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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.
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.
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 banks 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.
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.
PHILIPPINE NATIONAL BANK vs CONCEPCION MINING COMPANY, INC., ET AL.
G.R. No. L-16968 July 31, 1962 || Interpretation of instruments
FACTS:
A present action was instituted by the plaintiff to recover from the defendants the face of a promissory note the pertinent part of which
reads as follows:
Manila, March 12, 1954
NINETY DAYS after date, for value received, I promise to pay to the order of the Philippine National Bank . . . .
In case it is necessary to collect this note by or through an attorney-at-law, the makers and indorsers shall pay ten percent (10%) of the
amount due on the note as attorney's fees, which in no case shall be less than P100.00 exclusive of all costs and fees allowed by law as
stipulated in the contract of real estate mortgage. Demand and Dishonor Waived. Holder may accept partial payment reserving his
right of recourse again each and all indorsers.
(Purpose mining industry)CONCEPCION MINING COMPANY, INC.,By:(Sgd.) VICENTE LEGARDAPresident(Sgd.)
VICENTE LEGARDA(Sgd.) JOSE S SARTE
"Please issue check to Mr. Jose S. Sarte"
Defendants asking that the effects of the judgment be suspended for the reason that the deceased Vicente L. Legarda (co-maker the
promissory note, who died on February 24 1946) should have been included as a party-defendant and his liability should be
determined in pursuance of the provisions of the promissory note. This motion for relief was also denied, hence defendant appealed to
this Court.
The court in its decision ruled that the inclusion of said defendant is unnecessary and immaterial, in accordance with the provisions of
Article 1216 of the Deny Civil Code and section 17 (g) of the Negotiable Instruments Law. The defendants Concepcion Mining
Company and Jose Sarte were ordered to pay jointly and severally to the plaintiff the amount of P7,197.26 with interest up to
September 29, 1959, plus a daily interest of P1.3698 thereafter up to the time the amount is fully paid, plus 10% of the amount as
attorney's fees, and costs of this suit
ISSUE:
WON Legarda should be included as party defendant?
HELD:
As the promissory note was executed jointly and severally by the same parties, namely, Concepcion Mining Company, Inc. and
Vicente L. Legarda and Jose S. Sarte, the payee of the promissory note had the right to hold any one or any two of the signers of the
promissory note responsible for the payment of the amount of the note. This judgment of the lower court should be affirmed.
Section 17 (g) of the Negotiable Instruments Law provides as follows:
SEC. 17. Construction where instrument is ambiguous. Where the language of the instrument is ambiguous or there are omissions therein, the following rules of
construction apply:
xxx
xxx
xxx
(g) Where an instrument containing the word "I promise to pay" is signed by two or more persons, they are deemed to be jointly and severally liable thereon.
And Article 1216 of the Civil Code of the Philippines also provides as follows:
ART. 1216. The creditor may proceed against any one of the solidary debtors or some of them simultaneously. The demand made against one of them shall not be an
obstacle to those which may subsequently be directed against the others so long as the debt has not been fully collected.