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Elerlenne Lim

Negotiable Instruments Law

Concept of Negotiable Instruments
170 Scra 533
Private respondents, Mr. and Mrs. Isabelo R. Racho, together with the
spouses Mr. and Mrs Flaviano Lagasca, executed a deed of mortgage in
favor of petitioner Government Service Insurance System (hereinafter
referred to as GSIS) and subsequently, another deed of mortgage, in
connection with two loans granted by the latter in the sums of P
11,500.00 and P 3,000.00, respectively. A parcel of land, coowned by
said mortgagor spouses, was given as security under the aforesaid two
deeds. They also executed a 'promissory note" which states in part:
... for value received, we the undersigned ... JOINTLY, SEVERALLY and
SYSTEM the sum of . . . (P 11,500.00) Philippine Currency, with interest
at the rate of six (6%) per centum compounded monthly payable in . . .
(120)equal monthly installments of . . . (P 127.65) each.
On July 11, 1961, the Lagasca spouses executed an instrument
denominated "Assumption of Mortgage" under which they obligated
themselves to assume the aforesaid obligation to the GSIS and to
secure the release of the mortgage covering that portion of the land
belonging to herein private respondents and which was mortgaged to
the GSIS.
Upon failure of the mortgagors to comply with the conditions of the
mortgage, particularly the payment of the amortizations due, GSIS
extrajudicially foreclosed the mortgage and caused the mortgaged
property to be sold at public auction.
More than two years thereafter, or on August 23, 1965, herein private
respondents filed a complaint against the petitioner and the Lagasca
spouses praying that the extrajudicial foreclosure "made on, their
property and all other documents executed in relation thereto in favor
of the Government Service Insurance System" be declared null and
Whether or not the provisions of Act 2031, otherwise known as
Negotiable Instrument Law would apply in this case.

No. The promissory note hereinbefore quoted, as well as the mortgage

deeds subject of this case, are clearly not negotiable instruments.
These documents do not comply with the fourth requisite to be
considered as such under Section 1 of Act No. 2031 because they are
neither payable to order nor to bearer. The note is payable to a
specified party, the GSIS. Absent the aforesaid requisite, the provisions
of Act No. 2031 would not apply; governance shall be afforded, instead,
by the provisions of the Civil Code and special laws on mortgages.
Elerlenne Lim
Negotiable Instruments Law
Treasury Warrants- Not negotiable because they are payable
out of a particular fund.
Metropolitan Bank and Trust Company
G.R. No. 88866
Eduardo Gomez opened an account with Golden Savings and deposited
over a period of two months 38 treasury warrants. 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.
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
More than two weeks after the deposits, Gloria Castillo went to the
Calapan branch several times to ask whether the warrants had been
cleared. She was told to wait. Accordingly, 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. Three
withdrawals was made by Gomez totaling 968,000. 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.
Metrobank informed Golden Savings that 32 of the warrants had been
dishonored by the Bureau of Treasury on July 19, 1979, 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.
Whether or not the treasury warrants involved in this case are
negotiable instruments.
No. The treasury warrants in question are not negotiable instruments.
Clearly stamped on their face is the word "nonnegotiable." 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
(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
But an order or promise to pay out of a particular fund is not
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 nonnegotiable. There
should be no question that the exception on Section 3 of the
Negotiable Instruments Law is applicable in the case at bar.
Metrobank cannot contend that by indorsing the warrants in general,
Golden Savings assumed that they were "genuine and in all respects

what they purport to be," in accordance with Section 66 of the

Negotiable Instruments Law. The simple reason is that this law is not
applicable to the nonnegotiable treasury warrants. The indorsement
was made by Gloria Castillo not for the purpose of guaranteeing the
genuineness of the warrants but merely to deposit them with
Metrobank for clearing. It was in fact Metrobank that made the
guarantee when it stamped on the back of the warrants: "All prior
indorsement and/or lack of endorsements guaranteed, Metropolitan
Bank & Trust Co., Calapan Branch."
Elerlenne Lim
Negotiable Instruments Law
Postal Money Orders- the numerous restrictions and
limitations imposed by postal regulations are inconsistent with
Philippine Education, Co. vs. Soriano
39 Scra 587
Enrique Montinola sought to purchase from the Manila Post Office ten
(10) money orders of P200.00 each payable to E.P. Montinola with
address at Lucena, Quezon. After the postal teller had made out money
orders numbered 124685, 124687124695, Montinolas offer to pay for
them with a private checks were not generally accepted in payment of
money orders, the teller advised him to see the Chief of the Money
Order Division, but instead of doing so, Montinola managed to leave
building with his own check and the ten(10) money orders without the
knowledge of the teller.
Upon discovery of the disappearance of the unpaid money orders, an
urgent message was sent to all postmasters, and the following day
notice was likewise served upon all banks, instructing them not to pay
anyone of the money orders aforesaid if presented for payment. The
Bank of America received a copy of said notice three days later.
On April 23, 1958 one of the abovementioned money orders numbered
124688 was received by appellant as part of its sales receipts. The
following day it deposited the same with the Bank of America, and one
day thereafter the latter cleared it with the Bureau of Posts and
received from the latter its face value of P200.00.
On September 27, 1961, appellee Mauricio A. Soriano notified the Bank
of America that money order No. 124688 attached to his letter had
been found to have been irregularly issued and that, in view thereof,
the amount it represented had been deducted from the bank's clearing

account. For its part, on August 2 of the same year, the Bank of
America debited appellant's account with the same amount and gave it
advice thereof by means of a debit memo.
On October 12, 1961 appellant requested the Postmaster General to
reconsider the action taken by his office deducting the sum of P200.00
from the clearing account of the Bank of America, but his request was
Appellant filed an action against appellees.
Whether or not the postal money in question is a negotiable
No. It is not disputed that our postal statutes were patterned after
statutes in force in the United States. For this reason, ours are
generally construed in accordance with the construction given in the
United States to their own postal statutes, in the absence of any
special reason justifying a departure from this policy or practice. The
weight of authority in the United States is that postal money orders are
not negotiable instruments (Bolognesi vs. U.S. 189 Fed. 395; U.S. vs.
Stock Drawers National Bank, 30 Fed. 912), the reason behind this rule
being 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.
It is to be noted in this connection that some of the restrictions
imposed upon money orders by postal laws and regulations are
inconsistent with the character of negotiable instruments. For instance,
such laws and regulations usually provide for not more than one
endorsement; payment of money orders may be withheld under a
variety of circumstances
Elerlenne Lim
Negotiable Instruments Law
Crossed Check
Bataan Cigar vs. CA
230 SCRA 643
Petitioner, Bataan Cigar & Cigarette Factory, Inc. (BCCFI), a corporation
involved in the manufacturing of cigarettes, engaged one of its
suppliers, King Tim Pua George (herein after referred to as George
King), to deliver 2,000 bales of tobacco leaf starting October 1978. In

consideration thereof, BCCFI, on July 13, 1978 issued crossed checks

post dated sometime in March 1979 in the total amount of
Relying on the supplier's representation that he would complete
delivery within three months, petitioner agreed to purchase additional
2,500 bales of tobacco leaves, despite the supplier's failure to deliver
in accordance with their earlier agreement. Again petitioner issued
post dated crossed checks in the total amount of
P1,100,000.00, payable sometime in September 1979.
During these times, George King was simultaneously dealing with
private respondent SIHI. On July 19, 1978, he sold at a discount check
TCBT 551826 5 bearing an amount of P164,000.00, post dated March
31, 1979, drawn by petitioner, naming George King as payee to SIHI.
On December 19 and 26, 1978, he again sold to respondent checks
TCBT Nos. 608967 & 608968, both in the amount of P100,000.00, post
dated September 15 & 30, 1979 respectively, drawn by petitioner in
favor of George King.
In as much as George King failed to deliver the bales of tobacco leaf as
agreed despite petitioner's demand, BCCFI issued a stop payment
order on all checks payable to George King, including check TCBT
551826. Subsequently, stop payment was also ordered on checks TCBT
Nos. 608967 & 608968 on September 14 & 28, 1979, respectively, due
to George King's failure to deliver the tobacco leaves.
Efforts of SIHI to collect from BCCFI having failed, it instituted the
present case, naming only BCCFI as party defendant. The trial court
pronounced SIHI as having a valid claim being a holder in due course.
Whether SIHI, a second indorser, a holder of crossed checks, is a holder
in due course, to be able to collect from the drawer, BCCFI.
The court held citing the case of State Investment House, Inc. (the very
respondent in this case) v. Intermediate Appellate Court:
As preliminary, a check is defined by law as a bill of exchange drawn
on a bank payable on demand. There are a variety of checks, the more
popular of which are the memorandum check, cashier's check,
traveler's check and crossed check. Crossed check is one where two
parallel lines are drawn across its face or across a corner thereof. It
may be crossed generally or specially.

A check is crossed specially when the name of a particular banker or a

company is written between the parallel lines drawn. It is crossed
generally when only the words "and company" are written or nothing is
written at all between the parallel lines. It may be issued so that the
presentment can be made only by a bank. Veritably the Negotiable
Instruments Law (NIL) does not mention "crossed checks," although
Article 541 of the Code of Commerce refers to such instruments.
According to commentators, the negotiability of a check is not affected
by its being crossed, whether specially or generally. It may legally be
negotiated from one person to another as long as the one who
encashes the check with
the drawee bank is another bank, or if it is specially crossed, by the
bank mentioned between the parallel lines. This is specially true in
England where the Negotiable Instrument Law originated.
In order to preserve the credit worthiness of checks, jurisprudence has
pronounced that crossing of a check should have the following effects:
(a) the check may not be encashed but only deposited in the bank; (b)
the check may be negotiated only once to one who has an account
with a bank; (c) and the act of crossing the check serves as 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, otherwise, he is not a holder in due course.
It is then settled that crossing of checks should put the holder on
inquiry and upon him devolves the duty to ascertain the indorser's title
to the check or the nature of his possession. Failing in this respect, the
holder is declared guilty of gross negligence amounting to legal
absence of good faith, contrary to Sec. 52(c) of the
Negotiable Instruments Law, and as such the consensus of authority is
to the effect that the holder of the check is not a holder in due course.