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1. CHAN WAN VS. TAN KIM, ET AL.,

109 Phil 706 – Commercial Law – Negotiable Instruments Law – Negotiation after Dishonor
– Holder in Due Course

Tan Kim and her husband (Chen So) issued 11 checks payable to “cash or bearer” to be
drawn against their account with the Equitable Banking Corporation. The checks were
negotiated to the White House Shoe Supply (company). White House then deposited the
checks to their China Bank account. China Bank then presented the checks to Equitable Bank
but the checks were returned because Equitable Bank then had no funds to cover the checks.
China Bank then stamped the checks with “Account Closed” and “Non negotiable – China
Bank Corporation”.

But somehow, Chan Wan got hold of these checks (Chan Wan was not able to explain in
court how he got hold of the checks). Chan Wan now wants to encash the checks but
Equitable Bank refused accept the said checks.

ISSUE: Whether or not Chan Wan is a holder in due course.

HELD: No. As a general rule, a dishonored check/instrument may still be negotiated either
by indorsement or delivery and the holder may be a holder in due course provided that he
received no notice regarding the dishonor of the instrument. In this case, the checks were
already crossed on their face hence Chan Wan was properly notified of the dishonor of the
checks at the time of his acquisition.

But may Chan Wan still recover?

Yes. The Negotiable Instruments Law does not provide that a holder who is not a holder in
due course, may not in any case, recover on the instrument. The holder may recover directly
from the drawee, in this case Tan Kim and Chen So, unless the drawees have a valid excuse
in refusing payment. The only disadvantage of a holder who is not a holder in due course is
that the negotiable instrument is subject to defense as if it were non- negotiable. The case
was remanded to the lower court for a proper determination as to how Chan Wan acquired
the checks and to determine if he is indeed entitled to payment based on some other
transactions involving those checks.

2. ENRIQUE MONTINOLA VS. PNB

88 Phil 178 – Commercial Law – Negotiable Instruments Law – Alteration – Assignee –


Partial Indorsement

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
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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.
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3. CHARLES FOSSUM VS. FERNANDEZ HERMANOS, ET AL.,

In 1919, the Fernandez Hermanos (FH) contracted with the American Iron Products
Company, Inc. (AIP), for the latter to build a shaft for one of the ships managed by FH. In
consideration thereof, a time draft with the Philippine National Bank (PNB), a negotiable
instrument, was executed by FH in the amount of $2,250.00 payable in 60 days. But later, FH
dishonored the draft because AIP was not able to comply with the specifications of the shaft
ordered by FH.

Nevertheless, Charles Fossum, the agent of AIP here in the Philippines and the person with
whom FH was transacting with, was able to obtain the draft from the bank without
consideration (for free). Fossum then instituted an action against FH to recover the amount
covered by the draft.

Fossum maintains that he is a holder in due course; that he inherited that status from the
previous holder (PNB, named payee in the draft); that as such, he is entitled to payment.

ISSUE: Whether or not Fossum is a holder in due course.

HELD: No. In the first place, Fossum, as an agent of AIP, is well aware that the draft is
unenforceable because it has no consideration, the shaft being substandard. AIP did not
comply with its obligation thus the draft was dishonored – and Fossum was well aware of this
as part of the original party.

Under Sec. 59 of the Negotiable Instruments Law, there is indeed a presumption that every
holder is a holder in due course, this covers a payee or an indorsee (for bearer instruments,
the bearer). This presumption does not apply to Fossum because he was not a payee nor an
indorsee. He’s not an indorsee because the bank merely delivered the draft to him and the
delivery was even without consideration.

But if the presumption previously applied to PNB, wasn’t that acquired by Fossum?

No. The presumption only covers the present holder, and not the previous holder. When a
holder delivers/indorses the instrument, he loses that presumption. It will then become
incumbent upon the person who received the instrument to prove that the previous holder is
a holder in due course especially in this case when the current holder, Fossum, cannot be
granted the presumption in Sec. 59, which is merely prima facie by the way, because of the
fact that he was an original party fully notified of the failure of the consideration.

At any rate, PNB itself is not a holder in due course due to the timely dishonor of the draft by
FH.

Further even assuming PNB is a holder in due course, there is a well-known rule of law that
if the original payee of a note unenforceable for lack of consideration repurchases (in this
case, the draft was not even repurchased, it was merely delivered back) the instrument after
transferring it to a holder in due course, the paper again becomes subject in the payee’s
hands to the same defenses to which it would have been subject if the paper had never
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passed through the hands of a holder in due course. The same is true where the instrument
is re-transferred to an agent of the payee.

4. ANG TIONG VS. LORENZO TING, ET AL.,

In August 1960, Lorenzo Ting issued a check in the amount of P4,000.00 payable to cash or
bearer. At the back of the check, Felipe Ang affixed his signature. The check later on ended
up in the hands of Ang Tiong. When Tiong presented the check with the bank, it was
dishonored. Tiong then sued Lorenzo and Felipe. Tiong won the collection suit. Felipe
appealed on the ground that he should be allowed to recover from Lorenzo because Felipe
is a guarantor and not an indorser. Felipe also avers, in the alternative, that he is a mere
accommodation party and that fact is known by Tiong. As such, Tiong should make Lorenzo
the person directly and primarily liable, not Felipe.

ISSUE: Whether or not Felipe’s arguments are correct.

HELD: No. The check is a negotiable instrument. What governs the transaction is the
Negotiable Instruments Law (NIL) and not the Civil Code provisions on guaranty. Felipe is
not a guarantor. Under Section 63 of the NIL a person signing in blank a negotiable
instrument, such as the check in this case, is considered as a general indorser. All Felipe did
is to affix his signature at the back of the check – such already qualifies as a blank
indorsement.

A person placing his signature upon an instrument otherwise than as maker, drawer or
acceptor” is a general indorser, — “unless he clearly indicates plaintiff appropriate words his
intention to be bound in some other capacity,” which he did not do. And section 66 ordains
that “every indorser who indorses without qualification, warrants to all subsequent holders in
due course” (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 have capacity to contract; and (d) that the
instrument is at the time of his indorsement valid and subsisting. In addition, “he engages that
on due presentment, it shall be accepted or paid, or both, as the case may be, and that if it
be dishonored, he will pay the amount thereof to the holder.”

Anent Felipe’s alternative allegation that he is exempt as an accommodation party, the same
is not tenable. Section 29 of the NIL is clear when it states that an accommodation party is
“liable on the instrument to a holder for value, notwithstanding that such holder at the time of
taking the instrument knew him to be only an accommodation party.”

Further, whether or not Felipe should be allowed to recover from the maker, Lorenzo, does
not affect Tiong’s right to recover from any of them (Lorenzo the maker, or Felipe the
indorser).
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5. JOSE PONCE DE LEON VS. REHABILITATION FINANCE CORP., ET AL.,

36 SCRA 289 – Commercial Law – Negotiable Instruments Law – Payable on Demand

On October 8, 1951, Jose Ponce De Leon and Francisco Soriano took out a loan from the
Rehabilitation Finance Corporation or RFC (now Development Bank of the Philippines) for
P495,000.00. The loan was secured by a parcel of land owned by Soriano. A deed of
mortgage was then executed in view of the loan. Soriano and Ponce de Leon also executed
a promissory note in the amount of P495k, payable in monthly installments of P28,831.64.

Part of the P495k was used to pay off the previous encumbrances amounting to P135k on
the property of Soriano. The rest were released to Ponce de Leon in various amounts from
December 1951 to July 1952, still pursuant to the deed of mortgage.

The loan went unpaid and so RFC initiated a foreclosure proceeding on the mortgaged
property. According to RFC, the monthly payments were supposed to be due in October 1952.

In his defense, Ponce de Leon insists that the amortizations never became due because
allegedly, RFC did not complete the disbursement of the loan to him (allegedly, P19k was
withheld). He also invokes that on the face of the promissory note it was written that the
installments have “no fixed or determined dates of payment”. Hence, the monthly payments
were never due therefore the foreclosure is void. He insists that the court should first
determine the date of maturity of the loan.

ISSUE: Whether or not Ponce de Leon is right.

HELD: No. During trial and based on the records, Ponce de Leon’s lawyer admitted that all
the remainder of the loan was released to Ponce de Leon so he cannot invoke that not all of
the P495k was released by RFC.

Anent the issue of the loan’s maturity date, under Secs. 13 and 14 of the Negotiable
Instruments Law, when a promissory note expresses “no time for payment,” it is deemed
“payable on demand.” Therefore, when RFC demanded payment on October 24, 1952, the
installments become due.

6. VICTORIA VDA. DE GASTON VS. REPUBLIC OF THE PHILIPPINES

19 SCRA 685 – Commercial Law – Negotiable Instruments Law – Payable on Demand –


Meaning of “Reasonable Time”

In the months of April, May, June, July, and December 1943, German Gaston took out 5 loans
from the Bank of Taiwan totaling to P4,889.91. He executed 5 promissory notes (PNs)
corresponding to the 5 loans he took each month. The loan was promised to be used for the
plowing, cultivating, etc. of the hacienda that Gaston was leasing. Later, the Republic of the
Philippines was subrogated to the rights of the Bank of Taiwan.
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In February 1962, the Republic filed its claim against the estate of Gaston (obviously
German’s already dead at that time) on the strength of the 5 promissory notes. In its defense,
the estate invokes the statue of limitations as it avers that more than ten years have already
elapsed since the accrual of the obligation to pay (so first PN has prescribed in April 1953, so
on).

ISSUE: Whether or not the contention of the estate is correct.

HELD: No. There was a moratorium law in force from November 1944 to May 1953. During
that period, the running of the prescriptive period in all loan obligations was suspended. That’s
a period of 8 years and 6 months.

[From 1943 to 1962 (when the government claim was filed), at least 19 years have already
elapsed. But if we deduct the suspended period of 8 years and 6 months, there’s still 10 years
and six months remaining which is still more than the prescriptive period of ten years.]

The Supreme Court, however ruled that there being no maturity date on the PNs, the PNs
are deemed to be payable within a reasonable time (not payable on demand, as the estate
claims). The SC considered the nature of the transaction involved. The PNs were approved
in relation to an agricultural undertaking wherein Gaston must used the money for no other
purposes than agricultural purposes, otherwise they will be payable immediately. It appears
that Gaston used the money for agricultural purposes hence the PNs are payable only after
the agricultural year (for how can he pay if there’s no yield yet from his crops). The end of the
agricultural year is December 1944, and that will be the reckoning point as to when the PNs
become payable and that’s the time when the period of prescription must be counted.

From December 1944 to February 1962, 17 years ten months have elapsed. Subtract
therefrom the suspended period of 8 years 6 months and that would leave 9 years and four
months – therefore, the filing of the claim by the Republic of the Philippines is still well within
the period of prescription.

7. PHILIPPINE EDUCATION CO., INC., VS. MAURICIO SORIANO, ET AL.,

39 SCRA 587 – Commercial Law – Negotiable Instruments Law – Postal Money Orders Not
Negotiable Instruments

In April 1958, a certain Enrique Montinola was purchasing ten money orders from the Manila
Post Office. Each money order was worth P200.00. Montinola offered to pay the money
orders via a private check but the cashier told him he cannot pay via a private check. But still
somehow, Montinola was able to leave the post office with the money orders without him
paying for them.

Days later, the missing money orders were discovered. Meanwhile, the Philippine Education
Co., Inc. (PECI) presented one of the missing postal money orders before the Bank of
America. The money order was initially credited and so P200.00 was deposited in PECI’s
account with the bank. But then later the post office, through Mauricio Soriano (Chief of the
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Money Order Division of the Post Office), advised the bank that the money order was
irregularly issued hence the P200.00 was debited back from PECI’s account.

PECI is now invoking that the money order was duly negotiated to them and thus they are
entitled to the amount it represents.

ISSUE: Whether or not postal money orders are negotiable instruments.

HELD: No. Postal money orders are not negotiable instruments. The rationale behind this
rule is the fact that in establishing and operating a postal money order system, the
government is not engaging in commercial transactions but merely exercises a governmental
power for the public benefit. In fact, postal money orders are subject to a lot of restrictions
limiting their negotiability. Particularly in this case, as far back as 1948, there was already an
agreement between Bank of America and the Manila Post Office, that in case the post office
would have an adverse claim against any Bank of America depositor involving postal money
orders issued by the post office, all amounts cleared in relation thereto shall be refunded back
to the post office’s account with the bank – this in itself is already a limitation in the
negotiability and nature of the postal money orders issued by the post office because of the
special conditions attached.

8. FLORENTINA LOZANO VS. JUDGE ANTONIO MARTINEZ, ET AL.,

146 SCRA 323 – Commercial Law – Negotiable Instruments Law – Constitutionality of BP


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This case is a consolidation of 8 cases regarding violations of the Bouncing Checks Law or
Batas Pambansa Blg. 22 (enacted April 3, 1979). In one of the eight cases, Judge David
Nitafan of RTC Manila declared the law unconstitutional. Among the arguments against the
constitutionality of the law are a.) it is violative of the constitutional provision on non-
imprisonment due to debt, and b.) it impairs freedom of contract.

ISSUE: Whether or not BP 22 is constitutional.

HELD: Yes, BP 22 is constitutional.

The Supreme Court first discussed the history of the law. The SC explained how the law on
estafa was not sufficient to cover all acts involving the issuance of worthless checks; that in
estafa, it only punishes the fraudulent issuance of worthless checks to cover prior or
simultaneous obligations but not pre-existing obligations.

BP 22 is aimed at putting a stop to or curbing the practice of issuing checks that are worthless,
i.e. checks that end up being rejected or dishonored for payment. The practice is proscribed
by the state because of the injury it causes to public interests.
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BP 22 is not violative of the constitutional prohibition against imprisonment for debt. The
“debt” contemplated by the constitution are those arising from contracts (ex contractu). No
one is going to prison for non-payment of contractual debts.

However, non-payment of debts arising from crimes (ex delicto) is punishable. This is
precisely why the mala prohibita crime of issuing worthless checks as defined in BP 22 was
enacted by Congress. It is a valid exercise of police power.

Due to the insufficiency of the Revised Penal Code, BP 22 was enacted to punish the
following acts:

…any person who, having sufficient funds in or credit with the drawee bank when he makes
or draws and issues a check, shall fail to keep sufficient funds or to maintain a credit to cover
the full amount of the check if presented within a period of ninety (90) days from the date
appearing thereon, for which reason it is dishonored by the drawee bank.

And

…any person who makes or draws and issues any check on account or for value, knowing at
the time of issue that he does not have sufficient funds in or credit with the drawee bank for
the payment of said check in full upon presentment, which check is subsequently dishonored
by the drawee bank for insufficiency of funds or credit or would have been dishonored for the
same reason had not the drawer, without any valid reason, ordered the bank to stop payment.

Congress was able to determine at that time that the issuance of worthless checks was a
huge problem. The enactment of BP 22 is a declaration by the legislature that, as a matter of
public policy, the making and issuance of a worthless check is deemed public nuisance to be
abated by the imposition of penal sanctions.

Checks are widely used due to the convenience it brings in commercial transactions and
confidence is the primary basis why merchants rely on it for their various commercial
undertakings. If such confidence is shaken, the usefulness of checks as currency substitutes
would be greatly diminished or may become nil. Any practice therefore tending to destroy that
confidence should be deterred for the proliferation of worthless checks can only create havoc
in trade circles and the banking community. Thus, the Congress, through their exercise of
police power, declared that the making and issuance of a worthless check is deemed a public
nuisance which can be abated by the imposition of penal sanctions.

The Supreme Court however also explained that (regardless of their previous explanation on
ex delicto debts) the non-payment of a debt is not the gravamen of the violations of BP 22.
The gravamen of the offense punished by BP 22 is the act of making and issuing a worthless
check or a check that is dishonored upon its presentation for payment. It is not the non-
payment of an obligation which the law punishes. The law is not intended or designed to
coerce a debtor to pay his debt. The thrust of the law is to prohibit, under pain of penal
sanctions, the making of worthless checks and putting them in circulation. Because of its
deleterious effects on the public interest, the practice is proscribed by the law. The law
punishes the act not as an offense against property, but an offense against public order.
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9. MYRON PAPA VS. A.U. VALENCIA AND CO., INC.,

Myron Papa is the administrator of the estate of Angela Butte. In 1973, he sold a portion of
said estate to Felix Peñarroyo through A.U. Valencia and Co., Inc. Peñarroyo gave Papa
P5,000.00 plus a check worth P40,000.00. However, Papa was not able to deliver the
certificate of title to Peñarroyo. A litigation ensued and ten years after, Papa argued that the
sale between him and Peñarroyo was never consummated because he did not encash the
P40,000.00 check and that the P5,000.00 cash was merely earnest money.

ISSUE: Whether or not Papa is correct.

HELD: No. After more than ten (10) years from the payment in part by cash and in part by
check, the presumption is that the check had been encashed. Granting that Papa had never
encashed the check, his failure to do so for more than ten (10) years undoubtedly resulted in
the impairment of the check through his unreasonable and unexplained delay. While it is true
that the delivery of a check produces the effect of payment only when it is cashed, pursuant
to Article 1249 of the Civil Code, the rule is otherwise if the debtor (Peñarroyo) is prejudiced
by the creditor’s (Papa’s) unreasonable delay in presentment. The acceptance of a check
implies an undertaking of due diligence in presenting it for payment, and if he from whom it is
received sustains loss by want of such diligence, it will be held to operate as actual payment
of the debt or obligation for which it was given.

10. STATE INVESTMENT HOUSE, INC., VS. C.A. (1993)

217 SCRA 32 – Mercantile Law – Negotiable Instruments Law – Holder in Due Course –
Notice of Dishonor

Corazon Victoriano provided pieces of jewelry to Nora Moulic so that the latter may sell the
same. As security for the jewelries, Moulic issued to Victoriano two post-dated checks in the
aggregate amount of P100,000.00. Moulic was not able to sell the jewelries so she returned
the same to Victoriano. Victoriano was however unable to return the checks hence Moulic
withdrew all her funds from the bank.

Apparently, the checks were negotiated by Victoriano to State Investment House, Inc. So
when the checks were dishonored, State Investment demanded Moulic to pay. Moulic refused
to pay because she said the checks were merely used as security for the jewelry. Moulic
further averred that she received no notice of dishonor.

ISSUE: Whether or not State Investment House is entitled to be paid.

HELD: Yes. State Investment is a holder in due course as it met all the requirements to be
one pursuant to Section 52 of the Negotiable Instruments Law. In particular, it is clearly shown
that: (a) on their faces the post-dated checks were complete and regular: (b) State Investment
bought these checks from Victoriano, before their due dates; (c) State Investment took these
checks in good faith and for value, (d) State Investment was never informed nor made aware
that these checks were merely issued to Victoriano as security and not for value.
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Further, there is no need to issue a notice of dishonor to Moulic. After Moulic withdrew her
funds, she could not have expected her checks to be honored. It would only be futile for State
Investment to be sending her notices of dishonor for the two checks.

11. BENJAMIN ABUBAKAR VS. THE AUDITOR GENERAL

1 Phil. 359 – Commercial Law – Negotiable Instruments Law – Treasury Warrants

In 1941, a treasury warrant was issued in favor of Placido Urbanes, a government employee
in the province of La Union. The said treasury warrant was meant to augment the Food
Production Campaign in the said province. It was then negotiated by Urbanes to Benjamin
Abubakar, a private individual. When Abubakar sought to have the treasury warrant
encashed, the Auditor General denied payment because first of, it is against the appropriating
law (Republic Act 80) to authorize payments to private individuals when it comes to treasury
warrants. Abubakar then contends that he is entitled to encash as he was a holder in good
faith.

ISSUE: Whether or not a treasury warrant is a negotiable instrument.

HELD: No. A treasury warrant is not a negotiable instrument. One of the requirements of a
negotiable instrument is that it must be unconditional. In Section 3 of the Negotiable
Instruments Law, an order or promise to pay out of a particular fund makes the instrument
conditional. A treasury warrant, like the one in this case, comes from a particular fund, a
particular appropriation. In this case, it was written on the face of the treasury warrant that it
is “payable from the appropriation for food administration”. Thus, it is not negotiable for being
conditional.

NOTE the difference: However, an instrument is negotiable if it merely mentions/indicates a


particular fund out of which reimbursement is to be made. This does not make the instrument
conditional because it does not say that such particular fund is the source of payment. It is
only a notice to the drawee that he can reimburse himself out of that particular fund after
paying the payee. As to the source of payment to the payee, there is no mention of it.

12. MARLYN LAZARO VS. C.A.

Marlyn Lazaro, a businesswoman, was paid by Rudy Chua a check worth P90,000.00 so that
Lazaro may deliver goods ordered by Chua. Lazaro was only able to deliver P18,000.00 worth
of goods hence she issued a check worth P72,000.00 to Chua as refund. The check bounced
and Chua notified Lazaro about the dishonor. Lazaro failed to pay within the prescribed period
hence she was sued by Chua for estafa and violation of Batas Pambansa Blg. 22. The trial
court convicted her for violating BP 22 but was acquitted in the estafa case. Lazaro was made
to suffer one year imprisonment and to pay the P72,000.00. On appeal, Lazaro claimed that
she should be acquitted on the BP 22 case as well because there was no damage done
against Chua because Lazaro executed a deed of sale in favor of Chua for her car.
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ISSUE: Whether or not Lazaro should be acquitted.

HELD: No. The clear intention of the framers of Batas Pambansa Bilang 22 is to make the
mere act of issuing a worthless check malum prohibitum. It is not important whether or not
the victims thereon are prejudiced and/or damaged. The law has clearly provided that the
mere issuance of any kind of check, regardless of the intent of the parties; i.e. whether the
check is intended merely to serve as a guarantee or deposit, but which check is subsequently
dishonored, makes the person who issued the check liable. The intent of the law is to curb
the proliferation of worthless checks as a means of payment of obligations. On the other hand,
the fine provided for in BP 22 was intended as an additional penalty for the act of issuing a
worthless check. This is the only logical conclusion since the law does not require that there
be damage or prejudice to the individual complainant by reason of the issuance of the
worthless check.

13. ASSOCIATED BANK VS. C.A.

208 SCRA 465 – Mercantile Law – Negotiable Instruments Law – Crossed Checks –
Effects of Crossing Checks

Merle Reyes is a businesswoman who was issued 6 checks by her customers as payments
for her services. The 6 checks are crossed checks which on their faces are written: “Payee’s
account only”. The checks never reached the hands of Reyes. Instead, a certain Rafael
Sayson got hold of the checks and had them deposited, and subsequently encashed, from
his deposit account with Associated Bank.

Reyes demanded refund from Associated Bank as she averred that those checks are crossed
checks and should have only be deposited with Reyes’ account which is with Prudential Bank.
Associated Bank argued that the checks were indorsed to Sayson by Reyes’s husband, Eddie
Reyes.

ISSUE: Whether or not Associated Bank should refund the 6 checks.

HELD: Yes. The six checks in the case at bar had been crossed and issued “for payee’s
account only.” This could only signify that the drawers (Reyes’ clients) had intended the same
for deposit only by the person indicated, to wit, Merle Reyes.

The court also elucidated the effects of crossing a check namely:

1. that the check may not be encashed but only deposited in the bank;

2. that the check may be negotiated only once –– to one who has an account with a bank;
and

3. that the act of crossing the check serves as a warning to the holder that the check has
been issued for a definite purpose so that he must inquire if he has received the check
pursuant to that purpose.
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On the other hand, even if indeed Eddie Reyes indorsed the checks, Associated Bank is still
liable because in the first place, the husband is not authorized to make indrosements. And
even if the endorsements were forged, as alleged, Associated Bank would still be liable to
Reyes for not verifying the endorser’s authority. There is no substantial difference between
an actual forging of a name to a check as an endorsement by a person not authorized to
make the signature and the affixing of a name to a check as an endorsement by a person not
authorized to endorse it.

14. EQUITABLE BANKING CORP. VS. INTERMEDIATE APELLATE COURT

161 SCRA 518 – Mercantile Law – Negotiable Instruments Law – Negotiable Instruments in
General – Certainty of Payee

In 1975, Liberato Casals, majority stockholder of Casville Enterprises, went to buy two garrett
skidders (bulldozers) from Edward J. Nell Company amounting to P970,000.00. To pay the
bulldozers, Casals agreed to open a letter of credit with the Equitable Banking Corporation.
Pursuant to this, Nell Company shipped one of the bulldozers to Casville. Meanwile, Casville
advised Nell Company that in order for the letter of credit to be opened, Casville needs to
deposit P427,300.00 with Equitable Bank, and that since Casville is a little short, it requested
Nell Company to pay the deposit in the meantime.

Nell Company agreed and so it eventually sent a check in the amount of P427,300.00. The
check read:

Pay to the EQUITABLE BANKING CORPORATION Order of A/C OF CASVILLE


ENTERPRISES, INC.

Nell Company sent the check to Casville so that it would be the latter who could send it to
Equitable Bank to cover the deposit in lieu of the letter of credit. Casals received the check,
he went to Equitable Bank, and the teller received the check. The teller, instead of applying
the amount as deposit in lieu of the letter of credit, credited the check to Casville’s account
with Equitable Bank. Casals later withdrew all the P427,300.00 and appropriated it to himself.

ISSUE: Whether or not Equitable Bank is liable to cover for the loss.

HELD: No. The subject check was equivocal and patently ambiguous. Reading on the
wordings of the check, the payee thereon ceased to be indicated with reasonable certainty in
contravention of Section 8 of the Negotiable Instruments Law. As worded, it could be
accepted as deposit to the account of the party named after the symbols “A/C,” or payable to
the Bank as trustee, or as an agent, for Casville Enterprises, Inc., with the latter being the
ultimate beneficiary. That ambiguity is to be taken contra proferentem that is, construed
13

against Nell Company who caused the ambiguity and could have also avoided it by the
exercise of a little more care. Thus, Article 1377 of the Civil Code, provides:

Art. 1377. The interpretation of obscure words or stipulations in a contract shall


not favor the party who caused the obscurity.

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