COMMERCIAL LAW REVIEW: COMPILATION OF DIGESTS (SRC NEGO BATCH 4)

DISCLAIMER: This document is merely a compilation.

I do not claim authorship over the case digests.
SECURITIES AND EXCHANGE COMMISSION VS.
PROSPERITY.COM, INC. GR 164197, JANUARY 25,
2012

it

should

have

first registered such

contract

or

securities with the SEC.

ISSUE:
Whether or not PCI's scheme constitutes an investment
contract

FACTS:
Prosperity.Com,

Code,

Inc.

(PCI)

sold computer

software and

RULING:

hosted websites. To make a profit, PCI devised a scheme in

No. An investment contract is a contract, transaction, or

which for the price of US$234.00, a buyer would acquire

scheme

from it an internet website of a 15-mega byte (MB)

a common enterprise and is led to expect profits primarily

capacity. At the same time, by referring to PCI his own

from

down-line buyers, a first-time buyer could earn commission,

Supreme Court held in Securities and Exchange Commission

interest in real estate, and insurance coverage. To benefit

v. W.J. Howey Co. that, for an investment contract to exist,

from this scheme, a PCI buyer must enlist and sponsor at

the following elements, referred to as the Howey test must

least two other buyers as his own downlines. These second

concur: (a) a contract, transaction, or scheme; (b) an

tier of buyers could in turn build up their own downlines. For

investment

each pair of downlines, the buyer-sponsor receives at

a common enterprise; (d) expectation of profits; and (e)

US$92.00 commission. But referrals in a day by the buyer-

profits arising primarily from the efforts of others.

where

the

efforts

of

person

of

money;

invests

others.

(c)

his

The

investment

money

United

is

in

States

made

in

sponsor should not exceed 16 since the commissions due

from excess referrals inure to PCI, not to the buyersponsor. SEC ruled that PCI's scheme constitutes an
investment contract and, following the Securities Regulation

In this case, PCI's clients do not make such investments.

They buy a product of some value to them: an internet
website of a 15-MB capacity. The client can use this website
to enable people to have internet access to what he has to

KASC

COMMERCIAL LAW REVIEW: COMPILATION OF DIGESTS (SRC NEGO BATCH 4)

offer to them. The buyers of the website do not invest

PHILIPPINE STOCK EXCHANGE V CA, 281 SCRA 231

money in PCI that it could use for running some business

(1997)

that would generate profits for the investors. The price of

US$234 is what the buyer pays for the use of the website, a

FACTS:

tangible asset that PCI creates, using the computer facilities

Puerto Azul Land, Inc. (PALI) is a corporation engaged in

and technical skills.

the real estate business. PALI was granted permission by

The commission, interest in real estate, and insurance

coverage are incentives to downline sellers to bring in other
customers. These can hardly be regarded as profits from

the Securities and Exchange Commission (SEC) to sell its

shares to the public in order for PALI to develop its
properties.

investment of money under the Howey test. The CA is right

PALI then asked the Philippine Stock Exchange (PSE) to list

in ruling that the last requisite in the Howey test is lacking

PALIs stocks/shares to facilitate exchange. The PSE Board

in the marketing scheme that PCI has adopted. Evidently, it

of Governors denied PALIs application on the ground that

is PCI that expects profit from the network marketing of its

there

products. PCI is correct in saying that the US$234 it gets

Apparently, the Marcoses, Rebecco Panlilio (trustee of the

from its clients is merely a consideration for the sale of the

Marcoses), and some other corporations were claiming

websites that it provides.

assets if not ownership over PALI.

were

multiple

claims

on

the

assets

of

PALI.

PALI then wrote a letter to the SEC asking the latter to

review PSEs decision. The SEC reversed PSEs decisions
and ordered the latter to cause the listing of PALI shares in
the Exchange.

KASC

COMMERCIAL LAW REVIEW: COMPILATION OF DIGESTS (SRC NEGO BATCH 4)

adverse claims against the assets of PALI, PSE deemed that

ISSUE:
Whether or not it is within the power of the SEC to reverse
actions done by the PSE.

granting PALIs application will only be contrary to the best

interest of the general public. It was reasonable for the PSE
to exercise its judgment in the manner it deems appropriate
for its business identity, as long as no rights are trampled
upon, and public welfare is safeguarded.

HELD:
Yes. The SEC has both jurisdiction and authority to look into
the decision of PSE pursuant to the Revised Securities Act
and for the purpose of ensuring fair administration of the
exchange. PSE, as a corporation itself and as a stock
exchange is subject to SECs jurisdiction, regulation, and
control. In order to insure fair dealing of securities and a
fair administration of exchanges in the PSE, the SEC has the
authority to look into the rulings issued by the PSE. The SEC
is the entity with the primary say as to whether or not
securities, including shares of stock of a corporation, may
be traded or not in the stock exchange.
HOWEVER,

in

the

case

at

bar,

the

Supreme

Court

emphasized that the SEC may only reverse decisions issued

by the PSE if such are tainted with bad faith. In this case,
there was no showing that PSE acted with bad faith when it
denied the application of PALI. Based on the multiple

KASC

COMMERCIAL LAW REVIEW: COMPILATION OF DIGESTS (SRC NEGO BATCH 4)

CEMCO HOLDINGS, INC. vs. NATIONAL LIFE

National Life Insurance Company of the Philippines, Inc., a

INSURANCE COMPANY OF THE PHILIPPINES, INC.

minority

stockholder

of

UCC,

sent

letter

toCemco demanding the latter to comply with the rule on

GR No. 171815, August 7, 2007

mandatory tender offer. Cemco, however, refused.

FACTS:

Respondent

National

Life

Insurance

Company

of

the

publicly-listed

Philippines, Inc. filed a complaint with the SEC asking it to

company, has two principal stockholders UCHC, a non-

reverse its 27 July 2004 Resolution and to declare the

listed company, with shares amounting to 60.51%, and

purchase agreement of Cemco void and praying that the

petitioner Cemco with 17.03%. Majority of UCHCs stocks

mandatory tender offer rule be applied to its UCC shares.

Union

were

Cement

owned

by

Corporation

BCI

with

(UCC),

21.31%

and

ACC

with

29.69%. Cemco, on the other hand, owned 9% of UCHC

stocks. In a disclosure letter, BCI informed the Philippine
Stock Exchange (PSE) that it and its subsidiary ACC had
passed resolutions to sell to Cemco BCIsstocks in UCHC
equivalent to 21.31% and ACCs stocks in UCHC equivalent
to 29.69%.
As a consequence of this disclosure, the PSE inquired as to
whether the Tender Offer Rule under Rule 19 of the
Implementing Rules of the Securities Regulation Code is not
applicable to the purchase by petitioner of the majority of
shares

of

UCC. The

SEC en

banc had

resolved

that

the Cemco transaction was not covered by the tender offer

rule. Feeling aggrieved by the transaction, respondent

KASC

The SEC ruled in favor of the respondent by reversing and

setting aside its 27 July 2004 Resolution and directed
petitioner Cemco to make a tender offer for UCC shares to
respondent and other holders of UCC shares similar to the
class held by UCHC in accordance with Section 9(E), Rule 19
of the Securities Regulation Code.
On petition to the Court of Appeals, the CA rendered a
decision affirming the ruling of the SEC. It ruled that the
SEC has jurisdiction to render the questioned decision and,
in

any

event, Cemcowas

barred

by estoppel from

questioning the SECs jurisdiction. It, likewise, held that the

tender offer requirement under the Securities Regulation
Code

and

its

Implementing

Rules

applies

COMMERCIAL LAW REVIEW: COMPILATION OF DIGESTS (SRC NEGO BATCH 4)

to Cemcos purchase of UCHC stocks. Cemcos motion for
reconsideration was likewise denied.

13. Violation
If there shall be violation of this Rule by pursuing a
purchase of equity shares of a public company at threshold

ISSUES:

1. Whether or not the SEC has jurisdiction over

respondents

complaint

and

to

require Cemco to

make a tender offer for respondents UCC shares.

amounts without the required tender offer, the Commission,

upon complaint, may nullify the said acquisition and direct
the holding of a tender offer. This shall be without
prejudice to the imposition of other sanctions under the
Code.

2. Whether or not the rule on mandatory tender offer

The foregoing rule emanates from the SECs power and

applies to the indirect acquisition of shares in a listed

authority to regulate, investigate or supervise the activities

company,

of

in

this

case,

the

indirect

acquisition

to

ensure

Code,

more

compliance
specifically

with
the

the

Securities

by Cemco of 36% of UCC, a publicly-listed company,

Regulation

through its purchase of the shares in UCHC, a non-

mandatory tender offer under Section 19 thereof. Moreover,

listed company.

petitioner is barred from questioning the jurisdiction of the

provision

on

SEC. It must be pointed out that petitioner had participated

HELD:

in all the proceedings before the SEC and had prayed for

1. YES. In taking cognizance of respondents complaint

against

petitioner

and

eventually

rendering

judgment which ordered the latter to make a tender

offer, the SEC was acting pursuant to Rule 19(13) of
the Amended Implementing Rules and Regulations of
the Securities Regulation Code, to wit:

KASC

persons

affirmative relief.
2. YES. Tender offer is a publicly announced intention
by a person acting alone or in concert with other
persons to acquire equity securities of a public
company.[ A

public

company

is

defined

as

corporation which is listed on an exchange, or a

COMMERCIAL LAW REVIEW: COMPILATION OF DIGESTS (SRC NEGO BATCH 4)

corporation with assets exceeding P50,000,000.00

obtained, either through the direct purchase of its stocks or

and with 200 or more stockholders, at least 200 of

through

them holding not less than 100 shares of such

applies. As appropriately held by the Court of Appeals:

company. Stated differently, a tender offer is an

offer by the acquiring person to stockholders of a
public company for them to tender their shares
therein

on

the

terms

specified

in

the

offer.[14] Tender offer is in place to protect minority

shareholders against any scheme that dilutes the
share

value

minority

of their investments. It

shareholders

the

chance

to

gives the
exit

the

company under reasonable terms, giving them the

opportunity to sell their shares at the same price as
those of the majority shareholders.

an

indirect

means,

mandatory

tender

offer

What is decisive is the determination of the power of

control. The legislative intent behind the tender offer rule
makes clear that the type of activity intended to be
regulated is the acquisition of control of the listed company
through the purchase of shares. Control may [be] effected
through a direct and indirect acquisition of stock, and when
this takes place, irrespective of the means, a tender offer
must occur. The bottomline of the law is to give the
shareholder of the listed company the opportunity to decide
whether or not to sell in connection with a transfer of
control.xxx

The SEC and the Court of Appeals ruled that the indirect
acquisition by petitioner of 36% of UCC shares through the
acquisition of the non-listed UCHC shares is covered by the
mandatory tender offer rule.
The legislative intent of Section 19 of the Code is to
regulate activities relating to acquisition of control of the
listed company and for the purpose of protecting the
minority stockholders of a listed corporation. Whatever
may be the method by which control of a public company is

KASC

COMMERCIAL LAW REVIEW: COMPILATION OF DIGESTS (SRC NEGO BATCH 4)

ABACUS SECURITIES CORP V AMPIL, GR NO 160016

committed when it failed 1) to require respondent to pay for

his stock purchases within three (T+3) or four days (T+4)

FACTS:

from trading; and 2) to request from the appropriate

Petitioner corporation was engaged in business as a broker

authority an extension of time for the payment of his cash

and dealer of securities of listed companies at the Philippine

purchases.

Stock Exchange Center. On April 8, 1997, respondent

nonpayment within the required period, petitioner did not

opened a cash account with petitioner for his transactions in

cancel his purchases. Neither did it require him to deposit

securities and, on April 10, started trading on that account.

cash payments before it executed buy and/or sell orders

As a result of his trading activities, he accumulated an

subsequent to the first unsettled transaction. The Issues

outstanding obligation in favor of the corporation in the

Two issues were raised by the parties: (1) whether the pari

principal sum of P6,617,036.22 as of April 30, 1997.

delicto rule was applicable to the present case; and (2)

Respondent failed to settle his account upon the lapse of the

whether the trial court had jurisdiction over the case.

required period and the extension given by petitioner,

prompting it to sell his securities on May 6, 1997, to offset

The

trial

court

noted

that

despite

his

FIRST ISSUE: PARI DELICTO

his unsettled obligations. After the sale of his securities and

Sections 23 and 25 and Rule 25-1, otherwise known as the

the application of the proceeds against his account, his

mandatory close-out rule,[1] clearly vested an obligation,

remaining

totalled

not just a right, in petitioner. That obligation was to cancel

P3,364,313.56. This obligation he failed to settle despite its

or otherwise liquidate a customers order, if payment was

demands. The trial court and the Court of Appeals (CA) both

not received within three days from the date of purchase.

held that the parties were in pari delicto and, hence, without

Subsequent to an unpaid order, the broker should require

recourse against each other. The lower courts said that

its customer to deposit funds in the account sufficient to

petitioner had violated Sections 23 and 25 of the Revised

cover

Securities

Rules

transaction. These duties were imposed upon the broker to

Implementing the Act (RSA Rules). The violation was

ensure faithful compliance with the margin requirements of

KASC

accountabilities

Act

(RSA)

and

to

Rule

petitioner

25-1

of

the

each

purchase,

prior

to

the

execution

of

the

COMMERCIAL LAW REVIEW: COMPILATION OF DIGESTS (SRC NEGO BATCH 4)

the law, which forbade the broker from extending undue

obligation.[3] Elucidating further, since the buyer was not

credit to a cash customer. Respondent Liable for the First

able to pay for the transactions that had taken place on

Respondent Liable for the First But Not for the Subsequent

April 10 and 11 -- that is, at T+4 -- the broker was duty-

Trade But Not for the Subsequent Trade Nonetheless, these

bound to advance the payment to the settlement banks,

margin requirements were applicable only to transactions

without prejudice to its right to collect from the client later

entered into by the parties subsequent to the initial trades

on.[4] It should be clear that Congress had imposed the

of April 10 and 11, 1997. Thus, petitioner could still collect

margin requirements to protect the general economy, not to

from respondent to the extent of the difference between his

give the customer a free ride at the expense of the

outstanding obligation as of April 11, 1997, less the

broker.[5] Not to require respondent to pay for his April 10

proceeds from the mandatory sellout of the shares pursuant

and 11 trades would put a premium on his circumvention of

to the RSA Rules. Its right to collect was justified under the

the laws and would enable him to enrich himself unjustly at

general law on obligations and contracts.[2] Petitioner could

the expense of petitioner. By failing to ensure his payment

not be denied the right to collect, as the initial transactions

of

had been entered into pursuant to the instructions of

prescribed

respondent. His obligation for stock transactions made and

subsequent purchases, petitioner effectively converted his

entered

remained

cash account into a credit account. The extension or

and

maintenance

into

outstanding.

on

April

Those

10

and

transactions

11,

1997,

were

valid,

the

his

first

purchase

by

law,

of

transactions

thereby

credits

on

within

allowing

the

him

nonmargin

to

period
make

transactions,

obligations he incurred in regard to his stock purchases on

however, were specifically prohibited under Section 23(b).

those dates subsisted. At the time, there was yet no

Thus, petitioner was remiss in its duty and could not be said

violation of the RSA. Petitioner committed a fault only when

to have come to court with clean hands, insofar as it

it failed 1) to liquidate the transactions on April 14 and 15,

intended to collect on transactions subsequent to the initial

1997, or the fourth day following the stock purchases; and

trades of April 10 and 11, 1997. Respondent Equally Guilty

2) to complete its liquidation no later than ten days after,

Respondent

by applying the proceeds as payment for his outstanding

Subsequent Trades On the other hand, respondent was

KASC

Equally Guilty

for

Subsequent

Trades

for

COMMERCIAL LAW REVIEW: COMPILATION OF DIGESTS (SRC NEGO BATCH 4)

found to be equally guilty of entering into transactions in

petitioner should have liquidated the transactions (sold the

violation of the RSA and RSA Rules. The Court was not

stocks) on the fourth day after (at T+4) and completed its

prepared to accept his self-serving assertions of being an

liquidation not later than ten days following the last day for

innocent victim in all the transactions. Obviously, he

the customer to pay (effectively at T+14). Respondents

knowingly speculated on the market by taking advantage of

outstanding obligation, therefore, was to be determined on

the

the basis of the closing prices -- at T+14 -- of the stocks

nocash-out

arrangement

extended

to

him

by

petitioner. It was respondents privilege to gamble or

speculate, as he apparently did by asking for extensions of
time and refraining from giving orders to his broker to sell,

purchased.
SECOND ISSUE: JURISDICTION

in the hope that the prices would rise. Sustaining his

The instant controversy related to acts committed by the

argument would have amounted to relieving him of the risks

parties in the course of their business relationship. An

of his own speculation and saddling petitioner with the

ordinary civil case seeking to enforce rights arising from the

consequences

Agreement

after

the

result

turned

out

to

be

(AOF)

between

the

parties,

the

suit

was

unfavorable.[6] His conduct as an investor was precisely the

intended to enable petitioner to collect on the alleged

sort deplored by the law. Thus, with respect to his

outstanding debt incurred by respondent for his stock

counterclaim for damages for having been allegedly induced

purchases. To be sure, the RSA and its Rules were to be

by petitioner to generate additional purchases despite his

read into the Agreement that the parties had entered into.

outstanding obligations, the Court held that he deserved no

Thus,

legal or equitable relief. In the final analysis, both parties

obligations under this Agreement, the Court passed upon

had acted in violation of the law and did not come to court

their compliance with the RSA and its Rules. In no way did it

with clean hands as regards the transactions subsequent to

thereby deprive the Securities and Exchange Commission

the initial one made on April 10 and 11, 1997. In this case,

(SEC) of the authority to determine willful violations of the

the pari delicto rule applied only to transactions entered into

RSA and impose appropriate sanctions, as provided under

after those initial trades. Pursuant to RSA Rule 25-1,

Sections 45 and 46 of the Act. Thus, the Court upheld the

KASC

to

determine

whether

they

had

fulfilled

their

COMMERCIAL LAW REVIEW: COMPILATION OF DIGESTS (SRC NEGO BATCH 4)

SEC in its Opinion, as follows: As to the issue of

CALTEX (PHILIPPINES) INC. VS. CA, GR 97753, 10

jurisdiction, it is settled that a party cannot invoke the

AUGUST 1992

jurisdiction of a court to secure affirmative relief against his

opponent and after obtaining or failing to obtain such relief,

FACTS:

repudiate or question that same jurisdiction. Indeed, after

Security Bank and Trust Co. issued 280 certificates of time

voluntarily submitting a cause and encountering an adverse

deposit (CTD) in favor of one Mr. Angel dela Cruz who

decision on the merits, it is too late for petitioner to

deposited with the bank P1.12 million. Dela Cruz delivered

question the jurisdictional power of the court. It is not right

the CTDs to Caltex in connection with his purchase of fuel

for a party who has affirmed and invoked the jurisdiction of

products from the latter. Subsequently, dela Cruz informed

a court in a particular matter to secure an affirmative relief,

the bank that he lost all the CTDs, and thus executed an

to afterwards deny that same jurisdiction to escape a

affidavit of loss to facilitate the issuance of the replacement

penalty.

CTDs.

When Caltex presented said CTDs for verification

with the bank and formally informed the bank of its decision
to preterminate the same, the bank rejected Caltex claim
and demand as Caltex failed to furnish copies of certain
requested documents.

In 1983, dela Cruz loan matured

and the bank set-off and applied the time deposits as

payment for the loan. Caltex filed a complaint which was
dismissed on the ground that the subject certificates of
deposit are non-negotiable.
ISSUE:
Whether the Certificates of Time Deposit (CTDs) are
negotiable instruments.

KASC

10

COMMERCIAL LAW REVIEW: COMPILATION OF DIGESTS (SRC NEGO BATCH 4)

the requirements of the law for negotiability as provided for

RULING:
The CTDs in question are negotiable instruments as they
meet the requirements of the law for negotiability as
provided for in Section 1 of the Negotiable Instruments
Law. The documents provide that the amounts deposited
shall be repayable to the depositor. And according to the
document, the depositor is the "bearer." The documents do
not say that the depositor is Angel de la Cruz and that the
amounts

deposited

are

repayable

specifically

to

him.

Rather, the amounts are to be repayable to the bearer of

in Section 1 of the Negotiable Instruments Law.

The

documents provide that the amounts deposited shall be

repayable to the depositor. And according to the document,
the depositor is the "bearer." The documents do not say
that the depositor is Angel de la Cruz and that the amounts
deposited are repayable specifically to him. Rather, the
amounts are to be

repayable to the bearer

of the

documents or, for that matter, whosoever may be the

bearer at the time of presentment.

the documents or, for that matter, whosoever may be the

bearer at the time of presentment.
cannot recover on the CTDs.

However, petitioner

Although the CTDs are bearer

instruments, a valid negotiation thereof for the true purpose

and agreement between it and dela Cruz, as ultimately
ascertained, requires both delivery and indorsement.
this case, there was no indorsement as

In

the CTDs were

delivered not as payment but only as a security for dela

Cruz' fuel purchases.
**The accepted rule is that the negotiability or nonnegotiability of an instrument is determined from the
writing, that is, from the face of the instrument itself. The
CTDs in question are negotiable instruments as they meet

KASC

11

COMMERCIAL LAW REVIEW: COMPILATION OF DIGESTS (SRC NEGO BATCH 4)

PHILIPPINE EDUCATION CO. VS. SORIANO L-

ISSUE:

22405 JUNE 30, 1971 DIZON, J.:

Whether or not the postal money order in question

is a negotiable instrument

FACTS:
Enrique Montinola sought to purchase from Manila

HELD:

Post Office ten money orders of 200php each payable to E.

P. Montinola. Montinola offered to pay with the money

No. It is not disputed that the Philippine postal statutes

orders with a private check. Private check were not

were patterned after similar statutes in force in United

generally accepted in payment of money orders, the teller

States. The Weight of authority in the United States is that

advised him to see the Chief of the Money Order Division,

postal money orders are not negotiable instruments, the

but instead of doing so, Montinola managed to leave the

reason being that in establishing and operating a postal

building without the knowledge of the teller. Upon the

money order system, the government is not engaged in

disappearance of the unpaid money order, a message was

commercial

sent to instruct all banks that it must not pay for the money

governmental power for the public benefit. Moreover, some

order stolen upon presentment. The Bank of America

of the restrictions imposed upon money orders by postal

received a copy of said notice. However, The Bank of

laws and regulations are inconsistent with the character of

America received the money order and deposited it to the

negotiable

appellants account upon clearance. Mauricio Soriano, Chief

regulations

of the Money Order Division notified the Bank of America

endorsement; payment of money orders may be withheld

that the money order deposited had been found to have

under a variety of circumstances.

transactions

instruments.
usually

but

For

provide

merely

instance,
for

not

exercises

such

laws

and

more

than

one

been irregularly issued and that, the amount it represented

had been deducted from the banks clearing account. The
Bank of America debited appellants account with the same
account and give notice by mean of debit memo.

KASC

12

COMMERCIAL LAW REVIEW: COMPILATION OF DIGESTS (SRC NEGO BATCH 4)

CONSOLIDATED PLYWOOD INDUSTRIES, INC V. IFC

LEASING AND ACCEPTANCE CORP. (1987) G.R. NO.

It paid the down payment of P210,000

April 5, 1978: IPM issued the sales invoice and the

deed of sale with chattel mortgage with promissory

72593 APRIL 30, 1987

note was executed

IPM, by means of a deed of assignment,

assigned its rights and interest in the chattel

FACTS:

mortgage

Consolidated (buyer pays promossor note) > IPM (sellerassignor who violated warranty) > IFC (holder in due course

Plywood

(Consolidated) is

Industries,

corporation

engaged

Inc
in

the

For the purpose of opening of additional roads

the route of roads, it needed 2 additional

Because of the breaking down of the tractors, the

and

Consolidated unilaterally rescinded the contract w/

April 7, 1979: Wee of Consolidated asked IPM to pull

marketing

arm,

thereafter to offer them for sale.

Industrial

Products Marketing (IPM) (seller-assignor) offered to

IPM inspected the job site and assured that
the tractors were fit for the job and gave a
performance warranty of

the

The proceeds were to be given to IFC and the

excess will be divided between:

sell 2 "Used" Allis Crawler Tractors

90-days

After 14 days, one of the tractors broke down and

out the units and have them reconditioned, and

Atlantic Gulf & Pacific Company of Manila, through its

and

IPM

units of tractors
company

Leasing

were delayed

and simultaneous logging operations along

sister

IFC

road building and simultaneous logging operations

logging business

of

after another 9 days, the other tractor too

Consolidated

favor

Acceptance Corp. (IFC)

or merely an assignee?)

in

IPM

Consolidated which offered to bear

one-half 1/2 of the reconditioning cost

IPM didn't do anything

machines and availability of parts.

KASC

Consolidated purchased on installment.

13

COMMERCIAL LAW REVIEW: COMPILATION OF DIGESTS (SRC NEGO BATCH 4)

IFC filed against Consolidated for the recovery of the

which are not visible if the vendee is an expert who, by

principal sum P1,093,789.71, interest and attorney's

reason of his trade or profession, should have known

fees

them.chanroblesvirtualawlibrary

RTC and CA: favored IFC

ART. 1562. In a sale of goods, there is an implied warranty

breach of warranty if any, is not a defense available

or condition as to the quality or fitness of the goods, as

to Consolidated either to withdraw from the contract

follows:

and/or demand a proportionate reduction of the price

(1) Where the buyer, expressly or by implication makes

with damages in either case

known to the seller the particular purpose for which the

goods are acquired, and it appears that the buyer relies on

ISSUE:

the sellers skill or judge judgment (whether he be the

W/N IFC is a holder in due course of the negotiable

grower or manufacturer or not), there is an implied

promissory note so as to bar completely all the available

warranty that the goods shall be reasonably fit for such

defenses of the Consolidated against IPM

purpose;
xxx xxx xxx

HELD:

ART. 1564. An implied warranty or condition as to the

CA reversed and set aside

quality or fitness for a particular purpose may be annexed

Consolidated is a victim of warranrty

The Civil Code provides that:

by the usage of trade.chanroblesvirtualawlibrary

xxx xxx xxx

ART. 1561. The vendor shall be responsible for warranty

ART. 1566. The vendor is responsible to the vendee for any

against the hidden defects which the thing sold may have,

hidden faults or defects in the thing sold even though he

should they render it unfit for the use for which it is

was not aware thereof.

intended, or should they diminish its fitness for such use to

This provision shall not apply if the contrary has been

such an extent that, had the vendee been aware thereof, he

stipulated, and the vendor was not aware of the hidden

would not have acquired it or would have given a lower

faults or defects in the thing sold. (Emphasis supplied).

price for it; but said vendor shall not be answerable for
patent defects or those which may be visible, or for those

KASC

GR: extends to the corporation to whom it assigned

its rights and interests

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COMMERCIAL LAW REVIEW: COMPILATION OF DIGESTS (SRC NEGO BATCH 4)

EX: assignee is a holder in due course of the

no longer sue IPM except by way of counterclaim if

promissory note

IPM sues it because of the rescission

assuming the note is negotiable

Consolidated's

defenses

may

not

prevail against it.

Considering that paragraph (d), Section 1 of the

Negotiable

Instruments

Law

requires

that

Articles 1191 and 1567 of the Civil Code provide

promissory note "must be payable to order or

that:

bearer" - in this case it is non-negotiable

ART. 1191. The power to rescind obligations is implied in

reciprocal ones, in case one of the obligors should not

= expression of consent that the instrument

may be transferred

comply with what is incumbent upon him.

The injured party may choose between the fulfillment and

consent is indispensable since a maker

the rescission of the obligation with the payment of

assumes

greater

risk

under

damages in either case. He may also seek rescission, even

negotiable instrument than under a

after he has chosen fulfillment, if the latter should become

non-negotiable one

impossible.

When instrument is payable to order

xxx xxx xxx

ART. 1567. In the cases of articles 1561, 1562, 1564, 1565

SEC. 8. WHEN PAYABLE TO ORDER. - The instrument is

and 1566, the vendee may elect between withdrawing from

payable to order where it is drawn payable to the order of a

the contract and demanding a proportionate reduction of

specified person or to him or his order. . . .

the price, with damages in either case. (Emphasis supplied)

KASC

Without the words "or order" or"to the order of, "the

Consolidated, having unilaterally and extrajudicially

instrument is payable only to the person designated

rescinded its contract with the seller-assignor, can

therein and is therefore non-negotiable.

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COMMERCIAL LAW REVIEW: COMPILATION OF DIGESTS (SRC NEGO BATCH 4)

Any subsequent purchaser thereof will not enjoy the

in the title of the person negotiating the same, the person

advantages of being

negotiable

to whom it is negotiated must have had actual knowledge of

instrument but will merely "step into the shoes" of

the infirmity or defect, or knowledge of such facts that his

the person designated in the instrument and will

action in taking the instrument amounts to bad faith.

thus be open to all defenses available against the

(Emphasis supplied)

holder

of a

latter

We believe the finance company is better able to

bear the risk of the dealer's insolvency than the

Even conceding for purposes of discussion that the

buyer and in a far better position to protect his

promissory

interests against unscrupulous and insolvent dealers.

note

in

question

is

negotiable

instrument, the IFC cannot be a holder in due course

..

due to absence of GF for knowing that the tractors

were defective
SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE.
- A holder in due course is a holder who has taken the
instrument under the following conditions:
xxx xxx xxx
xxx xxx xxx
(c) That he took it in good faith and for value
(d) That the time it was negotiated by him he had no notice
of any infirmity in the instrument of deffect in the title of
the person negotiating it

SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. - To

constitute notice of an infirmity in the instrument or defect

KASC

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COMMERCIAL LAW REVIEW: COMPILATION OF DIGESTS (SRC NEGO BATCH 4)

ANG TEK LIAN VS. COURT OF APPEALS L-2516,

loss of the check by the rightful owner, raising of the

SEPTEMBER, 1950 BENGZON, J.:

amount payable, etc. But where the bank is satisfied of the

identity or economic standing of the bearer who tenders the

Facts:

check for collection, it will pay the instrument without

Ang Tek Lian knowing that he had no funds

therefor, drew a check upon China Banking Corporation

further question; and it would incur no liability to the

drawer in thus acting.

payable to the order of cash. He delivered it toLee Hua

Hong in exchange for money. The check was presented by
Lee Hua hong to the drawee bank for payment, but it w3as
dishonored for insufficiency of funds. With this, Ang Tek
Lian was convicted of estafa.
Issue:
Whether or not the check issued by Ang Tek Lian
that is payable to the order to cash and not have been
indorsed by Ang Tek Lian, making him not guilty for the
crime of estafa.
Held:
No.Under Sec. 9 of NIL a check drawn payable to
the order of cash is a check payable to bearer and the
bank may pay it to the person presenting it for payment
without the drawers indorsement. However, if the bank is
not sure of the bearers identity or financial solvency, it has
the right to demand identification or assurance against
possible complication, such as forgery of drawers signature,

KASC

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COMMERCIAL LAW REVIEW: COMPILATION OF DIGESTS (SRC NEGO BATCH 4)

PHILIPPINE NATIONAL BANK, vs.

ISSUE:

MANILA OIL REFINING & BY-PRODUCTS COMPANY,

INC.,

Is the provision in a promissory note which authorizes any

attorney to appear and confess judgment thereon in case

FACTS:

the same be not paid at maturity valid.

Manila Oil Refining & By-Products Company, Inc., executed

HELD:

and delivered to the Philippine National Bank, a written

instrument promising to pay to the order of the latter

Warrants of attorney to confess judgment are not

P61,000.00 and stipulating that in case the note be not paid

authorized nor contemplated by our law. The provisions in

at maturity, it authorizes any attorney in the Philippine

notes authorizing attorneys to appear and confess

Islands to appear in its name and confess judgment for the

judgments against makers should not be recognized in this

above sum with interest, cost of suit and attorney's fees of

jurisdiction by implication and should only be considered as

ten (10) per cent for collection, a release of all errors and

valid when given express legislative sanction.

waiver of all rights to inquisition and appeal, and to the

benefit of all laws exempting property, real or personal,
from levy or sale.

Such warrants of attorney are void as against public policy.

They enlarge the field for fraud, the promissor bargains
away his right to a day in court, and it strikes down the

The Manila Oil Refining and By-Products Company, Inc.

right of appeal accorded by statute. It might be the source

failed to pay. The Philippine National Bank brought action.

of abuse and oppression, and make the courts involuntary

An attorney associated with the Philippine National Bank

parties thereto.

entered his appearance in representation of Manila Oil

Refining & By-Products Company, Inc, and filed a motion
confessing judgment.

KASC

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