THE NEGOTIABLE INSTRUMENTS LAW

Act No. 2031

February 03, 1911

MIDTERM COVERAGE

Tips:
1. Put yourself 70 years back (NIL - old law)
2. Memorize each provision (verbatim)
3. Prepare for bonus question/s which is/are unrelated to the subject;
4. Prepare a “joke” as bonus during exams; and
5. Remember the 5 Ls (Language, Law, Logic, write Legibly & the Lord)

A. Definitions
a. Negotiable Instruments
b. Negotiability
c. Accumulation of secondary contracts
d. Negotiation
e. Indorsement
f. Holder
B. Types of Negotiable Instruments
a. Bill of Exchange (Sec. 126)
b. Promissory Note (Sec. 184)
c. Check (Sec. 185)
d. Are the following negotiable within the meaning of the NIL?
i. Negotiable Documents of Title
ii. Money Order
iii. Certificate of Stocks
iv. Treasury Warrants
C. Purpose of Negotiable Instruments
D. Features of Negotiable Instruments
E. Distinguish Assignability with Negotiability
F. Cases
a. Introduction
i. Metrobank v. CA, 194 SCRA 169
ii. Lozano v. Martinez, 146 SCRA 323
iii. Citibank v. Sabeniano, 504 SCRA 378
iv. Tibajia v. CA, 223 SCRA 567
v. PAL, Inc. v. CA, 181 SCRA 557
vi. Roman Catholic Bishop of Maloloas v. IAC, 191 SCRA 411
b. Negotiability
i. Phil. Education Co. v. Soriano, 39 SCRA 587
ii. Caltex Phil.v. CA, 212 SCRA 448
iii. Metrobank v. CA, 194 SCRA 168
iv. Sesbreno v. CA, 222 SCRA 466
v. Sales v. CA, 181 SCRA 296
c. Payable to bearer
i. Ang Tek Lian v. CA, 87 SCRA 363
G. Form (Secs. 1-9)
H. Date, presumption as to. (Sec. 11)
I. Ante-dated and post-dated (Sec. 12)
J. When date may be inserted (Sec. 13)
K. Blanks; when may be filled (Sec. 14)
L. Incomplete instrument not delivered. (Sec. 15)
M. Delivery; when effectual; when presumed (Sec. 16)
a. Development Bank of the Phils. Sima Wei, 219 SCRA 383
N. Negotiation (Sec. 30)
O. Real Defenses and Personal Defenses
a. Differentiate fraud in factum & fraud in inducement
P. Persons who did not sign, but liable (Secs. 18, 19, 23, 65)
a. See page 222 (Aquino Book)
Q. Persons who signed, but not liable (Secs. 20 & 21)
a. PB Commerce vs. Aruego, 102 SCRA 530
b. Francisco vs. CA, 319 SCRA 354 (1999)
R. Forgery (Sec. 23)
a. What is a discharge?
b. Cases about forgery:
i. Jai-Alai vs BPI
ii. Republic Bank vs. Ebrada
iii. MWSS vs CA
iv. Banco de Oro vs. Equitable Banking Corp.
v. Gempesaw vs CA
vi. Associated Bank vs. CA
vii. Metrobank vs. First National City Bank
viii. Republic Bank vs. CA
ix. Phil. Commercial Int’l Bank vs CA
x. Ramon Rosario vs. CA
xi. Samsung Construction vs. FEBTC and CA
S. Material Particulars (Secs. 124-125)
i. PNB vs CA
ii. Montinola vs PNB
T. Accommodation Party (Sec. 29)
i. Sadaya vs. Sevilla
ii. Crisologo-Jose vs. CA
iii. Stelco Marketing vs CA
iv. Travel-On vs CA
v. BPI vs. CA
vi. Agro Conglomerates vs CA
U. Who is a Holder in Due Course (Secs. 52 & 59)
a. De Ocampo vs Gatchalian
b. Mesina vs. IAC
V. Consideration, presumption (Sec. 24)
a. Value, what constitutes (Sec. 25)
b. Holder for Value (Sec. 26)
c. When lien on instruments constitutes holder for value (Sec. 27)
d. Effect of want of consideration (Sec. 28)
i. Absence or failure
ii. Illegal Consideration
1. People vs. Delarama (assigned during class)
e. Art. 1409, NCC (Void & Inexistent Contract)
f. Art. 1412, NCC (If the act is unlawful or forbidden cause)
g. Art. 1306, NCC (stipulations, clauses, terms and conditions - not contrary
to law, morals, good customs, public order, or public policy)
 A. Definitions

a. Negotiable Instruments

A negotiable instrument is a written contractual obligation signed by the maker or

drawer that contains an unconditional promise or order to pay a certain sum in money
which must be payable on demand or at a fixed or determinable future time. It must be
payable to the order or to bearer and if it is addressed to a drawee, the drawee must be
named or otherwise indicated therein with reasonable certainty.

b. Negotiability;
- allows NIs to be transferred from one person to another so as to
constitute the transferee a holder.

c. Accumulation of secondary contracts;

- indorsers become secondarily liable not only to their immediate
transferees but also to any holder.

d. Negotiation (see Sec. 30)

e. Indorsement (see Sec. 191) - lol

f. Holder (see Sec. 191)

B. Types of Negotiable Instruments

a. Bill of Exchange (Sec. 126)

Sec. 126. Bill of exchange, defined. - A bill of exchange is an unconditional order in

writing addressed by one person to another, signed by the person giving it, requiring the
person to whom it is addressed to pay on demand or at a fixed or determinable future
time a sum certain in money to order or to bearer.

b. Promissory Note (Sec. 184)

Sec. 184. Promissory note, defined. - A negotiable promissory note within the
meaning of this Act is an unconditional promise in writing made by one person to
another, signed by the maker, engaging to pay on demand, or at a fixed or determinable
future time, a sum certain in money to order or to bearer. Where a note is drawn to the
maker's own order, it is not complete until indorsed by him.

c. Check (Sec. 185)

Sec. 185. Check, defined. - A check is a bill of exchange drawn on a bank payable on
demand. Except as herein otherwise provided, the provisions of this Act applicable to a
bill of exchange payable on demand apply to a check.

d. Are the following negotiable within the meaning of the NIL?

i. Negotiable Documents of Title
ii. Money Order
iii. Certificate of Stocks
iv. Treasury Warrants

C. Purposes of Negotiable Instruments

1. substitute for money
2. increases the medium of circulations
3. evidence of transaction
*Note: Delivery of payment does not extinguishes the obligation as it is not a legal tender until encashed.
 *See Art. 1231, NCC and Sec. 16 of the Central Bank Act

D. Features of Negotiable Instruments

1. Negotiability – allows NIs to be transferred from one person to another so as

to constitute the transferee a holder.

2. Accumulation of Secondary Contracts – indorsers become secondarily

liable not only to their immediate transferees but also to any holder.

E. Distinguish Assignability with Negotiability

The most important feature of the negotiable instrument is that it can be freely
transferred which is possible in two ways, i.e. negotiation and assignment.

Negotiation implies the transfer of negotiable instrument that takes place in order to
make the transferee, the holder of the instrument. The essential distinction between
transfer by negotiation and transfer by assignment is that in the latter case, the
assignee does not acquire the right of a holder in due course but has only the right, title
and interest of his assignor; on the other hand in the former case he acquires all the
rights of a holder in due course

F. Cases
a. Introduction
i. Metrobank v. CA, 194 SCRA 169
ii. Lozano v. Martinez, 146 SCRA 323
iii. Citibank v. Sabeniano, 504 SCRA 378
iv. Tibajia v. CA, 223 SCRA 567
v. PAL, Inc. v. CA, 181 SCRA 557
vi. Roman Catholic Bishop of Maloloas v. IAC, 191 SCRA 411
b. Negotiability
i. Phil. Education Co. v. Soriano, 39 SCRA 587
ii. Caltex Phil.v. CA, 212 SCRA 448
iii. Metrobank v. CA, 194 SCRA 168
iv. Sesbreno v. CA, 222 SCRA 466
v. Sales v. CA, 181 SCRA 296
c. Payable to bearer
i. Ang Tek Lian v. CA, 87 SCRA 363’

G. Form (Secs. 1-9)

Section 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.
Sec. 2. What constitutes certainty as to sum. - The sum payable is a sum certain
within the meaning of this Act, although it is to be paid:

(a) With interest; or

(b) By stated installments; or

(c) By stated installments, with a provision that, upon default in payment of any
installment or of interest, the whole shall become due; or

(d) With exchange, whether at a fixed rate or at the current rate; or

(e) With costs of collection or an attorney's fee, in case payment shall not be made at
maturity.

Sec. 3. When promise is unconditional. - An unqualified order or promise to pay is

unconditional within the meaning of this Act though coupled with:

(a) An indication of a particular fund out of which reimbursement is to be made or a

particular account to be debited with the amount; or

(b) A statement of the transaction which gives rise to the instrument. But an order or
promise to pay out of a particular fund is not unconditional.

Sec. 4. Determinable future time; what constitutes. - An instrument is payable at a

determinable future time, within the meaning of this Act, which is expressed to be
payable:

(a) At a fixed period after date or sight; or

(b) On or before a fixed or determinable future time specified therein; or

(c) On or at a fixed period after the occurrence of a specified event which is certain to
happen, though the time of happening be uncertain.

An instrument payable upon a contingency is not negotiable, and the happening of the
event does not cure the defect.

Sec. 5. Additional provisions not affecting negotiability. - An instrument which

contains an order or promise to do any act in addition to the payment of money is not
negotiable.

But the negotiable character of an instrument otherwise negotiable is not affected by a

provision which:

(a) Authorizes the sale of collateral securities in case the instrument be not paid at
maturity; or

(b) Authorizes a confession of judgment if the instrument be not paid at maturity; or

(c) Waives the benefit of any law intended for the advantage or protection of the obligor;
or
(d) Gives the holder an election to require something to be done in lieu of payment of
money.

But nothing in this section shall validate any provision or stipulation otherwise illegal.

Sec. 6. Omissions; seal; particular money. - The validity and negotiable character of
an instrument are not affected by the fact that:

(a) It is not dated; or

(b) Does not specify the value given, or that any value had been given therefor; or

(c) Does not specify the place where it is drawn or the place where it is payable; or

(d) Bears a seal; or

(e) Designates a particular kind of current money in which payment is to be made.

But nothing in this section shall alter or repeal any statute requiring in certain cases the
nature of the consideration to be stated in the instrument.

Sec. 7. When payable on demand. - An instrument is payable on demand:

(a) When it is so expressed to be payable on demand, or at sight, or on presentation; or

(b) In which no time for payment is expressed.

Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards

the person so issuing, accepting, or indorsing it, payable on demand.

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
was 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) When the only or last indorsement is an indorsement in blank.

H. Date, presumption as to. (Sec. 11)

Sec. 11. Date, presumption as to. - Where the instrument or an acceptance or any
indorsement thereon is dated, such date is deemed prima facie to be the true date of
the making, drawing, acceptance, or indorsement, as the case may be.

I. Ante-dated and post-dated (Sec. 12)

Sec. 12. Ante-dated and post-dated. - The instrument is not invalid for the reason only
that it is ante-dated or post-dated, provided this is not done for an illegal or fraudulent
purpose. The person to whom an instrument so dated is delivered acquires the title
thereto as of the date of delivery.

J. When date may be inserted (Sec. 13)

Sec. 13. When date may be inserted. - Where an instrument expressed to be payable
at a fixed period after date is issued undated, or where the acceptance of an instrument
payable at a fixed period after sight is undated, any holder may insert therein the true
date of issue or acceptance, and the instrument shall be payable accordingly. The
insertion of a wrong date does not avoid the instrument in the hands of a subsequent
holder in due course; but as to him, the date so inserted is to be regarded as the true
date.

K. Blanks; when may be filled (Sec. 14)

Sec. 14. Blanks; when may be filled. - Where the instrument is wanting in any
material particular, the person in possession thereof has a prima facie authority to
complete it by filling up the blanks therein. And a signature on a blank paper delivered
by the person making the signature in order that the paper may be converted into a
negotiable instrument operates as a prima facie authority to fill it up as such for any
amount. In order, however, that any such instrument when completed may be enforced
against any person who became a party thereto prior to its completion, it must be filled
up strictly in accordance with the authority given and within a reasonable time. But if any
such instrument, after completion, is negotiated to a holder in due course, it is valid and
effectual for all purposes in his hands, and he may enforce it as if it had been filled up
strictly in accordance with the authority given and within a reasonable time.

L. Incomplete instrument not delivered. (Sec. 15)

Sec. 15. Incomplete instrument not delivered. - Where an incomplete instrument has
not been delivered, it will not, if completed and negotiated without authority, be a valid
contract in the hands of any holder, as against any person whose signature was placed
thereon before delivery.

M. Delivery; when effectual; when presumed (Sec. 16)

Sec. 16. Delivery; when effectual; when presumed. - Every contract on a negotiable
instrument is incomplete and revocable until delivery of the instrument for the purpose
of giving effect thereto. As between immediate parties and as regards a remote party
other than a holder in due course, the delivery, in order to be effectual, must be made
either by or under the authority of the party making, drawing, accepting, or indorsing, as
the case may be; and, in such case, the delivery may be shown to have been
conditional, or for a special purpose only, and not for the purpose of transferring the
 property in the instrument. But where the instrument is in the hands of a holder in due
course, a valid delivery thereof by all parties prior to him so as to make them liable to
him is conclusively presumed. And where the instrument is no longer in the possession
of a party whose signature appears thereon, a valid and intentional delivery by him is
presumed until the contrary is proved.

a. Development Bank of the Phils. Sima Wei, 219 SCRA 383

FACTS: Sima Wei executed a promissory note in consideration of a loan secured from DBR in
the amount of P1,820,000. Sima Wei was able to pay partially for the loan but failed to pay the
balance. Subsequently, Sima Wei issued two crossed checks payable to DBR. For reasons not
shown, these two checks however were not delivered to the DBR but instead came into the
possession of respondent Lee Kian Huat, who deposited the checks without DBR's indorsement
to the account of respondent Plastic Corporation with Producers Bank. Inspite ofmthe fact that
the checks were crossed and payable to DBR and bore no indorsement of the latter, the Branch
Manager of Producers Bank authorized the acceptance of the checks for deposit and credited
them to the account of said Plastic Corporation. DBR instituted actions against the Sima Wei
and the other defendants. The trial court dismissed the case stating that DBR had no cause of
action against the defendants-respondents. CA affirmed this decision.

ISSUE: W/N petitioner Bank has a cause of action against any or all of the defendant
respondents?

RULING: A negotiable instrument, of which a check is, is not only a written evidence of a
contract right but is also a species of property. Just as a deed to a piece of land must be
delivered in order to convey title to the grantee, so must a negotiable instrument be delivered
to the payee in order to evidence its existence as a binding contract. Section 16 provides that
every contract on a negotiable instrument is incomplete and revocable until delivery of the
instrument for the purpose of giving effect thereto. Thus, the payee of the negotiable
instrument acquires no interest with respect thereto until its delivery to him. Without the initial
delivery of the instrument from the drawer to the payee, there can be no liability on the
instrument. Moreover, such delivery must be intended to give effect to the instrument.
Since petitioner Bank never received the checks on which it based its action against said
respondents, it never owned them (the checks) nor did it acquire any interest therein. Thus,
anything which the respondents may have done with respect to said checks could not have
prejudiced petitioner Bank. It had no right or interest in the checks which could have been
violated by said respondents. Petitioner Bank has therefore no cause of action against said
respondents, in the alternative or otherwise. If at all, it is Sima Wei, the drawer, who would have
a cause of action against her co-respondents, if the allegations in the complaint are found to
be true.

N. Negotiation (Sec. 30)

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 and completed by delivery.

O. Real Defenses and Personal Defenses

Real Defenses Personal Defenses

1. Minority 1. Failure or absence of consideration
2. Forgery 2. Illegal Consideration
3. Non-delivery of Incomplete Instrument 3. Non-delivery of complete instrument
4. Material Alteration 4. Conditional delivery of complete instrument
5. Ultra Vires act of Corporation 5. Fraud in inducement
6. Fraud in Factum or Esse Contractus 6. Filling up blank not within authority
7. Illegality – if declared void for any purpose 7. Duress or Intimidation
8. Vicious Force or Violence 8. Filling up blank beyond reasonable time
9. Wants of authority 9. Transfer in breach of faith
10. Prescription 10. Mistake
11. Discharge in Insolvency 11. Insertion of a wrong date
12. Ante-dating or Post-dating for illegal or
fraudulent purpose
 a. Differentiate fraud in factum & fraud in inducement

Fraud in factum is present when a person is induced to sign an instrument not

knowing its character as a note or bill. The person who signs the instrument does
not know that he is signing a negotiable instrument. Fraud in factum is a real
defense.

In fraud in inducement, the person who signs the instrument intends to sign the
same as a negotiable instrument but was induced to do so only through fraud; his
consent to issue a negotiable instrument was vitiated by fraud. Fraud in inducement
is a personal defense.

P. Persons who did not sign, but liable (Secs. 18, 19, 23, 65, 137)

Sec. 18. Liability of person signing in trade or assumed name. - No person is liable
on the instrument whose signature does not appear thereon, except as herein otherwise
expressly provided. But one who signs in a trade or assumed name will be liable to the
same extent as if he had signed in his own name.

Sec. 19. Signature by agent; authority; how shown. - The signature of any party may
be made by a duly authorized agent. No particular form of appointment is necessary for
this purpose; and the authority of the agent may be established as in other cases of
agency.

Sec. 23. Forged signature; effect of. - When a signature is forged or made without the
authority of the person whose signature it purports to be, it is wholly inoperative, and no
right to retain the instrument, or to give a discharge therefor, or to enforce payment
thereof against any party thereto, can be acquired through or under such signature,
unless the party against whom it is sought to enforce such right is precluded from
setting up the forgery or want of authority.

Sec. 65. Warranty where negotiation by delivery and so forth. — Every person
negotiating an instrument by delivery or by a qualified indorsement warrants:.
(a) That the instrument is genuine and in all respects what it purports to be;
(b) That he has a good title to it;
(c) That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which would impair the validity of the
instrument or render it valueless.

But when the negotiation is by delivery only, the warranty extends in favor of no holder
other than the immediate transferee. The provisions of subdivision (c) of this section do
not apply to a person negotiating public or corporation securities other than bills and
notes.

Sec. 137. Liability of drawee returning or destroying bill. - Where a drawee to whom
a bill is delivered for acceptance destroys the same, or refuses within twenty-four hours
after such delivery or within such other period as the holder may allow, to return the bill
accepted or non-accepted to the holder, he will be deemed to have accepted the same.

a) Persons who did not sign, but liable

1. One who signs in trade or assumed name (Sec. 18)
2. One who signs through an agent or authorized representative (Sec. 19)
3. Incapacitated persons who signs through their legal guardians;
4. Forger of signatures (Sec. 23)
5. Persons whose signatures were forged but only who are precluded from
setting up the defense of forgery (Sec. 23)
6. In case of constructive acceptance (Sec. 137)
7. Indorsers who sign on a separate piece of paper known as allonge; and
8. Persons who negotiate by mere delivery. They are liable for breach of
warranty although they did not sign (Sec. 65)
 Q. Persons who signed, but not liable (Secs. 20 & 21)

Sec. 20. Liability of person signing as agent, and so forth. - Where the instrument
contains or a person adds to his signature words indicating that he signs for or on behalf
of a principal or in a representative capacity, he is not liable on the instrument if he was
duly authorized; but the mere addition of words describing him as an agent, or as filling
a representative character, without disclosing his principal, does not exempt him from
personal liability.

Sec. 21. Signature by procuration; effect of. - A signature by "procuration" operates

as notice that the agent has but a limited authority to sign, and the principal is bound
only in case the agent in so signing acted within the actual limits of his authority.

a. PB Commerce vs. Aruego, 102 SCRA 530

Facts:
Jose Aruego obtained a credit accommodation from the Philippine Bank of Commerce to
facilitate the payment of printing of “World Current Events”, the periodical he is publishing.
Thus, for every printing of the periodical, the printer, Encal Press and Photo Engraving,
collected the cost of printing by drawing a draft against the plaintiff, said draft being sent later
to the defendant for acceptance. As an added security for the payment of the amounts
advanced to Encal Press and Photo-Engraving, the plaintiff bank also required defendant
Aruego to execute a trust receipt in favor of said bank wherein said defendant undertook to
hold in trust for plaintiff the periodicals and to sell the same with the promise to turn over to the
plaintiff the proceeds of the sale of said publication to answer for the payment of all obligations
arising from the draft. The Philippine Bank of Commerce instituted an action against Aruego to
recover the cost of printing of the latter’s periodical. Aruego however argues that he signed the
supposed bills of exchange only as an agent of the Philippine Education Foundation Company
where he is president.
Issue:
Whether Aruego can be held liable by the petitioner although he signed the supposed bills of
exchange only as an agent of Philippine Education Foundation Company.

Held:
Yes. Aruego did not disclose in any of the drafts that he accepted that he was signing as
representative of the Philippine Education Foundation Company. Aruego contends that he
signed the supposed bills of exchange as an agent of the Philippine Education Foundation
Company where he is president. Section 20 of the Negotiable Instruments Law provides that
"Where the instrument contains or a person adds to his signature words indicating that he
signs for or on behalf of a principal or in a representative capacity, he is not liable on the
instrument if he was duly authorized; but the mere addition of words describing him as an
agent or as filing a representative character, without disclosing his principal, does not exempt
him from personal liability." An inspection of the drafts accepted by the defendant shows that
nowhere has he disclosed that he was signing as a representative of the Philippine Education
Foundation Company. He merely signed as follows: "JOSE ARUEGO (Acceptor) (SGD) JOSE
ARGUEGO For failure to disclose his principal, Aruego is personally liable for the drafts he
accepted.

b. Francisco vs. CA, 319 SCRA 354 (1999)

FACTS:
A. Francisco Realty & Development Corporation (AFRDC), of which petitioner Francisco is the
president, entered into a Land Development and Construction Contract with private
respondent Herby Commercial & Construction Corporation (HCCC), represented by its
President and General Manager private respondent Ong. Under the contract, HCCC was to be
paid on the basis of the completed houses and developed lands delivered to and accepted by
AFRDC and the GSIS. Sometime in 1979, Ong discovered that Diaz and Francisco, the Vice-
President of GSIS, had executed and signed seven checks of various dates and amounts
payable to HCCC for completed and delivered work under the contract. Ong, however, claims
that these checks were never delivered to HCCC. It turned out that Francisco forged the
indorsement of Ong on the checks and indorsed the checks for a second time by signing her
name at the back of the checks, petitioner then deposited said checks in her savings account.
A case was brought by private respondents against petitioner to recover the value of said
checks. Petitioner however claims that she was authorized to sign Ong's name on the checks
by virtue of the Certification executed by Ong in her favor giving her the authority to collect all
the receivables of HCCC from the GSIS, including the questioned checks.

ISSUE:
Whether petitioner cannot be held liable on the questioned checks by virtue of the Certification
executed by Ong giving her the authority to collect such checks from the GSIS.

RULING:
Petitioner is liable. The Negotiable Instruments Law provides that where any person is under
obligation to indorse in a representative capacity, he may indorse in such terms as to negative
personal liability. An agent, when so signing, should indicate that he is merely signing in behalf
of the principal and must disclose the name of his principal; otherwise he shall be held
personally liable. Even assuming that Francisco was authorized by HCCC to sign Ong's name,
still, Francisco did not indorse the instrument in accordance with law. Instead of signing Ong's
name, Francisco should have signed her own name and expressly indicated that she was
signing as an agent of HCCC. Thus, the Certification cannot be used by Francisco to validate
her act of forgery.

R. Forgery (Sec. 23)

Sec. 23. Forged signature; effect of. - When a signature is forged or made without the
authority of the person whose signature it purports to be, it is wholly inoperative, and no
right to retain the instrument, or to give a discharge therefor, or to enforce payment
thereof against any party thereto, can be acquired through or under such signature,
unless the party against whom it is sought to enforce such right is precluded from
setting up the forgery or want of authority.

a. What is a discharge?
- it means release from further liability, obligation, or from the binding
effect of the negotiable instrument.

b. Cases about forgery:

i. Jai-Alai vs BPI

FACTS: Jai-Alai Corp. deposited 10 checks with BPI. The checks were from Ramirez, a sales
agent of the Inter-Island Gas were all payable to Inter-Island Gas Service, Inc. or order. Inter-
Island Gas discovered that all the indorsements made on the checks purportedly by its
cashiers were forgeries. BPI debited Jai-Alai's current account and forwarded to it the checks
containing the forged indorsements

ISSUE: W/N BPI had the right to debit.

HELD: YES.
BPI acted within legal bounds when it debited the petitioner's account. Having indorsed the
checks to respondent bank, petitioner is deemed to have given the warranty prescribed in
Section 66 of the NIL that every single one of those checks "is genuine and in all respects what
it purports to be." Respondent which relied upon the petitioner's warranty should not be held
liable for the resulting loss. The depositor of a check as indorser warrants that it is genuine and
in all respects what it purports to be. Jai Alai Corporation negligent in accepting the checks
without question from Antonio Ramirez notwithstanding that the payee was the Inter-Island
Gas Services, Inc. and it did not appear that he was authorized to indorse it.
**The depositor of a check as indorser warrants that it is genuine and in all respects what it
purports to be. Having indorsed the checks to respondent bank, petitioner is deemed to have
given the warranty prescribed in Section 66 of the NIL that every single one of those checks "
is genuine and in all respects what it purports to be."

ii. Republic Bank vs. Ebrada

FACTS:
On January 15, 1963, the Bureau of Treasury issued a back pay check to Martin Lorenzo in the
amount of P1,246.08. The drawee named therein was Republic Bank. The check was
subsequently indorsed to Ramon Lorenzo, then to Delia Dominguez and then to Mauricia
Ebrada. Ebrada encashed the check with the Republic Bank. Republic Bank paid the amount
of the check to Ebrada. Ebrada, upon receiving the cash, gave it to Dominguez; Dominguez in
turn gave the cash to Ramon Lorenzo.
Later, the Bureau of Treasury notified that the check was a forgery because the payee named
therein (Martin Lorenzo) was actually dead 11 years ago before the check was issued. Republic
Bank refunded the amount to the Bureau of Treasury. The bank then demanded Ebrada to
refund them.

ISSUES:
1) Whether the bank can recover from Ebrada who was the last indorser of the check with
the forged indorsement.
2) Whether the existence of one forged signature in the check will render void all the other
negotiations of the check with respect to the other parties whose signature are genuine.

RULING:
1) Republic Bank should suffer the loss when it paid the amount of the check in question to
Ebrada but it has the remedy to recover from the latter the amount it paid to her because as
last indorser of the check, she has warranted that she has good title to it even if in fact she did
not because the payee of the check was already dead 11 years before the check was issued.
2) The negotiation of the check in question from Martin Lorenzo, the original payee whose
indorsement was forged, to the second indorser, should be declared of no affect, but the
negotiation of the aforesaid check from the second indorser to the third indorser, and from the
third indorser to Ebrada who did not know of the forgery, should be considered valid and
enforceable, barring any claim of forgery.

**The existence of one forged signature in the check will not render void all the other
negotiations of the check with respect to the other parties whose signature are genuine. As
last indorser of the check, petitioner warranted that she has good title to it even if in fact she
did not because the payee of the check was already dead 11 years before the check was
issued.

iii. MWSS vs CA

FACTS: Metropolitan Waterworks and Sewerage System (MWSS) had an account with PNB.
When it was still called NAWASA, MWSS made a special arrangement with PNB so that it may
have personalized checks to be printed by Mesina Enterprises. These personalized checks
were the ones being used by MWSS in its business transactions. From March to May 1969,
MWSS issued 23 checks to various payees in the aggregate amount of P320,636.26. During the
same months, another set of 23 checks containing the same check numbers earlier issued were
forged. The aggregate amount of the forged checks amounted to P3,457,903.00. This amount
was distributed to the bank accounts of three persons: Arturo Sison, Antonio Mendoza, and
Raul Dizon. MWSS then demanded PNB to restore the amount of P3,457,903.00. PNB refused.
The trial court ruled in favor of MWSS but the Court of Appeals reversed the trial court’s
decision.

ISSUE: Whether or not PNB should restore the said amount.

HELD: No. MWSS is precluded from setting up the defense of forgery. It has been proven that
MWSS has been negligent in supervising the printing of its personalized checks. It failed to
provide security measures and coordinate the same with PNB. Further, the signatures in the
forged checks appear to be genuine as reported by the National Bureau of Investigation so
much so that the MWSS itself cannot tell the difference between the forged signature and the
genuine one. The records likewise show that MWSS failed to provide appropriate security
measures over its own records thereby laying confidential records open to unauthorized
persons. Even if the twenty-three (23) checks in question are considered forgeries, considering
the MWSS’s gross negligence, it is barred from setting up the defense of forgery under Section
23 of the Negotiable Instruments Law.

The Supreme Court further emphasized that forgery cannot be presumed. It must be
established by clear, positive, and convincing evidence. This was not done in the present case.

iv. Banco de Oro vs. Equitable Banking Corp.

FACTS
Equitable Bank drew six crossed manager’s check payable to certain member establishments
of Visa Card. Subsequently, the checks were deposited with Banco De Oro (BDO) to the credit
of its depositor. Following normal procedures and after stamping at the back of the checks the
usual endorsements,BDOsent the checks for clearing through the Philippine Clearing House
Corporation (PCHC). Accordingly, Equitable Banking paid the checks; its clearing account was
debited for the value of the checks and BDO’s clearing account was credited for the same
amount. Thereafter, Equitable Banking discovered that the endorsements appearing at the
back of the checks and purporting to be that of the payees were forged and/or unauthorized or
otherwise belong to persons other than the payees.Equitable Banking presented the checks
directly to BDO for the purpose of claiming reimbursement from the latter. However, BDO
refused to accept such direct presentation and to reimburse Equitable Banking for the value of
the checks.

ISSUES
(a) Whether or not BDO is estopped from claiming that checks under consideration are
nonnegotiable
instruments.
(b) Whether or not BDO can escape liability by reasons of forgery.
(c) Whether or not only negotiable checks are within the jurisdiction of PCHC.

RULING
(a) YES. BDO having stamped its guarantee of “all prior endorsements and/or lack of
endorsements” is now estopped from claiming that the checks under consideration are not
negotiable instruments. The checks were accepted for deposit by the petitioner stamping
thereon its guarantee, in order that it can clear the said checks with the respondent bank. By
such deliberate and positive attitude of the petitioner it has for all legal intents and purposes
treated the said cheeks as negotiable instruments and accordingly assumed the warranty of
the endorser when it stamped its guarantee of prior endorsements at the back of the checks. It
led the said respondent to believe that it was acting as endorser of the checks and on the
strength of this guarantee said respondent cleared the checks in question and credited the
account of the petitioner. Petitioner is now barred from taking an opposite posture by claiming
that the disputed checks are not negotiable instrument.

(b) NO. A commercial bank cannot escape the liability of an endorser of a check and which
may turn out to be a forged endorsement. Whenever any bank treats the signature at the back
of the checks as endorsements and thus logically guarantees the same as such there can be
no doubt said bank has considered the checks as negotiable.The collecting bank or last
endorser generally suffers the loss because it has the duty to ascertain the genuineness of all
prior endorsements considering that the act of presenting the check for payment to the drawee
is an assertion that the party making the presentment has done its duty to ascertain the
genuineness of the endorsements.

(c) NO. PCHC’s jurisdiction is not limited to negotiable checks only. The term check as used in
the said Articles of Incorporation of PCHC can only connote checks in general use in
commercial and business activities. Thus, no distinction. Ubi lex non distinguit, nec nos
distinguere debemus. Checks are used between banks and bankers and their customers, and
are designed to facilitate banking operations. It is of the essence to be payable on demand,
because the contract between the banker and the customer is that the money is needed on
demand.

v. Gempesaw vs CA

FACTS: Gempesaw owns and operates four grocery stores to pay their debts of her supplies,
she draws checks against her account she signed each and every crossed check without
bothering to verify the accuracy of the checks against the corresponding invoices because she
reposed full and implicit trust and confidence on her bookkeeper. Although the Bank notified
her of all checks presented to and paid by the bank, petitioner did not verify he correctness of
the returned checks, much less check if the payees actually received the checks in payment
for the supplies she received It was only after the lapse of more 2 years that petitioner found
out about the fraudulent manipulations of her bookkeeper. November 7, 1984: Gempesaw made
a written demand on respondent drawee Bank to credit her account with the money value of the
82 checks totalling P1,208.606.89 for having been wrongfully charged against her account
January 23, 1985: Gempesaw filed against Philippine Bank of Communications (drawee Bank)
for recovery of the money value of 82 checks charged against the Gempesaw's account on the
ground that the payees' indorsements were forgeries. RTC: dismissed the complaint CA:
affirmed Gempesaw gross negligence = promixate cause of the loss

ISSUE: Whether or not the bank should refund the money lost by reason of the forged
indorsements.
HELD: No. Gempesaw cannot set up the defense of forgery by reason of her negligence. As a
rule, a drawee bank (in this case the Philippine Bank of Communications) who has paid a
check on which an indorsement has been forged cannot charge the drawer’s (Gempesaw’s)
account for the amount of said check. An exception to this rule is where the drawer is guilty of
such negligence which causes the bank to honor such a check or checks. If a check is stolen
from the payee, it is quite obvious that the drawer cannot possibly discover the forged
indorsement by mere examination of his cancelled check. A different situation arises where the
indorsement was forged by an employee or agent of the drawer, or done with the active
participation of the latter.

The negligence of a depositor which will prevent recovery of an unauthorized payment is based
on failure of the depositor to act as a prudent businessman would under the circumstances. In
the case at bar, Gempesaw relied implicitly upon the honesty and loyalty of Galang, and did not
even verify the accuracy of amounts of the checks she signed against the invoices attached
thereto. Furthermore, although she regularly received her bank statements, she apparently did
not carefully examine the same nor the check stubs and the returned checks, and did not
compare them with the same invoices. Otherwise, she could have easily discovered the
discrepancies between the checks and the documents serving as bases for the checks. With
such discovery, the subsequent forgeries would not have been accomplished. It was not until
two years after Galang commenced her fraudulent scheme that Gempesaw discovered that
eighty-two (82) checks were wrongfully charged to her account, at which she notified the
Philippine Bank of Communications

vi. Associated Bank vs. CA

FACTS: The Province of Tarlac maintains a current account with the Philippine National Bank
(PNB) Tarlac Branch where the provincial funds are deposited. Checks issued by the Province
are signed by the Provincial Treasurer and countersigned by the Provincial Auditor or the
Secretary of the Sangguniang Bayan. A portion of the funds of the province is allocated to the
Concepcion Emergency Hospital drawn to the order of "Concepcion Emergency Hospital,
Concepcion, Tarlac" or "The Chief, Concepcion Emergency Hospital, Concepcion, Tarlac."
The checks are released by the Office of the Provincial Treasurer and received for the hospital
by its administrative officer and cashier. January 1981:Upon post-audit by the Provincial
Auditor, it was discovered that the hospital did not receive several allotment checks February
19, 1981: After the checks were examined, they learned that 30 checks of P203,300 were
encashed by Fausto Pangilinan, with the Associated Bank acting as collecting bank. Fausto
Pangilinan administrative officer and cashier of payee hospital until his retirement on February
28, 1978, collected the questioned checks from the office of the Provincial Treasurer sought to
encash the 1st check with Associated Bank Jesus David, manager of Associated Bank refused
and suggested that Pangilinan deposit the check in his personal savings account with the
same bank Pangilinan was able to withdraw the money when the check was cleared and paid
by the drawee bank, PNB. PNB did not return the questioned checks within twenty-four hours,
but several days later After forging the signature of Dr. Adena Canlas who was chief of the
payee hospital, Pangilinan followed the same procedure for the other checks. All the checks
bore the stamp of Associated Bank which reads "All prior endorsements guaranteed
ASSOCIATED BANK. CA affrimed RTC: Associated to reimburse PNB and ordering PNB to
pay Province of Tarlac

ISSUE: W/N PNB and Associated Bank should be held liable

HELD: YES. PARTIALLY GRANTED. The collecting bank, Associated Bank, shall be liable to
PNB for 50% of P203,300. A forged signature, whether it be that of the drawer or the payee, is
wholly inoperative and no one can gain title to the instrument through it. A person whose
signature to an instrument was forged was never a party and never consented to the contract
which allegedly gave rise to such instrument. EX: where "a party against whom it is sought to
enforce a right is precluded from setting up the forgery or want of authority." Parties who
warrant or admit the genuineness of the signature in question and those who, by their acts,
silence or negligence are estopped from setting up the defense of forgery, are precluded from
using this defense. Indorsers, persons negotiating by delivery and acceptors are warrantors of
the genuineness of the signatures on the instrument In bearer instruments, the signature of the
payee or holder is unnecessary to pass title to the instrument. Hence, when the indorsement is
a forgery, only the person whose signature is forged can raise the defense of forgery against a
holder in due course In order instruments, the signature of its rightful holder (here, the payee
hospital) is essential to transfer title to the same instrument. When the holder's indorsement is
forged all parties prior to the forgery may raise the real defense of forgery against all parties
subsequent thereto. An indorser of an order instrument warrants "that the instrument is
genuine and in all respects what it purports to be; that he has a good title to it; that all prior
parties had capacity to contract; and that the instrument is at the time of his indorsement valid
and subsisting A collecting bank where a check is deposited and which indorses the check
upon presentment with the drawee bank = indorser So even if the indorsement on the check
deposited by the banks's client is forged, the collecting bank is bound by his warranties as an
indorser and cannot set up the defense of forgery as against the drawee bank. The bank on
which a check is drawn, known as the drawee bank, is under strict liability to pay the check to
the order of the payee. The drawer's instructions are reflected on the face and by the terms of
the check. Payment under a forged indorsement is not to the drawer's order. then is that the
drawee bank may not debit the drawer's account and is not entitled to indemnification from the
drawer. 25 The risk of loss must perforce fall on the drawee bank.

GR: drawee bank may not debit the drawer's account and is not entitled to indemnification
from the drawer - risk of loss must perforce fall on the drawee bank

EX: if the drawee bank can prove a failure by the customer/drawer to exercise ordinary care
that substantially contributed to the making of the forged signature, the drawer is precluded
from asserting the forgery If at the same time the drawee bank was also negligent to the point
of substantially contributing to the loss, then such loss from the forgery can be apportioned
between the negligent drawer and the negligent bank In cases involving a forged check, where
the drawer's signature is forged, the drawer can recover from the drawee bank. In cases
involving checks with forged indorsements, the drawee bank canseek reimbursement or a
return of the amount it paid from the presentor bank or person However, a drawee bank has
the duty to promptly inform the presentor of the forgery upon discovery. If the drawee bank
delays in informing the presentor of the forgery, thereby depriving said presentor of the right to
recover from the forger, the former is deemed negligent and can no longer recover from the
presentor Under Section 4(c) of CB Circular No. 580, items bearing a forged endorsement shall
be returned within twenty-Sour (24) hours after discovery of the forgery but in no event beyond
the period fixed or provided by law for filing of a legal action by the returning bank. Section 23
of the PCHC Rules deleted the requirement that items bearing a forged endorsement should be
returned within twenty-four hours. Since PNB did not return the questioned checks within
twenty-four hours, but several days later, Associated Bank alleges that PNB should be
considered negligent and not entitled to reimbursement of the amount it paid on the checks.
More importantly, by reason of the statutory warranty of a general indorser in section 66 of the
Negotiable Instruments Law, a collecting bank which indorses a check bearing a forged
indorsement and presents it to the drawee bank guarantees all prior indorsements, including
the forged indorsement In this case, the checks were indorsed by the collecting bank
(Associated Bank) to the drawee bank (PNB) The stamp guaranteeing prior indorsements is
not an empty rubric which a bank must fulfill for the sake of convenience It is within the bank's
discretion to receive a check for no banking institution would consciously or deliberately
accept a check bearing a forged indorsement. When a check is deposited with the collecting
bank, it takes a risk on its depositor.

vii. Metrobank vs. First National City Bank

FACTS: August 25, 1964: Check dated July 8, 1964 for P50,000.00, payable to CASH, drawn
by Joaquin Cunanan & Company on First National City Bank (FNCB) was deposited with
Metropolitan Bank and Trust Company (Metro Bank) by Salvador Sales. Earlier that day, Sales
had opened a current account with Metro Bank depositing P500.00 in cash Metro Bank
immediately sent the cash check to the Clearing House of the Central Bank with the following
words stamped at the back of the check: Metropolitan Bank and Trust Company Cleared
(illegible) office All prior endorsements and/or Lack of endorsements Guaranteed. The check
was cleared the same day. Private respondent paid petitioner through clearing the amount of
P50,000.00, and Sales was credited with the said amount in his deposit with Metro Bank.
August 26, 1964: Sales made his 1st withdrawal of P480.00 from his current account August
28, 1964: he withdrew P32,100.00 August 31, 1964: he withdrew the balance of P17,920 and
closed his account with Metro Bank September 3, 1964: FNCB returned cancelled Check to
drawer Joaquin Cunanan & Company, together with the monthly statement of the company's
account with FNCB. notified FNCB that the check had been altered actual amount of P50.00
was raised to P50,000.00 name of the payee, Manila Polo Club, was superimposed the word
CASH. September 10, 1964: FNCB wrote Metro Bank asking for reimbursement June 29,
1965: FNCB filed for recovery CA affirmed Trial Court: Metro Bank to reimburse FNCB

ISSUE: W/N Metrobank should reimsburse FNCB for the altered amount as indorser

HELD: NO. FNCB liable. Under the procedure prescribed, the drawee bank receiving the check
for clearing from the Central Bank Clearing House must return the check to the collecting bank
within the 24-hour period if the check is defective for any reason. - FNCB failed to do so
indorsement must be read together with the 24-hour regulation on clearing House Operations
of the Central Bank Metro Bank can not be held liable for the payment of the altered check.
Moreover, FNCB did not deny the allegation of Metro Bank that before it allowed the
withdrawal of the balance of P17,920.00 by Salvador Sales, Metro Bank withheld payment and
first verified, through its Assistant Cashier Federico Uy, the regularity and genuineness of the
check deposit from Marcelo Mirasol, Department Officer of FNCB, because its (Metro Bank)
attention was called by the fast movement of the account.

viii. Republic Bank vs. CA

FACTS: On January 25, 1966, San Miguel Corporation (SMC) issued a P240.00 check in favor
of Roberto Delgado against SMC’s account with the First National City Bank (FNCB). Delgado
fraudulently changed the amount written on the check to P9,240.00. Delgado made a check
deposit with Republic Bank. Republic Bank accepted the check and endorsed it to FNCB by
stamping on the back of the check “all prior and/or lack of indorsement guaranteed“. The
check cleared and FNCB paid Republic Bank P9,240.00.

On April 19, 1966, SMC notified FNCB that the check involved was forged. FNCB refunded
SMC the amount of the check. On May 19, 1966, FNCB informed Republic bank about the
forgery, by then Delgado withdrew his account from Republic Bank. On August 15, 1966,
FNCB demanded Republic Bank to refund the amount of the check.

ISSUE: Whether or not Republic Bank should refund the amount to FNCB.

HELD: No. The 24-hour clearing house rule embodied in Section 4(c) of Central Bank Circular
No. 9, as amended, applies to this case. This rule mandates banks that after a clearing, all
cleared items must be returned not later than 3:00 PM of the following business day.
It is true that when an endorsement is forged, the collecting bank or last endorser, as a general
rule, bears the loss. But the unqualified endorsement of the collecting bank on the check
should be read together with the 24-hour regulation on clearing house operation. Thus, when
the drawee bank (FNCB) fails to return a forged or altered check to the collecting bank
(Republic Bank) within the 24-hour clearing period, the collecting bank is absolved from
liability.

ix. Phil. Commercial Int’l Bank vs CA

FACTS:
Ford drew and issued a crossed check in favor of the Commissioner of Internal Revenue (CIR)
as payment of its percentage or manufacturer’s sales taxes. The check was deposited with
Philippine Commercial International Bank (PCIBank) and was subsequently cleared. Upon
presentment with Citibank, the proceeds were paid to PCIBank. In a letter by the Acting CIR,
Ford was officially informed that its check was not paid to the government or its authorized
agent but were encashed by unauthorized persons. An investigation revealed that Ford’s
general ledger accountant had recalled the check purportedly because of an error in the
computation of the tax due. With his instruction, PCIBank replaced the check with two of its
own Manager’s Checks which were subsequently deposited with another bank.

ISSUE(S): W/N PCIBank is liable to reimburse Ford for the payment of the crossed check.

RULING:
YES. The crossing of the check with the phrase “Payee’s Account Only,” is a warning that the
check should be deposited only in the account of the CIR. Thus, it is the duty of the collecting
bank PCIBank to ascertain that the check be deposited in payee’s account only. It is bound to
scrutinize the check and to know its depositors before it could make the clearing indorsement
“all prior indorsements and/or lack of indorsement guaranteed.” Having established that the
collecting bank’s negligence is the proximate cause of the loss, we conclude that PCIBank is
liable in the amount corresponding to the proceeds of the forged check.

x. Ramon Rosario vs. CA

FACTS: Ramon K. Ilusorio, a prominent businessman, entrusted to his secretary, Katherine E.

Eugenio, his credit cards and his checkbook with blank checks, as well as the verification and
reconciliation of said checking account. Due to this, Eugenio was able to encash and deposit
to her personal account about seventeen (17) checks drawn against the account of Ilusorio at
the respondent bank, Manila Banking Corporation, with an aggregate amount of P119,634.34.
Such fact was not known to Ilusorio, until a business partner asked him whether he had
entrusted his credit card to his secretary because the said partner had seen her used the
same. Prompted by this, he was minded to verify the records of his account. Thereafter,
Ilusorio fired Eugenio and filed a case of estafa thru falsification. Consequently, the bank also
filed a case of estafa thru falsification of commercial documents against her. Petitioner then
requested the bank to credit back and restore to its account the value of the checks which
were wrongfully encashed but the latter refused; hence, the instant case. RTC and CA dis
missed the case for there is no sufficient basis on the plaintiff’s cause.

ISSUE: Whether or not Ilusorio has a cause of action against Manila Banking Corporation
Whether or not Manila Bank had no authority to pay the forged check

RULING: No. The Court ruled that in order to be entitled to damages, the petitioner has the
burden of proving negligence on the part of the bank for failure to detect the discrepancy in the
signatures on the checks. It is incumbent upon petitioner to establish the fact of forgery, which
he failed to do so. It was clear in this case that respondent bank took all the precautions in
verifying the same. Moreover, it appears that petitioner accorded his secretary unusual degree
of trust and unrestricted access to his credit cards, passbooks, check books, bank statements,
including custody and possession of cancelled checks and reconciliation of accounts, which
caused him added injury. The contention of the petitioner that the bank had no authority to pay
the forged check is correct. It is a rule that when a signature is forged or made without the
authority of the person whose signature it purports to be, the check is wholly inoperative. No
right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof
against any party, can be acquired through or under such signature. However, the rule does
provide for an exception, namely: unless the party against whom it is sought to enforce such
right is precluded from setting up the forgery or want of authority. In the instant case, it is the
exception that applies. The Supreme Court held that the petitioner is precluded from setting up
the forgery, assuming there is forgery, due to his own negligence in entrusting to his secretary
his credit cards and checkbook including the verification of his statements of account.

xi. Samsung Construction vs. FEBTC and CA

FACTS: Samsung Construction maintained a current account with Far East Bank and Trust
Bank (FETBC) in its Bel-Air Makati Branch, with Jong Kyu Lee who is the Project Manager as
the sole signatory and Kyu Yong Lee having the checks in his custody as the company’s
accountant. A certain Roberto Gonzaga presented an FETBC Check on the same branch. The
check was payable to cash and drawn against the account of Samsung Construction
amounting to P995, 500.00. The teller and the bank officers were satisfied with the
genuineness of the signature in the check and confirmed the identity of Gonzaga with the
assistant accountant of Samsung Construction who was also familiar and known to them, the
latter being present at the bank premises at that time. In the end, the check was authorized to
be encashed. The Project Manager and the Accountant of the company found out the next day
that the last blank check was missing and that the chec k was encashed with Jong’s signature
being forged. Samsung Construction demanded reimbursement of the amount encashed and
when it was not heeded immediately, it filed a Complaint against the bank for violation of Sec.
23 of Negotiable Instruments Law. In the RTC, it held that Jong’s signature on the check was
forged and ordered the bank to pay company for the amount plus interest. During appeal in
CA, this decision was reversed by stating that even assuming there was forgery, it occurred
due to the negligence of Samsung Construction specifically the accountant for lack of care in
keeping the checks. The decision was appealed to SC, based on the grounds that the CA
misapprehended the facts and erred when it said that the company has been negligent in
safekeeping the check.

ISSUE: Is bank liable to reimburse the amount encashed through forgery?

RULING: Yes, the bank is liable to pay Samsung Construction. Therefore, the decision of CA is
set aside. Under Sec. 23 of Negotiable Instruments Law, forgery is a real or absolute defense
by the party whose signature is forged. The general rule remains that the drawee who has paid
upon the forged signature bears the loss. The exception to this rule arises only when
negligence can be traced on the part of the drawer whose signature was forged, and the need
arises to weigh the comparative negligence between the drawer and the drawee to determine
who should bear the burden of loss. The Court finds no basis to conclude that Samsung
Construction was negligent in the safekeeping of its checks especially that Samsung
Construction reported the forgery almost immediately upon discovery. The general rule
imputing liability on the drawee who paid out on the forgery holds in this case. The
circumstances should have aroused the suspicion of the bank, as it is not ordinary business
practice for a check for such large amount to be made payable to cash or to bearer, instead of
to the order of a specified person. Extraordinary diligence dictates that FEBTC should have
ascertained from Jong personally that the signature in the questionable check was his. Still,
even if the bank performed with utmost diligence, the drawer whose signature was forged may
still recover from the bank as long as he or she is not precluded from setting up the defense of
forgery. After all, Section 23 of the Negotiable Instruments Law plainly states that no right to
enforce the payment of a check can arise out of a forged signature. Since the drawer, Samsung
Construction, is not precluded by negligence from setting up the forgery, the general rule
should apply. Consequently, if a bank pays a forged check, it must be considered as paying
out of its funds and cannot charge the amount so paid to the account of the depositor. A bank
is liable, irrespective of its good faith, in paying a forged check

S. Material Particulars (Secs. 124-125)

i. PNB vs CA

FACTS: A check with serial number 7-3666-223-3, dated August 7, 1981 in the amount of
P97,650.00 was issued by the Ministry of Education and Culture payable to F. Abante
Marketing. This check was drawn against Philippine National Bank (herein petitioner).
F. Abante Marketing, a client of Capitol City Development Bank (Capitol), deposited the
questioned check in its savings account with said bank. In turn, Capitol deposited the same in
its account with the Philippine Bank of Communications (PBCom) which, in turn, sent the
check to petitioner for clearing.

Petitioner cleared the check as good and, thereafter, PBCom credited Capitol’s account for the
amount stated in the check. However, petitioner PNB returned the check to PBCom and
debited PBCom’s account for the amount covered by the check, the reason being that there
was a “material alteration” of the check number.

PBCom, as collecting agent of Capitol, then proceeded to debit the latter’s account for the
same amount. On the other hand, Capitol could not, in turn, debit F. Abante Marketing’s
account since the latter had already withdrawn the amount of the check.

ISSUE: WHETHER OR NOT AN ALTERATION OF THE SERIAL NUMBER OF A CHECK IS A

MATERIAL ALTERATION UNDER THE NEGOTIABLE INSTRUMENTS LAW.

HELD: No. An alteration is said to be material if it alters the effect of the instrument. It means
an unauthorized change in an instrument that purports to modify in any respect the obligation
of a party or an unauthorized addition of words or numbers or other change to an incomplete
instrument relating to the obligation of a party.In other words, a material alteration is one which
changes the items which are required to be stated under Section 1 of the Negotiable
Instrument Law

The case at the bench is unique in the sense that what was altered is the serial number of the
check in question, an item which, it can readily be observed, is not an essential requisite for
negotiability under Section 1 of the Negotiable Instruments Law. The aforementioned alteration
did not change the relations between the parties. The name of the drawer and the drawee
were not altered. The intended payee was the same. The sum of money due to the payee
remained the same.

If the purpose of the serial number is merely to identify the issuing government office or
agency, its alteration in this case had no material effect whatsoever on the integrity of the
check. The identity of the issuing government office or agency was not changed thereby and
the amount of the check was not charged against the account of another government office or
agency which had no liability under the check.

Petitioner, thus cannot refuse to accept the check in question on the ground that the serial
number was altered, the same being an immaterial or innocent one.

ii. Montinola vs PNB

FACTS: In May 1942, Ubaldo Laya, as provincial treasurer of Misamis Oriental issued a
P100,000.00 Philippine National Bank (PNB) check to Mariano Ramos. The said check was to
be used by Ramos, as disbursing officer of the US forces at that time, for military purposes.
Before Ramos can encash the check, he was made a prisoner of war by the invading
Japanese forces. When he got free in December 1944, he needed some cash for himself and
so he went to a certain Enrique Montinola and made arrangements.

On the back of the check, Ramos wrote: Pay to the order of Enrique P. Montinola P30,000 only.
The balance to be deposited in the Philippine National Bank to the credit of M. V. Ramos.

In consideration thereof, Montinola promised to pay 85,000 in Japanese notes (that time peso
notes are valued higher). However, he was only able to pay 45k in Japanese notes to Ramos.
Later, Montinola sought to have the check encashed but PNB dishonored the check. It appears
that there was an insertion made. Under the signature of Laya, the words “Agent, Philippine
National Bank” was inserted, thus making it appear that Laya disbursed the check as an agent
of PNB and not as provincial treasurer of Misamis Oriental (NOTE: at that time, a provincial
treasurer is an ex officio agent of the government’s bank).

ISSUE: Whether or not the subject check is a negotiable instrument.

HELD: No. It was not negotiated according to the Negotiable Instruments Law (NIL) hence it is
not a negotiable instrument. There was only a partial indorsement and not a negotiation
contemplated under the NIL. Only P30k of the P100k amount of the check was indorsed. This
merely make Montinola a mere assignee – and this is the clear intent of Ramos. Ramos was
merely assigning P30k to Montinola. Montinola may therefore not be regarded as an indorsee
and PNB has all the right to dishonor the check. As mere assignee, he is subject to all defenses
available to the drawer Provincial Treasurer of Misamis Oriental and against Ramos.

Anent the issue of alteration, the apparent purpose of which is to make the drawee (PNB) the
drawer against which Montinola can recover from directly. Such material alteration which was
done by Montinola without the consent of the parties liable thereon discharges the instrument,
pursuant to Sec. 124 of the NIL.

Montinola cannot be said to be a holder. He is an assignee. And even if he is a holder, he is not

in good faith because he did not pay the full amount of the consideration for which the P30k
was issued to him – he only paid 45k Japanese notes out of the 90k Japanese notes
consideration.

At any rate, even assuming that there is proper negotiation, Montinola can no longer encash
said check because when he sought to have it encashed in January 1945, it is already stale
there being two and half years passing since its time of issuance.

T. Accommodation Party (Sec. 29)

i. Sadaya vs. Sevilla

FACTS:
Sadaya, Sevilla and Varona signed solidarily a promissory note in favor of the bank. Varona
was the only one who received the proceeds of the note. Sadaya and Sevilla both signed
as co-makers to accommodate Varona. Thereafter, the bank collected from Sadaya. Varona
failed to reimburse.
Consequently, Sevilla died and intestate estate proceedings were established.
Sadaya filed a creditor’s claim on his estate for the payment he made on the note. The
administrator resisted the claim on the ground that Sevilla didn't receive any proceeds of
the loan. The trial court admitted the claim of Sadaya though this was reversed by the CA.

ISSUE: W/N Sadaya can claim

HELD:
Sadaya could have sought reimbursement from Varona, which is right and just as the latter
was the only one who received value for the note executed. There is an implied contract
of indemnity between Sadaya and Varona upon the former’s payment of the obligation to the
bank.

Surely enough, the obligations of Varona and Sevilla to Sadaya cannot be joint and several.
For indeed, had payment been made by Varona, Varona couldn't have reason to seek
reimbursement from either Sadaya or Sevilla. After all, proceeds of the loan only wento Varona.
On principle, a solidary accommodation maker—who made payment—has the right to
contribution, from his co-accomodation maker, in the absence of agreement to the contrary
between them, subject to conditions imposed by law. This right springs from an implied
promise to share equally the burdens thay may ensue from their having consented to
stamp their signatures on the promissory note.

The following are the rules:

1. A joint and several accommodation maker of a negotiable promissory note may
demand from the principal debtor reimbursement for the amount that he paid to the payee
2. A joint and several accommodation maker who pays on the said promissory note
may directly demand reimbursement from his co-accommodation maker without first directing
his action against the principal debtor provided that
a. He made the payment by virtue of a judicial demand
b. A principal debtor is insolvent.

It was never shown that there was a judicial demand on Sadaya to pay the obligation and also,
it was never proven that Varona was insolvent. Thus, Sadaya cannot proceed against Sevilla
for reimbursement.

ii. Crisologo-Jose vs. CA

FACTS: Plaintiff Ricardo S. Santos, Jr. was the vice-president of Mover Enterprises, Inc.
incharge of marketing and sales; and the president of the said corporation was Atty. Oscar Z.
Benares. Atty. Benares, in accommodation of his clients, the spouses Jaime and Clarita Ong,
issued check against Traders Royal Bank, payable to defendant Ernestina Crisologo-Jose.
Since the check was under the account of Mover Enterprises, Inc., the same was to be signed
by its president, Atty. Oscar Z. Benares, and the treasurer of the said corporation. However,
since at that time, the treasurer of Mover Enterprises was not available, Atty. Benares prevailed
upon the plaintiff, Ricardo S. Santos, Jr., to sign the aforesaid check. The check was issued to
defendant Ernestina Crisologo-Jose in consideration of the waiver or quitclaim by said
defendant over a certain property which the Government Service Insurance System (GSIS)
agreed to sell to the spouses Jaime and Clarita Ong, with the understanding that upon
approval by the GSIS of the compromise agreement with the spouses Ong, the check will be
encashed accordingly. Since the compromise agreement was not approved within the
expected period of time, the aforesaid check was replaced by Atty. Benares. This replacement
check was also signed by Atty. Oscar Z. Benares and by the plaintiff Ricardo S. Santos, Jr.
When defendant deposited this replacement check with her account at Family Savings Bank,
Mayon Branch, it was dishonored for insufficiency of funds. The petitioner filed an action
against the corporation for accommodation party.

ISSUE: WON the corporation can be held liable as accommodation party?

HELD: No. Accommodation party liable on the instrument to a holder for value, although such
holder at the time of taking the instrument knew him to be only an accommodation party, does
not include nor apply to corporations which are accommodation parties. This is because the
issue or indorsement of negotiable paper by a corporation without consideration and for the
accommodation of another is ultra vires. Hence, one who has taken the instrument with
knowledge of the accommodation nature thereof cannot recover against a corporation where it
is only an accommodation party. If the form of the instrument, or the nature of the transaction,
is such as to charge the indorsee with knowledge that the issue or indorsement of the
instrument by the corporation is for the accommodation of another, he cannot recover against
the corporation thereon. By way of exception, an officer or agent of a corporation shall have
the power to execute or indorse a negotiable paper in the name of the corporation for the
accommodation of a third person only if specifically authorized to do so. Corollarily, corporate
officers, such as the president and vice-president, have no power to execute for mere
accommodation a negotiable instrument of the corporation for their individual debts or
transactions arising from or in relation to matters in which the corporation has no legitimate
concern. Since such accommodation paper cannot thus be enforced against the corporation,
especially since it is not involved in any aspect of the corporate business or operations, the
inescapable conclusion in law and in logic is that the signatories thereof shall be personally
liable therefor, as well as the consequences arising from their acts in connection therewith.

iii. Stelco Marketing vs CA

FACTS:
Petitioner was engaged in the distribution and sale of structural steel bars. RYL bought on
several occasion large quantities of steel bars but the same were never paid for despite several
demands by petitioner.
On a relevant date, RYL gave to Armstrong Industries a check in payment of its obligations.
The check was drawn by Steelweld Corporation—allegedly the owner of RYL persuaded the
president of Steelweld to accommodate the former in its obligation. The check, when deposited
was thereafter dishonored due to insufficient funds. A case ensued for violations of BP22 but
the case was dismissed as the check was held to be for accommodation purposes only.

Thereafter a complaint was filed by petitioner against RYL and Steelweld for the
recovery of sum of money in payment of the steel bars ordered. RYL was nowhere to
be found that is why the proceedings commenced as against Steelweld only. The trial
court decided in favor of petitioner but this was reversed by the CA.

ISSUE: W/N liable as accommodation party?

HELD:
Petitioner contends that the acquittal of Lim and Tianson didn't operate to release Steelweld
from its liability as an accommodation party. Noteworthy is that neither said pronouncement
nor any other part of the judgment of acquittal declared it liable to petitioner. To be sure,
as regards an accommodation party, the condition of lack of notice of any infirmity or
defect in title of the persons negotiating it is of no application since the law preserves the
right of recourse of a holder for value against an
accommodation party notwithstanding knowledge that at the time of taking the instrument,
knew him only as an accommodation party.

Further, there is no evidence to show that petitioner possessed the check before the
instrument’s presentment and dishonor. In what transpired during the transactions
involving the check, evidence and facts show that there was any participation or intervention
on the part of petitioner. What the record shows is that only after the check was
deposited and dishonored, petitioner came into possession of it in some way and was able to
give it in evidence at the trial of the civil case it has instituted against the drawers of the check.

iv. Travel-On vs CA

FACTS:
Petitioner was a travel agency involved in ticket sales on a commission basis for and
on behalf of different airline companies. Miranda has a revolving credit line with the
company. He procured tickets on behalf of others and derived commissions from it.
Petitioner filed a collection suit against Miranda for the unpaid amount of six checks.
Petitioner alleged that Miranda procured tickets from them which he paid with cash and
checks but the checks were dishonored upon presentment to the bank. This was being
refuted by Miranda by saying that he actually paid for his obligations, even in the excess. He
argued that the checks were for accommodation purposes only. The company needed to show
to its Board of Directors that its accounts receivable was in good standing. The RTC and CA
held Miranda not to be liable.

ISSUE: W/N Miranda is liable for the 6 dishonored checks because there was no
accomodation?

HELD:
Reliance by the lower and appellate court on the company’s financial statements were
wrong, to see if Miranda was liable or not. This financial statements were actually not updated
to show that there was indebtedness on the part of Miranda. The best evidence that the
courts should have looked at were the checks itself. There is a prima facie presumption that a
check was issued for valuable consideration and the provision puts the burden upon the
drawer to disprove this presumption. Miranda was unable to relieve himself of this burden.
Only clear and convincing evidence and not mere self-serving evidence of drawer can rebut
this presumption. The company was entitled to the benefit conferred by the statutory
provision. Miranda failed to show that the checks weren’t issued for any valuable
consideration. The checks were clear by stating that the company was the payee and not a
mere accommodated party. And also, notice was given to the fact that the checks were issued
after a written demand by the company regarding Miranda’s unpaid liabilities.

v. BPI vs. CA

FACTS:
A certain Henry Chan owned a Continental Bank Manager’s Check payable to "cash" in the
amount of Two Thousand Five Hundred Dollars ($2,500.00). Chan went to the office of
Benjamin Napiza and requested him to deposit the check in his dollar account by way of
accommodation and for the purpose of clearing the same. Private respondent acceded, and
agreed to deliver to Chan a signed blank withdrawal slip, with the understanding that as soon
as the check is cleared, both of them would go to the bank to withdraw the amount of the
check upon private respondent’s presentation to the bank of his passbook. Napiza thus
endorsed the check and deposited it in a Foreign Currency Deposit Unit (FCDU) Savings
Account he maintained with BPI. Using the blank withdrawal slip given by private respondent
to Chan, one Ruben Gayon, Jr. was able to withdraw the amount of $2,541.67 from Napiza's
FCDU account. It turned out that said check deposited by private respondent was a
counterfeit check.

*When BPI demanded the return of $2,500.00, private respondent claimed that he deposited
the check "for clearing purposes" only to accommodate Chan.

**Petitioner claims that private respondent, having affixed his signature at the dorsal side of the
check, should be liable for the amount stated therein in accordance with the provision of the
Negotiable Instruments Law on the liability of a general indorser (Sec. 66).

ISSUE:
Whether private respondent is obliged to return the money paid out by BPI on a counterfeit
check even if he deposited the check "for clearing purposes" only to accommodate Chan.
Whether or not respondent Napiza is liable under his warranties as a general indorser.

RULING:
Ordinarily private respondent may be held liable as an indorser of the check or even as an
accommodation party. However, petitioner BPI, in allowing the withdrawal of private
respondent’s deposit, failed to exercise the diligence of a good father of a family. BPI violated
its own rules by allowing the withdrawal of an amount that is definitely over and above the
aggregate amount of private respondent’s dollar deposits that had yet to be cleared. The
proximate cause of the eventual loss of the amount of $2,500.00 on BPI's part was its
personnel’s negligence in allowing such withdrawal in disregard of its own rules and the
clearing requirement in the banking system. In so doing, BPI assumed the risk of incurring a
loss on account of a forged or counterfeit foreign check and hence, it should suffer the
resulting damage.

vi. Agro Conglomerates vs CA

FACTS:
Petitioner sold to Wonderland Food Industries two parcels of land. They stipulated
under a Memorandum of Agreement that the terms of payment would be P1,000,000 in
cash, P2,000,000 in shares of stock, and the balance would be payable in monthly
installments. Thereafter, an addendum was executed between them, qualifying the cash
payment. Instead of cash payment, the vendee authorized the vendor to obtain a loan from the
financier on which the vendee bound itself to pay for. This loan was to cover for the payment of
P1,000,000. This addendum was not notarized.

Petitioner Soriano signed as maker the promissory notes payable to the bank. However,
the petitioners failed to pay the obligations as they were due. During that time, the bank
was in financial distress and this prompted it to endorse the promissory notes for
collection. The bank gave ample time to petitioners then to satisfy their obligations.
The trial court held in favor of the bank. It didn't find merit to the contention that
Wonderland was the one to be held liable for the promissory notes.

ISSUE: W/N Agro should be liable because there was no accomodation or surety?

HELD:
YES. First, there was no contract of sale that materialized. The original agreement was
that Wonderland would pay cash and petitioner would deliver possession of the
farmlands. But this was changed through an addendum, that petitioner would instead
secure a loan and the settlement of the same would be shouldered by Wonderland.
Petitioners became liable as accommodation parties. They have the right after paying the
instrument to seek reimbursement from the party accommodated, since the relation
between them has in effect became one of principal and surety.

Furthermore, as it turned out, the contract of surety between Woodland and petitioner
was extinguished by the rescission of the contract of sale of the farmland. With the rescission,
there was confusion in the persons of the principal debtor and surety. The addendum
thereon likewise lost its efficacy.

U. Who is a Holder in Due Course (Secs. 52 & 59)

a. De Ocampo vs Gatchalian

FACTS: 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:
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 he’s 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 latter’s title to the
check was or the nature of his possession.

There were obvious instances to show that the check was negligently acquired like plaintiff
having no liability with defendant and that the check was crossed. Plaintiff failed to exercise
prudence and caution. Plaintiff should have asked questions to further inquire upon suspicion.
The presumption of good faith did not apply to plaintiff because the defect was apparent on
the instruments face – it was not payable to defendant or bearer.

b. Mesina vs. IAC

FACTS: Jose Go maintains an account with Associated Bank. He needed to transfer

P800,000.00 from Associated Bank to another bank but he realized that he does not want to be
carrying that cash so he bought a cashier’s check from Associated Bank worth P800,000.00.
Associated Bank then issued the check but Jose Go forgot to get the check so it was left on top
of the desk of the bank manager. The bank manager, when he found the check, entrusted it to
Albert Uy for the later to safe keep it. The check was however stolen from Uy by an Alexander
Lim. Jose Go learned that the check was stolen son he made a stop payment order against the
check. Meanwhile, Associated Bank received the subject check from Prudential Bank for
clearing. Apparently, the check was presented by a certain Marcelo Mesina for payment.
Associated Bank dishonored the check. When asked how Mesina got hold of the check, he
merely stated that Alfredo Lim, who’s already at large, paid the check to him for “a certain
transaction”.

ISSUE: Whether or not Mesina is a holder in due course?

HELD: NO. Admittedly, Mesina became the holder of the cashier’s check as endorsed by
Alexander Lim who stole the check. Mesina however refused to say how and why it was
passed to him. Mesina had therefore notice of the defect of his title over the check from the
start. The holder of a cashier’s check who is not a holder in due course cannot enforce such
check against the issuing bank which dishonors the same. The check in question suffers from
the infirmity of not having been properly negotiated and for value by Jose Go who is the real
owner of said instrument.

Petitioner cannot raise as arguments that a cashier’s check cannot be countermanded

from the hands of a holder in due course and that a cashier’s check is a check
drawn by the bank against itself. Petitioner failed to substantiate that he was a holder
in due course. Upon questioning, he admitted that he got the check from Lim who
stole the check. He refused to disclose how and why it has passed to him. It simply means
that he has notice of the defect of his title over the check from the start. The holder of a
cashier’s check who is not a holder in due course cannot enforce payment against the
issuing bank which dishonors the same. If a payee of a cashier’s check obtained it from the
issuing bank by fraud, or if there is some other reason why the payee is not entitled to
collect the check, the bank would of course have the right to refuse payment of the
check when presented by payee, since the bank was aware of the facts surrounding the loss of
the check in question.

V. Consideration, presumption (Sec. 24)

a. Value, what constitutes (Sec. 25)
b. Holder for Value (Sec. 26)
c. When lien on instruments constitutes holder for value (Sec. 27)
d. Effect of want of consideration (Sec. 28)
i. Absence or failure
ii. Illegal Consideration

1. Pineda vs. Delarama (assigned during class)

FACTS: Jose Dela Rama is a practising lawyer whose services were retained by Jesus Pineda
for the purpose of making representations with the chairman and general manager of the
National Rice and Corn Administration (NARIC) to stop or delay the institution of criminal
charges against Pineda who allegedly misappropriated 11,000 cavans of palay deposited at his
ricemill in Concepcion, Tarlac. The NARIC general manager was allegedly an intimate friend of
Dela Rama.

According to Dela Rama, petitioner Pineda has used up all his funds to buy a big hacienda in
Mindoro and, therefore, borrowed the P9,300.00 subject of his complaint for collection. In
addition to filling the suit to collect the loan evidenced by the matured promissory note, Dela
Rama also sued to collect P5,000.00 attorney's fees for legal services rendered as Pineda's
counsel in the case being investigated by NARIC.

The Court of First Instance of Manila decided Civil Case No. 45762 in favor of petitioner Pineda.
The court believed the evidence of Pineda that he signed the promissory note for P9,300.00
only because Dela Rama had told him that this amount had already been advanced to grease
the palms of the 'Chairman and General Manager of NARIC in order to save Pineda from
criminal prosecution.

The Court of Appeals reversed the decision of the trial court on a finding that Pineda, being a
person of more than average intelligence would not "sign any document or paper with his name
unless he was fully aware of the contents and important thereof.

ISSUE: WON Dela Rama could claim

RULING: NO
The Court of Appeals relied on the efficacy of the promissory note for its decision, citing Section
24 of the Negotiable Instruments Law which reads:

SECTION 24. Presumption of consideration.—Every negotiable instrument is

deemed prima facie to have been issued for a valuable consideration; and every
person whose signature appears thereon to have become a party thereto for
value.

The Court of Appeals' reliance on the above provision is misplaced. The presumption that a
negotiable instrument is issued for a valuable consideration is only puma facie. It can be
rebutted by proof to the contrary.

According to Dela Rama, he loaned the P9,300.00 to Pineda in two installments on two
occasions five days apart - first loan for P5,000.00 and second loan for P4,300.00, both given in
cash. He also alleged that previously Pineda loaned P3,000.00 but Pineda paid this other loan
two days afterward. These allegations of Dela Rama are belied by the promissory note itself.
The second sentence of the note reads - "This represents the cash advances made by him in
connection with my case for which he is my attorney-in- law."

The terms of the note sustain the version of Pineda that he signed the P9,300.00 promissory
note because he believed Dela Rama's story that these amounts had already been advanced
by Dela Rama and given as gifts for NARIC officials.

Dela Rama himself admits that Pineda engaged his services to delay by one month the filing of
the NARIC case against Pineda while the latter was trying to work out an amicable settlement.
There is no question that Dela Rama was indeed a close friend of then NARIC Administrator
Jose Rodriquez and that Dela Rama made what he calls "proper representations" with
Rodriguez and with other NARIC officials in connection with the investigation of the criminal
charges against Pineda.

Considering the foregoing, we agree with the trial court that the promissory note was executed
for an illegal consideration. Articles 1409 and 1412 of the Civil Code in part, provide:

Art. 1409. The following contracts are inexistent and void from the beginning:

(1) Those whose cause, object or purpose is contrary to law, morals, good
customs, public order and public policy;

xxx xxx xxx

Art. 1412. If the act in which the unlawful or forbidden cause consists does not
constitute a criminal offense, the following rules shall be observed:

(1) When the fault is on the part of both contracting parties, neither may recover
what he has given by virtue of the contract, or demand the performance of the
other's undertaking.

xxx xxx xxx

Whether or not the supposed cash advances reached their destination is of no moment. The
consideration for the promissory note - to influence public officers in the performance of their
duties - is contrary to law and public policy. The promissory note is void ab initio and no cause
of action for the collection cases can arise from it.

e. Art. 1409, NCC (Void & Inexistent Contract)

f. Art. 1412, NCC (If the act is unlawful or forbidden cause)
g. Art. 1306, NCC (stipulations, clauses, terms and conditions - not contrary
to law, morals, good customs, public order, or public policy)

/RNA