METROPOLITAN BANK & TRUST COMPANY, 
petitioner,  significance, it is indicated that they are payable from a particular fund,
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.  promise to pay is unconditional within the meaning of this Act
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by Golden Savings of the amount it had previously withdrawn, to make up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.
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
Negotiable Instruments Law Case Digest Page 1
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
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.
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
Negotiable Instruments Law Case Digest Page 2
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, 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 discounting 3arrangement 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.
Negotiable Instruments Law Case Digest Page 3
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
(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
Negotiable Instruments Law Case Digest Page 4
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. x x x
The principle that the fictitious-payee rule extends protection even to
non-bank transferees of the checks.
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-
Negotiable Instruments Law Case Digest Page 5
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,
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
Negotiable Instruments Law Case Digest Page 6
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.
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 and Trust Co. by Firestone, the check was returned for
so dated is delivered acquires the title thereto as of the date of delivery.
(Underscoring supplied.) insufficiency of funds. Despite repeated demands, Ines
Chaves failed to settle its account; hence, the suit.
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 Issue: Whether good faith is required in the issuance of a
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 check.
the instrument is delivered gets the title to the instrument completely and
irrevocably. Held: Everyone must in the performance of his duties,
observe honesty and good faith. Where a person issues a
If the subject check was given by Puzon to SMC in payment of the
postdated check without funds to cover it and informs the
obligation, the purpose of giving effect to the instrument is evident thus
title to or ownership of the check was transferred upon delivery. payee of this fact, he cannot be held guilty of estafa
However, if the check was not given as payment, there being no intent because there is no deceit. Herein, there is nothing in the
to give effect to the instrument, then ownership of the check was not
transferred to SMC. record to show that Firestone knew that there were no
funds when it accepted the check, much less that Firestone
The evidence of SMC failed to establish that the check was given in agreed to take the check with knowledge of the lack of
payment of the obligation of Puzon. There was no provisional receipt or funds. As Ines Chavez is guilty of fraud (bad faith) in the
official receipt issued for the amount of the check. What was issued was
a receipt for thedocument, a "POSTDATED CHECK SLIP."13 performance of its obligation, it is liable for damages. Its
conduct wanting in good faith, the award of attorney’s fees
Furthermore, the petitioner's demand letter sent to respondent states was warranted.
"As per company policies on receivables, all issuances are to be covered
by post-dated checks. However, you have deviated from this policy by
forcibly taking away the check you have issued to us to cover the  
December issuance."14 Notably, the term "payment" was not used
instead the terms "covered" and "cover" were used.

The evidence proves that the check was accepted, not as payment, but in
accordance with the long-standing policy of SMC to require its dealers to
issue postdated checks to cover its receivables. The check was only meant
to cover the transaction and in the meantime Puzon was to pay for the
transaction by some other means other than the check. This being so, title
to the check did not transfer to 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

Negotiable Instruments Law Case Digest Page 7