METROPOLITAN BANK & TRUST COMPANY, petitioner, vs. COURT OF APPEALS, GOLDEN SAVINGS & LOAN ASSOCIATION, INC.

, LUCIA CASTILLO, MAGNO CASTILLO and GLORIA CASTILLO, respondents. FACTS Eduardo Gomez opened an account with Golden Savings and deposited over a period of two months 38 treasury warrants with a total value of P1,755,228.37. They were all drawn by the Philippine Fish Marketing Authority and purportedly signed by its General Manager and countersigned by its Auditor. Six of these were directly payable to Gomez while the others appeared to have been indorsed by their respective payees, followed by Gomez as second indorser. 1 All these warrants were subsequently indorsed by Gloria Castillo as Cashier of Golden Savings and deposited to its Savings Account No. 2498 in the Metrobank branch in Calapan, Mindoro. They were then sent for clearing by the branch office to the principal office of Metrobank, which forwarded them to the Bureau of Treasury for special clearing. 2 Gloria Castillo went to the Calapan branch several times to ask whether the warrants had been cleared. Gomez was meanwhile not allowed to withdraw from his account. Later, however, "exasperated" over Gloria's repeated inquiries and also as an accommodation for a "valued client," the petitioner says it finally decided to allow Golden Savings to withdraw from the proceeds of the warrants. In turn, Golden Savings subsequently allowed Gomez to make withdrawals from his own account, eventually collecting the total amount of P1,167,500.00 from the proceeds of the apparently cleared warrants. Eventually, Metrobank informed Golden Savings that 32 of the warrants had been dishonored by the Bureau of Treasury and demanded the refund by Golden Savings of the amount it had previously withdrawn, to make up the deficit in its account. The demand was rejected. Metrobank then sued Golden Savings. ISSUE Whether or not the treasury warrants involved in this case are not negotiable instruments. HELD The treasury warrants are non-negotiable instruments. It would appear to the Court that Metrobank was indeed negligent in giving Golden Savings the impression that the treasury warrants had been cleared and that, consequently, it was safe to allow Gomez to withdraw the proceeds thereof from his account with it. Without such assurance, Golden Savings would not have allowed the withdrawals.

It was, in fact, to secure the clearance of the treasury warrants that Golden Savings deposited them to its account with Metrobank. Golden Savings had no clearing facilities of its own. It relied on Metrobank to determine the validity of the warrants through its own services. A no less important consideration is the circumstance that the treasury warrants in question are not negotiable instruments. Clearly stamped on their face is the word "non-negotiable." Moreover, and this is of equal significance, it is indicated that they are payable from a particular fund, to wit, Fund 501. The following sections of the Negotiable Instruments Law, especially the underscored parts, are pertinent: Sec. 1. Form of negotiable instruments. An instrument to be negotiable must conform to the following requirements: (a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be payable on demand, or at a fixed or determinable future time; (d) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. xxx xxx xxx Sec. 3. When promise is unconditional. An unqualified order or 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 judgment. But an order or promise to pay out of a particular fund is not unconditional. The indication of Fund 501 as the source of the payment to be made on the treasury warrants makes the order or promise to pay "not unconditional" and the warrants themselves non-negotiable. NARCISA BUENCAMINO, AMADA DE LEON-ERAA, ENCARNACION DE LEON and BIENVENIDO B. ERAA vs C. HERNANDEZ FACTS

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The Land Tenure Administration, LTA for short, purchased from the petitioners Narcisa Buencamino, Amada de LeonEraa, and Encarnacion de Leon, and other members of the de Leon family their hacienda in Talavera, Nueva Ecija for a total consideration of P2,746,000.00. For the purpose, a Memorandum Agreement was executed on the said date which expressly declared that the LTA was purchasing the hacienda upon petition of the tenants thereof in accordance with Republic Act No. 1400, otherwise known as the Land Reform Act of 1955. The parties to the sale agreed that of the full price of P2,746,000.00, 50% or P1,373,000.00 was to be paid in cash and the balance in negotiable land certificates. The condition in the certificate regarding its encashment only after the lapse of five years from the date of execution of the Deed of Sale of Hacienda de Leon was adopted or taken from the Memorandum Agreement Under the deed of sale, dated July 31, 1957, the above condition was That the VENDORS shall not, however, within five (5) years, present for encashment the negotiable land certificates amounting to ONE MILLION THREE HUNDRED SEVENTY THREE THOUSAND PESOS (P1,373,000.00) but nevertheless, shall be authorized to use the same for payment of land taxes or obligations due and payable in favor of the Government and such other uses or purposes provided for by Section 10 of Republic Act No. 1400 within the said period of five (5) years from this date. (page 4, Absolute Deed of Sale) Availing themselves of what they considered was their contractual and statutory rights under the certificate, the petitioners presented two of them to the respondent City Treasurer in payment of certain 1957 realty tax obligations to Quezon City. The respondent Treasurer refused to accept the same and claimed that as per the opinion rendered by the Secretary of Finance, it was discretionary on his part, the respondent Treasurer, to accept or reject the said certificates. And, invoking his discretion in the premises, the respondent Treasurer explained that he could not accept the certificates offered as Quezon City was then in great need of funds. The petitioners were thus obliged to settle in cash the 1957 tax obligation aforementioned. Subsequently, however, the petitioners tendered once more the same certificates in payment of their 1958 realty taxes and the respondent Treasurer similarly rejected the tender. As a result, the petitioners filed the instant mandamus proceedings with the Court of First Instance of Quezon City. To the above petition, the LTA filed a timely answer sustaining the petitioners' stand. The Secretary of Finance, represented by the Solicitor General, also filed an answer, which argued that he was not a necessary party to the case as he was not the officer with the duty of collecting taxes. In effect, however, they resolve themselves into the single question of whether or not the said certificates where drawn payable on demand as required by Section 9 of Republic Act 1400.

The respondent Treasurer contends that the certificates in question were not issued strictly in accordance with the provisions of Republic Act No. 1400 because while Section 9 of that Act inquires that "negotiable land certificates shall be issued in denominations of one thousand pesos or multiples of one thousand pesos and shall be payable to bearer on demand . . ., " the ones issue to the petitioners were payable to bearer not on demand but, only upon the expiration of the five-year period there in specified. On the other hand, the petitioners contend that although the certificates issued could not really be encashed within the period therein mentioned, they could, however, still be used for the settlement of tax liabilities at any time after their issue in accordance with Section 10 of the same Act. The petitioners maintain that the 5-year restriction against encashment referred merely and exclusively to the time when the certificates may be converted to cash and not anymore to the utility of the said instruments as substitutes for tax obligations. ISSUE Whether or not the refusal of respondent Treasurer to accept the land certificates to be legally justified. HELD YES. We hold the refusal of the respondent Treasurer to accept the land certificates to be legally justified. They failed to comply with the requirements of Republic Act No. 1400. Under the above-mentioned law, the land certificates "shall be payable to bearer on demand." (Section 9) The one issued, however, were payable to bearer only after the lapse of five years from a given period. Obviously then, the requirement that they should be payable on demand was not met since an instrument payable on demand is one which (a) is expressed to be payable on demand, or at sight, or on presentation; or (b) expresses no time for payment (Sec. 7, Negotiable Instruments Law) The 5-year period within which the certificates could not be encashed was an expression of the time for payment contrary to paragraph (b) of the last law cited. FAR EAST BANK AND TRUST COMPANY vs ESTRELLA O. QUERIMIT

FACTS Estrella O. Querimit worked as internal auditor of the Philippine Savings Bank (PSB) for 19 years, from 1963 to 1992. She opened a dollar savings account in petitioner's Harrison Plaza branch,[4] for which she was issued four (4) Certificates of Deposit each certificate representing the amount of $15,000.00, or a total amount of $60,000.00. The certificates were to mature in 60 days and were payable to bearer at 4.5% interest per annum. The certificates bore the word "accrued," which meant that if they were not presented for encashment or pre-terminated prior to maturity, the money deposited with accrued interest would be "rolled over" by the bank and annual interest would accumulate automatically. The petitioner bank's manager

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assured respondent that her deposit would be renewed and earn interest upon maturity even without the surrender of the certificates if these were not indorsed and withdrawn. Respondent kept her dollars in the bank so that they would earn interest and so that she could use the fund after she retired. In 1989, respondent accompanied her husband Dominador Querimit to the United States for medical treatment. She used her savings in the Bank of the Philippine Islands (BPI) to pay for the trip and for her husband's medical expenses. Her husband died and Estrella returned to the Philippines. She went to petitioner FEBTC to withdraw her deposit but, to her dismay, she was told that her husband had withdrawn the money in deposit. Through counsel, respondent sent a demand letter to petitioner FEBTC. In another letter, respondent reiterated her request for updating and payment of the certificates of deposit, including interest earned.[10] As petitioner FEBTC refused respondent's demands, the latter filed a complaint. FEBTC alleged that it had given respondent's late husband Dominador an "accommodation" to allow him to withdraw Estrella's deposit. Petitioner presented certified true copies of documents showing that payment had been made. The trial court rendered judgment for respondent. Court of Appeals affirmed the decision of the trial court. The appeals court stated that petitioner FEBTC failed to prove that the certificates of deposit had been paid out of its funds, since "the evidence by the [respondent] stands unrebutted that the subject certificates of deposit until now remain unindorsed, undelivered and unwithdrawn by her. ISSUE Whether the subject certificates of deposit have already been paid by petitioner. HELD NO. Petitioner bank failed to prove that it had already paid Estrella Querimit, the bearer and lawful holder of the subject certificates of deposit. The finding of the trial court on this point, as affirmed by the Court of Appeals, is that petitioner did not pay either respondent Estrella or her husband the amounts evidenced by the subject certificates of deposit. A certificate of deposit is defined as a written acknowledgment by a bank or banker of the receipt of a sum of money on deposit which the bank or banker promises to pay to the depositor, to the order of the depositor, or to some other person or his order, whereby the relation of debtor and creditor between the bank and the depositor is created. The principles governing other types of bank deposits are applicable to certificates of deposit,[25] as are the rules governing promissory notes when they contain an unconditional promise to pay a sum certain of money absolutely.[26] The principle that payment, in order to discharge a debt, must be made to someone authorized to receive it is applicable to the payment of certificates of deposit. Thus, a bank will be protected in making payment to the holder of a certificate indorsed by the payee, unless it has notice of the invalidity of the indorsement or the holder's want of title. [27] A bank acts at its peril when it pays deposits evidenced by a certificate of deposit, without its production and surrender after proper indorsement. [28] As a rule, one who pleads payment has the burden of proving it. Even where the plaintiff must allege non-payment, the general rule is that the burden rests on the defendant to prove payment, Negotiable Instruments Law Case Digest Page 11

rather than on the plaintiff to prove payment. The debtor has the burden of showing with legal certainty that the obligation has been discharged by payment.[29] In this case, the certificates of deposit were clearly marked payable to "bearer," which means, to "[t]he person in possession of an instrument, document of title or security payable to bearer or indorsed in blank."[30] Petitioner should not have paid respondent's husband or any third party without requiring the surrender of the certificates of deposit. Petitioner claims that it did not demand the surrender of the subject certificates of deposit since respondent's husband, Dominador Querimit, was one of the bank's senior managers. PHILIPPINE NATIONAL BANK vs. RODRIGUEZ and NORMA RODRIGUEZ FACTS Respondents-Spouses Erlando and Norma Rodriguez were clients of petitioner Philippine National Bank (PNB). They maintained savings and demand/checking accounts, namely, PNBig Demand Deposits (Checking/Current Account No. 810624-6 under the account name Erlando and/or Norma Rodriguez), and PNBig Demand Deposit (Checking/Current Account No. 810480-4 under the account name Erlando T. Rodriguez). The spouses were engaged in the informal lending business. In line with their business, they had a discounting3arrangement with the Philnabank Employees Savings and Loan Association (PEMSLA), an association of PNB employees. Naturally, PEMSLA was likewise a client of PNB PEMSLA regularly granted loans to its members. Spouses Rodriguez would rediscount the postdated checks issued to members whenever the association was short of funds. As was customary, the spouses would replace the postdated checks with their own checks issued in the name of the members. It was PEMSLAs policy not to approve applications for loans of members with outstanding debts. To subvert this policy, some PEMSLA officers devised a scheme to obtain additional loans despite their outstanding loan accounts. They took out loans in the names of unknowing members, without the knowledge or consent of the latter. The PEMSLA checks issued for these loans were then given to the spouses for rediscounting. The officers carried this out by forging the indorsement of the named payees in the checks. In return, the spouses issued their personal checks (Rodriguez checks) in the name of the members and delivered the checks to an officer of PEMSLA. The PEMSLA checks, on the other hand, were deposited by the spouses to their account. The Rodriguez checks were deposited directly by PEMSLA to its savings account without any indorsement from the named payees. This was an irregular procedure made possible through the facilitation of Edmundo Palermo, Jr., treasurer of PEMSLA and bank teller in the PNB Branch. ERLANDO T.

Petitioner PNB eventually found out about these fraudulent acts. To put a stop to this scheme, PNB closed the current account of PEMSLA. As a result, the PEMSLA checks deposited by the spouses were returned or dishonored for the reason "Account Closed." The corresponding Rodriguez checks, however, were deposited as usual to the PEMSLA savings account. The amounts were duly debited from the Rodriguez account. Thus, because the PEMSLA checks given as payment were returned, spouses Rodriguez incurred losses from the rediscounting transactions. RTC rendered judgment in favor of spouses Rodriguez (plaintiffs). It ruled that PNB (defendant) is liable to return the value of the checks. The CA concluded that the checks were obviously meant by the spouses to be really paid to PEMSLA. The court a quo declared: Not swayed by the contention of the plaintiffs-appellees (Spouses Rodriguez) that their cause of action arose from the alleged breach of contract by the defendant-appellant (PNB) when it paid the value of the checks to PEMSLA despite the checks being payable to order. Rather, we are more convinced by the strong and credible evidence for the defendant-appellant with regard to the plaintiffs-appellees and PEMSLAs business arrangement that the value of the rediscounted checks of the plaintiffs-appellees would be deposited in PEMSLAs account for payment of the loans it has approved in exchange for PEMSLAs checks with the full value of the said loans. The CA found that the checks were bearer instruments, thus they do not require indorsement for negotiation; and that spouses Rodriguez and PEMSLA conspired with each other to accomplish this money-making scheme. The payees in the checks were "fictitious payees" because they were not the intended payees at all. ISSUE Whether the subject checks are payable to order or to bearer and who bears the loss. HELD The checks are order instruments. As a rule, when the payee is fictitious or not intended to be the true recipient of the proceeds, the check is considered as a bearer instrument. A check is "a bill of exchange drawn on a bank payable on demand."11 It is either an order or a bearer instrument. Sections 8 and 9 of the NIL states: SEC. 8. When payable to order. The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. It may be drawn payable to the order of (a) A payee who is not maker, drawer, or drawee; or (b) The drawer or maker; or (c) The drawee; or

(d) Two or more payees jointly; or (e) One or some of several payees; or (f) The holder of an office for the time being. Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable certainty. SEC. 9. When payable to bearer. The instrument is payable to bearer (a) When it is expressed to be so payable; or (b) When it is payable to a person named therein or bearer; or (c) When it is payable to the order of a fictitious or non-existing person, and such fact is known to the person making it so payable; or (d) When the name of the payee does not purport to be the name of any person; or (e) Where the only or last indorsement is an indorsement in blank.12 (Underscoring supplied) The distinction between bearer and order instruments lies in their manner of negotiation. Under Section 30 of the NIL, an order instrument requires an indorsement from the payee or holder before it may be validly negotiated. A bearer instrument, on the other hand, does not require an indorsement to be validly negotiated. It is negotiable by mere delivery. The provision reads: SEC. 30. What constitutes negotiation. An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holder completed by delivery. A check that is payable to a specified payee is an order instrument. However, under Section 9(c) of the NIL, a check payable to a specified payee may nevertheless be considered as a bearer instrument if it is payable to the order of a fictitious or non-existing person, and such fact is known to the person making it so payable. Thus, checks issued to "Prinsipe Abante" or "Si Malakas at si Maganda," who are well-known characters in Philippine mythology, are bearer instruments because the named payees are fictitious and non-existent. A review of US jurisprudence yields that an actual, existing, and living payee may also be "fictitious" if the maker of the check did not intend for the payee to in fact receive the proceeds of the check . This usually occurs when the maker places a name of an existing payee on the check for convenience or to cover up an illegal activity.14 Thus, a check made expressly payable to a non-fictitious and existing person is not necessarily an order instrument. If the payee is not the intended recipient of the proceeds of the check, the payee is considered a "fictitious" payee and the check is a bearer instrument.

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In a fictitious-payee situation, the drawee bank is absolved from liability and the drawer bears the loss. When faced with a check payable to a fictitious payee, it is treated as a bearer instrument that can be negotiated by delivery. The underlying theory is that one cannot expect a fictitious payee to negotiate the check by placing his indorsement thereon. And since the maker knew this limitation, he must have intended for the instrument to be negotiated by mere delivery. Thus, in case of controversy, the drawer of the check will bear the loss. This rule is justified for otherwise, it will be most convenient for the maker who desires to escape payment of the check to always deny the validity of the indorsement. This despite the fact that the fictitious payee was purposely named without any intention that the payee should receive the proceeds of the check.15 The fictitious-payee rule is best illustrated in Mueller & Martin v. Liberty Insurance Bank.16 In the said case, the corporation Mueller & Martin was defrauded by George L. Martin, one of its authorized signatories. Martin drew seven checks payable to the German Savings Fund Company Building Association (GSFCBA) amounting to $2,972.50 against the account of the corporation without authority from the latter. Martin was also an officer of the GSFCBA but did not have signing authority. At the back of the checks, Martin placed the rubber stamp of the GSFCBA and signed his own name as indorsement. He then successfully drew the funds from Liberty Insurance Bank for his own personal profit. When the corporation filed an action against the bank to recover the amount of the checks, the claim was denied. The US Supreme Court held in Mueller that when the person making the check so payable did not intend for the specified payee to have any part in the transactions, the payee is considered as a fictitious payee. The check is then considered as a bearer instrument to be validly negotiated by mere delivery. Thus, the US Supreme Court held that Liberty Insurance Bank, as drawee, was authorized to make payment to the bearer of the check, regardless of whether prior indorsements were genuine or not.17 However, there is a commercial bad faith exception to the fictitious-payee rule. A showing of commercial bad faith on the part of the drawee bank, or any transferee of the check for that matter, will work to strip it of this defense. The exception will cause it to bear the loss. Commercial bad faith is present if the transferee of the check acts dishonestly, and is a party to the fraudulent scheme. Said the US Supreme Court in Getty: there is a "commercial bad faith" exception to UCC 3-405, applicable when the transferee "acts dishonestly where it has actual knowledge of facts and circumstances that amount to bad faith, thus itself becoming a participant in a fraudulent scheme. xxx The principle that the fictitious-payee rule extends protection even to non-bank transferees of the checks.

In the case under review: the Rodriguez checks were payable to specified payees. It is unrefuted that the 69 checks were payable to specific persons. Likewise, it is uncontroverted that the payees were actual, existing, and living persons who were members of PEMSLA that had a rediscounting arrangement with spouses Rodriguez. What remains to be determined is if the payees, though existing persons, were "fictitious" in its broader context. For the fictitious-payee rule to be available as a defense, PNB must show that the makers did not intend for the named payees to be part of the transaction involving the checks. At most, the banks thesis shows that the payees did not have knowledge of the existence of the checks. This lack of knowledge on the part of the payees, however, was not tantamount to a lack of intention on the part of respondents-spouses that the payees would not receive the checks proceeds. Considering that respondents-spouses were transacting with PEMSLA and not the individual payees, it is understandable that they relied on the information given by the officers of PEMSLA that the payees would be receiving the checks. Verily, the subject checks are presumed order instruments. This is because, as found by both lower courts, PNB failed to present sufficient evidence to defeat the claim of respondents-spouses that the named payees were the intended recipients of the checks proceeds. The bank failed to satisfy a requisite condition of a fictitiouspayee situation that the maker of the check intended for the payee to have no interest in the transaction. Because of a failure to show that the payees were "fictitious" in its broader sense, the fictitious-payee rule does not apply. Thus, the checks are to be deemed payable to order. Consequently, the drawee bank bears the loss. CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and RODOLFO VERGARA vs. IFC LEASING AND ACCEPTANCE CORPORATION FACTS The petitioner is a corporation engaged in the logging business. For its program of logging activities the opening of additional roads, and simultaneous logging operations along the route of said roads, it needed two (2) additional units of tractors. Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf & Pacific Company of Manila, through its sister company and marketing arm, Industrial Products Marketing a corporation dealing in tractors and other heavy equipment business, offered to sell to petitioner-corporation two (2) "Used" Allis Crawler Tractors. In order to ascertain the extent of work to which the tractors were to be exposed, and to determine the capability of the "Used" tractors being offered, petitionercorporation requested the seller-assignor to inspect the job site. After conducting said inspection, the seller-assignor assured petitioner-corporation that the "Used" Allis Crawler Tractors which were being offered were fit for the job.

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With said assurance and warranty, and relying on the sellerassignor's skill and judgment, petitioner-corporation through petitioners Wee and Vergara, president and vicepresident, respectively, agreed to purchase on installment said two (2) units of "Used" Allis Crawler Tractors. It also paid the down payment of Two Hundred Ten Thousand Pesos (P210,000.00). The seller-assignor issued the sales invoice for the two 2) units of tractors at the same time, the deed of sale with chattel mortgage with promissory note was executed. The seller-assignor, by means of a deed of assignment, assigned its rights and interest in the chattel mortgage in favor of the respondent. Barely fourteen (14) days had elapsed after their delivery when one of the tractors broke down and after another nine (9) days, the other tractor likewise broke down. Rodolfo T. Vergara formally advised the seller-assignor of the fact that the tractors broke down and requested for the sellerassignor's usual prompt attention under the warranty. The seller-assignor sent to the job site its mechanics to conduct the necessary repairsbut the tractors did not come out to be what they should be after the repairs were undertaken because the units were no longer serviceable. Because of the breaking down of the tractors, the road building and simultaneous logging operations of petitionercorporation were delayed and petitioner Vergara advised the seller-assignor that the payments of the installments as listed in the promissory note would likewise be delayed until the seller-assignor completely fulfills its obligation under its warranty. Since the tractors were no longer serviceable, on April 7, 1979, petitioner Wee asked the seller-assignor to pull out the units and have them reconditioned, and thereafter to offer them for sale. The proceeds were to be given to the respondent and the excess, if any, to be divided between the seller-assignor and petitioner-corporation which offered to bear one-half (1/2) of the reconditioning The seller-assignor did nothing with regard to the request, until the complaint in this case was filed by the respondent against the petitioners, the corporation, Wee, and Vergara. The complaint was filed by the respondent against the petitioners for the recovery of the principal sum and accrued interest ISSUE: Whether or not the promissory note in question is a negotiable instrument so as to bar completely all the available defenses of the petitioner against the respondentassignee. HELD The promissory note is NOT a negotiable instrument. It is patent then, that the seller-assignor is liable for its breach of warranty against the petitioner. This liability as a general rule, extends to the corporation to whom it assigned its rights and interests unless the assignee is a holder in due course of the promissory note in question, Negotiable Instruments Law Case Digest Page 14

assuming the note is negotiable, in which case the latter's rights are based on the negotiable instrument and assuming further that the petitioner's defenses may not prevail against it. The pertinent portion of the note is as follows: FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the INDUSTRIAL PRODUCTS MARKETING, the sum of ONE MILLION NINETY THREE THOUSAND SEVEN HUNDRED EIGHTY NINE PESOS & 71/100 only (P 1,093,789.71), Philippine Currency, the said principal sum, to be payable in 24 monthly installments starting July 15, 1978 and every 15th of the month thereafter until fully paid. ... Considering that paragraph (d), Section 1 of the Negotiable Instruments Law requires that a promissory note "must be payable to order or bearer, " it cannot be denied that the promissory note in question is not a negotiable instrument. The instrument in order to be considered negotiablility-i.e. must contain the socalled 'words of negotiable, must be payable to 'order' or 'bearer'. These words serve as an expression of consent that the instrument may be transferred. This consent is indispensable since a maker assumes greater risk under a negotiable instrument than under a non-negotiable one. ... xxx xxx xxx When instrument is payable to order. SEC. 8. WHEN PAYABLE TO ORDER. The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. . . . xxx xxx xxx These are the only two ways by which an instrument may be made payable to order. There must always be a specified person named in the instrument. It means that the bill or note is to be paid to the person designated in the instrument or to any person to whom he has indorsed and delivered the same. Without the words "or order" or"to the order of, "the instrument is payable only to the person designated therein and is therefore nonnegotiable. Any subsequent purchaser thereof will not enjoy the advantages of being a holder of a negotiable instrument but will merely "step into the shoes" of the person designated in the instrument and will thus be open to all defenses available against the latter." Therefore, considering that the subject promissory note is not a negotiable instrument, it follows that the respondent can never be a holder in due course but remains a mere

assignee of the note in question. Thus, the petitioner may raise against the respondent all defenses available to it as against the seller-assignor Industrial Products Marketing. Secondly, even conceding for purposes of discussion that the promissory note in question is a negotiable instrument, the respondent cannot be a holder in due course for a more significant reason: The respondent had actual knowledge of the fact that the seller-assignor's right to collect the purchase price was not unconditional, and that it was subject to the condition that the tractors -sold were not defective. The respondent knew that when the tractors turned out to be defective, it would be subject to the defense of failure of consideration and cannot recover the purchase price from the petitioners. Even assuming for the sake of argument that the promissory note is negotiable, the respondent, which took the same with actual knowledge of the foregoing facts so that its action in taking the instrument amounted to bad faith, is not a holder in due course. SAN MIGUEL CORPORATION vs. BARTOLOME PUZON, JR. FACTS Respondent Bartolome V. Puzon, Jr., (Puzon) owner of Bartenmyk Enterprises, was a dealer of beer products of petitioner San Miguel Corporation. Puzon purchased SMC products on credit. To ensure payment and as a business practice, SMC required him to issue postdated checks equivalent to the value of the products purchased on credit before the same were released to him. Said checks were returned to Puzon when the transactions covered by these checks were paid or settled in full. Puzon purchased products on credit amounting to P11,820,327 for which he issued, and gave to SMC, Bank of the Philippine Islands (BPI) Check Nos. 27904 (for P309,500.00) and 27903 (forP11,510,827.00) to cover the said transaction. Puzon, together with his accountant, visited the SMC Sales Office to reconcile his account with SMC. During that visit Puzon allegedly requested to see BPI Check No. 17657. However, when he got hold of BPI Check No. 27903 which was attached to a bond paper together with BPI Check No. 17657 he allegedly immediately left the office with his accountant, bringing the checks with them. SMC sent a letter to Puzon demanding the return of the said checks. Puzon ignored the demand hence SMC filed a complaint against him for theft with the City Prosecutors Office. Rulings of the Prosecutor and the Secretary of Department of Justice (DOJ) The investigating prosecutor, Elizabeth Yu Guray found that the "relationship between [SMC] and [Puzon] appears to be one of credit or creditor-debtor relationship. The problem lies in the reconciliation of accounts and the non-payment of beer empties which cannot give rise to a criminal prosecution for theft." She recommended the dismissal of the case for lack of evidence. SMC appealed.

The DOJ issued its resolution5 affirming the prosecutors Resolution dismissing the case. Ruling of the Court of Appeals The CA found that the postdated checks were issued by Puzon merely as a security for the payment of his purchases and that these were not intended to be encashed. It thus concluded that SMC did not acquire ownership of the checks as it was duty bound to return the same checks to Puzon after the transactions covering them were settled. The CA agreed with the prosecutor that there was no theft, considering that a person cannot be charged with theft for taking personal property that belongs to himself. ISSUE Whether the checks issued by Puzon were payments for his purchases or were intended merely as security to ensure payment. "[T]he essential elements of the crime of theft are the following: (1) that there be a taking of personal property; (2) that said property belongs to another; (3) that the taking be done with intent to gain; (4) that the taking be done without the consent of the owner; and (5) that the taking be accomplished without the use of violence or intimidation against persons or force upon things." Considering that the second element is that the thing taken belongs to another, it is relevant to determine whether ownership of the subject check was transferred to petitioner. On this point the Negotiable Instruments Law provides: Sec. 12. Antedated and postdated The instrument is not invalid for the reason only that it is antedated or postdated, provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered acquires the title thereto as of the date of delivery. (Underscoring supplied.) Note however that delivery as the term is used in the aforementioned provision means that the party delivering did so for the purpose of giving effect thereto.12 Otherwise, it cannot be said that there has been delivery of the negotiable instrument. Once there is delivery, the person to whom the instrument is delivered gets the title to the instrument completely and irrevocably. If the subject check was given by Puzon to SMC in payment of the obligation, the purpose of giving effect to the instrument is evident thus title to or ownership of the check was transferred upon delivery. However, if the check was not given as payment, there being no intent to give effect to the instrument, then ownership of the check was not transferred to SMC. The evidence of SMC failed to establish that the check was given in payment of the obligation of Puzon. There was no provisional receipt or official receipt issued for the amount of the check. What was issued was a receipt for thedocument, a "POSTDATED CHECK SLIP."13

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Furthermore, the petitioner's demand letter sent to respondent states "As per company policies on receivables, all issuances are to be covered by postdated checks. However, you have deviated from this policy by forcibly taking away the check you have issued to us to cover the December issuance."14 Notably, the term "payment" was not used instead the terms "covered" and "cover" were used. The evidence proves that the check was accepted, not as payment, but in accordance with the long-standing policy of SMC to require its dealers to issue postdated checks to cover its receivables. The check was only meant to cover the transaction and in the meantime Puzon was to pay for the transaction by some other means other than the check. This being so, title to the check did not transfer to SMC; it remained with Puzon. Firestone Tire and Rubber vs. Ines Chaves & Co. GR L-17106, 19 October 1966 En Banc, Regala (J) Facts: The check was intended as part of the payment of Ines Chaves debt. When presented to the Security Bank and Trust Co. by Firestone, the check was returned for insufficiency of funds. Despite repeated demands, Ines Chaves failed to settle its account; hence, the suit. Issue: Whether good faith is required in the issuance of a check.

Held: Everyone must in the performance of his duties, observe honesty and good faith. Where a person issues a postdated check without funds to cover it and informs the payee of this fact, he cannot be held guilty of estafa because there is no deceit. Herein, there is nothing in the record to show that Firestone knew that there were no funds when it accepted the check, much less that Firestone agreed to take the check with knowledge of the lack of funds. As Ines Chavez is guilty of fraud (bad faith) in the performance of its obligation, it is liable for damages. Its conduct wanting in good faith, the award of attorneys fees was warranted.

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