1
CONSOLIDATED PLYWOOD CASE.
G.R. No. 72593 April 30, 1987
Lessons Applicable: Requisites of negotiability to
antedated and postdated instruments (Negotiable
Instruments Law)
FACTS: Consolidated (buyer pays promossor note)
> IPM (seller-assignor who violated warranty) >
IFC (holder in due course or merely an assignee?)
Consolidated Plywood Industries, Inc
(Consolidated) is a
corporation engaged in the logging business
For the purpose of opening of
additional roads and simultaneous logging
operations along the route of roads, it needed 2
additional units of tractors
Atlantic Gulf & Pacific Company of Manila,
through its sister company and marketing arm,
Industrial Products Marketing (IPM) (seller-
assignor) offered to sell 2 "Used" Allis Crawler
Tractors
IPM inspected the job site and assured
that the tractors were fit for the job and gave a
90-days performance warranty of the machines
and availability of parts.
Consolidated purchased on installment.
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 note was executed
IPM, by means of a deed of
assignment, assigned its rights and interest in the
chattel mortgage in favor of IFC Leasing and
Acceptance Corp. (IFC)
After 14 days, one of the tractors broke
down and after another 9 days, the other tractor
too
Because of the breaking down of the
tractors, the road building and simultaneous
logging operations were delayed
Consolidated unilaterally rescinded the
contract w/ IPM
April 7, 1979: Wee of Consolidated asked
IPM to pull out the units and have them
reconditioned, and thereafter to offer them for
sale.
The proceeds were to be given to IFC
and the excess will be divided between:
IPM

Consolidated which offered to
bear one-half 1/2 of the reconditioning cost
IPM didn't do anything
IFC filed against Consolidated for the
recovery of the principal sum P1,093,789.71,
interest and attorney's fees
RTC and CA: favored IFC
breach of warranty if any, is not a defense
available to Consolidated either to withdraw from
the contract and/or demand a proportionate
reduction of the price with damages in either
case
ISSUE: W/N IFC is a holder in due course of the
negotiable promissory note so as to bar
completely all the available defenses of the
Consolidated against IPM
HELD: CA reversed and set aside
Consolidated is a victim of warranrty
The Civil Code provides that:
ART. 1561. The vendor shall be responsible for
warranty against the hidden defects which the
thing sold may have, should they render it unfit
for the use for which it is intended, or should they
diminish its fitness for such use to such an extent
2
that, had the vendee been aware thereof, he
would not have acquired it or would have given a
lower price for it; but said vendor shall not be
answerable for patent defects or those which may
be visible, or for those which are not visible if the
vendee is an expert who, by reason of his trade or
profession, should have known them.
ART. 1562. In a sale of goods, there is an implied
warranty or condition as to the quality or fitness
of the goods, as follows:
(1) Where the buyer, expressly or by implication
makes known to the seller the particular purpose
for which the goods are acquired, and it appears
that the buyer relies on the sellers skill or judge
judgment (whether he be the grower or
manufacturer or not), there is an implied
warranty that the goods shall be reasonably fit for
such purpose;
xxx xxx xxx
ART. 1564. An implied warranty or condition as to
the quality or fitness for a particular purpose may
be annexed by the usage of trade.
xxx xxx xxx
ART. 1566. The vendor is responsible to the
vendee for any hidden faults or defects in the
thing sold even though he was not aware thereof.
This provision shall not apply if the contrary has
been stipulated, and the vendor was not aware of

the hidden faults or defects in the thing sold.
(Emphasis supplied).
GR: extends to the corporation to whom it
assigned its rights and interests
EX: assignee is a holder in due course of the
promissory note
assuming the note is negotiable
Consolidated's defenses may not
prevail against it.
Articles 1191 and 1567 of the Civil Code
provide that:
ART. 1191. The power to rescind obligations is
implied in reciprocal ones, in case one of the
obligors should not comply with what is
incumbent upon him.
The injured party may choose between the
fulfillment and the rescission of the obligation
with the payment of damages in either case. He
may also seek rescission, even after he has
chosen fulfillment, if the latter should become
impossible.
xxx xxx xxx
ART. 1567. In the cases of articles 1561, 1562,
1564, 1565 and 1566, the vendee may elect
between withdrawing from the contract and
demanding a proportionate reduction of the price,
with damages in either case. (Emphasis supplied)
3
Consolidated, having unilaterally and
extrajudicially rescinded its contract with the
seller-assignor, can no longer sue IPM except by
way of counterclaim if IPM sues it because of the
rescission
Considering that paragraph (d), Section 1 of
the Negotiable Instruments Law requires that a
promissory note "must be payable to order or
bearer" - in this case it is non-negotiable
= expression of consent that the
instrument may be transferred
consent is indispensable since a
maker assumes greater risk under a negotiable
instrument than under a non-negotiable one
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. . . .
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
Even conceding for purposes of discussion
that the promissory note in question is a
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 in the title of the person
negotiating the same, the person to whom it is
negotiated must have had actual knowledge of
the infirmity or defect, or knowledge of such facts
that his action in taking the instrument amounts
to bad faith. (Emphasis supplied)
4
We believe the finance company is better able to
bear the risk of the dealer's insolvency than the
buyer and in a far better position to protect his
interests against unscrupulous and insolvent
dealers. . .
CHAN WAN v. TAN KIM
109 Phil 706 Commercial Law Negotiable
Instruments Law Negotiation after Dishonor
Holder in Due Course
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
5
Wan acquired the checks and to determine if he is
indeed entitled to payment based on some other
transactions involving those checks.
If maker has no defense.
VICENTE TAN DE OCAMPO V. GACHALIAN
3 SCRA 596 Mercantile Law Negotiable
Instruments Law Rights of the Holder What
Constitutes a Holder in Due Course Is a payee a
holder in due course?
Matilde Gonzales was a patient of the De Ocampo
Clinic owned by Vicente De Ocampo. She incurred
a debt amounting to P441.75. Her husband,
Manuel Gonzales designed a scheme in order to
pay off this debt: In 1953, Manuel went to a
certain Anita Gatchalian.
Manuel purported himself to be selling the car of
Vicente De Ocampo. Gatchalian was interested in
buying said car but Manuel told her that De
Ocampo will only sell the car if Gatchalian shows
her willingness to pay for it. Manuel advised
Gatchalian to draw a check of P600.00 payable to
De Ocampo so that Manuel may show it to De
Ocampo and that Manuel in the meantime will
hold it for safekeeping. Gatchalian agreed and
gave Manuel the check. After that, Manuel never
showed himself to Gatchalian.
Meanwhile, Manuel gave the check to his wife who
in turn gave the check to De Ocampo as payment

of her bills with the clinic. De Ocampo received
the check and even gave Matilde her change
(sukli). On the other hand, since Gatchalian never
saw Manuel again, she placed a stop-payment on
the P600.00 check so De Ocampo was not able to
cash on the check.
Eventually, the issue reached the courts and the
trial court ordered Gatchalian to pay De Ocampo
the amount of the check.
Gatchalian argued that De Ocampo is not entitled
to payment because there was no valid
indorsement. De Ocampo argued tha he is a
holder in due course because he is the named
payee.
ISSUE: Whether or not De Ocampo is a holder in
due course.
HELD: No. Section 52 of the 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;
6
(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.
The Supreme Court emphasized that if one is such
a holder in due course, it is immaterial that he
was the payee and an immediate party to the
instrument. The Supreme Court however ruled
that De Ocampo is not a holder in due course for
his lack of good faith. De Ocampo should have
inquired as to the legal title of Manuel to the said
check. The fact that Gatchalian has no obligation
to De Ocampo and yet hes named as the payee
in the check hould have apprised De Ocampo;
that the check did not correspond to Matilde
Gonzales obligation with the clinic because of the
fact that it was for P600.00 more than the
indebtedness; that why was Manuel in possession
of the check all these gave De Ocampo the duty
to ascertain from the holder Manuel Gonzales
what the nature of the latters title to the check
was or the nature of his possession.
G.R. No. L-11526 January 2, 1917
B. A. GREEN, ET AL., plaintiffs-appellees,
v. M. LOPEZ, ET AL., defendants-appellants.
This is an appeal from a judgment for the face value of a
negotiable note, in favor of the plaintiffs who purchased
the note, and against the makers, with a declaration of
the subsidiary liability of the payee, from whom the note
was purchased and by whom it was indorsed to the
plaintiffs.

The complaint alleged that the note was indorsed by the
payee to the plaintiffs "for value received," and this
allegation was conclusively established by the evidence
adduced at the trial. We are of opinion that this allegation
was substantially equivalent to a formal allegation that
the indorsement was made for a valuable consideration,
and that the truth of this allegation having been
established by the introduction of competent evidence
establishing the fact that the indorsement was made for a
valuable consideration, the purchasers were clearly
entitled to judgment for the face value of the note.
By the decisive weight of authority in this country, where
negotiable paper has been put in circulation, and there is
no infirmity or defense between the antecedent parties
thereto, a purchaser of such security is entitled to recover
thereon, as against the maker, the whole amount,
irrespective of what he may have paid therefor.
It follows that any allegation which sets forth the
existence of a valuable consideration for the transfer by
indorsement is sufficient, notwithstanding the failure to
allege expressly the amount which was in fact paid by the
indorser.
What has been said disposes of the various contentions
of appellants based upon the failure of the court below to
sustain a demurrer to the complaint because of the lack
of an allegation setting forth specifically the nature and
amount of the consideration paid by the plaintiffs to the
payee of the note, by whom it was indoresed in their
7
favor.
The real defense relied upon in the court below by the
makers of the note was that the plaintiffs were not bona
fide holders of the note by indorsement, in that they had
knowledge of the existence of certain equitable defenses
which the maker were entitled to set us against the payee
of the note, before they acquired it by indorsement from
the payee.
But there was nothing on the face of the note to put the
purchasers on notice of the existence of such equitable
defenses.
It was entirely regular in form and came into their
possession in the usual course of business. Under these
circumstances the burden of proof was manifestly upon
the makers of the note to establish the fact of knowledge
of these equitable defenses before they could be
permitted to rely upon such defenses as against the
purchasers.
The only evidence tending to establish such knowledge
was the testimony of Lopez, one of the maker of the note,
that a person unknown to him and representing himself to
be an employee of Green, one of the plaintiffs, came to
him, and made inquiries as to the validity and
genuineness of the note, stating that his principal desired
this information because he was contemplating its
purchase; and that he then and there explained the
nature of his equitable defenses ad against the payee,
and repudiated any obligation to meet the note.
There is no evidence of record upon which to base a

finding that these alleged disclosures were in truth and in
fact made to an employee of either of the plaintiffs other
than the testimony of Lopez to the effect that these
alleged disclosures were made to a person unknown to
him, who represented himself to be an employee of one
of the plaintiffs; and the testimony of Green, one of the
plaintiffs who stated that before purchasing the note he
sent an employed to call upon the makers of the note to
inquire whether it was a good note which would be paid
at maturity, and that upon his return this employee stated
that he had been informed by the makers of the note that
it was a good note duly executed by them and that it
would be paid when due.
We do not stop to consider whether this evidence is
sufficient to establish the fact that the person to whom the
maker of the note claims to have disclosed the alleged
equitable defenses was in truth and in fact the employee
sent by the plaintiffs to the makers of the note for the
purpose of inquiring as to is validity, because we are
satisfied that, admitting that the person with whom Lopez
claims to have had the interview was an employee of one
or both of the purchasers, we do not think that the
evidence sustains an affirmative finding that the plaintiffs
had knowledge of the alleged equitable defenses when
they purchased the note.
One of the purchasers of the note is a broker, engaged in
business in the city of Manila, and the other is an
attorney, licensed to practice in the courts of these
Islands, and it would require stronger and more
convincing evidence than the interested testimony of one
of the makers of the note to satisfy us, as against their
8
testimony to the contrary, that these gentlemen were so
imprudent as to discount negotiable paper, in the ordinary
course of business, after having received formal notice of
the existence of equitable defenses against the payee;
and our opinion in this regard is strengthened by the
undoubted fact that they took the precaution before
purchasing the note to send an agent to make inquiries
as to its validity. We are forced to conclude with the trial
judge that the testimony of the maker of the note as to
the disclosures made to the purchasers' agent must be
rejected, either on the ground that it is wholly false, or
upon the ground that he failed to make himself
understood in the course of his alleged interview with the
plaintiffs' agent, with the result in either event that
knowledge of the existence of equitable defenses was
not brought home to the purchasers of the note.
Equitable defenses of this nature can in no event defeat
the right of the holders of a negotiable note by
indorsement and for valuable consideration until and
unless knowledged of the existence of such equitable
defenses is brought home to them, or until it appears that
the holders had such knowledged of the existence of
defects in the instrument as to charge them with bad faith
in acquiring it under all the attendant circumstances.
(Confer numerous cases cited in notes, 7 Cyc., p. 945.)
The judgment entered in the court below should be
affirmed, with the costs of this instance against the
appellants. So ordered.
FOSSUM v. HERMOSA

44 Phil 713 Commercial Law Negotiable
Instruments Law Presumption as to who is a
Holder in Due Course
In 1919, the Fernandez Hermanos (FH) contracted
with the American Iron Products Company, Inc.
(AIP), for the latter to build a shaft for one of the
ships managed by FH. In consideration thereof, a
time draft with the Philippine National Bank (PNB),
a negotiable instrument, was executed by FH in
the amount of $2,250.00 payable in 60 days. But
later, FH dishonored the draft because AIP was not
able to comply with the specifications of the shaft
ordered by FH.
Nevertheless, Charles Fossum, the agent of AIP
here in the Philippines and the person with whom
FH was transacting with, was able to obtain the
draft from the bank without consideration (for
free).
Fossum then instituted an action against FH to
recover the amount covered by the draft.
Fossum maintains that he is a holder in due
course; that he inherited that status from the
previous holder (PNB, named payee in the draft);
that as such, he is entitled to payment.
ISSUE: Whether or not Fossum is a holder in due
course.
HELD: No. In the first place, Fossum, as an agent
9
of AIP, is well aware that the draft is
unenforceable because it has no consideration,
the shaft being substandard. AIP did not comply
with its obligation thus the draft was dishonored
and Fossum was well aware of this as part of the
original party.
Under Sec. 59 of the Negotiable Instruments Law,
there is indeed a presumption that every holder is
a holder in due course, this covers a payee or an
indorsee (for bearer instruments, the bearer). This
presumption does not apply to Fossum because
he was not a payee nor an indorsee.
Hes not an indorsee because the bank merely
delivered the draft to him and the delivery was
even without consideration.
But if the presumption previously applied to PNB,
wasnt that acquired by Fossum?
No. The presumption only covers the present
holder, and not the previous holder. When a
holder delivers/indorses the instrument, he loses
that presumption.
It will then become incumbent upon the person
who received the instrument to prove that the
previous holder is a holder in due course
especially in this case when the current holder,
Fossum, cannot be granted the presumption in
Sec. 59, which is merely prima facie by the way,
because of the fact that he was an original party
fully notified of the failure of the consideration.

At any rate, PNB itself is not a holder in due
course due to the timely dishonor of the draft by
FH.
Further even assuming PNB is a holder in due
course, there is a well-known rule of law that if the
original payee of a note unenforceable for lack of
consideration repurchases (in this case, the draft
was not even repurchased, it was merely
delivered back) the instrument after transferring it
to a holder in due course, the paper again
becomes subject in the payees hands to the
same defenses to which it would have been
subject if the paper had never passed through the
hands of a holder in due course. The same is true
where the instrument is re-transferred to an agent
of the payee.
Travel-On, Inc. vs Court of Appeals
G.R. No. L-56169 June 26, 1992
-accommodation party
FACTS:
Petitioner Travel-On Inc. is a travel agency from which
Arturo Miranda procured tickets on behalf of airline
passengers and derived commissions therefrom.
Miranda was sued by petitioner to collect on the six
postdated checks he issued which were all dishonored by
the drawee banks. Miranda, however, claimed that he
had already fully paid and even overpaid his obligations
and that refunds were in fact due to him. He argued that
he had issued the postdated checks not for the purpose
10
of encashment to pay his indebtedness but for purposes
of accommodation, as he had in the past accorded
similar favors to petitioner. Petitioner however urges that
the postdated checks are per se evidence of liability on
the part of private respondent and further argues that
even assuming that the checks were for accommodation,
private respondent is still liable thereunder considering
that petitioner is a holder for value.
ISSUE:
Whether Miranda is liable on the postdated checks he
issued even assuming that said checks were issued for
accommodation only.
RULING:
There was no accommodation transaction in the case at
bar. In accommodation transactions recognized by the
Negotiable Instruments Law, an accommodating party
lends his credit to the accommodated party, by issuing or
indorsing a check which is held by a payee or indorsee
as a holder in due course, who gave full value therefor to
the accommodated party. The latter, in other words,
receives or realizes full value which the accommodated
party then must repay to the accommodating party. But
the accommodating party is bound on the check to the
holder in due course who is necessarily a third party and
is not the accommodated party. In the case at bar,
Travel-On was payee of all six (6) checks, it presented
these checks for payment at the drawee bank but the
checks bounced. Travel-On obviously was not an
accommodated party; it realized no value on the checks
which bounced. Miranda must be held liable on the
checks involved as petitioner is entitled to the benefit of
the statutory presumption that it was a holder in due

course and that the checks were supported by valuable
consideration.
**InaccommodationtransactionsrecognizedbytheNegotiable
InstrumentsLaw,anaccommodatingpartylendshiscreditto
the accommodated party, by issuing or indorsing a check
whichisheldbyapayeeorindorseeasaholderinduecourse,
whogavefullvaluetherefortotheaccommodatedparty. In
thecaseatbar,TravelOnwasthepayeeofallsix(6)checks,
itpresentedthesechecksforpaymentatthedraweebankbut
the checks bounced. TravelOn obviously was not an
accommodatedparty;itrealizednovalueonthecheckswhich
bounced.
LIABITIES OF PARTIES
State Investment House Inc. vs. CA
GR No. 101163 January 11, 1993
Bellosillo, J.:
Facts:
Nora Moulic issued to Corazon Victoriano, as security for
pieces of jewellery to be sold on commission, two postdated
checks in the amount of fifty thousand each. Thereafter,
Victoriano negotiated the checks to State Investment House,
Inc. When Moulic failed to sell the jewellry, she returned it to
Victoriano before the maturity of the checks. However, the
11
checks cannot be retrieved as they have been negotiated.
Before the maturity date Moulic withdrew her funds from the
bank contesting that she incurred no obligation on the checks
because the jewellery was never sold and the checks are
negotiated without her knowledge and consent. Upon
presentment of for payment, the checks were dishonoured for
insufficiency of funds.
Issues:
1. Whether or not State Investment House inc. was a holder of
the check in due course
2. Whether or not Moulic can set up against the petitioner the
defense that there was failure or absence of consideration
Held:
Yes, Section 52 of the NIL provides what constitutes a holder
in due course. The evidence shows that: on the faces of the post
dated checks were complete and regular; that State Investment
House Inc. bought the checks from Victoriano before the due
dates; that it was taken in good faith and for value; and there
was no knowledge with regard that the checks were issued as
security and not for value. A prima facie presumption exists
that a holder of a negotiable instrument is a holder in due
course. Moulic failed to prove the contrary.
No, Moulic can only invoke this defense against the petitioner
if it was a privy to the purpose for which they were issued and
therefore is not a holder in due course.
No, Section 119 of NIL provides how an instruments be
discharged. Moulic can only invoke paragraphs c and d as
possible grounds for the discharge of the instruments. Since

Moulic failed to get back the possession of the checks as
provided by paragraph c, intentional cancellation of instrument
is impossible. As provided by paragraph d, the acts which will
discharge a simple contract of payment of money will
discharge the instrument. Correlating Article 1231 of the Civil
Code which enumerates the modes of extinguishing obligation,
none of those modes outlined therein is applicable in the instant
case. Thus, Moulic may not unilaterally discharge herself from
her liability by mere expediency of withdrawing her funds from
the drawee bank. She is thus liable as she has no legal basis to
excuse herself from liability on her check to a holder in due
course. Moreover, the fact that the petitioner failed to give
notice of dishonor is of no moment. The need for such notice is
not absolute; there are exceptions provided by Sec 114 of NIL.
Chan Wan vs Tan Kim et al
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
12
(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.
Far East Bank & Trust Co. V. Gold Palace Jewelry Co.
(2008)
G.R. No. 168274 August 20, 2008
Lessons Applicable: Liabilities of the Parties
(Negotiable Instruments Law)
FACTS:
June 1998: Samuel Tagoe, a foreigner,
purchased from Gold Palace Jewellery Co.'s (Gold
Palace's) store at SM-North EDSA several pieces
of jewelry valued at P258,000
paid w/ Foreign Draft issued by the
United Overseas Bank (Malaysia) to Land Bank of
the Philippines, Manila (LBP) for P380,000
Teller of Far East Bank, next door tenant,
informed Julie Yang-Go (manager of Gold Palace)
that a foreign draft has similar nature to
a manager's check, but advised her not to release
the pieces of jewelry until the draft had been
cleared
Yang issued Cash Invoice so the
13
jewelries can be released
Yang deposited the draft in the
company's account with the Far East on June 2,
1998
When Far East, the collecting bank,
presented the draft for clearing to LBP, the drawee
bank, cleared the it and Gold Palace's account
with Far East was credited
June 6, 1998: The foreigner eventually
returned to claim the purchased goods.
After ascertaining that the draft had
been cleared, Yang released the pieces of jewelry
and his change, Far East Check of P122,000 paid
by the bank
June 26, 1998: LBP informed Far East that
the Foreign Draft had been materially altered from
P300 to P300,000and that it was returning the
same
Far East refunded the amount to LBP
and debit only P168,053.36 of the amount left in
Gold Palace' account without a prior written notice
to the account holder
Far East only notified by phone
the representatives of the Gold Palace

August 12, 1998: Far East demanded from
Gold Palace the payment of balance and upon
refusal filed in the RTC
RTC: in favor of Far East on the basis that
Gold Palace was liable under the liabilities of a
general indorser
CA: reversed since Far East failed to
undergo the proceedings on the protest of the
foreign draft or to notify Gold Palace of the draft's
dishonor; thus, Far East could not charge Gold
Palace on its secondary liability as an indorser
ISSUE: W/N Gold Palace should be liable for the
altered Foreign Draft
HELD: NO. AFFIRMED WITH THE
MODIFICATION that the award of exemplary damages
and attorney's fees is DELETED
Act No. 2031, or the Negotiable Instruments Law
(NIL), explicitly provides that the acceptor, by
accepting the instrument, engages that he will
pay it according to the tenor of his acceptance.
This provision applies with equal force in
case the drawee pays a bill without having
previously accepted it.
Actual payment by the drawee is
greater than his acceptance, which is merely a
promise in writing to pay
14
The payment of a check includes
its acceptance
The tenor of the acceptance is determined
by the terms of the bill as it is when the drawee
accepts.
LBP was liable on its payment of the
check according to the tenor of the check at the
time of payment, which was the raised amount.
Gold Palace was not a participant in the
alteration of the draft, was not negligent, and was
a holder in due course
LBP, having the most convenient means to
correspond with UOB, did not first verify the
amount of the draft before it cleared and paid the
same
Gold Palace had no facility to ascertain
with the drawer, UOB Malaysia, the true amount in
the draft. It was left with no option but to rely on
the representations of LBP that the draft was good
Principle that the drawee bank, having paid
to an innocent holder the amount of an
uncertified, altered check in good faith and
without negligence which contributed to the loss,
could recover from the person to whom payment
was made as for money paid by mistake - NOT

applicable
The Court is also aware that under the
Uniform Commercial Code in the United States of
America, if an unaccepted draft is presented to a
drawee for payment or acceptance and the
drawee pays or accepts the draft, the person
obtaining payment or acceptance, at the time of
presentment, and a previous transferor of the
draft, at the time of transfer, warrant to the
drawee making payment or accepting the draft in
good faith that the draft has not been altered
- absent any similar provision in our law, cannot
extend the same preferential treatment to the
paying bank
Gold Palace is protected by Section 62 of
the NIL, its collecting agent, Far East, should not
have debited the money paid by the drawee bank
from respondent company's account. When Gold
Palace deposited the check with Far East, it, under
the terms of the deposit and the provisions of the
NIL, became an agent of the Gold Palace for the
collection of the amount in the draft
The subsequent payment by the drawee
bank and the collection of the amount by the
collecting bank closed the transaction insofar as
the drawee and the holder of the check or his
agent are concerned, converted the check into a
mere voucher, and, as already discussed,
foreclosed the recovery by the drawee of the
15
amount paid. This closure of the transaction is a
matter of course; otherwise, uncertainty in
commercial transactions, delay and annoyance
will arise if a bank at some future time will call on
the payee for the return of the money paid to him
on the check
As the transaction in this case had
been closed and the principal-agent relationship
between the payee and the collecting bank had
already ceased, the latter in returning the amount
to the drawee bank was already acting on its own
and should now be responsible for its own actions.
Neither can petitioner be considered to have acted
as the representative of the drawee bank when it
debited respondent's account, because, as already
explained, the drawee bank had no right to
recover what it paid. Likewise, Far East cannot
invoke the warranty of the payee/depositor who
indorsed the instrument for collection to shift the
burden it brought upon itself. This is precisely
because the said indorsement is only for purposes
of collection which, under Section 36 of the NIL, is
a restrictive indorsement. It did not in any way
transfer the title of the instrument to the
collecting bank. Far East did not own the draft, it
merely presented it for payment. Considering that
the warranties of a general indorser as provided in
Section 66 of the NIL are based upon a transfer of
title and are available only to holders in due
course, these warranties did not attach to the
indorsement for deposit and collection made by

Gold Palace to Far East. Without any legal right to
do so, the collecting bank, therefore, could not
debit respondent's account for the amount it
refunded to the drawee bank.
Associated Bank vs Court of Appeals (1996)
K 252 SCRA 620 Mercantile Law Negotiable
Instruments Law Liabilities of Parties
Forgery Collecting Bank vs Drawee Bank
K The Province of Tarlac was disbursing funds
to Concepcion Emergency Hospital via
checks drawn against its account with the
Philippine National Bank (PNB). These
checks were drawn payable to the order of
Concepcion Emergency Hospital. Fausto
Pangilinan was the cashier of Concepcion
Emergency Hospital in Tarlac until his
retirement in 1978. He used to handle
checks issued by the provincial government
of Tarlac to the said hospital. However, after
his retirement, the provincial government
still delivered checks to him until its
discovery of this irregularity in 1981. By
forging the signature of the chief payee of
the hospital (Dr. Adena Canlas), Pangilinan
was able to deposit 30 checks amounting to
P203k to his account with the Associated
Bank.
K When the province of Tarlac discovered this
irregularity, it demanded PNB to reimburse
the said amount. PNB in turn demanded
Associated Bank to reimburse said amount.
16
PNB averred that Associated Bank is liable
to reimburse because of its indorsement
borne on the face of the checks:
K
All prior endorsements guaranteed ASSOCIATED
BANK.
ISSUE: What are the liabilities of each party?
HELD: The checks involved in this case are order
instruments.
Liability of Associated Bank
Where the instrument is payable to order at the
time of the forgery, such as the checks in this
case, the signature of its rightful holder (here, the
payee hospital) is essential to transfer title to the
same instrument. When the holders indorsement
is forged, all parties prior to the forgery may raise
the real defense of forgery against all parties
subsequent thereto.
A collecting bank (in this case Associated Bank)
where a check is deposited and which indorses
the check upon presentment with the drawee
bank (PNB), is such an indorser. So even if the
indorsement on the check deposited by the
bankss client is forged, Associated Bank is bound
by its warranties as an indorser and cannot set up
the defense of forgery as against the PNB.
EXCEPTION: If it can be shown that the drawee
bank (PNB) unreasonably delayed in notifying the
collecting bank (Associated Bank) of the fact of
the forgery so much so that the latter can no
longer collect reimbursement from the depositor-
forger.

Liability of PNB
The bank on which a check is drawn, known as the
drawee bank (PNB), is under strict liability to pay
the check to the order of the payee (Provincial
Government of Tarlac). Payment under a forged
indorsement is not to the drawers order. When
the drawee bank pays a person other than the
payee, it does not comply with the terms of the
check and violates its duty to charge its
customers (the drawer) account only for properly
payable items. Since the drawee bank did not pay
a holder or other person entitled to receive
payment, it has no right to reimbursement from
the drawer. The general rule then is that the
drawee bank may not debit the drawers account
and is not entitled to indemnification from the
drawer. The risk of loss must perforce fall on the
drawee bank.
EXCEPTION: If the drawee bank (PNB) can prove a
failure by the customer/drawer (Tarlac Province) to
exercise ordinary care that substantially
contributed to the making of the forged signature,
the drawer is precluded from asserting the
forgery.
17
In sum, by reason of Associated Banks
indorsement and warranties of prior indorsements
as a party after the forgery, it is liable to refund
the amount to PNB. The Province of Tarlac can ask
reimbursement from PNB because the Province is
a party prior to the forgery. Hence, the instrument
is inoperative. HOWEVER, it has been proven that
the Provincial Government of Tarlac has been
negligent in issuing the checks especially when it
continued to deliver the checks to Pangilinan even
when he already retired. Due to this contributory
negligence, PNB is only ordered to pay 50% of the
amount or half of P203 K.
K BUT THEN AGAIN, since PNB can pass its
loss to Associated Bank (by reason of
Associated Banks warranties), PNB can ask
the 50% reimbursement from Associated
Bank. Associated Bank can ask
reimbursement from Pangilinan but
unfortunately in this case, the court did not
acquire jurisdiction over him.