A. HOLDERS -- Sec. 50 - 59; MEMORIZE SEC. 52

3.1 CHAN WAN v. TAN KIM GR L-15380 (9/ 30/1960)

MENDOZAFacts:

Tan Kim and her husband (Chen So) issued 11 checks payable to “cash or bearer” to be drawn against their account with the Equitable Banking Corporation. The checks were negotiated to the White House Shoe Supply (company). White House then deposited the checks to their China Bank account. China Bank then presented the checks to Equitable Bank but the checks were returned because Equitable Bank then had no funds to cover the checks. China Bank then stamped the checks with “Account Closed” and “Non negotiable – China Bank Corporation”.

But somehow, Chan Wan got hold of these checks (Chan Wan was not able to explain in court how he got hold of the checks). Chan Wan now wants to encash the checks but Equitable Bank refused accept the said checks.

ISSUE: Whether or not Chan Wan is a holder in due course.

HELD:

No. As a general rule, a dishonored check/instrument may still be negotiated either by indorsement or delivery and the holder may be a holder in due course provided that he received no notice regarding the dishonor of the instrument. In this case, the checks were already crossed on their face hence Chan Wan was properly notified of the dishonor of the checks at the time of his acquisition.

But may Chan Wan still recover?

Yes. 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. The holder may recover directly from the drawee, in this case Tan Kim and Chen So, unless the drawees have a valid excuse in refusing payment. The only disadvantage of a holder who is not a holder in due course is that the negotiable instrument is subject to defense as if it were non- negotiable. The case was remanded to the lower court for a proper determination as to how Chan Wan acquired the checks and to determine if he is indeed entitled to payment based on some other transactions involving those checks.

3.2 ATRIUM MGT, CORP. v. CA GR 109491 (2/ 28/ 2001)

BASSIG

DOCTRINE: The Negotiable Instruments Law does not provide that a holder not in due course can not recover on the instrument. The disadvantage of Atrium in not being a holder in due course is that the negotiable instrument is subject to defenses as if it were non-negotiable. One such defense is absence or failure of consideration.

FACTS: Hi-Cement Corporation, issued checks in favor of E.T. Henry and Co. Inc., as payee.  The checks, which were crossed checks and specifically indorsed for deposit to payees account, represented payment for petroleum products which E.T. Henry delivered to Hi-Cement.

 E.T. then approached Atrium for financial assistance, offering to discount the four RCBC checks issued by Hi-Cement. Atrium agreed. Upon presentment for payment by Atrium, the drawee bank dishonored all four checks for the common reason payment stopped. Atrium, thus, instituted this action after its demand for payment of the value of the checks was denied.

The RTC ordered Hi-Cement, as drawer, to pay. However, it was argued that 1) Atrium was not a holder in due course of the rediscounted checks; 2.) The transfer of the check from E.T. to Atrium was without any consideration, which is a defense against a holder not in due course and that the liability shall be borne alone by E.T. Henry.

ISSUE: Whether Atrium was not a holder in due course and for value.

HELD: The Negotiable Instruments Law, Section 52 defines a holder in due course, thus: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.

In the instant case, the checks were crossed checks and specifically indorsed for deposit to payees account only. From the beginning, Atrium was aware of the fact that the checks were all for deposit only to payees account, meaning THE ACCOUNTO ONLY OF E.T. Henry. Clearly, then, Atrium could not be considered a holder in due course.

 The Negotiable Instruments Law does not provide that a holder not in due course can not recover on the instrument. The disadvantage of Atrium in not being a holder in due course is that the negotiable instrument is subject to defenses as if it were non-negotiable. One such defense is absence or failure of consideration.

3.3 HI-CEMENT v. INSULAR BANK 534 SCRA 269 (2007)

ALCANTARA

Facts:

Spouses Tan were controlling stockholders of E.T. Henry & Co., Inc., a company engaged in the business of processing and distributing bunker fuel. E.T. Henry’s Customers were Hi – Cement, Riverside and Kanebo Cosmetics who issues postdated checks for their purchases. In 1979, Insular granted E.T. Henry (Turned PCIB then Equitable PCI) a credit facility known as “Purchase

of Short Term Receivables.” Through this, E.T. Henry was able to encash with pre deducted interest the post dated checks. For every transaction, E.T. Henry has to execute a promissory note and a deed of assignment. On 1979-1981, E.T. Henry was able to rediscount its client’s checks. On February 1981, twenty checks of Hi- Cement (deposit to payee’s account only”) were dishonored. So were the checks of riverside and Kanebo. Insular filed a complaint for sum of money. The court ordered E.T.Henry, spouses Tan, Hi-Cement, Riverside and Kanebo, jointly and severally to pay the bank damages represented by the face value of the post dated checks plus interests, services and charges and penalties until fully paid. The Court of Appeals affirmed the order. Hi – Cement authorized its general manager and treasurer to issue the subject postdated crossed checks. Hi-Cement is estopped from denying such authority since it never objected to the signatories’ issuance of all previous checks to E.T. Henry.

Issue:

1. Whether or not the bank was a holder in due course? No.2. Whether or not Hi-Cement can be made liable for the checks? No.

Held:

1. Sec. 191 and 52. The bank was aware that the checks were crossed and bore restrictions that they were for deposit to payee’s account only, hence, it could no longer be further negotiated to it. Also, only the treasurer’s signature appeared on the deed of assignment. As a banking institution, it behooved respondent to act with extraordinary diligence in every transaction. Its business is impressed with public interest, thus, it was not expected to be careless and negligent, specially so where the checks it dealt with were crossed. It is then settled that 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. Failure would result to gross negligence amounting to legal absence of good faith.

2. The drawer of the postdated crossed checks was not liable to the holder who was deemed not a holder in due course. Thus, recovery may be made from the party who indorsed/encashed the checks “if the latter has no valid excuse for refusing payment.” E.T. Henry had no justification to refuse payment, thus, payment must be made.

3.4 DE OCAMPO v. GATCHALIAN GR L- 15126 (11/ 30/ 1961)

ENCIO

FACTS:Anita Gatchalian (GATCHALIAN) was looking for a car. Manuel Gonzales

(GONZALES) represented himself to GATCHALIAN as the duly authorized agent of car owner, De Ocampo Clinic (DE OCAMPO). Such fact was not known to DE OCAMPO. Finding the price of the car to her liking, GATCHALIAN requested GONZALES to bring the car the following day together with the certificate of registration of the car. GONZALES, however, informed GATCHALIAN that DE OCAMPO will not be selling the car unless the former draws a check in favor of the latter. GATCHALIAN then drew a check in the amount of P600 in favor of DE OCAMPO. GATCHALIAN delivered the check to GONZALES but only for safekeeping; that said check will be returned to GATCHALIAN the following day when GONZALES brings the certificate registration.

GONZALES failed to appear the following day. GATCHALIAN issued a "Stop Payment Order" with the drawee bank.

In the meantime, GONZALES delivered the check to DE OCAMPO as payment for the underlying hospital bill of his wife amounting to P441.75. DE OCAMPO accepted the check and gave GONZALES the amount of P158.25 representing the balance of the check.

ISSUE:WON DE OCAMPO is a holder in due course.

HELD:NO. Section 52, Negotiable Instruments Law, defines holder in due course,

thus:

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.

In the case at bar 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 indicated by the appellants in their brief, 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.

In this case, the payee acquired the check under circumstances which should have put it to inquiry, why the holder had the check and used it to pay his own personal account, the duty devolved upon it, plaintiff-appellee, to prove that it actually acquired said check in good faith. The stipulation of facts contains no statement of such good faith, hence we are forced to the conclusion that plaintiff payee has not proved that it acquired the check in good faith and may not be deemed a holder in due course thereof.

3.5 PRUDENCIO v. CA GR L-34539 (7/14/ 1986)

PACSA

Doctrine: A holder for value is one who meets the requirement of being a holder in due course except the notice for want of consideration.

Facts: Appellants are the registered owners of a parcel of land located in Sampaloc, Manila. On October 1954 this property was mortgaged by the appellants to the Philippine National Bank, hereinafter called PNB, to guarantee a loan of P1,000.00 extended to one Domingo Prudencio.

Sometime in 1955, the Concepcion & Tamayo Construction Company, had a pending contract with the Bureau of Public Works, for the construction of the municipal building in Puerto Princess, Palawan, in the amount of P36,800.00 and, as said Company needed funds for said construction, Jose Toribio, appellants' relative, and attorney-in-fact of the Company, approached the appellants asking them to mortgage their property to secure the loan of P10,000.00 which the Company was negotiating with the PNB.

On December 1955 the appellants was persuaded thereby mortgaging their said property to the PNB to guaranty the loan of P10,000.00 extended to the Company. The terms and conditions of the original mortgage for Pl,000.00 were made integral part of the new mortgage for P10,000.00 and both documents were registered with the Register of Deeds of Manila. The promissory note covering the loan of P10,000.00 dated December 29, 1955, maturing on April 27, 1956, was signed by Jose Toribio, as attorney-in-fact of the Company, and by the appellants. Appellants also signed the portion of the promissory note indicating that they are requesting the PNB to issue the Check covering the loan to the Company. On the same date (December 23, 1955) that the 'Amendment of Real Estate' was executed, Jose Toribio, in the same capacity as attorney-in- fact of the Company, executed also the 'Deed of Assignment' assigning all payments to be made by the Bureau to the Company on account of the contract for the construction of the Puerto Princesa building in favor of the PNB.

A Deed of Assignment assigning all payments to be made by the Bureau to the Co. on account of the contract for the construction in favor of the PNB. PNB then approved the Bureau's release of 3 payments directly to Concepcion for material and labor instead of paying the same to the Bank on account of the contract price totalling P11,234.40 without the knowledge of the Prudencios'. PNB did not apply the initial and subsequent payments to the Prudencios' debt as provided for in the deed of assignment . On June 30 1956, Concepcion abandoned their work so Bureau rescinded the construction contract and assumed the work. Later on Jun 27 1959, Concepcion filed to cancelled their mortgage complaint was amended to exclude the Company as defendant, it having been shown that its life as a partnership had already expired and, in lieu thereof, Ramon Concepcion and Manuel M. Tamayo, partners of the defunct Company, were impleaded in their private capacity as defendants. The CA affirmed  RTC. It said that no stipulation in the deed making it obligatory on the part of the PNB to notify the petitioners everytime it authorizes payment to the Company. The Prudencios' contend that as accommodation makers, the nature of their liability is only that of mere sureties instead of solidary co-debtors such that "a material alteration in the principal contract, effected by the creditor

without the knowledge and consent of the sureties, completely discharges the sureties from all liability on the contract of suretyship.

Issue: Whether or not PNB was a holder in due course.

Held: A holder for value is one who meets the requirement of being a holder in due course except the notice for want of consideration. In the case at bar, PNB may not be considered as a holder for value. Not only was PNB an immediate party or privy to the promissory note, knowing fully well that petitioners only signed as accommodation parties, but more importantly it was the Deed of Assignment which moved the petitioners to sign the promissory note. Petitioners also relied on the belief that there will be no alterations to the terms of the agreement. The deed provided that there will no further conditions which could possibly alter the agreement without the consent of the petitioner such as the grant of greater priority to obligations other than the payment of the loan. This notwithstanding, the bank approved the release of payments to the Company instead of the same to the bank. This was in violation of the deed of assignment and prejudiced the rights of petitioners. The bank was not in good faith—a requisite for a holder to be one in due course.

3.6 STELCO MRKTG. v. CA GR 96160 (6/17/ 1992)

ARIOLA

DOCTRINE: Prima facie presumption that every holder is a holder in due course cannot operate if there is no proof how the person claiming the rights of a holder acquired the instrument.

FACTS:

STELCO is engaged in the distribution and sale of steel bars. STELCO sold and delivered to RYL the steel bars they ordered. Although it was stipulated that RYL would pay in cash, RYL issued to Armstrong (sister corp. and manufacturing arm of STELCO) a company check of another corporation (STEELWELD) which was signed by its President (Limson) and VP (Torres). The check was issued by Limson to RYL for financial assistance and Limson agreed to give Lim the check only by way of accommodation. The check was dishonored when Armstrong tried to deposit the check in the bank.

Armstrong filed a complaint against Limson and Torres in RTC of Manila for violating B.P. 22 but was acquitted. STELCO filed with RTC of Caloocan a civil complaint against RYL and STEELWELD for recovery. Court ruled in favor of STELCO. STEELWELD appealed to CA and succeeded in reversing the judgment.

ISSUE/S: WON STELCO became a holder in due course

HELD:

No.

STELCO theorizes that it should be deemed a “holder for value” because they were in

actual possession of the check and through their sister corporation, Armstrong, they presented the check to the drawee bank for payment. However, there is no evidence that that STELCO’s possession dated back to any time before the the checks presentment and dishonor. Therefore STELCO never because a holder for value and that nowhere in the check itself does the name of STELCO appeared as payee, indorsee or depositor. 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.

STELCO can’t be deemed a holder of the check for value because it didn’t meet the 2 essential requisites prescribed by the statute i.e. "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."

WHEREFORE, the petition is DENIED and CA’s decision AFFIRMED.

3.7 FOSSUM v. FERNANDEZ HERMANOS GR 19461 (3/ 28/ 1923)

SAGMIT

Facts:

Fossum, acting as agent of American Iron Products Company, Inc, procured an order from Fernandez Hermanos, a general commercial partnership engaged in business in the Philippine Islands, to deliver to said firm a tail shaft. It was stipulated that said tail shaft would be in accordance with the specifications contained in a blueprint, which had been placed in the hands of Fossum on or about December 18, 1919. Meanwhile the American Iron Products Company, Inc., had drawn a time draft, at sixty days, upon Fernandez Hermanos, for the purchase price of the shaft, the same being in the amount of $2,250, and payable to the Philippine National Bank. In due course the draft was presented to Fernandez Hermanos for acceptance, and was accepted by said firm on December 15, 1920, according to its tenor. Upon inspection after arrival in Manila the shaft was found not to be in conformity with the specifications and was incapable of use for the purpose for which it had been intended. Fernandez Hermanos refused to pay the draft, and it remained for a time dishonored in the hands of the Philippine National Bank in Manila. Later the bank indorsed the draft in blank, without consideration, and delivered it to the plaintiff, Charles A. Fossum, who thereupon instituted the present action on the instrument against the acceptor, Fernandez Hermanos, and the two individuals named as defendants in the complaint, in the character of members of said partnership. The court held that the consideration for the draft in question and for the acceptance placed thereon by Fernandez Hermanos, has completely failed. Plaintiff appealed.

Issue: Whether or not Fossum is a holder in due course? No.

Held:

In the first place, he was himself a party to the contract, which supplied the consideration for the draft, albeit he there acted in a representative capacity. In the second place, he procured the instrument to be indorsed by the bank and delivered to himself without the payment of value, after it was overdue, and with full notice that, as between the original parties, the consideration had completely failed. His attorney, however, calls attention to the familiar rule that a person who is not himself a holder in due course may yet recover against the person primarily liable where it appears that such holder derives his title through a holder in due course. The difficulty of the plaintiff's position from this point of view is that there is not a line of proof in the record tending to show as a fact that the bank itself was ever a holder of this draft in due course. In this connection it was incumbent on the plaintiff to show, as an independent claims, i.e., the bank, was a holder in due course; and upon this point the plaintiff can have no assistance from the presumption, expressed in section 59 of the Negotiable Instrument Law, to the effect that every holder is deemed prima facie to be a holder in due course. The presumption expressed in that section arise 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. If this action had been instituted by the bank itself, the presumption that the bank was a holder in due course would have arisen from the tenor of the draft and the fact that it was in the bank's possession; but when the instrument passed out of the possession of the bank and into the possession of the present plaintiff, no presumption arises as to the character in which the bank held the paper. The bank's relation to the instrument became past history when it delivered the document to the plaintiff; and it was incumbent upon the plaintiff in this action to show that the bank had in fact acquired the instrument for value and under such conditions as would constitute it a holder in due course.

3.8 STATE INVESTMENT v. CA GR 101163 (1/ 11/1993 1993)

DOMINGUEZ

3.9 BATAAN CIGAR v. CA GR 93048 (3/ 3/ 1994)

UY

Facts: Petitioner, Bataan Cigar & Cigarette Factory, Inc., a corporation involved in the manufacturing of cigarettes, engaged one of its suppliers, King Tim Pua George (herein after referred to as George King), to deliver 2,000 bales of tobacco leaf starting October 1978. In consideration thereof, BCCFI, on July 13, 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 deliver within 3 months, petitioner agreed to purchase additional 2,500 bales of tobacco leaves, despite the supplier's failure to deliver in accordance with their earlier agreement. Again petitioner issued post dated crossed checks in the total amount of P1,100,000.00, payable sometime in September 1979. George King was dealing with SIHI and sold a discounted check with an amount of P164T and further sold 2 more checks with an amount of P100T each, all drawn by petitioner in favour of George King. Due to King’s failure to deliver, all checks were order

for stop payment. Efforts of SIHI to collect from BCCFI having failed, it instituted the present case, 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 this case, since he, as payee, is not an indispensable party hence this appeal.

Issue: WOH SIHI can be considered as a holder in due course and therefore can collect from drawee

Held: No

“Sec 52: Sec. 52 — 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.”

In the case of SIHI v CA, it was discussed that a check is defined by law as a bill of exchange drawn on a bank payable on demand. There are a variety of checks, memorandum check, cashier's check, traveler's check and crossed check. 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. Specially when the name of a particular banker or a company is written between the parallel lines drawn. Generally when only the words "and company" are written or nothing is written at all between the parallel lines.

The negotiability of a check is not affected by its being crossed, whether specially or generally. It may legally be negotiated from one person to another as long as the one who encashes the check with the drawee bank is another bank, or if it is specially crossed, by the bank mentioned between the parallel lines. This is specially true in England where the Negotiable Instrument Law originated.

By way of jurisprudence, crossing checks 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.

It is then settled that 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.

In the case at hand, BCCFI's defense in stopping payment is as good to SIHI as it is to George King. 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.

The foregoing does not mean that respondent 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 werenon-negotiable. Hence, respondent can collect from the immediate indorser, George King.

3.10 STATE INVESTMENT v. CA GR 72764 (July 13, 1989)

HERNANDO

Doctrine:

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 this 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.

Facts:

It appears that shortly before September 5, 1980, New Sikatuna Wood Industries, Inc. requested for a loan from private respondent 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, private respondent-wife, Anita Pena Chua issued three (3) crossed checks payable to New Sikatuna Wood Industries, Inc. all postdated December 22, 1980 as follows:

DRAWEE BANK CHECK NO. DATE AMOUNT

1. China Banking Corporation 589053 Dec. 22, 1980 P98,750.00

2. International Corporate Bank 04045549 Dec. 22, 1980 102,313.00

3. Metropolitan Bank & Trust Co. 036512 Dec. 22, 1980 98,387.00

The total value of the three (3) postdated checks amounted to P 299,450.00.

Subsequently, New Sikatuna Wood Industries, Inc. entered into an agreement with herein petitioner State Investment House, Inc. whereby for and in consideration of the sum of Pl,047,402.91 under a deed of sale, the former assigned and discounted with petitioner eleven (11) postdated checks including the aforementioned three (3) postdated checks issued by herein private respondent-wife Anita Peña Chua to New Sikatuna Wood Industries, Inc.

When the three checks issued by private respondent Anita Pena Chua were allegedly deposited by petitioner, these checks were dishonored by reason of "insufficient funds", "stop payment" and "account closed", respectively. Petitioner claims that despite demands on private respondent Anita Peña 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 Harris Chua before the Regional Trial Court of Manila.

Private respondents-defendants filed a third party complaint against New Sikatuna Wood Industries, Inc. for reimbursement and indemnification in the event that they be held liable to petitioner-plaintiff. For failure of third party defendant to answer the third party complaint despite due service of summons, the latter was declared in default.

Issue:

Whether or not petitioner is a holder in due course as to entitle it to proceed against private respondents for the amount stated in the dishonored checks

Held:

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 x x x 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 this 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 (supra), 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:

It results therefore that when appellee rediscounted the check knowing that it was a crossed check he was knowingly violating the avowed intention of crossing the check. Furthermore, his failure to inquire from the holder, party defendant New Sikatuna Wood Industries, Inc., 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. Being not a holder in due course, plaintiff is subject to personal defenses, such as lack of consideration between appellants and New Sikatuna Wood Industries. Note that under the facts the checks were postdated and issued only as a loan to New Sikatuna Wood Industries, Inc. if and when deposits were made to back up the checks. Such deposits were not made, hence no loan was made, hence the three checks are without consideration (Sec. 28, Negotiable Instruments Law).

Likewise New Sikatuna Wood Industries negotiated the three checks in breach of faith in violation of Article (sic) 55, Negotiable Instruments Law, which is a personal defense available to the drawer of the check. 6

In addition, such instruments are mentioned in Section 541 of the Negotiable Instruments Law as follows:

Sec. 541. The maker or 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."

The 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.

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.

The three subject checks in the case at bar had been crossed generally and issued payable to New Sikatuna Wood Industries, Inc. 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 petitioner against the drawer of the subject checks, private respondent wife, considering that petitioner is not the proper party authorized to make presentment of the checks in question.

Yet it does not follow as a legal proposition that simply because petitioner 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, petitioner 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 for in the case at bar, petitioner may recover from the New Sikatuna Wood Industries, Inc. 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. 

That the subject checks had been issued subject to the condition that private respondents on due date would make the backup deposit for said checks but which condition apparently was not made, thus resulting in the non-consummation of the loan intended to be granted by private respondents to New Sikatuna Wood Industries, Inc., constitutes a good defense against petitioner who is not a holder in due course.

3.11 MESINA v. IAC 145 SCRA 497 (1986)

PELAYO

Doctrine:A person who became the holder of a cashier’s check as endorsed by the person who stole it and who refused to say how and why it was passed to him is not a holder in due course.

FACTS:

Jose Go (GO), on December 29, 1983, purchased from Associated Bank a Cashier Check for Php800k. Unfortunately, GO left said check on top of the desk of the bank manager when he left the bank. The bank manager entrusted the check for safekeeping to a bank official, Albert Uy (UY), who had then a visitor in the person of Alexander Lim (LIM). UY then had to answer a phone call on a nearby telephone after which he proceeded to the men’s room. When he returned to his desk, his visitor LIM was already gone. When GO inquired for the cashier’s check from UY, the check was nowhere to be found. GO immediately ordered “STOP PAYMENT” order and executed an affidavit of loss. On December 31, 1983, Associated Bank received the lost check for clearing coming from Prudential Bank. Associate Bank immediately dishonored the check with words “Payment Stopped” stamped on it. However, the same was again returned to Associate Bank on January 4, 1984 and for the second time it was dishonored. Atty. Navarro representing his client, Marcelo Mesina (MESINA), demanded payment on the cashier’s check in question which was being held by his client. The lost check is now in the possession of MESINA. MESINA then came to possess the check that it was paid to him by LIM in a certain transaction but refused to elucidate further.

Trial court rendered judgment in favor of GO. GO is entitled to payment by Associated Bank for the replacement of the cahier’s check or its cash equivalent instead of MESINA.

ISSUE:Whether or not, IAC erred in ruling that a cahier’s check can be

countermanded even in the hands of a holder in due course.

HELD:Associated Bank can cancel the said cashier’s check since MESINA is not a

holder in due course. MESINA is not holder in due course as he failed to substantiate his claim as shown by the established facts. MESINA became the holder of the cashier’s check as endorsed by LIM, who stole the check. He refused to say how and why it was passed to him. He had therefore notice of the defect of his title over the check from the start. The holder of a cashier’s check who is not a holder in due course cannot enforce such check against the issuing bank which dishonors the same.

The check was still GO’s property when it was misplaced or stolen hence he stopped its payment. Associated Bank knew it was GO’s check and no one else since GO had not paid or indorsed it to anyone. The bank was therefore liable to nobody on the check but Jose Go. The bank had no intention to issue it to MESINA but only to buyer Jose Go. When payment on it was therefore stopped, Associated Bank was not the one who did it but Jose Go. The moment the cashier check was lost and or stolen no one outside of Jose Go can be termed a holder in due course because Jose Go had not indorsed it in due course.

B. LIABILITIES OF PARTIES – Secs. 60 – 69; 18 – 23; 29; 127; 137

3. 12 BLAKE v. WEIDEN 291 N.Y. 134; 51 N.E. 2d 667; A.L.R. 1050

CACAPIT

Facts:

In 1939, R. Weiden Sons, Inc., became a voluntary bankrupt and plaintiff qualified as its trustee. From the books of the bankrupt corporation it appeared that there was a balance of $8,103.68 owing to it on open account from defendant who was one of its stockholders and had been one of its officers from 1930 to 1938. The trustee sued defendant. The latter's answer contained a number of counterclaims. Five of the counterclaims involved five negotiable promissory notes, each for $5,000 and each given by the corporation in 1930 to Robert Weiden, defendant's father who died in 1937. All of the notes remain unpaid. At some time between the father's death and the bankruptcy, defendant's two brothers, Charles R. Weiden and Hermann J. Weiden, who were the executors of the father's will, put on the back of each of the notes a form of indorsement, signed by the estate, by themselves as executors, and worded thus: "Pay to the order of Charles R. Weiden, Hermann J. Weiden and Frank J. Weiden, share and share alike, as tenants in common." Defendant is the third named indorsee. The brothers Charles and Hermann Weiden filed in the bankruptcy proceedings proofs of claim on their purported individual shares of the five notes, as indorsees. Defendant attempted in his five counterclaims to use his purported share of the five notes as a set-off against the debt for which the trustee is suing, defendant's share of the notes, including interest, being larger in amount than the debt in suit.

ISSUE:

Whether or not the defendant can use his individual share of the five notes to set off his debts for which the trustee is suing

HELD

YES. Even if the enforcement of these counterclaims did involve a splitting of each of the five causes of action on the separate notes, such splitting could be justified in two ways. First, the record here at least suggests that the splitting was really done by the other two purported assignees who filed separate proofs of claim in bankruptcy before this suit was brought, and that plaintiff trustee, by acquiescence, probably waived the benefits of the rule against splitting. Second, the rule against splitting does not forbid the use of part of a claim as a set-off, retaining the rest for later use. A fair application of that exception permits defendant to use as a set-off an amount which was equal to the claim in suit but less than his one third of the whole amount due on the notes. Having held that defendant had legal title to, and causes of action at law on his share of the notes, the court necessarily conclude that he brings himself well within the Bankruptcy Act requirements as to set-offs, found in section 68 of that Act (U.S. Code, tit. 11, § 108): "(a) In all cases of mutual debts or mutual credits between the estate of a bankrupt and a creditor the account shall be stated and one debt shall be set off against the other, and the balance only shall be allowed or paid. (b) A set-off or counterclaim shall not be allowed in favor of any debtor of the bankrupt which [1] is not provable against the

estate and allowable under subdivision g of section 93 of this title; or [2] was purchased by or transferred to him after the filing of the petition or within four months before such filing, with a view to such use and with knowledge or notice that such bankrupt was insolvent or had committed an act of bankruptcy." Plaintiff's and defendant's claims are mutual and defendant's claim is by its nature one provable in bankruptcy.

3.13 PNB v. PICORNELL46 Phil. 716 (9/26/1922)

BASSIG

DOCTRINE: The question whether or not the tobacco was worth the value of the bill, does not concern the plaintiff bank. 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.

FACTS: The firm of Hyndman, Tavera and Ventura instructed Picornell as commission agent to buy bales of tobacco. Picornell obtained from PNB a sum of money, and in exchange he drew a bill of exchange in favour of the bank drawn against the firm of Hyndman, Tavera and Ventura. PNB received the bill and presented it to Hyndman, Tavera & Ventura, who accepted it.

Hyndman, Tavera & Ventura proceeded to the examination of the tobacco and notified Picornell that of the tobacco received, there was a certain portion which was no use and was damaged. The firm refused to pay PNB. It alleged that the bill in question was without consideration, the Tobacco being of poor quality. PNB brought an action for recovery of the value of the bill of exchange.

ISSUE: W/N THE COMPANYcan decline payment.

HELD: No. The drawee, Hyndman, Tavera & Ventura company accepted the bill and is primarily liable for the value of the negotiable instrument, while the drawer, Bartolome Picornell, is secondarily liable.

Sec. 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.

Sec. 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.

The question whether or not the tobacco was worth the value of the bill, does not concern the plaintiff bank. 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.

. . . 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 on 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 advance by the plaintiff, that the draft was accepted or the accommodation of the drawer.

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.

3.14 EQUITABLE PCIB v. ONG502 SCRA 119 (2006)

ZAPATOS

DOCTRINES:

By accepting check # 073661 issued by Sarande to Ong and issuing in turn a MANAGER’S CHECK, Equitable PCI Bank assumed the liability of an ACCEPTOR under sec 62 of the NIL.

FACTS:

Sarande deposited TCBT Check No. 0249188, which is worth 225,000 at PCI Bank, Magsaysay ave., Davao City(PCI-Magsaysay). Upon inquiry, PCI-Magsasay told her that the check was cleared. Sarande issued 2 checks against the proceeds of TCBT Check No. 0249188, one of these two was PCI Bank Check No. 073661, for 132,000, which was issued to Rowena Ong.

Ong presented to PCI-Magsaysay said check no. 073661 and requested PCI-Magsaysay to convert the proceeds into a manager’s check. PCI-Magsaysay obliged, and check 073661 became PCI Bank Manager’s Check no. 10983, for 132,000. Ong deposited the manager’s check with Equitable Banking Corp., Davao. Three days later PCI-Magsaysay stopped the payment of the manager’s check on the ground of irregular issuance.

Despite several demands by Ong for payment, PCI Bank refused. Thus, Ong filed a complaint for sum of money, damages, and atty’s fees against PCI Bank.

PCI bank, on the other hand, had it’s own version of the story, saying that TCBT Check No. 0249188 was returned on the ground that the account against w/c it was drawn was already closed. According to PCI, it gave notice to Sarande and ong about the return of 0249188, and requested Ong to return the manager’s check. Ong filed a motion for summary judgment, w/c was granted by the trial court. PCI bank filed a motion for recon w/c was denied.

TRIAL COURT: judgment is rendered for the plaintiff. PCI bank is ordered to pay costs, damages and atty’s fees.

PCI bank appealed, but the CA denied the appeal. Hence, this present petition for review.

ISSUE:

Whether or not PCI Bank should pay Ong the funds under the manager’s check. If so, how is PCI Bank liable?

HELD:

YES. For the following reasons:

A MANAGER’s CHECK is one drawn by the bank’s manager upon the bank itself; the check become’s the primary obligation of the bank w/c issues it and constitutes its written promise to pay on demand.

Sec 187. Where a check is certified by the bank on w/c it is drawn, the certification is equivalent to an acceptance.

By accepting check # 073661 issued by Sarande to Ong and issuing in turn a MANAGER’S CHECK, Equitable PCI Bank assumed the liability of an ACCEPTOR under sec 62 of the NIL, which provides that:

Sec. 62. Liability of acceptor. — The acceptor by accepting the instruments 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.

3.15 FEBTC v. GOLD PALACE JEWELLERYG.R. 168274 (8/20/2008)

PALMERO

3.16 ANG TIONG v. TING22 SCRA 713 (1968)

DURANTE

Facts: 

On August 15, 1960 Lorenzo Ting issued Philippine Bank of Communications check for the sum of P4,000, payable to "cash or bearer". With Felipe Ang's signature (indorsement in blank) at the back thereof, the instrument was received by the plaintiff Ang Tiong who thereafter presented it to the drawee bank for payment. The bank dishonored it. The plaintiff then made written demands on both Lorenzo Ting and Felipe Ang that they make good the amount represented by the check. These demands went unheeded; so he filed in the municipal court of Manila an action for collection of the sum of P4,000, plus P500 attorney's fees. On March 6, 1962 the municipal court adjudged for the plaintiff against the two defendants.

Issue:

Whether or not Felipe Ang is considered a general endorser.

Whether or not Appellant’s alternative allegation that he is an accommodation party should exempt him from liability.

Held:

Yes.  Under Section 63 of the NIL a person signing in blank a negotiable instrument, such as the check in this case, is considered as a general indorser. All Felipe did is to affix his signature at the back of the check – such already qualifies as a blank indorsement. A person placing his signature upon an instrument otherwise than as maker, drawer or acceptor” is a general indorser, — “unless he clearly indicates plaintiff appropriate words his intention to be bound in some other capacity,” which he did not do. And section 66 ordains that “every indorser who indorses without qualification, warrants to all subsequent holders in due course” (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 have capacity to contract; and (d) that the instrument is at the time of his indorsement valid and subsisting. In addition, “he engages that on due presentment, it 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.”

No. Section 29 of the NIL is clear when it states that an accommodation party is “liable on the instrument to a holder for value, notwithstanding that such holder at the time of taking the instrument knew him to be only an accommodation party.” It is not a valid defense that the accommodation party did not receive any valuable consideration when he executed the instrument. Nor is it correct to say that the holder for value is not a holder in due course merely because at the time he acquired the instrument, he knew that the indorser was only an accommodation party. assuming him to be 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 the Tiong, as the said remedy is a matter of concern exclusively between accommodation indorser and accommodated party. The liability of the appellant remains primary and unconditional.

3.17 PEOPLE. v. MANIEGO

148 SCRA 30 (1987)FOJAS

Doctrine: the acquittal of an accused on reasonable doubt is not generally an impediment to the imposition, in the same criminal action, of civil liability for damages on said accused, is what is essentially called into question by the appellant in this case.

Doctrine Relevant to Negotiable Instruments: 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." 18 Among the "parties liable thereon" is an indorser of the instrument.

Facts: Lt. RIZALINO M. Ubay, was 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 Office 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. 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 with Julia Maniego and Milagros Pamintuan (sisters), conspiring together, malversed public funds in the amount of P 66,434.50 belonging to the Republic of the Philippines. Julia Maniego was the indorser of several checks drawn by Milagros Pamintuan, which were dishonored after they had been exchanged with cash belonging to the Government, then in the official custody of the above-mentioned Lt. Rizalino Ubay. Ubay, Pamintuan and Maniego were indicted for the crime of malversation. Ubay and Maniego were arraigned, while Pamintuan fled to the United States.

Judgement of the CFI:There being sufficient evidence beyond reasonable doubt against the accused, Rizalino M. Ubay, was convicted of the crime of malversation and was

sentenced to reclusion temporal and a fine of P57,434.50 which is the amount malversed, and to suffer perpetual special disqualification.

In the absence of evidence against accused Julia T. Maniego, the Court hereby acquits her, but both she and Rizal T. Ubay are hereby ordered to pay jointly and severally( in solidum) the amount of P57,434.50 to the government.

Ubay and Maniego appealed. Ubay's appeal was dismissed due to his failure to file brief, while Maniego ascribed three errors to court.

ISSUES:

1) The Lower Court erred in holding Maniego civilly liable to indemnify the Government for the value of the checks after she had been found not guilty of the crime out of which the civil liability arises.

2) Even assuming arguendo that Maniego could properly be held civilly liable after her acquittal, it was error for the lower Court to adjudge her liable as an indorser to indemnify the government for the amount of the checks.

HELD:

1.) Rule III SEC. 3(b) — Extinction of the penal action does not carry with it extinction of the civil, unless the extinction proceeds from a declaration in a final judgment that the fact from which the civil might arise did not exist. In other cases, the person entitled to the civil action may institute it in the jurisdiction and in the manner provided by law against the person who may be liable for restitution of the thing and reparation of indemnity for the damage suffered. (1985 Rules on Criminal Procedure)

Maniego's acquittal on reasonable doubt of the crime of Malversation imputed to her and her two (2) co-accused did not operate to absolve her from civil liability for reimbursement of the amount rightfully due to the Government as owner thereof. Her liability therefor could properly be adjudged, as it was so adjudged, by the Trial Court on the basis of the evidence before it, which adequately establishes that she was an indorser of several checks drawn by her sister.

2.) Appellant's contention that as mere indorser, she may not be made liable on account of the dishonor of the checks indorsed by her, is likewise untenable. 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

NOTE: Maniego may also be deemed an "accommodation party" in the light of the facts. A person "who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefore, 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," 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."

The Trial Court acted correctly in adjudging Maniego to be civilly liable in the same criminal action in which she had been acquitted of the felony of Malversation ascribed to her, dispensing with the necessity of having a separate civil action subsequently instituted against her for the purpose.

WHEREFORE, the judgment of the Trial Court, being entirely in accord with the facts and the law, is hereby affirmed in toto, with costs against the appellant.

SO ORDERED.

3.18 PBCOM v. ARUEGO102 SCRA 530 (1981)

ESCASINAS

DOCTRINE: When 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 filing a representative character, without disclosing his principal, does not exempt him from personal liability.

FACTS:

On December 1, 1959, the Philippine Bank of Commerce instituted against Jose M. Aruego Civil Case for the recovery of the total sum of about P35,000.00. The sum sought to be recovered represents the cost of the printing of "World Current Events," a periodical published by the defendant. To facilitate the payment of the printing the defendant obtained a credit accommodation from the plaintiff. Thus, for every printing of the "World Current Events," the printer, Encal Press and Photo Engraving, collected the cost of printing by drawing a draft against the plaintiff, said draft being sent later to the defendant for acceptance. As an added security for the payment of the amounts advanced to Encal Press and Photo-Engraving, the plaintiff bank also required defendant Aruego to execute a trust receipt in favor of said bank wherein said defendant undertook to hold in trust for plaintiff the periodicals and to sell the same with the promise to turn over to the plaintiff the proceeds of the sale of said publication to answer for the payment of all obligations arising from the draft.

The complaint was dismissed in an order dated December 22, 1959. Upon plaintiff’s motion for reconsideration, the RTC set aside its order dismissing the complaint. The defendant answered that he signed the document upon which the plaintiff sues in his capacity as President of the Philippine Education Foundation; that his liability is only secondary; and that he believed that he was signing only as an accommodation party.

On the other hand, the trial court declared the defendant in default. The RTC then rendered judgment sentencing the defendant to pay to the plaintiff the total amount of his obligation under the twenty-two (22) causes of action.

ISSUE:

Whether or not Jose Argueo signing the instrument as an agent may be held personally liable thereto.

RULING:

YES. The SC held that pursuant to Section 20 of the Negotiable Instruments Law which provides that "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 filing a representative character, without disclosing his principal, does not exempt him from personal liability." An inspection of the drafts accepted by the defendant shows that nowhere has he disclosed that he was signing as a representative of the Philippine Education Foundation Company.

He merely signed as follows: "JOSE ARUEGO (Acceptor) (SGD) JOSE ARGUEGO. For failure to disclose his principal, Aruego is personally liable for the drafts he accepted.

3.19 R.N.CLARK v. SELLNERG.R. 16477 (8/ 22/1921)

DIATO

FACTS:

 The defendant, in conjunction with two other persons, signed the following note in favor of the plaintiff:

The note matured, but its amount was not paid.

Counsel for the defendant allege that the latter did not receive in that transaction either the whole or any part of the amount of the debt; that the instrument was not presented to the defendant for payment; and that the defendant, being an accommodation party, is not liable unless the note is negotiated, which was not done, as shown by the evidence.

TRIAL COURT

The trial judge took into account the fact that at the time of the maturity of the note, the collateral security given to guarantee the payment was worth more than what was due on the note, but it depreciated to such an extent that, at the time of the institution of this action, it was entirely valueless. And taking this circumstance, together with the fact that this case was not commenced until after the lapse of four years from the date on which the payment fell due, and with the further fact that the defendant had not received any part of the amount mentioned in the note, he was of the opinion, and so decided, that the defendant could not be held liable. The theory of the judge a quo was that the plaintiff's failure to enforce the guaranty for the payment of the debt, and his delay in instituting this action constitute laches, which had the effect of extinguishing his right of action.

ISSUE:

HELD:

DEFENDANTS LIABILITY

The liability of the defendant, as one of the signers of the note, is not dependent on whether he has, or has not, received any part of the amount of the debt. The defendant is really and expressly one of the joint and several debtors on the note, and as such he is liable under the provisions of section 60 of Act No. 2031, entitled The Negotiable Instruments Law, which provisions should be applied in this case in view of the character of the instrument.

As to presentment for payment, such action is not necessary in order to charge the person primarily liable, as is the defendant. (Sec. 70, Act No. 2031.)

And as to whether or not the defendant is an accommodation party, it should be taken into account that by putting his signature to the note, he lent his name, not to the creditor, but to those who signed with him placing himself with respect to the creditor in the same position and with the same liability as the said signers. It should be noted that the phrase "without receiving value therefor," as used in section 29 of the aforesaid Act, 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." If, as in the instant case, a sum of money was received by virtue of the note, it is immaterial, so far as the creditor is concerned, whether one of the singers has, or has not, received anything in payment of the use of his name. In reality the legal situation of the defendant in this case may properly be regarded as that of a joint surety rather than that of an accommodation party. The defendant, as a joint surety, may, upon the maturity of the note, pay the debt, demand the collateral security and dispose of it to his benefit; but there is no proof whatever that this was done.

PLAINTIFF’S RIGHT

As to the plaintiff, he is the "holder for value," under the phrase of said section 29, for he had paid the money to the signers at the time the note was executed and delivered to him. Who is the "holder" is defined in section 191 of the said law thus:

"Holder" means the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof.

And as such holder, he has the right to demand payment of the debt from the signer of the note, even though he knows that said person is merely an accommodation party (section 29 above cited), assuming the defendant to be such, which, as has been stated, is not the case.

SUPREME COURT

P12,000.00 MANILA, July 1, 1914.

Six months after date, for value received, we jointly and severally promise to pay to the order of R. N. Clark at his office in the city of Manila, the sum of twelve thousand pesos, Philippine currency, with interest thereon in like currency from date until paid at the rate of ten per cent per annum, payable quarterly.

If suit is necessary to collect this note, we hereby agree to pay as attorney's fees ten per centum of the amount found due.

          (Sgd.) W. H. CLARKE, [INTERNAL REVENUE JOHN MAYE. STAMP.] By W. H. CLARKE, his

attorney. GEO. C. SELLNER."

We see no sufficient ground for applying such a theory to the case before us. As stated, the defendant's position being, as it is, that of a joint surety, he may, at any time after the maturity of the note, make payment, thus subrogating himself in the place of the creditor with the right to enforce the guaranty against the other signers of the note for the reimbursement of what he is entitled to recover from them. The mere delay of the creditor in enforcing the guaranty has not by any means impaired his action against the defendant. It should not be lost sight of that the defendant's signature on the note is an assurance to the creditor that the collateral guaranty will remain good, and that otherwise, he, the defendant, will be personally responsible for the payment.

True, that if the creditor had done any act whereby the guaranty was impaired in its value, or discharged, such an act would have wholly or partially released the surety; but it must be born in mind that it is a recognized doctrine in the matter of suretyship that with respect to the surety, the creditor is under no obligation to display any diligence in the enforcement of his rights as a creditor. His mere inaction, indulgence, passiveness, or delay in proceeding against the principal debtor, or the fact that he did not enforce the guaranty or apply on the payment of such funds as were available, constitute no defense at all for the surety, unless the contract expressly requires diligence and promptness on the part of the creditor, which is not the case in the present action. There is in some decisions a tendency toward holding that the creditor's laches may discharge the surety, meaning by laches a negligent forbearance. This theory, however, is not generally accepted and the courts almost universally consider it essentially inconsistent with the relation of the parties to the note. (21 R. C. L., 1032-1034.)

We find that in the judgment appealed from there were committed the errors assigned, and that the defendant is under obligation to pay the plaintiff the amount of the debt, as prayed for in the complaint.lawphil.net

The judgment appealed from must, therefore, be, as is hereby, reversed. Let an order be issued to the effect that the plaintiff have and recover from the defendant the sum of twelve thousand pesos (P12,000), as principal debt, plus one thousand two hundred pesos (P1,200), the sum agreed upon as attorney's fees, and 10 per cent interest on the principal debt from July 1, 1914, until it is fully paid, deducting therefrom the sum of three hundred pesos (P300) already paid on account, as stated in the complaint.

This decision is rendered without special pronouncement as to costs. So ordered.

3.20 MAULINI v. SERRANO28 Phil. 640 (1914)

MANIBO

Moreland, J.:

Where an indorsement is made as a favor to the indorsee, who requests it to relieve himself from a distasteful situation, and where the only consideration for such indorsement passes from the indorser to the indorsee, the situation does

not present one creating an accommodation indorsement, nor one where there is a consideration sufficient to sustain an action on the indorsement.

FACTS:The action was brought by the plaintiff upon the contract of indorsement

alleged to have been made in his favor by the defendant upon the following promissory note:

“3,000. Due 5th of September, 1912.

We jointly and severally agree to pay to the order of Don Antonio G. Serrano on or before the 5th day of September, 1912, the sum of three thousand pesos (P3,000) for value received for commercial operations. Notice and protest renounced. If the sum herein mentioned is not completely paid on the 5th day of September, 1912, this instrument will draw interest at the rate of 1½ per cent per month from the date when due until the date of its complete payment. The makers hereof agree to pay the additional sum of P500 as attorney's fees in case of failure to pay the note.

Manila, June 5, 1912.

(Sgd.) For Padern, Moreno & Co., by F. Moreno, member of the firm. For Jose Padern, by F. Moreno. Angel Gimenez.”

The note was indorsed on the back as follows:

“Pay note to the order of Don Fernando Maulini, value received. Manila, June 5, 1912. (Sgd.) A.G. Serrano.”

The defendant was a broker and that part of his business consisted in looking up and ascertaining persons who had money to loan as well as those who desired to borrow money and, acting as a mediary, negotiate a loan between the two. He had done much business with the plaintiff and the borrower prior to this action, and was well known to the parties interested. According to the arrangement made in this particular case, the broker obtained compensation for his services of the borrower, the lender paying nothing therefor. Sometimes this was a certain per cent of the sum loaned; at other times it was a part of the interest which the borrower was to pay, the latter paying 1½ per cent and the broker ½ per cent. The broker delivered the money personally to the borrower, took note in his own name and immediately transferred it by indorsement to the lender. In the case at bar this was done at the special request of the indorsee and simply as a favor to him, the latter stating to the broker that he did not wish his name to appear on the books of the borrowing company as a lender of money and that he desired that the broker take the note in his own name, immediately transferring to him title thereto by indorsement. This was done, the note being at once transferred to the lender.

TRIAL COURT = although it received parol evidence on the subject provisionally, held that such evidence was not admissible to alter, very, modify or contradict the terms of the contract of indorsement, and, therefore, refused to consider the evidence thus provisionally received, which tended to show that, by verbal agreement between the indorser and the indorsee, the indorser, in making the indorsement, was acting as agent for the indorsee, as a mere vehicle for the transference of naked title, and that his indorsement was wholly without consideration. The court also held that it was immaterial whether there was a consideration for the transfer or not, as the indorser, under the evidence offered, was an accommodation indorser.

ISSUE: Whether or not, under the Negotiable Instruments Law, an indorser of a negotiable promissory note may, in an action brought by his indorsee, show, by parol evidence, that the indorsement was wholly without consideration and that, in making it, the indorser acted as agent for the indorsee, as a mere vehicle of transfer of the naked title from the maker to the indorsee, for which he received no consideration whatever?

HELD:NO. The Court ruled that according to the evidence referred to, there never

was a moment when Serrano was the real owner of the note. It was always the note of the indorsee, Maulini, he having furnished the money which was the consideration for the note directly to the maker and being the only person who had the slightest interest therein, Serrano, the broker, acting solely as an agent, a vehicle by which the naked title to the note passed fro the borrower to the lender. The only payment that the broker received was for his services in negotiating the loan. He was paid absolutely nothing for becoming responsible as an indorser on the paper, nor did the indorsee lose, pay or forego anything, or alter his position thereby.

Nor was the defendant an accommodation indorser. The learned trial court quoted that provision of the Negotiable Instruments Law which defines an accommodation party as "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 the same to be only an accommodation party." (Act No. 2031, sec. 29.)

We are of the opinion that the trial court misunderstood this definition. The accommodation to which reference is made in the section quoted is not one to the person who takes the note — that is, the payee or indorsee, but one to the maker or indorser of the note. It is true that in the case at bar it was an accommodation to the plaintiff, in a popular sense, to have the defendant indorse the note; but it was not the accommodation described in the law, but, rather, a mere favor to him and one which in no way bound Serrano. In cases of accommodation indorsement the indorser makes the indorsement for the accommodation of the maker. Such an indorsement is generally for the purpose of better securing the payment of the note — that is, he lend his name to the maker, not to the holder. Putting it in another way: An accommodation note is one to which the accommodation party has put his name, without consideration, for the purpose of accommodating some other party who is to use it and is expected to pay it. The credit given to the accommodation part is sufficient consideration to bind the accommodation maker. Where, however, an indorsement is made as a favor to the indorsee, who requests it, not the better to secure payment, but to relieve himself from a distasteful situation, and where the only

consideration for such indorsement passes from the indorser to the indorsee, the situation does not present one creating an accommodation indorsement, nor one where there is a consideration sufficient to sustain an action on the indorsement.

3.21 PNB v. MAZA & MECENASG.R. 24224 (11/ 3 /1925)

DIATO

DOCTRINE: Fundamental that an instrument given without consideration does not create any obligation at law or in equity in favor of the payee. However, to fasten liability upon an accommodation maker, it is not necessary that any consideration should move to 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

FACTS:

The Philippine National Bank is suing Ramon Maza and Francisco Mecenas on five promissory notes of ten thousand pesos (P10,000) each.

Maza and Mecenas executed the following promissory notes

1. executed two of the promissory notes on January 20, 1921, due three months after date.

2. The three other notes due four months after date were executed by the same parties on January 21, 1921.

One of the above-mentioned notes, typical of the rest reads as follows:

P10,000          ILOILO, I.F. Jan. 20, 1921.

A los tres meses de la fecha, pagaremos mancomunada y solidariamente a la orden delPhilippine National Bank, Iloilo, Iloilo, I. F., la cantidad de diez mil (P10,000) pesos en elPhilippine National Bank.

Iloilo, I. F.

Valor Recibido.

No. 340 Pagadero el 4/20/21

The notes were not taken up by Maza and Mecenas at maturity. The obligations with accumulated interest totaled P65,207.73 on September 22, 1924.

COURT OF FIRST INSTANCE

To recover the amounts stated on the face of the notes with back interest, action was begun by the Philippine National Bank in the court of first instance of Iloilo against Ramon Maza and Francisco Mecenas.

The special defense interposed by the defendants was that the promissory notes were sent in blank to them by Enrique Echaus with the request that they sign them so that he, Echaus, might negotiate them with the Philippine National Bank in case of need; that the defendants have not negotiated the promissory notes with the bank, nor have they received the value thereof, or delivered them to the bank in payment of any preexisting debt; and that it was Enrique Echaus who negotiated the noted with the bank and who is accordingly the real party in interest and the party liable for the payment of the notes. Defendants also moved that Echaus be ordered included as one of the defendants.

The trial judge denied the motion. Judgment was rendered in favor of the plaintiff and against the defendants jointly and severally for a total of P65,207.73, with interest at 9 per cent on twenty thousand pesos (P5) a day, and with interest at 9 per cent on thirty thousand pesos (P30,000) from September 23, 1924, or at the rate of P7.5 a day, and with costs.

COURT OF APPEALS

Four errors are assigned by the defendants on appeal.

ISSUE

Whether or not Maza and Mecenes are liable

HELD

The first error relates to the order of the trial judge refusing to require Enrique Echaus to become a party to the action. As the defendants failed to duly except to the order, they are not now entitled to ask this court to review the ruling. Moreover, it is not evident that Echaus was an indispensable party. The other three error go to the merits and rest on the same foundation as the special defense.

From the pleadings and the stipulation of facts, it is deduced that the defendants admit the genuineness and due execution of the instruments sued on . Neither do the appellants point out any mistake in regard to the amount and interest that the lower court sentenced them to pay to the plaintiff bank. Predicated on these premises, from whatever point of view we look at the case, we arrive at the same conclusion — that the defendants are liable.

Different assumptions of this court:

1. Maza and Mecenas were the principals and Echaus the agent, as argued by counsel for the appellee, the principals must fulfill their obligations.

2. That the defendants are exactly what they appear to be, the makers of the negotiable instruments, then they must keep their engagement and must pay as promised. Their liability on the instruments is primary and unconditional.

3. The most plausible and reasonable stand for the defendants is that they are accommodation parties. but as accommodation parties, the defendants having signed the instruments without receiving value therefor and for the purpose of lending their names to some other person, are still liable on the instruments. The law now is that the accommodation party can claim no benefit as such, but he is liable according to the face of his undertaking, the same as if he were himself financially interested in the transaction.lawph!1.net

The defense is made to the action that the defendants never received the value of the promissory notes. it is, of course, fundamental that an instrument given without consideration does not create any obligation at law or in equity in favor of the payee. However, to fasten liability upon an accommodation maker, it is not necessary that any consideration should move to 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.

While perhaps unnecessary to this decision, it may properly be remarked that 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.

Judgment affirmed with costs.

3.22 TOWN SAVINGS & LOAN v. CAG.R. 106011 (6/17/ 1993)

ROSIT

DOCTRINE: An accommodation party is one who has signed the instrument as marker, drawer, indorser, without receiving value therefor and for the purpose of lending his name to some other person. Such person 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.

FACTS: Respondent spouses Miguel and Alicia Hipolito applied for, and were granted, a loan to Town Savings and Loan Bank (TSLB). The spouses then executed a

promissory note with a maturity period of 3 years and an acceleration clause upon default in the payment of any amortization plus a penalty of 36% interest and 10% attorney’s fees.

The spouses defaulted for failure to update their payments, and despite demands for payment – it were ignored. At the time of the institution of the action, the unpaid obligation amounted to Php 1, 114, 983.40.

The spouses denied personal liability to the promissory note they executed alleging that the loan was for Pilarita H. Reyes, sister of Miguel Hipolito; hence, they were mere guarantors for her. They allegedly signed the promissory note because the President of TSLB persuaded them. When they received the demand letters, they confronted the President but were told that the Bank had to observe the formality of sending notices and demand letter, but the real purpose was only to pressure Pilarita to pay.

Insisting that they were mere guarantors, the spouses protested about being dragged into the litigation as principal parties and allegedly incurred actual damages.

The RTC held that the spouses Hipolito are liable as accommodation parties on the promissory note.

The CA, upon appeal, found that the spouses did not accommodate Pilarita but the TSLB, hence, the spouses were relived from any liability to TSLB.

ISSUE: W/N THE SPOUSES HIPOLITO ARE LIABLE ON THE PROMISSORY NOTE WHICH THEY EXECUTED IN FAVOR OF TOWN SAVINGS AND LOAN BANK?

HELD:

Yes, the spouses are liable as an accommodation party.

According to Phil. Bank of Commerce vs Aruego,

An accommodation party is one who has signed the instrument as marker, drawer, indorser, without receiving value therefor and for the purpose of lending his name to some other person. Such person 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. In lending his name to the accommodated party, the accommodation party is in effect a surety for the latter. He lends his name to enable the accommodated party to obtain credit or to raise money. He receives no part of the consideration for the instrument but assumes liability to the other parties thereto because he wants to accommodate another.

As observed by both the trial and appellate court, the actual beneficiary of the loan was Pilarita H. Reyes; the respondent spouses signed the promissory note in order to enable Pilarita to borrow the loan from TSLB because TSLB may not lend any single borrower more than the authorized limit of its loan portfolio. Under Section 29 of the Negotiable Instruments Law, the spouses are liable to the bank on the promissory note that they signed to accommodate Pilarita.

The CA erred in giving credence to spouses’ allegation that it was the bank’s president who induced him to sign the promissory note. The Court is convinced that the intention of the respondents in signing was not so much to enable the Bank to grant a loan but for Pilarita to obtain the full amount of the loan. In this case, there was no agreement that in signing the promissory note, Miguel and Alicia Hipolito were acting as agents for TSLB. They acted as agents of Pilarita, not of the bank. They signed the promissory note as a favor to Pilarita, to help her raise the funds that she needed. It was Pilarita whom they accommodated, not the bank, contrary to the erroneous finding of the CA.