House, Inc., G.R. No. 93048, March 3, 1994)

The disadvantage of not being a holder in due course is that the negotiable instrumentis subject to defenses as if it were non-negotiable. One such defense is absence or failureof consideration. (Atrium Management Corporation vs. Court of Appeals, et al., G.R. No.109491, February 28, 2001)

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.


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However, said presumption may be rebutted and vital to the resolution of this issue isthe concurrence of all the requisites provided for in Section 52 of the NegotiableInstruments Law. (Cely Yang vs. Hon. Court of Appeals, Philippine CommercialInternational Bank, Far East Bank & Trust Co., Equitable Banking Corporation, Prem

Chandiramani and Fernando David,

G.R. No. 138074, August 15, 2003)

2. Defenses Against the Holder

H. Liabilities of Parties

1. Maker

Under the Negotiable Instruments Law, persons who write their names on the face ofpromissory notes are makers and liable as such. (Republic Planters Bank vs. Court ofAppeals, 216 SCRA 730, 1992)

2. Drawer

The acceptance of a check implies an undertaking of due diligence in presenting it forpayment, and if he from whom it is received sustains loss by want of such diligence, itwill be held to operate as actual payment of the debt or obligation for which it was given.If no presentment is made at all, the drawer cannot be held liable irrespective of loss orinjury unless presentment is otherwise excused. (Myron C. Papa vs. A.U. Valencia & Co.,Inc., et al. G.R. No. 105188. January 23, 1998)

In the case of DAUD, the depositor has, on its face, sufficient funds in his account,although it is not available yet at the time the check was drawn, whereas in DAIF, thedepositor lacks sufficient funds in his account to pay the check. Moreover, DAUD does

not expose the drawer to possible prosecution for estafa and violation of BP 22, whileDAIF subjects the depositor to liability for such offenses.(Bank of the Philippine Islands

vs. Reynald R. Suarez, G.R. No. 167750, March 15, 2010)

3. Acceptor

To simplify proceedings, the payee of the illegally encashed checks should be allowedto recover directly from the bank responsible for such encashment regardless ofwhether or not the checks were actually delivered to the payee. (Associated Bank andConrado Cruz, vs. Hon. Court of Appeals, and Merle V. Reyes, doing business under the

name and style Melissa’s RTW, G.R. No. 89802, May 7, 1992)

As a general rule, a bank or corporation who has obtained possession of a check uponan 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 orother owner, notwithstanding that the amount has been paid to the person from whomthe check was obtained. The theory of the rule is that the possession of the check on theforged or unauthorized indorsement is wrongful and when the money had beencollected on the check, the proceeds are held for the rightful owners who may recoverthem. The payee ought to be allowed to recover directly from the collecting bank,


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regardless of whether the check was delivered to the payee or not. [Westmont Bank(formerly Associated Banking Corp.)

vs.

Eugene Ong, G.R. No. 132560, January 30, 2002]

If a bank pays a forged check, it must be considered as paying out of its funds and cannotcharge the amount so paid to the account of the depositor. A bank is liable, irrespectiveof its good faith, in paying a forged check. (Samsung Construction Company Philippines,Inc. vs. Far East Bank and Trust Company and Court Of Appeals, G.R. NO. 129015, August13, 2004)

4. Indorser

Section 63 of the Negotiable Instruments Law makes "a person placing his signatureupon an instrument otherwise than as maker, drawer or acceptor" a general indorser"unless he clearly indicates by appropriate words his intention to be bound in some othercapacity."

(Ang Tiong vs. Lorenzo Ting, doing business under the name & style of Prunes

Preserves MFG., & Felipe Ang, G.R. No. L-26767, February 22, 1968)

After an instrument is dishonored by non-payment, indorsers cease to be merelysecondarily liable; they become principal debtors whose liability becomes identical tothat of the original obligor.The holder of the negotiable instrument need not evenproceed against the drawer before suing the indorser. (Maria Tuazon vs. Heirs ofBartolome Ramos, 463 SCRA 408, 2005)

The collecting bank which accepted a post-dated check for deposit and sent it forclearing and the drawee bank which cleared and honored the check are both liable tothe drawer for the entire face value of the check. Allied Banking Corporation vs. Bank ofthe Philippine Islands, GR. 188363, February 27, 2013

5. Warranties

The subject checks were accepted for deposit by the Bank for the account of Saysonalthough they were crossed checks and the payee was not Sayson but Melissa’s RTW.

The Bank stamped thereon its guarantee that "all prior endorsements and/or lack ofendorsements (were) guaranteed." By such deliberate and positive act, the Bank had forall legal intents and purposes treated the said checks as negotiable instruments and,accordingly, assumed the warranty of the endorser. (Associated Bank and Conrado Cruz,vs. Hon. Court of Appeals, and Merle V. Reyes, doing business under the name and style

Melissa’s RTW, G.R. No. 89802, May 7, 1992)

I. Presentment for Payment

The effects of crossing a check relate to the mode of its presentment for payment. UnderSection 72 of the Negotiable Instruments Law, presentment for payment must be madeby the holder or by some person authorized to receive payment on his behalf. Who theholder or authorized person depends on the face of the check. (Associated Bank andConrado Cruz, vs. Hon. Court of Appeals, and Merle V. Reyes, doing business under the

name and style Melissa’s RTW, G.R. No. 89802, May 7, 1992)


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1. Necessity of Presentment for Payment

Under the Negotiable Instruments Law, an instrument not payable on demand must bepresented for payment on the day it falls due. When the instrument is payable ondemand, presentment must be made within a reasonable time after its issue. In the caseof a bill of exchange, presentment is sufficient if made within a reasonable time afterthe last negotiation thereof. (International Corporate Bank vs. Gueco, 351 SCRA 516,2001)

2. Parties to Whom Presentment for Payment Should Be Made

3. Dispensation with Presentment for Payment

4. Dishonor by Non-Payment

J. Notice of Dishonor

The term "notice of dishonor" denotes that a check has been presented for payment andwas subsequently dishonored by the drawee bank. This means that the check mustnecessarily be due and demandable because only a check that has become due can bepresented for payment and subsequently be dishonored. A postdated check cannot bedishonored if presented for payment before its due date. (Jaime Dico vs. Hon. Court ofAppeals and People of the Philippines, G.R. NO. 141669, February 28, 2005)

1. Parties to Be Notified

Notice of dishonor to the corporation, which has a personality distinct and separatefrom the officer of the corporation, does not constitute notice to the latter. The absence

of notice of dishonor necessarily deprives an accused an opportunity to preclude acriminal prosecution.(Lao vs. Court of Appeals, G.R. No. 119178, June 20, 1997)

If the drawer or maker is an officer of a corporation, the notice of dishonor to the saidcorporation is not notice to the employee or officer who drew or issued the check forand in its behalf. (Ofelia Marigomen vs. People of the Philippines, G.R. No. 153451, May26, 2005)

Under the Negotiable Instruments Law, notice of dishonor is not required if the drawerhas no right to expect or require the bank to honor the check, or if the drawer hascountermanded payment. In the instant case, all the checks were dishonored for any ofthe following reasons: "account closed", "account under garnishment", insufficiency of

funds", or "payment stopped." In the first three instances, the drawers had no right toexpect or require the bank to honor the checks, and in the last instance, the drawers hadcountermanded payment. (Great Asian Sales Center Corporation and Tan Chong Lin vs.the Court of Appeals and Bancasia Finance and Investment Corporation, G.R. No. 105774,

April 25, 2002)

2. Parties Who May Give Notice and Dishonor


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When what was stamped on the check was “Payment Stopped Funded” and “DAUD”

which means drawn against uncollected deposits, the check was not issued withoutsufficient funds and was not dishonored due to insufficiency of funds. Even withuncollected deposits, the bank may honor the check at its discretion in favor of favoredclients, in which case there would be no violation of B. P. 22.

(Eliza T. Tan vs. People of

the Philippines, G.R. No. 141466, January 19, 2001)

3. Effect of Notice

In the case of DAUD, the depositor has, on its face, sufficient funds in his account,although it is not available yet at the time the check was drawn, whereas in DAIF, thedepositor lacks sufficient funds in his account to pay the check. Moreover, DAUD doesnot expose the drawer to possible prosecution for estafa and violation of BP 22, whileDAIF subjects the depositor to liability for such offenses. (Bank of the Philippine Islandsvs. Reynald R. Suarez, G.R. No. 167750, March 15, 2010)

The failure of the prosecution to prove the existence and receipt by petitioner of the

requisite written notice of dishonor and that he was given at least five banking dayswithin which to settle his account constitutes sufficient ground for his acquittal in a casefor violation of BP 22. (James Svendsen vs. People of the Philippines, G.R. NO. 175381,February 26, 2008)

4. Form of Notice

A notice of dishonor received by the maker or drawer of the check is thus indispensablebefore a conviction for violation of BP 22 can ensue. The notice of dishonor may be sentby the offended party or the drawee bank, and it must be in writing. A mere oral noticeto pay a dishonored check will not suffice. The lack of a written notice is fatal for the

prosecution. (Jaime Dico vs. Hon. Court of Appeals and People of the Philippines, G.R.NO. 141669, February 28, 2005)

5. Waiver

6. Dispensation with Notice

7. Effect of Failure to Give Notice

K. Discharge of Negotiable Instrument

1. Discharge of Negotiable Instrument

In depositing the check in his name, the depositor did not become the out-right ownerof the amount stated therein. By depositing the check with the bank, depositor was, ina way, merely designating the bank as the collecting bank. This is in consonance withthe rule that a negotiable instrument, such as a check, whether a manager’s check or

ordinary check, is not legal tender. As such, after receiving the deposit, under its ownrules, the bank shall credit the amount to the depositor’s account or infuse value thereon

only after the drawee bank shall have paid the amount of the check or the check has


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been cleared for deposit. The depositor’s contention that after the lapse of the 35-dayperiod the amount of a deposited check could be withdrawn even in the absence of aclearance thereon, otherwise it could take a long time before a depositor could make awithdrawal is untenable. Said practice amounts to a disregard of the clearancerequirement of the banking system.

Bank of the Philippine Islands vs. Court of Appeals,

326 SCRA 641 (2000)

Mere delivery of a check does not discharge the obligation. The obligation is notextinguished and remains suspended until the payment by commercial document isactually realized. Thus, although the value of a check was deducted from the funds ofthe drawer but the funds were never delivered to the payee because the drawee bankset off the amount against the losses it incurred from the forgery of the drawer’s check,the drawer’s obligation to the payee remains unpaid. Cebu International Finance

Corporation vs. Court of Appeals, 316 SCRA 488 (1999)

While Section 119 of the Negotiable Instrument Law in relation to Article 1231 of the

Civil Code provides that one of the modes of discharging a negotiable instrument is by

any other act which will discharge a simple contract for the payment of money, such as

novation, the acceptance by the holder of another check which replaced the dishonored

bank check did not result to novation. There are only two ways which indicate the

presence of novation and thereby produce the effect of extinguishing an obligation by

another which substitutes the same. First, novation must be explicitly stated and

declared in unequivocal terms as novation is never presumed. Secondly, the old and the

new obligations must be incompatible on every point. In the instant case, there was no

express agreement that the holder’s acceptance of the replacement check will

discharge the drawer and endorser from liability. Neither is there incompatibility

because both checks were given precisely to terminate a single obligation arising from

the same transaction. Anamer Salazar vs. JY Brothers Marketing Corporation, GR no.

171998, October 20, 2010

2. Discharge of Parties Secondarily Liable

3. Right of Party Who Discharged Instrument

4. Renunciation by Holder

L. Material Alteration

1. Concept

An alteration is said to be material if it alters the effect of the instrument. It means anunauthorized change in an instrument that purports to modify in any respect theobligation of a party or an unauthorized addition of words or numbers or other changeto an incomplete instrument relating to the obligation of a party. In other words, amaterial alteration is one which changes the items which are required to be stated under


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Section 1 of the Negotiable Instruments Law. (Philippine National Bank vs. Court ofAppeals, Capitol City Development Bank, Philippine Bank of Communications, and F.

Abante Marketing, G.R. No. 107508, April 25, 1996)

The serial number is not an essential requisite for negotiability under Section 1 of theNegotiable Instrument Law and an alteration of which is not material. The alteration ofthe serial number does not change the relations between the parties. (PhilippineNational Bank vs. Court of Appeals, Capitol City Development Bank, Philippine Bank of

Communications, and F. Abante Marketing, G.R. No. 107508, April 25, 1996)

Alterations of the serial numbers do not constitute material alterations on the checks.Since there were no material alterations on the checks, respondent as drawee bank hasno right to dishonor them and return them to petitioner, the collecting bank. (TheInternational Corporate Bank, Inc. vs. Court of Appeals and Philippine National Bank, G.R.NO. 129910, September 5, 2006)

2. Effect of Material Alteration

Payment made under materially altered instrument is not payment done in accordancewith the instruction of the drawer. When the drawee bank pays a materially alteredcheck, it violates the terms of the check, as well as its duty to charge its client's accountonly for bona fide disbursements he had made. Since the drawee bank, in the instantcase, did not pay according to the original tenor of the instrument, as directed by thedrawer, then it has no right to claim reimbursement from the drawer, much less, the rightto deduct the erroneous payment it made from the drawer's account which it wasexpected to treat with utmost fidelity. (Metropolitan Bank and Trust Company vs. RenatoD. Cabilzo, G.R. No. 154469, December 6, 2006)

M. Acceptance

1. Definition

The acceptance of a bill is the signification by the drawee of his assent to the order ofthe drawer. (Prudential Bank, Petitioner, v. Intermediate Appellate Court, PhilippineRayon Mills Inc. and Anacleto R. Chi, G.R. No. 74886, December 8, 1992)

Indeed, "acceptance" and "payment" are, within the purview of the law, essentiallydifferent 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 thesignification by the drawee of his assent to the order of the drawer," which, in the case

of checks, is the payment, on demand, of a given sum of money. (Philippine NationalBank vs. the Court of Appeals and Philippine Commercial and Industrial Bank, G.R. No. L-

26001, October 29, 1968)

2. Manner

When a check had been certified by the drawee bank, such certification is equivalent toacceptance because it enables the holder to use it as money. Also, where a holder


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procures a check to be certified, the check operates as an assignment of a part of thefunds to the creditor. (New Pacific Timber vs. Seneris, 101 SCRA 686, 1980)

Acceptance may be done in writing by the drawee in the bill itself, or in a separateinstrument.

(Prudential Bank, Petitioner, v. Intermediate Appellate Court, Philippine

Rayon Mills Inc. and Anacleto R. Chi, G.R. No. 74886, December 8, 1992)

3. Time for Acceptance

4. Rules Governing Acceptance

N. Presentment for Acceptance

1. Time/Place/Manner of Presentment

Presentment for acceptance is defined as the production of a bill of exchange to adrawee for acceptance. Presentment for acceptance is necessary only where the bill is

payable after sight or in any other case, where presentment for acceptance is necessaryin order to fix the maturity of the instrument, or where the bill expressly stipulates thatit shall be presented for acceptance, or where the bill is drawn payable elsewhere thanat the residence or place of business of the drawee. (Prudential Bank vs. IntermediateAppellate Court, Philippine Rayon Mills Inc. and Anacleto R. Chi, G.R. No. 74886,December 8, 1992)

2. Effect of Failure to Make Presentment

While it is true that the delivery of a check produces the effect of payment only when itis encashed, pursuant to Art. 1249 of the Civil Code, the rule is otherwise if the debtor is

prejudiced by the creditor’s unreasonable delay in presentment. After more than ten(10) years from the payment in part by cash and in part by check, the presumption is thatthe check had been encashed, and the failure to encash for more than ten (10) yearsundoubtedly resulted in the impairment of the check through unreasonable andunexplained delay on the part of the payee. (Myron C. Papa vs. A.U. Valencia & Co., Inc.,et al. G.R. No. 105188. January 23, 1998)

3. Dishonor by Non-Acceptance

O. Promissory Notes

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. Under Section 17(g) of the Negotiable Instrument Law and Art. 1216 of the Civil Code, where thepromissory note was executed jointly and severally by two or more persons, the payeeof the promissory note had the right to hold any one or any two of the signers of thepromissory note responsible for the payment of the amount of the note. (PhilippineNational Bank vs. Concepcion Mining Company, Inc., et al., G.R. No. L-16968. July 31,

1962.)


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The buyer of a car shall be liable to pay the unpaid balance on the promissory note andnot just the installments due and payable before the said automobile was carnapped.Being the principal contract, the promissory note is unaffected by whatever befalls thesubject matter of the accessory contract.

(Perla Compania De Seguros, Inc. vs. the Court

of Appeals, Herminio Lim And Evelyn Lim, G.R. No. 96452, May 7, 1992)

When a promissory note expresses "no time for payment," it is deemed "payable ondemand. (Jose L. Ponce de leon vs. Rehabilitation Finance Corporation, G.R. No. L-24571,December 18, 1970)

When there is a discrepancy between the amount in words and the amount in figures inthe check, the rule in the Negotiable Instruments Law is that it would be the amount inwords that would prevail. (People of the Philippines vs. Martin L. Romero and Ernesto C.Rodriguez, G.R. No. 112985, April 21, 1999)

An instrument which begins with I, We, or Either of us promise to pay, when signed bytwo 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 togetherfor its enforcement, or the creditor may select one or more as the object of the suit.(Astro Electronics Corp. and Peter Roxas vs. Philippine Export and Foreign Loan Guarantee

Corporation, G.R. No. 136729, September 23, 2003)

P. Checks

1. Definition

Settled is the doctrine that a check is the only a substitute for money and not money;hence, the delivery of such an instrument does not, by itself, operate as payment. This is

especially true in case of post-dated check. Thus, the issuance of a post-dated check wasnot effective payment. It did not comply with the cardholder’s obligation to pay his pastdue credit card charges. Consequently, the card company was justified in suspending hiscredit card. BPI Card Corporation vs. Court of Appeals, 296 SCRA 260 (1998)

2. Kinds

Under accepted banking practice, crossing a check is done by writing two parallel linesdiagonally on the left top portion of the checks. The crossing is special where the nameof a bank or a business institution is written between the two parallel lines, which meansthat the drawee should pay only with the intervention of that company. The crossing isgeneral where the words written between the two parallel lines are "and Co." or "forpayee’s account only," which means that the drawee bank should not encash the checkbut merely accept it for deposit.

(Associated Bank and Conrado Cruz, vs. Hon. Court of

Appeals, and Merle V. Reyes, doing business under the name and style Melissa’s RTW,

G.R. No. 89802, May 7, 1992)

The effects of crossing a check are: (1) that the check may not be encashed but onlydeposited in the bank; (2) that the check may be negotiated only once –– to one whohas an account with a bank; and (3) that the act of crossing the check serves as a warning


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to the holder that the check has been issued for a definite purpose so that he mustinquire if he has received the check pursuant to that purpose. (State Investment Housevs. IAC, 175 SCRA 310, 1989)

A memorandum check is an evidence of debt against the drawer and although may notbe intended to be presented, has the same effect as an ordinary check and if passed onto a third person, will be valid in his hands like any other check. (People vs. Nitafan, G.R.No. 75954, October 22, 1992)

A cashier’s check is a primary obligation of the issuing bank and accepted in advance byits mere issuance. By its very nature, a cashier’s check is the bank’s order to pay drawn

upon itself, committing in effect its total resources, integrity and honor behind thecheck. A cashier’s check by its peculiar character and general use in the commercialworld is regarded substantially to be as good as the money which it represents. (Tan vs.Court of Appeals, G.R. No. 108555, December

20,

1994)

Payment in check by the debtor may be acceptable as valid, if no prompt objection to

said payment is made. Consequently, the debtor’s tender of payment in the form ofmanager’s check is valid. Thus, where the seller of real property tendered the return of

the reservation fee in the form of manager’s check because the sale agreement was notfully consummated owing to the failure of the buyer to pay the balance of the purchaseprice within the stipulated period, the tender of the manager’s check was considered a

valid tender of payment. When the buyer refused to accept the check, the consignationof the check with the court was sufficient to satisfy the obligation. (Teddy G. Pabugaisvs. Dave Sahijiwani, G.R. No. 156846, February 23, 2004)

While its manager forged the signature of the authorized signatories of clients in theapplication for manager’s checks and forged the signatures of the payees thereof, the

drawee bank also failed to exercise the highest degree of diligence required of banks inthe case at bar. It allowed its manager to encash the Manager’s checks that were plainlycrossed checks. A crossed check is one where two parallel lines are drawn across its faceor across its corner. Based on jurisprudence, the crossing of a check has the followingeffects: (a) the check may not be encashed but only deposited in the bank; (b) the checkmay be negotiated only once — to the one who has an account with the bank; and (c)the act of crossing the check serves as a warning to the holder that the check has beenissued for a definite purpose and he must inquire if he received the check pursuant tothis purpose; otherwise, he is not a holder in due course. In other words, the crossing ofa check is a warning that the check should be deposited only in the account of the payee.When a check is crossed,it is the duty of the collecting bank to ascertain that the checkis only deposited to the payee’s account. Philippine Commercial International Bank vs.Balmaceda,G.R. No. 158143, September 21, 2011

3. Presentment for Payment

A judgment creditor cannot validly refuse acceptance of the payment of the judgmentobligation tendered in the form of a cashier’s check. A cashier’s check issued by a bank

of good standing is deemed as cash. (New Pacific Timber vs. Seneris, G.R. No. 41764,December 19, 1980)


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The obligation of the judgment debtor subsists when the check issued by a judgmentdebtor was made payable to the sheriff who encashed the same but failed to deliver itsproceeds to the judgment creditor. This is because a check does not produce the effectof payment until encashed.

(Philippine Airlines vs. Court of Appeals, G.R. No. 49188,

January 30, 1990)

Tendering a check on the last day of the grace period to pay the purchase price is notvalid and a seller has a right to cancel the contract. A check, be it a manager’s check or

ordinary check, is not legal tender, and an offer of a check in payment of a debt is not avalid tender of payment and may be refused by the creditor. (Bishop of Malolos vs.Intermediate Appellate Court, G.R. No. 72110, November 16, 1990)

A check may be used for the exercise of the right of redemption, the same being a rightand not an obligation.

(Fortunado vs. Court of Appeals, 196 SCRA 26, 1991)

The judgment creditor may validly refuse the tender of payment partly in check and

partly in cash. A cashier’s check tendered by the judgment debtor to satisfy thejudgment debt is not a legal tender. (Tibajia, Jr. vs. Court of Appeals, G.R. No. 100290,June 4, 1993)

A check does not constitute legal tender, but once the creditor accepted a fully fundedcheck to settle an obligation, he is estopped from later on denouncing the efficacy ofsuch tender of payment. By accepting the tendered check and converting it into money,the creditor is presumed to have accepted it as payment and to hold otherwise wouldbe inequitable and unfair to the obligor. (Far East Bank & Trust Company vs. Diaz Realty,Inc., G.R. No. 138588, August 23, 2001)

A stale check is one which has not been presented for payment within a reasonable timeafter its issue. It is valueless and, therefore, should not be paid.(International Corporate

Bank vs. Sps. Francis S. Gueco and Ma. Luz E. Gueco, G.R. No. 141968, February 12, 2001)

Where a manager’s check made payable to “cash” and appearing regular on its face,

was presented to another bank that immediately honors it – no faulty may be attributedto such bank in relying upon the integrity of the check, even if payment thereon waslater ordered stopped by the drawer-bank because the one who encashed the checkwas actually not the intended payee. In other words, as between the bank that honoredthe manager’s check and the drawer-bank, it is the latter that should bear the loss.(Security Bank and Trust Company vs. Rizal Commercial Banking Corporation, G.R. No.

170984, 30 January 2009)

a. Time

A check must be presented for payment within a reasonable time after its issue, and indetermining 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 factsof the particular case. The test is whether the payee employed such diligence as aprudent man exercise in his own affairs. This is because the nature and theory behind


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the use of a check points to its immediate use and payability. (International CorporateBank vs. Sps. Francis S. Gueco and Ma. Luz E. Gueco, G.R. No. 141968, February 12, 2001)

b. Effect of Delay

Failure to present for payment within a reasonable time will result to the discharge ofthe 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 anacknowledgment of liability in the sum stated in the check. In this case, the debtors havenot alleged, much less shown that they or the bank which iss ued the manager’s checkhas suffered damage or loss caused by the delay or non-presentment. Definitely, theoriginal obligation to pay certainly has not been erased. (International Corporate Bankvs. Sps. Francis S. Gueco and Ma. Luz E. Gueco, G.R. No. 141968, February 12, 2001)

IV. Insurance Code

A. Concept of Insurance

One test in order to determine whether one is engaged in insurance business is whetherthe assumption of risk and indemnification of loss (which are elements of an insurancebusiness) are the principal object and purpose of the organization or whether they aremerely incidental to its business. If these are the principal objectives, the business is thatof insurance. But if they are merely incidental and service is the principal purpose, thenthe business is not insurance. In this case, Health Maintenance Organizations (HMOs)are not insurance business. (Philippine Health Care Providers, Inc., vs. Commissioner ofInternal Revenue, G.R. No. 167330, September 18, 2009)

The contract of insurance is one of perfect good faith (uferrimal fidei ) not for the insured

alone, but equally so for the insurer; in fact, it is mere so for the latter, since its dominantbargaining position carries with it stricter responsibility. (Qua Chee Gan v. Law Union, 98Phil 85, 1955)

Being a contract of adhesion, terms of a policy are to be construed strictly against theparty which prepared the contract - the insurer. By reason of exclusive control ofinsurance contract, ambiguity must be strictly interpreted against the insurer andliberally in favor of the insured, especially to avoid forfeiture. (Philamcare Health Systemvs. Court of Appeals, 379 SCRA 356, 2002)

The cardinal principle in Insurance Law is that a policy or contract of insurance is to beconstrued liberally in favor of the insured and strictly as against the insurance company,yet, contracts of insurance, like other contracts, are to be construed according to thesense and meaning of the terms, which the parties themselves have used. (Lalican vs.Insular Life Assurance Company, Ltd. 597 SCRA 159, 2009)

Contracts of insurance, like other contracts, are to be construed according to the senseand meaning of the terms which the parties themselves have used. If such terms are clearand unambiguous, they must be taken and understood in their plain, ordinary andpopular sense. Accordingly, in interpreting the exclusions in an insurance contract, the


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terms used specifying the excluded classes therein are to be given their meaning asunderstood in common speech. A contract of insurance is a contract of adhesion. So,when the terms of the insurance contract contain limitations on liability, courts shouldconstrue them in such a way as to preclude the insurer from non-compliance with hisobligation.

Alpha Insurance and Surety Co. vs. Castor, GR No. 198174, September 2, 2013

B.

Elements of an Insurance Contract

Under Sec. 2(a) of the Insurance Code, an insurance contract is an agreement wherebyone undertakes for a consideration to indemnify another against loss, damage or liabilityarising from an unknown or contingent event, and with the following elements: 1.)Insured has an insurable interest; 2.) Insured is subject to a risk of loss by the happeningof the designated peril; 3.) Insurer assumes risk; 4.) Such assumption of risk is part of ageneral scheme to distribute actual losses among a large group of persons bearing asimilar risk; and 5.) In consideration of the insurer’s promise, the insured pays a premium.

(Philamcare Health System vs. Court of Appeals, 379 SCRA 432, 1997)

For purposes of determining the liability of a health care provider to its members, a healthcare agreement is in the nature of non-life insurance, which is primarily a contract of

indemnity. Once the member incurs hospital, medical or any other expense arising from

sickness, injury or other stipulated contingent, the health care provider must pay for the

same to the extent agreed upon under the contract. Limitations as to liability must be

distinctly specified and clearly reflected in the extent of coverage which the company

voluntary assume, otherwise, any ambiguity arising therein shall be construed in favor of the

member. Being a contract of adhesion, the terms of an insurance contract are to be

construed strictly against the party which prepared the contract - the insurer. This is equally

applicable to Health Care Agreements. The phraseology used in medical or hospital service

contracts, such as “ standard charges “, must be liberally construed in favor of the subscriber,

and if doubtful or reasonably susceptible of two interpretations the construction conferring

coverage is to be adopted, and exclusionary clauses of doubtful import should be strictly

construed against the provider. Thus,