METROPOLITAN BANK & TRUST COMPANY, petitioner,
vs.
COURT OF APPEALS, GOLDEN SAVINGS & LOAN
ASSOCIATION, INC., LUCIA CASTILLO, MAGNO
CASTILLO and GLORIA CASTILLO, respondents.
FACTS
Eduardo Gomez opened an account with Golden Savings
and deposited over a period of two months 38 treasury
warrants with a total value of P1,755,228.37. They were all
drawn by the Philippine Fish Marketing Authority and
purportedly signed by its General Manager and
countersigned by its Auditor. Six of these were directly
payable to Gomez while the others appeared to have been
indorsed by their respective payees, followed by Gomez as
second indorser. 1
All these warrants were subsequently indorsed by Gloria
Castillo as Cashier of Golden Savings and deposited to its
Savings Account No. 2498 in the Metrobank branch in
Calapan, Mindoro. They were then sent for clearing by the
branch office to the principal office of Metrobank, which
forwarded them to the Bureau of Treasury for special
clearing. 2
Gloria Castillo went to the Calapan branch several times to
ask whether the warrants had been cleared. Gomez was
meanwhile not allowed to withdraw from his account. Later,
however, "exasperated" over Gloria's repeated inquiries
and also as an accommodation for a "valued client," the
petitioner says it finally decided to allow Golden Savings to
withdraw from the proceeds of the
warrants.
In turn, Golden Savings subsequently allowed Gomez to
make withdrawals from his own account, eventually
collecting the total amount of P1,167,500.00 from the
proceeds of the apparently cleared warrants.
Eventually, Metrobank informed Golden Savings that 32 of
the warrants had been dishonored by the Bureau of
Treasury and demanded the refund by Golden Savings of
the amount it had previously withdrawn, to make up the
deficit in its account.
The demand was rejected. Metrobank then sued Golden
Savings.
ISSUE
Whether or not the treasury warrants involved in this case
are not negotiable instruments.
HELD
The treasury warrants are non-negotiable instruments.
It would appear to the Court that Metrobank was indeed
negligent in giving Golden Savings the impression that the
treasury warrants had been cleared and that, consequently,
it was safe to allow Gomez to withdraw the proceeds
thereof from his account with it. Without such assurance,
Golden Savings would not have allowed the withdrawals.
Negotiable Instruments Law Case Digest Page 9
It was, in fact, to secure the clearance of the treasury
warrants that Golden Savings deposited them to its account
with Metrobank. Golden Savings had no clearing facilities of
its own. It relied on Metrobank to determine the validity of
the warrants through its own services.
A no less important consideration is the
circumstance that the treasury warrants in question
are not negotiable instruments. Clearly stamped on
their face is the word "non-negotiable." Moreover,
and this is of equal significance, it is indicated that
they are payable from a particular fund, to wit, Fund
501.
The following sections of the Negotiable Instruments
Law, especially the underscored parts, are pertinent:
Sec. 1. — Form of negotiable instruments. — An
instrument to be negotiable must conform to the
following requirements:
(a) It must be in writing and signed by the maker
or drawer;
(b) Must contain an unconditional promise or
order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or
determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a
drawee, he must be named or otherwise
indicated therein with reasonable certainty.
xxx xxx xxx
Sec. 3. When promise is unconditional. — An
unqualified order or promise to pay is
unconditional within the meaning of this Act
though coupled with —
(a) An indication of a particular fund out of which
reimbursement is to be made or a particular
account to be debited with the amount; or
(b) A statement of the transaction which gives
rise to the instrument judgment.
But an order or promise to pay out of a particular
fund is not unconditional.
The indication of Fund 501 as the source of the
payment to be made on the treasury warrants makes
the order or promise to pay "not unconditional" and
the warrants themselves non-negotiable.
NARCISA BUENCAMINO, AMADA DE LEON-ERAÑA,
ENCARNACION DE LEON and BIENVENIDO B. ERAÑA vs
C. HERNANDEZ
FACTS
The Land Tenure Administration, LTA for short, purchased
from the petitioners Narcisa Buencamino, Amada de Leon-
Eraña, and Encarnacion de Leon, and other members of the
de Leon family their hacienda in Talavera, Nueva Ecija for a
total consideration of P2,746,000.00. For the purpose, a
Memorandum Agreement was executed on the said date
which expressly declared that the LTA was purchasing the
hacienda upon petition of the tenants thereof in accordance
with Republic Act No. 1400, otherwise known as the Land
Reform Act of 1955.
The parties to the sale agreed that of the full price of
P2,746,000.00, 50% or P1,373,000.00 was to be paid in
cash and the balance in negotiable land certificates.
The condition in the certificate regarding its encashment
only after the lapse of five years from the date of execution
of the Deed of Sale of Hacienda de Leon was adopted or
taken from the Memorandum Agreement
Under the deed of sale, dated July 31, 1957, the above
condition was —
That the VENDORS shall not, however, within five
(5) years, present for encashment the negotiable
land certificates amounting to ONE MILLION THREE
HUNDRED SEVENTY THREE THOUSAND PESOS
(P1,373,000.00) but nevertheless, shall be
authorized to use the same for payment of land
taxes or obligations due and payable in favor of
the Government and such other uses or purposes
provided for by Section 10 of Republic Act No.
1400 within the said period of five (5) years from
this date. (page 4, Absolute Deed of Sale)
Availing themselves of what they considered was their
contractual and statutory rights under the certificate, the
petitioners presented two of them to the respondent City
Treasurer in payment of certain 1957 realty tax obligations
to Quezon City. The respondent Treasurer refused to accept
the same and claimed that as per the opinion rendered by
the Secretary of Finance, it was discretionary on his part,
the respondent Treasurer, to accept or reject the said
certificates. And, invoking his discretion in the premises,
the respondent Treasurer explained that he could not
accept the certificates offered as Quezon City was then in
great need of funds.
The petitioners were thus obliged to settle in cash the 1957
tax obligation aforementioned. Subsequently, however, the
petitioners tendered once more the same certificates in
payment of their 1958 realty taxes and the respondent
Treasurer similarly rejected the tender. As a result, the
petitioners filed the instant mandamus proceedings with the
Court of First Instance of Quezon City.
To the above petition, the LTA filed a timely answer
sustaining the petitioners' stand. The Secretary of Finance,
represented by the Solicitor General, also filed an answer,
which argued that he was not a necessary party to the case
as he was not the officer with the duty of collecting taxes.
In effect, however, they resolve themselves into the single
question of whether or not the said certificates where
drawn payable on demand as required by Section 9 of
Republic Act 1400.
Negotiable Instruments Law Case Digest Page 10
The respondent Treasurer contends that the
certificates in question were not issued strictly in
accordance with the provisions of Republic Act No.
1400 because while Section 9 of that Act inquires
that "negotiable land certificates shall be issued in
denominations of one thousand pesos or multiples of
one thousand pesos and shall be payable to bearer
on demand . . ., " the ones issue to the petitioners
were payable to bearer not on demand but, only
upon the expiration of the five-year period there in
specified.
On the other hand, the petitioners contend that although
the certificates issued could not really be encashed within
the period therein mentioned, they could, however, still be
used for the settlement of tax liabilities at any time after
their issue in accordance with Section 10 of the same Act.
The petitioners maintain that the 5-year restriction against
encashment referred merely and exclusively to the time
when the certificates may be converted to cash and not
anymore to the utility of the said instruments as substitutes
for tax obligations.
ISSUE
Whether or not the refusal of respondent Treasurer to
accept the land certificates to be legally justified.
HELD
YES. We hold the refusal of the respondent Treasurer
to accept the land certificates to be legally justified.
They failed to comply with the requirements of
Republic Act No. 1400.
Under the above-mentioned law, the land certificates
"shall be payable to bearer on demand." (Section 9)
The one issued, however, were payable to bearer
only after the lapse of five years from a given period.
Obviously then, the requirement that they should be
payable on demand was not met since an instrument
payable on demand is one which (a) is expressed to
be payable on demand, or at sight, or on
presentation; or (b) expresses no time for payment
(Sec. 7, Negotiable Instruments Law) The 5-year
period within which the certificates could not be
encashed was an expression of the time for payment
contrary to paragraph (b) of the last law cited.
FAR EAST BANK AND TRUST COMPANY vs ESTRELLA
O. QUERIMIT
FACTS
Estrella O. Querimit worked as internal auditor of the
Philippine Savings Bank (PSB) for 19 years, from 1963 to
1992. She opened a dollar savings account in petitioner's
Harrison Plaza branch,[4] for which she was issued four (4)
Certificates of Deposit each certificate representing the
amount of $15,000.00, or a total amount of $60,000.00. The
certificates were to mature in 60 days and were payable to
bearer at 4.5% interest per annum. The certificates bore the
word "accrued," which meant that if they were not
presented for encashment or pre-terminated prior to
maturity, the money deposited with accrued interest would
be "rolled over" by the bank and annual interest would
accumulate automatically. The petitioner bank's manager
assured respondent that her deposit would be renewed and
earn interest upon maturity even without the surrender of
the certificates if these were not indorsed and withdrawn.
Respondent kept her dollars in the bank so that they would
earn interest and so that she could use the fund after she
retired.
In 1989, respondent accompanied her husband Dominador
Querimit to the United States for medical treatment. She
used her savings in the Bank of the Philippine Islands (BPI)
to pay for the trip and for her husband's medical expenses.
Her husband died and Estrella returned to the Philippines.
She went to petitioner FEBTC to withdraw her deposit but,
to her dismay, she was told that her husband had
withdrawn the money in deposit. Through counsel,
respondent sent a demand letter to petitioner FEBTC. In
another letter, respondent reiterated her request for
updating and payment of the certificates of deposit,
including interest earned.[10] As petitioner FEBTC refused
respondent's demands, the latter filed a complaint. FEBTC
alleged that it had given respondent's late husband
Dominador an "accommodation" to allow him to withdraw
Estrella's deposit. Petitioner presented certified true copies
of documents showing that payment had been made.
The trial court rendered judgment for respondent. Court of
Appeals affirmed the decision of the trial court. The appeals
court stated that petitioner FEBTC failed to prove that the
certificates of deposit had been paid out of its funds, since
"the evidence by the [respondent] stands unrebutted that
the subject certificates of deposit until now remain
unindorsed, undelivered and unwithdrawn by her.
ISSUE
Whether the subject certificates of deposit have already
been paid by petitioner.
HELD
NO. Petitioner bank failed to prove that it had already paid
Estrella Querimit, the bearer and lawful holder of the
subject certificates of deposit. The finding of the trial court
on this point, as affirmed by the Court of Appeals, is that
petitioner did not pay either respondent Estrella or her
husband the amounts evidenced by the subject certificates
of deposit. A certificate of deposit is defined as a written
acknowledgment by a bank or banker of the receipt of a
sum of money on deposit which the bank or banker
promises to pay to the depositor, to the order of the
depositor, or to some other person or his order, whereby
the relation of debtor and creditor between the bank and
the depositor is created. The principles governing other
types of bank deposits are applicable to certificates of
deposit,[25] as are the rules governing promissory notes
when they contain an unconditional promise to pay a sum
certain of money absolutely.[26] The principle that
payment, in order to discharge a debt, must be made
to someone authorized to receive it is applicable to
the payment of certificates of deposit. Thus, a bank
will be protected in making payment to the holder of a
certificate indorsed by the payee, unless it has notice of the
invalidity of the indorsement or the holder's want of title.
[27] A bank acts at its peril when it pays deposits
evidenced by a certificate of deposit, without its
production and surrender after proper indorsement.
[28] As a rule, one who pleads payment has the
burden of proving it. Even where the plaintiff must
allege non-payment, the general rule is that the
burden rests on the defendant to prove payment,
Negotiable Instruments Law Case Digest Page 11
rather than on the plaintiff to prove payment. The
debtor has the burden of showing with legal
certainty that the obligation has been discharged by
payment.[29]
In this case, the certificates of deposit were clearly
marked payable to "bearer," which means, to "[t]he
person in possession of an instrument, document of
title or security payable to bearer or indorsed in
blank."[30] Petitioner should not have paid
respondent's husband or any third party without
requiring the surrender of the certificates of deposit.
Petitioner claims that it did not demand the
surrender of the subject certificates of deposit since
respondent's husband, Dominador Querimit, was one
of the bank's senior managers.
PHILIPPINE NATIONAL BANK vs. ERLANDO T.
RODRIGUEZ and NORMA RODRIGUEZ
FACTS
Respondents-Spouses Erlando and Norma Rodriguez were
clients of petitioner Philippine National Bank (PNB). They
maintained savings and demand/checking accounts,
namely, PNBig Demand Deposits (Checking/Current Account
No. 810624-6 under the account name Erlando and/or
Norma Rodriguez), and PNBig Demand Deposit
(Checking/Current Account No. 810480-4 under the account
name Erlando T. Rodriguez).
The spouses were engaged in the informal lending
business. In line with their business, they had a
discounting3arrangement with the Philnabank Employees
Savings and Loan Association (PEMSLA), an association of
PNB employees. Naturally, PEMSLA was likewise a client of
PNB
PEMSLA regularly granted loans to its members. Spouses
Rodriguez would rediscount the postdated checks issued to
members whenever the association was short of funds. As
was customary, the spouses would replace the postdated
checks with their own checks issued in the name of the
members.
It was PEMSLA’s policy not to approve applications for loans
of members with outstanding debts. To subvert this policy,
some PEMSLA officers devised a scheme to obtain
additional loans despite their outstanding loan accounts.
They took out loans in the names of unknowing members,
without the knowledge or consent of the latter. The PEMSLA
checks issued for these loans were then given to the
spouses for rediscounting. The officers carried this out by
forging the indorsement of the named payees in the checks.
In return, the spouses issued their personal checks
(Rodriguez checks) in the name of the members and
delivered the checks to an officer of PEMSLA. The PEMSLA
checks, on the other hand, were deposited by the spouses
to their account.
The Rodriguez checks were deposited directly by PEMSLA to
its savings account without any indorsement from the
named payees. This was an irregular procedure made
possible through the facilitation of Edmundo Palermo, Jr.,
treasurer of PEMSLA and bank teller in the PNB Branch.
Petitioner PNB eventually found out about these fraudulent
acts. To put a stop to this scheme, PNB closed the current
account of PEMSLA. As a result, the PEMSLA checks
deposited by the spouses were returned or dishonored for
the reason "Account Closed." The corresponding Rodriguez
checks, however, were deposited as usual to the PEMSLA
savings account. The amounts were duly debited from the
Rodriguez account. Thus, because the PEMSLA checks given
as payment were returned, spouses Rodriguez incurred
losses from the rediscounting transactions.
RTC rendered judgment in favor of spouses Rodriguez
(plaintiffs). It ruled that PNB (defendant) is liable to return
the value of the checks.
The CA concluded that the checks were obviously meant by
the spouses to be really paid to PEMSLA. The court a quo
declared:
Not swayed by the contention of the plaintiffs-appellees
(Spouses Rodriguez) that their cause of action arose from
the alleged breach of contract by the defendant-appellant
(PNB) when it paid the value of the checks to PEMSLA
despite the checks being payable to order. Rather, we are
more convinced by the strong and credible evidence for the
defendant-appellant with regard to the plaintiffs-appellees’
and PEMSLA’s business arrangement – that the value of the
rediscounted checks of the plaintiffs-appellees would be
deposited in PEMSLA’s account for payment of the loans it
has approved in exchange for PEMSLA’s checks with the full
value of the said loans.
The CA found that the checks were bearer instruments, thus
they do not require indorsement for negotiation; and that
spouses Rodriguez and PEMSLA conspired with each other
to accomplish this money-making scheme. The payees in
the checks were "fictitious payees" because they were not
the intended payees at all.
ISSUE
Whether the subject checks are payable to order or to
bearer and who bears the loss.
HELD
The checks are order instruments.
As a rule, when the payee is fictitious or not intended to be
the true recipient of the proceeds, the check is considered
as a bearer instrument. A check is "a bill of exchange drawn
on a bank payable on demand."11 It is either an order or a
bearer instrument. Sections 8 and 9 of the NIL states:
SEC. 8. When payable to order. – The instrument is payable
to order where it is drawn payable to the order of a
specified person or to him or his order. It may be drawn
payable to the order of –
(a) A payee who is not maker, drawer, or drawee;
or
(b) The drawer or maker; or
(c) The drawee; or
Negotiable Instruments Law Case Digest Page 12
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.
Where the instrument is payable to order, the payee must
be named or otherwise indicated therein with reasonable
certainty.
SEC. 9. When payable to bearer. – The instrument is
payable to bearer –
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein
or bearer; or
(c) When it is payable to the order of a fictitious or
non-existing person, and such fact is known to the
person making it so payable; or
(d) When the name of the payee does not purport
to be the name of any person; or
(e) Where the only or last indorsement is an
indorsement in blank.12 (Underscoring supplied)
The distinction between bearer and order instruments lies
in their manner of negotiation. Under Section 30 of the NIL,
an order instrument requires an indorsement from the
payee or holder before it may be validly negotiated. A
bearer instrument, on the other hand, does not require an
indorsement to be validly negotiated. It is negotiable by
mere delivery. The provision reads:
SEC. 30. What constitutes negotiation. – An instrument is
negotiated when it is transferred from one person to
another in such manner as to constitute the transferee the
holder thereof. If payable to bearer, it is negotiated by
delivery; if payable to order, it is negotiated by the
indorsement of the holder completed by delivery.
A check that is payable to a specified payee is an order
instrument. However, under Section 9(c) of the NIL, a check
payable to a specified payee may nevertheless be
considered as a bearer instrument if it is payable to the
order of a fictitious or non-existing person, and such fact is
known to the person making it so payable. Thus, checks
issued to "Prinsipe Abante" or "Si Malakas at si Maganda,"
who are well-known characters in Philippine mythology, are
bearer instruments because the named payees are fictitious
and non-existent.
A review of US jurisprudence yields that an actual,
existing, and living payee may also be "fictitious" if
the maker of the check did not intend for the payee
to in fact receive the proceeds of the check. This
usually occurs when the maker places a name of an
existing payee on the check for convenience or to
cover up an illegal activity.14 Thus, a check made
expressly payable to a non-fictitious and existing
person is not necessarily an order instrument. If the
payee is not the intended recipient of the proceeds
of the check, the payee is considered a "fictitious"
payee and the check is a bearer instrument.
In a fictitious-payee situation, the drawee bank is absolved
from liability and the drawer bears the loss. When faced
with a check payable to a fictitious payee, it is
treated as a bearer instrument that can be
negotiated by delivery. The underlying theory is that
one cannot expect a fictitious payee to negotiate the
check by placing his indorsement thereon. And since
the maker knew this limitation, he must have
intended for the instrument to be negotiated by
mere delivery. Thus, in case of controversy, the
drawer of the check will bear the loss. This rule is
justified for otherwise, it will be most convenient for
the maker who desires to escape payment of the
check to always deny the validity of the
indorsement. This despite the fact that the fictitious
payee was purposely named without any intention
that the payee should receive the proceeds of the
check.15
The fictitious-payee rule is best illustrated in Mueller
& Martin v. Liberty Insurance Bank.16 In the said
case, the corporation Mueller & Martin was
defrauded by George L. Martin, one of its authorized
signatories. Martin drew seven checks payable to the
German Savings Fund Company Building Association
(GSFCBA) amounting to $2,972.50 against the
account of the corporation without authority from
the latter. Martin was also an officer of the GSFCBA
but did not have signing authority. At the back of the
checks, Martin placed the rubber stamp of the
GSFCBA and signed his own name as indorsement.
He then successfully drew the funds from Liberty
Insurance Bank for his own personal profit. When the
corporation filed an action against the bank to
recover the amount of the checks, the claim was
denied.
The US Supreme Court held in Mueller that when the
person making the check so payable did not intend
for the specified payee to have any part in the
transactions, the payee is considered as a fictitious
payee. The check is then considered as a bearer
instrument to be validly negotiated by mere delivery.
Thus, the US Supreme Court held that Liberty
Insurance Bank, as drawee, was authorized to make
payment to the bearer of the check, regardless of
whether prior indorsements were genuine or not.17
However, there is a commercial bad faith exception
to the fictitious-payee rule. A showing of commercial
bad faith on the part of the drawee bank, or any
transferee of the check for that matter, will work to
strip it of this defense. The exception will cause it to
bear the loss. Commercial bad faith is present if the
transferee of the check acts dishonestly, and is a
party to the fraudulent scheme. Said the US
Supreme Court in Getty:
there is a "commercial bad faith" exception
to UCC 3-405, applicable when the transferee "acts
dishonestly – where it has actual knowledge of facts
and circumstances that amount to bad faith, thus
itself becoming a participant in a fraudulent scheme.
xxx
The principle that the fictitious-payee rule extends
protection even to non-bank transferees of the
checks.
Negotiable Instruments Law Case Digest Page 13
In the case under review: the Rodriguez checks were
payable to specified payees. It is unrefuted that the 69
checks were payable to specific persons. Likewise, it is
uncontroverted that the payees were actual, existing, and
living persons who were members of PEMSLA that had a
rediscounting arrangement with spouses Rodriguez.
What remains to be determined is if the payees, though
existing persons, were "fictitious" in its broader context.
For the fictitious-payee rule to be available as a defense,
PNB must show that the makers did not intend for the
named payees to be part of the transaction involving the
checks. At most, the bank’s thesis shows that the payees
did not have knowledge of the existence of the checks. This
lack of knowledge on the part of the payees, however, was
not tantamount to a lack of intention on the part of
respondents-spouses that the payees would not receive the
checks’ proceeds. Considering that respondents-spouses
were transacting with PEMSLA and not the individual
payees, it is understandable that they relied on the
information given by the officers of PEMSLA that the payees
would be receiving the checks.
Verily, the subject checks are presumed order
instruments. This is because, as found by both lower
courts, PNB failed to present sufficient evidence to defeat
the claim of respondents-spouses that the named payees
were the intended recipients of the checks’ proceeds. The
bank failed to satisfy a requisite condition of a fictitious-
payee situation – that the maker of the check intended for
the payee to have no interest in the transaction.
Because of a failure to show that the payees were
"fictitious" in its broader sense, the fictitious-payee
rule does not apply. Thus, the checks are to be
deemed payable to order. Consequently, the drawee
bank bears the loss.
CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY
WEE, and RODOLFO VERGARA vs. IFC LEASING AND
ACCEPTANCE CORPORATION
FACTS
The petitioner is a corporation engaged in the logging
business. For its program of logging activities the opening
of additional roads, and simultaneous logging operations
along the route of said roads, it needed two (2) additional
units of tractors.
Cognizant of petitioner-corporation's need and purpose,
Atlantic Gulf & Pacific Company of Manila, through its sister
company and marketing arm, Industrial Products Marketing
a corporation dealing in tractors and other heavy
equipment business, offered to sell to petitioner-corporation
two (2) "Used" Allis Crawler Tractors.
In order to ascertain the extent of work to which the
tractors were to be exposed, and to determine the
capability of the "Used" tractors being offered, petitioner-
corporation requested the seller-assignor to inspect the job
site. After conducting said inspection, the seller-assignor
assured petitioner-corporation that the "Used" Allis Crawler
Tractors which were being offered were fit for the job.
With said assurance and warranty, and relying on the seller-
assignor's skill and judgment, petitioner-corporation
through petitioners Wee and Vergara, president and vice-
president, respectively, agreed to purchase on installment
said two (2) units of "Used" Allis Crawler Tractors. It also
paid the down payment of Two Hundred Ten Thousand
Pesos (P210,000.00).
The seller-assignor issued the sales invoice for the two 2)
units of tractors at the same time, the deed of sale with
chattel mortgage with promissory note was executed.
The seller-assignor, by means of a deed of
assignment, assigned its rights and interest in the
chattel mortgage in favor of the respondent.
Barely fourteen (14) days had elapsed after their delivery
when one of the tractors broke down and after another nine
(9) days, the other tractor likewise broke down. Rodolfo T.
Vergara formally advised the seller-assignor of the fact that
the tractors broke down and requested for the seller-
assignor's usual prompt attention under the warranty. The
seller-assignor sent to the job site its mechanics to conduct
the necessary repairsbut the tractors did not come out to
be what they should be after the repairs were undertaken
because the units were no longer serviceable.
Because of the breaking down of the tractors, the road
building and simultaneous logging operations of petitioner-
corporation were delayed and petitioner Vergara advised
the seller-assignor that the payments of the installments as
listed in the promissory note would likewise be delayed until
the seller-assignor completely fulfills its obligation under its
warranty.
Since the tractors were no longer serviceable, on April 7,
1979, petitioner Wee asked the seller-assignor to pull out
the units and have them reconditioned, and thereafter to
offer them for sale. The proceeds were to be given to the
respondent and the excess, if any, to be divided between
the seller-assignor and petitioner-corporation which offered
to bear one-half (1/2) of the reconditioning
The seller-assignor did nothing with regard to the request,
until the complaint in this case was filed by the respondent
against the petitioners, the corporation, Wee, and Vergara.
The complaint was filed by the respondent against the
petitioners for the recovery of the principal sum and
accrued interest
ISSUE:
Whether or not the promissory note in question is a
negotiable instrument so as to bar completely all the
available defenses of the petitioner against the respondent-
assignee.
HELD
The promissory note is NOT a negotiable instrument.
It is patent then, that the seller-assignor is liable for its
breach of warranty against the petitioner. This liability as a
general rule, extends to the corporation to whom it
assigned its rights and interests unless the assignee is a
holder in due course of the promissory note in question,
Negotiable Instruments Law Case Digest Page 14
assuming the note is negotiable, in which case the latter's
rights are based on the negotiable instrument and
assuming further that the petitioner's defenses may not
prevail against it.
The pertinent portion of the note is as follows:
FOR VALUE RECEIVED, I/we jointly and
severally promise to pay to the
INDUSTRIAL PRODUCTS MARKETING, the
sum of ONE MILLION NINETY THREE
THOUSAND SEVEN HUNDRED EIGHTY
NINE PESOS & 71/100 only (P
1,093,789.71), Philippine Currency, the
said principal sum, to be payable in 24
monthly installments starting July 15,
1978 and every 15th of the month
thereafter until fully paid. ...
Considering that paragraph (d), Section 1 of the Negotiable
Instruments Law requires that a promissory note "must be
payable to order or bearer, " it cannot be denied that the
promissory note in question is not a negotiable instrument.
The instrument in order to be considered
negotiablility-i.e. must contain the so-
called 'words of negotiable, must be
payable to 'order' or 'bearer'. These words
serve as an expression of consent that
the instrument may be transferred. This
consent is indispensable since a maker
assumes greater risk under a negotiable
instrument than under a non-negotiable
one. ...
xxx xxx xxx
When instrument is payable to order.
SEC. 8. WHEN PAYABLE TO ORDER. — The
instrument is payable to order where it is
drawn payable to the order of a specified
person or to him or his order. . . .
xxx xxx xxx
These are the only two ways by which an
instrument may be made payable to
order. There must always be a specified
person named in the instrument. It means
that the bill or note is to be paid to the
person designated in the instrument or to
any person to whom he has indorsed and
delivered the same. Without the words
"or order" or"to the order of, "the
instrument is payable only to the person
designated therein and is therefore non-
negotiable. Any subsequent purchaser
thereof will not enjoy the advantages of
being a holder of a negotiable instrument
but will merely "step into the shoes" of
the person designated in the instrument
and will thus be open to all defenses
available against the latter."
Therefore, considering that the subject promissory note is
not a negotiable instrument, it follows that the respondent
can never be a holder in due course but remains a mere
assignee of the note in question. Thus, the petitioner may
raise against the respondent all defenses available to it as
against the seller-assignor Industrial Products Marketing.
Secondly, even conceding for purposes of discussion that
the promissory note in question is a negotiable instrument,
the respondent cannot be a holder in due course for a more
significant reason:
The respondent had actual knowledge of the fact that the
seller-assignor's right to collect the purchase price was not
unconditional, and that it was subject to the condition that
the tractors -sold were not defective. The respondent knew
that when the tractors turned out to be defective, it would
be subject to the defense of failure of consideration and
cannot recover the purchase price from the petitioners.
Even assuming for the sake of argument that the
promissory note is negotiable, the respondent, which took
the same with actual knowledge of the foregoing facts so
that its action in taking the instrument amounted to bad
faith, is not a holder in due course.
SAN MIGUEL CORPORATION vs. BARTOLOME PUZON,
JR.
FACTS
Respondent Bartolome V. Puzon, Jr., (Puzon) owner of
Bartenmyk Enterprises, was a dealer of beer products of
petitioner San Miguel Corporation. Puzon purchased SMC
products on credit. To ensure payment and as a business
practice, SMC required him to issue postdated checks
equivalent to the value of the products purchased on credit
before the same were released to him. Said checks were
returned to Puzon when the transactions covered by these
checks were paid or settled in full.
Puzon purchased products on credit amounting
to P11,820,327 for which he issued, and gave to SMC, Bank
of the Philippine Islands (BPI) Check Nos. 27904
(for P309,500.00) and 27903 (forP11,510,827.00) to cover
the said transaction.
Puzon, together with his accountant, visited the SMC Sales
Office to reconcile his account with SMC. During that visit
Puzon allegedly requested to see BPI Check No. 17657.
However, when he got hold of BPI Check No. 27903 which
was attached to a bond paper together with BPI Check No.
17657 he allegedly immediately left the office with his
accountant, bringing the checks with them.
SMC sent a letter to Puzon demanding the return of the said
checks. Puzon ignored the demand hence SMC filed a
complaint against him for theft with the City Prosecutor’s
Office.
Rulings of the Prosecutor and the Secretary of
Department of Justice (DOJ)
The investigating prosecutor, Elizabeth Yu Guray found that
the "relationship between [SMC] and [Puzon] appears to be
one of credit or creditor-debtor relationship. The problem
lies in the reconciliation of accounts and the non-payment
of beer empties which cannot give rise to a criminal
prosecution for theft." She recommended the dismissal of
the case for lack of evidence. SMC appealed.
Negotiable Instruments Law Case Digest Page 15
The DOJ issued its resolution5 affirming the prosecutor’s
Resolution dismissing the case.
Ruling of the Court of Appeals
The CA found that the postdated checks were issued by
Puzon merely as a security for the payment of his
purchases and that these were not intended to be
encashed. It thus concluded that SMC did not acquire
ownership of the checks as it was duty bound to return the
same checks to Puzon after the transactions covering them
were settled. The CA agreed with the prosecutor that there
was no theft, considering that a person cannot be charged
with theft for taking personal property that belongs to
himself.
ISSUE
Whether the checks issued by Puzon were payments for his
purchases or were intended merely as security to ensure
payment.
"[T]he essential elements of the crime of theft are the
following: (1) that there be a taking of personal property;
(2) that said property belongs to another; (3) that the taking
be done with intent to gain; (4) that the taking be done
without the consent of the owner; and (5) that the taking be
accomplished without the use of violence or intimidation
against persons or force upon things."
Considering that the second element is that the thing
taken belongs to another, it is relevant to determine
whether ownership of the subject check was transferred to
petitioner. On this point the Negotiable Instruments Law
provides:
Sec. 12. Antedated and postdated – The instrument
is not invalid for the reason only that it is antedated
or postdated, provided this is not done for an illegal
or fraudulent purpose. The person to whom an
instrument so dated is delivered acquires the title
thereto as of the date of delivery. (Underscoring
supplied.)
Note however that delivery as the term is used in the
aforementioned provision means that the party
delivering did so for the purpose of giving effect
thereto.12 Otherwise, it cannot be said that there has been
delivery of the negotiable instrument. Once there is
delivery, the person to whom the instrument is delivered
gets the title to the instrument completely and irrevocably.
If the subject check was given by Puzon to SMC in
payment of the obligation, the purpose of giving
effect to the instrument is evident thus title to or
ownership of the check was transferred upon
delivery. However, if the check was not given as
payment, there being no intent to give effect to the
instrument, then ownership of the check was not
transferred to SMC.
The evidence of SMC failed to establish that the
check was given in payment of the obligation of
Puzon. There was no provisional receipt or official
receipt issued for the amount of the check. What was
issued was a receipt for
thedocument, a "POSTDATED CHECK SLIP."13
Furthermore, the petitioner's demand letter sent to
Held: Everyone must in the performance of his duties,
respondent states "As per company policies on
receivables, all issuances are to be covered by post- observe honesty and good faith. Where a person issues a
dated checks. However, you have deviated from this postdated check without funds to cover it and informs the
policy by forcibly taking away the check you have
issued to us to cover the December payee of this fact, he cannot be held guilty of estafa
issuance."14 Notably, the term "payment" was not because there is no deceit. Herein, there is nothing in the
used instead the terms "covered" and "cover" were
used. record to show that Firestone knew that there were no
funds when it accepted the check, much less that Firestone
The evidence proves that the check was accepted, not as agreed to take the check with knowledge of the lack of
payment, but in accordance with the long-standing policy of
funds. As Ines Chavez is guilty of fraud (bad faith) in the
SMC to require its dealers to issue postdated checks to
cover its receivables. The check was only meant performance of its obligation, it is liable for damages. Its
to cover the transaction and in the meantime Puzon was to
conduct wanting in good faith, the award of attorney’s fees
pay for the transaction by some other means other than the
check. This being so, title to the check did not transfer to was warranted.
SMC; it remained with Puzon.

Firestone Tire and Rubber vs. Ines Chaves & Co.

GR L-17106, 19 October 1966
En Banc, Regala (J)

Facts: The check was intended as part of the payment of

Ines Chaves’ debt. When presented to the Security Bank
and Trust Co. by Firestone, the check was returned for
insufficiency of funds. Despite repeated demands, Ines
Chaves failed to settle its account; hence, the suit.

Issue: Whether good faith is required in the issuance of a

check.

Negotiable Instruments Law Case Digest Page 16