PRELIMINARY CONSIDERATIONS

1. Phil. Educ. Co., Inc. vs. Soriano, 39 SCRA 587; x

2. Tibajia, Jr. vs. CA, 223 SCRA 163;x
3. Philippine Airlines vs. CA, 181 SCRA 557x

FORM AND INTERPRETATION OF NEGOTIABLE INSTRUMENTS

1. Metropolitan Bank & Trust Company vs. CA, Feb. 18, 1991, 194 SCRA 169; x
2. Caltex Phils. vs. CA, 212 SCRA 448
3. Ang Tek Lian vs. CA, 87 Phil. 383 x
4. PNB vs. Rodriguez, G.R. No. 170325, September 26, 2008
5. Philippine National Bank vs. Manila Oil Refining & By-Products Company, 43 Phil 44 x
6. Republic Planters Bank vs. CA, 216 SCRA 738; x
7. Sps. Evangelista vs. Mercator Finance Corp., et al, August 21, 2003; x
8. Ilano vs. Hon. Espanol, G.R. No. 161756, 16 December 2005

NEGOTIATION

1. Sesbreño vs. CA, 222 SCRA 466;

2. Consolidated Plywood Inc. vs. IFC Leasing 149 SCRA 448 x
3. De la Victoria vs. Hon. Burgos, 245 SCRA 374; x
4. Development Bank of Rizal vs. Sima Wei, 219 SCRA 736 x
5. Metropol (Bacolod) Financing vs. Sambok Motors Co., et al., 120 SCRA 864 x

HOLDERS

1. De Ocampo vs. Gatchalian, 03 SCRA 596;

2. Yang vs. CA, G.R. No. 138074, August 15, 2003;
3. Mesina vs. IAC, 145 SCRA 497

LIABILITY OF PARTIES

1. Crisologo-Jose vs. CA, Sept. 15, 1989;

2. Sadaya vs. Sevilla, 19 SCRA 924;
3. Travel-On vs. CA, 210 SCRA 352;
4. Agro-Conglomerates Inc. vs. CA, 348 SCRA 350;
5. Gonzales vs. RCBC, 29 November 2006;
6. Ang vs. Associated Bank, 05 September 2007;
7. Far East vs. Gold Palace Jewelry, G.R. No. 168274, August 20, 2008

DEFENSES
CASES:
1. Salas vs. CA, January 22, 1990;
2. Philippine National Bank vs. CA, 256 SCRA 491;
3. International Corporate Bank vs. CA, 05 September 2006;
4. Associated Bank vs. CA, January 31, 1996;
5. Jai-Alai vs. BPI, 66 SCRA 29;
6. Republic vs. Ebrada, July 31, 1975;
7. Philippine National Bank vs. Quimpo, March 14, 1988;
8. Gempesaw vs. CA, February 9, 1993;
9. Philippine Commercial International Bank vs. Court of Appeals, 350 SCRA 446;
10. MWSS vs. CA, 143 SCRA 20;
11. Ilusorio vs. CA, 393 SCRA 89;
12. Samsung Construction vs. Far East Bank, 15 August 2004;
13. Metrobank vs. Cabilzo, 06 December 2006;
14. Bank of America vs. Philippine Racing Club, G.R. No. 150228, July 20, 2009;
15. Metrobank vs. BA Finance, 4 December 2009

ENFORCEMENT OF LIABILITY

1. Far East Realty Investment, Inc. vs. CA, 166 SCRA 256;

FAR EAST REALTY INVESTMENT INC. v. CA

G.R. No. L-36549 October 5, 1988
Paras, J.

Doctrine:
• Where the instrument is not payable on demand, presentment must be made on the day it falls due. Where it is
payable on demand, presentment must be made within a reasonable time after issue, except that in the case of a
bill of exchange, presentment for payment will be sufficient if made within a reasonable time after the last
negotiation thereof.

• Reasonable Time has been defined as so much time as is necessary under the circumstances for a reasonable
prudent and diligent man to do, conveniently, what the contract or duty requires should be done, having a regard
for the rights, and possibility of loss, if any, to the other party.

• No hard and fast demarcation line can be drawn between what may be considered as a reasonable or an
unreasonable time, because “reasonable time” depends upon the peculiar facts and circumstances in each case.

Facts:
Private respondents asked the petitioner to extend an accommodation loan in the sum of P4,500.00.
Respondents delivered to the petitioner a check for P4,500.00, drawn by Dy Hian Tat, and signed by them at the
back of said check, with the assurance that after one month from September 13, 1960, the said check would be
redeemed by them by paying cash in the sum of P4,500.00, or the said check can be presented for payment on or
immediately after one month. Petitioner agreed and extended an accommodation loan

The aforesaid check was presented for payment to the China Banking Corporation, but said check bounced and
was not cashed by said bank, for the reason that the current account of the drawer thereof had already been
closed. Petitioner demanded payment from the private but the latter failed and refused to pay notwithstanding
repeated demands.

Both private respondents raised the defense that both have been wholly discharged by delay in presentment of
the check for payment.
The Lower Court ruled in favor of the petitioner. However, this was reversed by the CA upon appeal by the
respondents, ruling that the check was not given as collateral to guarantee a loan secured since the check passed
through other hands before reaching the petitioner and the said check was not presented within a reasonable
time. Hence this petition.

Petitioner argues that presentment for payment and notice of dishonor are not necessary as when funds are
insufficient to meet a check, thus the drawer is liable, whether such presentment and notice be totally omitted or
merely delayed.

Issues:
1. Whether or not presentment for payment can be dispensed with
2. Whether or not presentment for payment and notice of dishonor of the questioned check were made within
reasonable time

Held:
1. No. Where the instrument is not payable on demand, presentment must be made on the day it falls due. Where
it is payable on demand, presentment must be made within a reasonable time after issue, except that in the case
of a bill of exchange, presentment for payment will be sufficient if made within a reasonable time after the last
negotiation thereof (Section 71, Negotiable Instruments Law).

2. No. It is obvious in this case that presentment and notice of dishonor were not made within a reasonable time.

“Reasonable time” has been defined as so much time as is necessary under the circumstances for a reasonable
prudent and diligent man to do, conveniently, what the contract or duty requires should be done, having a regard
for the rights, and possibility of loss, if any, to the other party (Citizens’ Bank Bldg. v. L & E. Wertheirmer 189 S.W.
361, 362, 126 Ark, 38, Ann. Cas. 1917 E, 520).

Notice may be given as soon as the instrument is dishonored; and unless delay is excused must be given within
the time fixed by the law (Section 102, Negotiable Instruments Law).

In the instant case, the check in question was issued on September 13, 1960, but was presented to the drawee
bank only on March 5, 1964, and dishonored on the same date. After dishonor by the drawee bank, a formal
notice of dishonor was made by the petitioner through a letter dated April 27, 1968. Under these circumstances,
the petitioner undoubtedly failed to exercise prudence and diligence on what he ought to do al. required by law.
The petitioner likewise failed to show any justification for the unreasonable delay.

No hard and fast demarcation line can be drawn between what may be considered as a reasonable or an
unreasonable time, because “reasonable time” depends upon the peculiar facts and circumstances in each case
(Tolentino, Commentaries and Jurisprudence on Commercial Laws of the Philippines, Vol. I, Eighth Edition, p.
327).

2. Wong vs. CA, February 2, 2001;

Luis Wong is a collector of Limtong Press, Inc., a company which prints calendars. Wong was assigned to collect
check payments from LPI’ clients. One time, six of LPI’s clients were not able to give the check payments to Wong.
Wong then made arrangements with LPI so that for the meantime, Wong can use his personal checks to guarantee
the calendar orders of the LPI’s clients. LPI however has a policy of not accepting personal checks of its agents.
LPI instead proposed that the personal checks should be used to cover Wong’s debt with LPI which arose from
unremitted checks by Wong in the past. Wong agreed. So he issued 6 checks dated December 30, 1985.

Before the maturity of the checks, Wong persuaded LPI not to deposit the checks because he said he’ll be replacing
them within 30 days. LPI complied however Wong reneged on the payment. On June 5, 1986 or 157 days from date
of issue, LPI presented the check to RCBC but the checks were dishonored (account closed). On June 20, 1986,
LPI sent Wong a notice of dishonor. Wong failed to make good the amount of the checks within five banking days
from his receipt of the notice. LPI then sued Wong for violations of Batas Pambansa Blg. 22.

Among others, Wong argued that he’s not guilty of the crime of charged because one of the elements of the crime
is missing, that is, prima facie presumption of “knowledge of lack of funds” against the drawer. According to Wong,
this element is lost by reason of the belated deposit of the checks by LPI which was 157 days after the checks were
issued; that he is not expected to keep his bank account active beyond the 90-day period – 90 days being the period
required for the prima facie presumption of knowledge of lack of fund to arise.

ISSUE: Whether or not Wong is guilty of the crime charged.

HELD: Yes. Wong is guilty of violating BP 22. The elements of violation of BP 22 pertinent to this case are:

1. The making, drawing and issuance of any check to apply for account or for value;

2. The knowledge of the maker, drawer, or issuer that at the time of issue he does not have sufficient funds in or
credit with the drawee bank for the payment of such check in full upon its presentment; and

3. The subsequent dishonor of the check by the drawee bank for insufficiency of funds or credit or dishonor for the
same reason had not the drawer, without any valid cause, ordered the bank to stop payment.
Under the second element, the presumption of knowledge of the insufficiency arises if the check is presented within
90 days from the date of issue of the check. This presumption is lost, as in the case at bar, by failure of LPI to
present it within 90 days. But this does not mean that the second element was not attendant with respect to Wong.
The presumption is lost but lack of knowledge can still be proven, LPI did not deposit the checks because of the
reassurance of Wong that he would issue new checks. Upon his failure to do so, LPI was constrained to deposit
the said checks. After the checks were dishonored, Wong was duly notified of such fact but failed to make
arrangements for full payment within five (5) banking days thereof. There is, on record, sufficient evidence that
Wong had knowledge of the insufficiency of his funds in or credit with the drawee bank at the time of issuance of
the checks.

The Supreme Court also noted that under Section 186 of the Negotiable Instruments Law, “a check must be
presented for payment within a reasonable time after its issue or the drawer will be discharged from liability thereon
to the extent of the loss caused by the delay.” By current banking practice, a check becomes stale after more than
six (6) months, or 180 days. LPI deposited the checks 157 days after the date of the check. Hence said checks
cannot be considered stale.

3. International Corporate Bank vs. Sps. Gueco, February 12, 2001;

FACTS

Spouses Gueco obtained a loan from petitioner International Corporate Bank (now Union Bank of Philippines) to
purchase a car. Respondent spouses executed a promissory note in consideration, which were payable in monthly
installment and chattel mortgage over the car.

The spouses however, defaulted payment. The car was detained by the bank. When Dr. Gueco delivered the
manger’s check of P150,000, the car was not released because of his refusal to sign the Joint Motion to Dismiss
(JMD).

The bank insisted that the JMD is a standard operating procedure to effect a compromise and to preclude future
filing of claims or suits for damages. Gueco spouses filed an action against the bank for fraud, failing to inform them
regarding JMD during the meeting & for not releasing the car if they do not sign the said motion.

ISSUE

Whether or not International Corporate Bank was guilty of fraud.

HELD

No. Fraud has been defined as the deliberate intention to cause damage or prejudice. It is the voluntary execution
of a wrongful act, or a willful omission, knowing and intending the effects which naturally and necessarily arise from
such act or omission. The fraud referred to in Article 1170 of the Civil Code is the deliberate and intentional evasion
of the normal fulfillment of obligation. The court fails to see how the act of the petitioner bank in requiring the
respondent to sign the joint motion to dismiss could constitute as fraud.

The joint motion to dismiss cannot in any way have prejudiced Dr. Gueco. The motion to dismiss was in fact also
for the benefit of Dr. Gueco, as the case filed by petitioner against it before the lower court would be dismissed with
prejudice.

The joint motion to dismiss was but a natural consequence of the compromise agreement and simply stated that
Dr. Gueco had fully settled his obligation, hence, the dismissal of the case. Petitioner’s act of requiring Dr. Gueco
to sign the joint motion to dismiss cannot be said to be a deliberate attempt on the part of petitioner to renege on
the compromise agreement of the parties.

4. Far East Realty vs. CA, October 5, 1988; - same with Number 1
5. State Investment House vs. CA, 217 SCRA 32;

FACTS:
Moulic issued checks as security to Victoriano, for pieces of jewelry to be sold on commission. Moulic failed to
sell the pieces of jewelry, so she returned them to Victoriano. The checks however could not be recovered by
Moulic as these have been discounted already in favor of petitioner. Consequently, before the maturity dates,
Moulic withdrew her funds from her account. Thereafter, petitioner presented the checks for payment but these
were dishonored. This prompted the petitioner to initiate an action
against Moulic.

HELD:
A prima facie presumption exists that a holder of a negotiable instrument is a holder in due course. The burden of
proving that State is not a holder in due course is upon Moulic. In this regard, she failed to do so.

The evidence shows that the dated checks were complete and regular; petitioner bought the checks from
Victoriano before their due dates; it took the checks in good faith and for value; and it was never informed nor made
aware that these checks were merely issued to payee as security.

Consequently, State is a holder in due course. Moulic cannot set up the defense that there was failure or
want of consideration. It can only invoke the defense if State was a privy to the purpose for which they were issued
and therefore is not a holder in due course.

Furthermore, the mere fact that the checks were issued as security is not sufficient ground to discharge the
instrument as against a holder in due course.

And also, Moulic was responsible for the dishonor of her checks. She withdrew her funds from her
account and could not have expected her checks to be honored by then.

6. Asia Banking Corporation vs. Javier, 44 Phil 777;

On May 10, 1920, Salvador B. Chaves drew a check on the Philippine National Bank for P11,000 in favor of La
Insular, a concern doing business in this city. This check was indorsed by the limited partners of La Insular, and
then deposited by Salvador B. Chaves in his current account with the plaintiff, Asia Banking Corporation. The
deposit was made on July 14, 1920.
On June 25, 1920, Salvador B. Chaves drew another check for P18,785.30 on the Philippine National Bank, in favor
of the aforesaid La Insular. This check was also indorsed by the limited partners of La Insular, and was likewise
deposited by Salvador B. Chaves in his current account with the plaintiff, Asia Banking Corporation, on July 6, 1920.

The amount represented by both checks was used by Salvador B. Chaves after they were deposited in the plaintiff
bank, by drawing checks on the plaintiff. Subsequently these checks were presented by the plaintiff to the Philippine
National Bank for payment, but the latter refused to pay on the ground that the drawer, Salvador B. Chaves, had no
funds therein.

The plaintiff now brings this action against the defendant, as indorser, for the payment of the value of both checks.

The lower court sentenced the defendant to pay the plaintiff P11,000, upon the check of May 10, 1920, with interest
thereon at 9 per cent per annum from July 10, 1920, and P18,778.34 on the check of June 25, 1920, with interest
thereon at 9 per cent per annum from August 5, 1920. From this judgment the defendant appealed.

One of the contentions of the appellant in support of this appeal is, that at all events its liability as indorser of the
checks in question was extinguished. We may say in connection with this assignment of error that the liability of the
defendant never arose.
Section 89 of the Negotiable Instruments Law (Act No. 2031) provides that, when a negotiable instrument is
dishonored for non-acceptance or non-payment, notice thereof must be given to the drawer and each of the
indorsers, and those who are not notified shall be discharged from liability, except where this act provides otherwise.
According to this, the indorsers are not liable unless they are notified that the document was dishonored. Then,
under the general principle of the law of procedure, it will be incumbent upon the plaintiff, who seeks to enforce the
defendant's liability upon these checks as indorser, to establish said liability by proving that notice was given to the
defendant within the time, and in the manner, required by the law that the checks in question had been dishonored.
If these facts are not proven, the plaintiff has not sufficiently established the defendant's liability. There is no proof
in the record tending to show that plaintiff gave any notice whatsoever to the defendant that the checks in question
had been dishonored, and therefore it has not established its cause of action.

For the foregoing, the judgment appealed from is reversed and the defendant is absolved from the complaint without
special pronouncement as to costs. So ordered.

Araullo, C.J., Street, Malcolm, and Ostrand, JJ., concur.

Mr. Justice Johns voted for reversal, but he was absent at the time of the promulgation of the decision and his
signature therefore does not appear signed to the opinion of the court.

7. Nyco Sales Corporation vs. BA Finance Corporation, 200 SCRA 637;

Nyco Sales Corporation has discounting privileges with BA Finance Corporation. In 1978, brothers Renato
Fernandez and Santiago Renato (officers of Sanshell Corporation) approached Nyco Sales Corporation for a credit
accommodation in order for the brothers make use of Nyco’s discounting privileges. Nyco Sales agreed and so, on
November 15, 1978, Sanshell issued a post-dated (November 17, 1978) BPI check to Nyco Sales in the amount of
P60,000.00. Following the discounting process agreed upon, Nyco Sales, thru its president Rufino Yao, endorsed
the check in favor of BA Finance. Thereafter, BA Finance issued a check payable to Nyco Sales which endorsed it
in favor of Sanshell. Sanshell then made use of and/or negotiated the check. Accompanying the exchange of checks
was a Deed of Assignment executed by Nyco Sales (assignor) in favor of BA Finance (assignee) with the conformity
of Sanshell. Under the said Deed, the subject of the discounting was P60k BPI check.

The check bounced. BA Finance notified Sanshell. Sanshell substituted the BPI check with a Security Bank and
Trust Company check for P60k. This check again bounced. BA Finance made repeated demands to Nyco Sales
and Sanshell but neither of the two settled the obligation. Hence, BA Finance sued Nyco Sales. Nyco Sales averred
that it received no notice of dishonor when the second check was dishonored.

ISSUE: Whether or not Nyco Sales is liable to pay BA Finance.

HELD: Yes. The relationship between Nyco Sales and BA Finance is one of assignor-assignee. The assignor-
vendor warrants both the credit itself (its existence and legality) and the person of the debtor (his solvency), if so
stipulated, as in the case at bar. Consequently, if there be any breach of the above warranties, the assignor-vendor
should be held answerable therefor. There is no question then that the assignor-vendor is indeed liable for the
invalidity of whatever he assigned to the assignee-vendee. Considering now the facts of the case at bar, it is beyond
dispute that Nyco executed a deed of assignment in favor of BA Finance with Sanshell Corporation as the debtor-
obligor. BA Finance is actually enforcing said deed and the check covered thereby is merely an incidental or
collateral matter. This particular check merely evidenced the credit which was actually assigned to BA Finance.
Thus, the designation is immaterial as it could be any other check. It is only what is represented by the said checks
that Nyco is being asked to pay.

Nyco Sales’ pretension that it had not been notified of the fact of dishonor is belied not only by the formal demand
letter issued by BA Finance but also by the fact that Nyco Sales and Sanshell had frequent contacts before, during
and after the dishonor. More importantly, as long as the credit remains outstanding, Nyco Sales shall continue to
be liable to BA Finance as its assignor. The dishonor of an assigned check simply stresses its liability and the failure
to give a notice of dishonor will not discharge it from such liability. This is because the cause of action stems from
the breach of the warranties embodied in the Deed of Assignment, and not from the dishonoring of the check alone.

8. Arceo, Jr. vs. People of the Philippines, G.R. No. 142641, 17 July 2006;

FACTS:

Pacifico Arceo obtained a loan from Josefino Cenizal. He then issued a check in favor of Cenizal, in which he
promised verbally seven times that he would replace it with cash. After not replacing the check, he encashed the
check but was dishonored due to insufficient funds.

Cenizal went to Arceo's house to inform him of the dishonor but he was not around anymore so he went to Arceo's
lawyer and gave him a letter giving him three days to pay the check. When Arceo failed, Cenizal charged him in
violation of BP 22.

The lower court found him guilty.

Arceo contends that he should not be held liable because it was presented beyond the 90-day period provided
under the law; that he only given three days to pay and not five banking days as per law; and that he paid his
obligation.

ISSUE: Whether Arceo is guilty.

RULING:

The SC denied Arceo's petition. The SC held that the life of a check is six months. Cenizal presented the check
within four months of issuance. The 90-day period in the law is not an element of the offense. Arceo cannot claim
that he was not given five banking days (the rule is three), because he still remained unpaid after five days of his
receipt of dishonor. Lastly, his claim that he paid the obligation was only mere allegation as there was no proof of
his payment and that the check still remained on Arceo.

9. Allied Banking vs. CA, GG Sportswear, 11 July 2006

FACTS:
January 6, 1981: Allied Bank (Allied) purchased Export Bill of $20,085 from G.G. Sportswear Mfg. Corporation
(GGS)

The bill, drawn under a letter of credit covered Men's Valvoline Training Suit that was in transit to West Germany

The export bill was issued by Chekiang First Bank Ltd., Hongkong.

With the purchase of the bill, ALLIED credited GGS the peso equivalent of the bill amounting to P151,474.52

Nari Gidwani and Alcron International Ltd. (Alcron) executed their respective Letters of Guaranty, holding
themselves liable on the export bill if it should be dishonored or retired by the drawee for any reason.

spouses Leon and Leticia de Villa and Nari Gidwani also executed a Continuing Guaranty/Comprehensive Surety
(surety), guaranteeing payment of any and all such credit accommodations which ALLIED may extend to GGS

When ALLIED negotiated the export bill to Chekiang, payment was refused due to some material discrepancies in
the documents submitted by GGS relative to the exportation covered by the letter of credit.

ALLIED demanded payment

GGS and Nari Gidwani: signed blank forms of the Letters of Guaranty and the Surety, and the blanks were only
filled up by ALLIED after they had affixed their signatures. They also added that the documents did not cover the
transaction involving the subject export bill.

spouses de Villa: not aware of the existence of the export bill; they signed blank forms of the surety; and averred
that the guaranty was not meant to secure the export bill

Alcron: foreign corporation doing business in the Philippines, its branch in the Philippines is merely a liaison office;
neither its liaison office in the Philippines nor its then representative, Hans-Joachim Schloer, had the authority to
issue Letters of Guaranty for and in behalf of local entities and persons

RTC: in favor of Allied

CA: modified holding GGS liable to reimburse Allied, but it exonerated the guarantors from their liabilities under the
Letters of Guaranty

ISSUE: W/N Gidwani, Alcron and Spouses Villa can be held jointly and severally liable becuase of their capacity as
guarantors and surety in the absence of protest on the bill in accordance with Section 152 of the Negotiable
Instruments Law?

HELD: YES. CA modified. Nari Gidwani, and Spouses Leon and Leticia de Villa are jointly and severally liable
together with G.G. Sportswear

Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this
Book shall be observed. In such case the contract is called a suretyship.

Section 152 of the Negotiable Instruments Law pertaining to indorsers, relied on by respondents, is not pertinent to
this case.

There are well-defined distinctions between the contract of an indorser and that of a guarantor/surety of a
commercial paper, which is what is involved in this case.

The contract of indorsement is primarily that of transfer, while the contract of guaranty is that of personal security

The liability of a guarantor/surety is broader than that of an indorser.

Unless the bill is promptly presented for payment at maturity and due notice of dishonor given to the indorser within
a reasonable time, he will be discharged from liability thereon. On the other hand, except where required by the
provisions of the contract of suretyship, a demand or notice of default is not required to fix the surety's liability.

Therefore, no protest on the export bill is necessary to charge all the respondents jointly and severally liable

having affixed their consenting signatures in several documents executed at different times, it is safe to presume
that they had full knowledge of its terms and conditions, hence, they are precluded from asserting ignorance of the
legal effects of the undertaking they assumed thereunder

DISCHARGE OF INSTRUMENTS

1. New Pacific Timber vs. Hon. Seneris, December 19, 1980;

Facts: Herein petitioner is the defendant in a complaint for collection of a sum of money filed by the private
respondent. A compromise judgment was rendered by the respondent Judge against New Pacific Timber. For
failure of the petitioner to comply with his judgment obligation, a writ of execution was issued for the amount of
P63,130.00 pursuant to which, the Ex-Officio Sheriff levied upon the following personal properties of the
petitioner. Prior to the auction sale, petitioner deposited with the CFI, in his capacity as Ex-Officio Sheriff of
Zamboanga City, the sum of P63,130.00

Private respondent refused to accept the check as well as the cash deposit. Private respondent requested the
scheduled auction to proceed if the petitioner cannot produce the cash.

In the course of the proceedings, Deputy Sheriff Castro sold the levied properties item by item to the private
respondent as the highest bidder in the amount of P50,000.00. As a result thereof, the Ex-Officio Sheriff declared
a deficiency of P13,130.00.

Petitioner filed an ex-parte motion for issuance of certificate of satisfaction of judgment. This motion was denied
by the respondent Judge. Petitioner now questions said order as there was already a full satisfaction of the
judgment before the auction sale was conducted.\

Issue: Whether or not the private respondent can validly refuse acceptance of the payment of the judgment
obligation in Cashier’s check which it deposited with the Ex-Officio Sheriff before the date of the scheduled
auction sale.

Held: No valid reason for the private respondent to have refused acceptance of the payment of the obligation in
his favour. It is to be emphasized in this connection that the check deposited by the petitioner in the amount of
P50,000.00 is not an ordinary check but a Cashier’s Check of the Equitable Banking Corporation, a bank of good
standing and reputation. As testified to by the Ex-Officio Sheriff with whom it has been deposited, it is a certified
crossed check. It is a well-known and accepted practice in the business sector that a Cashier’s Check is deemed
as cash. Moreover, since the said check had been certified by the drawee bank, by the certification, the funds
represented by the check are transferred from the credit of the maker to that of the payee or holder, and for all
intents and purposes, the latter becomes the depositor of the drawee bank, with rights and duties of one in such
situation.

The exception to the rule enunciated under Section 63 of the Central Bank Act to the effect “that a check which
has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor in
cash in an amount equal to the amount credited to his account” shall apply in this case.

2. PNB vs. National City Bank of New York, 63 Phil 711;

FACTS: Unknown persons negotiated with Motor Services Company checks, which were part of the stipulation in
payment of automobile tires purchased from the latter’s store. It purported to have been issued by Pangasinan
Transportation Company. The said checks were indorsed at the back by said unknown persons, the Motor
company believing at that time that the signatures contained therein were genuine. The checks were later
deposited with the company’s account in National City Bank of NY. The said checks were consequently
cleared and PNB credited National City Bank with the amounts. Thereafter, PNB discovered that the signatures
were forged and it demanded the reimbursement of the amounts for which it credited the other bank.

HELD: A check is a bill of exchange payable on demand and only the rules governing bills of exchanges
payable on demand are applicable to it. in view of the fact that acceptance is a step necessary insofar as
negotiable instruments are concerned, it follows that the provisions relative to acceptance are without
application to checks. Acceptance implies subsequent negotiation of the instrument, which is not true in the
case of checks because from the moment it is paid, it is withdrawn from circulation. When the drawee banks
cashes or pays a check, the cycle of negotiation is terminated and it is illogical thereafter to speak of
subsequent holders who can invoke the warrant against the drawee. Further, in determining the relative rights
of a drawee who under a mistake of fact, has paid, a holder who has received such payment, upon a check to which
the name of the drawer has been forged, it is only fair to consider the question of diligence and negligence of the
parties in respect thereto. The responsibility of the drawee who pays a forged check, for the genuineness of
the drawer’s signature is absolute only in favor of one who has not, by his own fault or negligence, contributed to
the success of the fraud or to mislead the drawee.
According to the undisputed facts, National City Bank in purchasing the papers in question from unknown
persons without making any inquiry as to the identity and authority of said persons negotiating and indorsing them,
acted negligently and contributed to the constructive loss of PNB in failing to detect the forgery. Under the
circumstances of the case, if the appellee bank is allowed to recover, there will be no change in position as
to the injury or prejudice of the appellant.

3. Bataan Cigar vs. CA, 230 SCRA 648;

FACTS: Bataan Cigar & Cigarette Factory, Inc. (BCCFI), a corporation involved in the manufacturing of cigarettes
purchased from King Tim Pua George (George King) 2,000 bales of tobacco leaf to be delivered starting October
1978. July 13, 1978: it issued crossed checks post dated sometime in March 1979 in the total amount of P820K
George represented that he would complete delivery w/in 3 months from Dec 5 1978 so BCCFI agreed to purchase
additional 2,500 bales of tobacco leaves, despite the previous failure in delivery It issued post dated crossed checks
in the total amount of P1.1M payable sometime in September 1979. July 19, 1978: George sold to SIHI at a
discount check amounting to P164K, post dated March 31, 1979, drawn by BCCFI w/ George as payee. December
19 and 26, 1978: George sold 2 checks both in the amount of P100K, post dated September 15 & 30, 1979
respectively, drawn by BCCFI w/ George as payee Upon failure to deliver, BCCFI issued on March 30, 1979 and
September 14 & 28, 1979 a stop payment order for all checks SIHI failing to claim, filed a claim against BCCFI
RTC: SIHI = holder in due course. Non-inclusion of Gearoge as party is immaterial to the case
ISSUE: W/N SIHI is a holder in due course beign a second indorser and a holder of crossed checks
HELD: YES. GRANTED. RTC reversed. Sec. 52 That it is complete and regular upon its face That he became the
holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact
That he took it in good faith and for value That at the time it was negotiated to him he had no notice of any infirmity
in the instrument or defect in the title of the person negotiating it Sec. 59 every holder is deemed prima facie a
holder in due course However, when it is shown that the title of any person who has negotiated the instrument was
defective, the burden is on the holder to prove that he or some person under whom he claims, acquired the title as
holder in due course. effect of crossing of a check check may not be encashed but only deposited in the bank
check may be negotiated only once — to one who has an account with a bank act of crossing the check serves as
warning to the holder that the check has been issued for a definite purpose - he must inquire if he has received the
check pursuant to that purpose, otherwise, he is not a holder in due course 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
- failure = guilty of gross negligence amounting to legal absence of good faith, contrary to Sec. 52(c) of the
Negotiable Instruments Law SIHI is not a holder in due course. Consequently, BCCFI cannot be obliged to pay the
checks. However, that SIHI could not recover from the checks. The only disadvantage of a holder who is not a
holder in due course is that the instrument is subject to defenses as if it were non-negotiable. Hence, SIHI can
collect from the immediate indorser, George

4. Stelco Marketing Corporation vs. CA, June 17, 1992;

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.
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.

5. State Investment House vs. CA, 175 SCRA 311;

Petitioner State Investment House seeks a review of the decision of respondent Intermediate Appellate Court (now
Court of Appeals) in AC-G.R. CV No. 04523 reversing the decision of the Regional Trial Court of Manila, Branch
XXXVII dated April 30, 1984 and dismissing the complaint for collection filed by petitioner against private
respondents Spouses Anita Pena Chua and Harris Chua.

It appears that shortly before September 5, 1980, New Sikatuna Wood Industries, Inc. requested for a loan from
private respondent Harris Chua. The latter agreed to grant the same subject to the condition that the former should
wait until December 1980 when he would have the money. In view of this agreement, private respondent-wife, Anita
Pena Chua issued three (3) crossed checks payable to New Sikatuna Wood Industries, Inc. all postdated December
22, 1980 as follows:

DRAWEE BANK

CHECK NO.

DATE

AMOUNT

1. China Banking Corporation

589053

Dec. 22, 1980

P98,750.00

2. International Corporate Bank

04045549

Dec. 22, 1980

102,313.00

3. Metropolitan Bank & Trust Co.

036512

Dec. 22, 1980

98,387.00

The total value of the three (3) postdated checks amounted to P 299,450.00.

Subsequently, New Sikatuna Wood Industries, Inc. entered into an agreement with herein petitioner State
Investment House, Inc. whereby for and in consideration of the sum of Pl,047,402.91 under a deed of sale, the
former assigned and discounted with petitioner eleven (11) postdated checks including the aforementioned three
(3) postdated checks issued by herein private respondent-wife Anita Peña Chua to New Sikatuna Wood Industries,
Inc.

When the three checks issued by private respondent Anita Pena Chua were allegedly deposited by petitioner, these
checks were dishonored by reason of "insufficient funds", "stop payment" and "account closed", respectively.
Petitioner claims that despite demands on private respondent Anita Peña to make good said checks, the latter failed
to pay the same necessitating the former to file an action for collection against the latter and her husband Harris
Chua before the Regional Trial Court of Manila, Branch XXXVII docketed as Civil Case No. 82-10547.

Private respondents-defendants filed a third party complaint against New Sikatuna Wood Industries, Inc. for
reimbursement and indemnification in the event that they be held liable to petitioner-plaintiff. For failure of third party
defendant to answer the third party complaint despite due service of summons, the latter was declared in default.

On April 30, 1984, the lower court 1 rendered judgment against herein private respondents spouses, the dispositive
portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff or against the defendants ordering the
defendants to pay jointly and severally to the plaintiff the following amounts:

1. P 229,450.00 with interest at the rate of 12% per annum from February 24,1981 until fully paid;

2. P 29,945.00 as and for attorney's fees; and

3. the costs of suit.

On the third party complaint, third party defendant New Sikatuna Wood Industries, Inc. is ordered to pay third party
plaintiffs Anita Pena Chua and Harris Chua all amounts said defendants' third- party plaintiffs may pay to the plaintiff
on account of this case. 2

On appeal filed by private respondents in AC-G.R. CV No. 04523, the Intermediate Appellate Court 3 (now Court
of Appeals) reversed the lower court's judgment in the now assailed decision, the dispositive portion of which reads:

WHEREFORE, finding this appeal meritorious, We Reverse and Set Aside the appealed judgment, dated April 30,
1984 and a new judgment is hereby rendered dismissing the complaint, with costs against plaintiff-appellee. 4

Hence, this petition.

The pivotal issue in this case is whether or not petitioner is a holder in due course as to entitle it to proceed against
private respondents for the amount stated in the dishonored checks.

Section 52(c) of the Negotiable Instruments Law defines a holder in due course as one who takes the instrument
"in good faith and for value". On the other hand, Section 52(d) provides that in order that one may be a holder in
due course, it is necessary that "at the time the instrument was negotiated to him he had no notice of any x x x
defect in the title of the person negotiating it." However, under Section 59 every holder is deemed prima facie to be
a holder in due course.

Admittedly, the Negotiable Instruments Law regulating the issuance of negotiable checks as well as the lights and
liabilities arising therefrom, does not mention "crossed checks". But this Court has taken cognizance of the practice
that a check with two parallel lines in the upper left hand corner means that it could only be deposited and may not
be converted into cash. Consequently, such circumstance should put the payee on inquiry and upon him devolves
the duty to ascertain the holder's title to the check or the nature of his possession. Failing in this respect, the payee
is declared guilty of gross negligence amounting to legal absence of good faith and as such the consensus of
authority is to the effect that the holder of the check is not a holder in good faith. 5

Petitioner submits that at the time of the negotiation and endorsement of the checks in question by New Sikatuna
Wood Industries, it had no knowledge of the transaction and/or arrangement made between the latter and private
respondents.

We agree with respondent appellate court.

Relying on the ruling in Ocampo v. Gatchalian (supra), the Intermediate Appellate Court (now Court of Appeals),
correctly elucidated that the effects of crossing a check are: the check may not be encashed but only deposited in
the bank; the check may be negotiated only once to one who has an account with a bank; and 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, otherwise he is not a holder in due course. Further,
the appellate court said:

It results therefore that when appellee rediscounted the check knowing that it was a crossed check he was knowingly
violating the avowed intention of crossing the check. Furthermore, his failure to inquire from the holder, party
defendant New Sikatuna Wood Industries, Inc., the purpose for which the three checks were cross despite the
warning of the crossing, prevents him from being considered in good faith and thus he is not a holder in due course.
Being not a holder in due course, plaintiff is subject to personal defenses, such as lack of consideration between
appellants and New Sikatuna Wood Industries. Note that under the facts the checks were postdated and issued
only as a loan to New Sikatuna Wood Industries, Inc. if and when deposits were made to back up the checks. Such
deposits were not made, hence no loan was made, hence the three checks are without consideration (Sec. 28,
Negotiable Instruments Law).

Likewise New Sikatuna Wood Industries negotiated the three checks in breach of faith in violation of Article (sic)
55, Negotiable Instruments Law, which is a personal defense available to the drawer of the check.6

In addition, such instruments are mentioned in Section 541 of the Negotiable Instruments Law as follows:

Sec. 541. The maker or any legal holder of a check shall be entitled to indicate therein that it be paid to a certain
banker or institution, which he shall do by writing across the face the name of said banker or institution, or only the
words "and company."

The payment made to a person other than the banker or institution shall not exempt the person on whom it is drawn,
if the payment was not correctly made.

Under usual practice, crossing a check is done by placing two parallel lines diagonally on the left top portion of the
check. The crossing may be special wherein between the two parallel lines is written the name of a bank or a
business institution, in which case the drawee should pay only with the intervention of that bank or company, or
crossing may be general wherein between two parallel diagonal lines are written the words "and Co." or none at all
as in the case at bar, in which case the drawee should not encash the same but merely accept the same for deposit.

The effect therefore of crossing a check relates to the mode of its presentment for payment. Under Section 72 of
the Negotiable Instruments Law, presentment for payment to be sufficient must be made (a) by the holder, or by
some person authorized to receive payment on his behalf ... As to who the holder or authorized person will be
depends on the instructions stated on the face of the check.

The three subject checks in the case at bar had been crossed generally and issued payable to New Sikatuna Wood
Industries, Inc. which could only mean that the drawer had intended the same for deposit only by the rightful person,
i.e., the payee named therein. Apparently, it was not the payee who presented the same for payment and therefore,
there was no proper presentment, and the liability did not attach to the drawer.

Thus, in the absence of due presentment, the drawer did not become liable. 7 Consequently, no right of recourse
is available to petitioner against the drawer of the subject checks, private respondent wife, considering that petitioner
is not the proper party authorized to make presentment of the checks in question.

Yet it does not follow as a legal proposition that simply because petitioner was not a holder in due course as found
by the appellate court for having taken the instruments in question with notice that the same is for deposit only to
the account of payee named in the subject checks, petitioner could not recover on the checks. 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 for in the case at bar, petitioner may recover from the New Sikatuna Wood Industries, Inc. if the latter
has no valid excuse for refusing payment. The only disadvantage of a holder who is not in due course is that the
negotiable instrument is subject to defenses as if it were non-negotiable. 8

That the subject checks had been issued subject to the condition that private respondents on due date would make
the back up deposit for said checks but which condition apparently was not made, thus resulting in the non-
consummation of the loan intended to be granted by private respondents to New Sikatuna Wood Industries, Inc.,
constitutes a good defense against petitioner who is not a holder in due course.

WHEREFORE, the decision appealed from is hereby AFFIRMED with costs against petitioner.

6. Papa vs. A.U. Valencia, 284 SCRA 643;

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.

7. Villanueva vs. Nite, G.R. No. 148211, 25 July 2006;

FACTS:
Nite loaned from Villanueva P409,000
as a sceurity he issued an Asian Bank Corporation (ABC) check of P325,500 dated February 8, 1994
it was consented to be changed to June 8, 1994
check was dishonored due to a material alteration
August 24, 1994: Nite while abroad partially paid P235K through her representative Emily P. Abojada
The balance of P174K was due on or before December 8, 1994.
August 24, 1994: Villanueva filed an action for a sum of money and damages against ABC for the full amount of the
dishonored check (despite the loan not being due and Nite away)
RTC: favored Villanueva
June 30, 1997: Nite went to ABC to withdraw but she was not able to because of the RTC order
August 25, 1997: ABC remitted to the sheriff a manager’s check amounting to P325,500 drawn on Nite's account
CA: favored Nite's appeal
ISSUE: W/N ABC should be liable to Villanueva

HELD: NO. DENIED

Negotiable Instruments Law
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
SEC. 189. When check operates as an assignment. – A check of itself does not operate as an assignment of any
part of the funds to the credit of the drawer with the bank, and the bank is not liable to the holder, unless and until
it accepts or certifies the check
Rule 3, Sec. 7 of the Rules of Court states:

Sec. 7. Compulsory joinder of indispensable parties. – Parties in interest without whom no final determination can
be had of an action shall be joined either as plaintiffs or defendants.
The contract of loan was between Villanueva and Nite. No collection suit could prosper without Nite who was an
indispensable party

8. Equitable PCI vs. Ong, 15 September 2006;

FACTS:
Warliza Sarande deposited in her account at Philippine Commercial International (PCI) Bank a PCI Bank TCBT
Check of P225K.

December 5 1991: Upon inquiry by Serande at PCI Bank on whether the TCBT Check had been cleared, she
received an affirmative answer.

Relying on this assurance, she issued 2 checks drawn against the proceeds of TCBT Check.

PCI Bank Check No. 073661 dated 5 December 1991 for P132K which Sarande issued to respondent Rowena Ong
owing to a business transaction.

On the same day, Ong presented to PCI Bank requesting PCI Bank to convert the proceeds into a manager's check,
which the PCI Bank obliged.

December 6 1991: Ong deposited PCI Bank Manager's Check in her account with Equitable Banking Corporation

December 9 1991: she received a check return-slip informing her that PCI Bank had stopped the payment of the
check on the ground of irregular issuance.

Despite several demands made, it was refused

Ong was constrained to file a Complaint for sum of money, damages and attorney's fees against PCI Bank

CA affirmed RTC: favored Ong

ISSUE: W/N Ong can hold PCI liable

HELD: YES. Petition is DENIED. CA affirmed.

By admitting it committed an error, clearing the check of Sarande and issuing in favor of Ong not just any check but
a manager's check for that matter, PCI Bank's liability is fixed

certification = acceptance,

Equitable PCI as drawee bank is bound on the instrument upon certification and it is immaterial to such liability in
favor of Ong who is a holder in due course whether the drawer (Warliza Sarande) had funds or not with the Equitable
PCI Bank

No unjust enrichment

SECTION 52. What constitutes a holder in due course. – A holder in due course is a holder who has taken the
instrument under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice it had been previously dishonored, if
such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title
of the person negotiating it.
The same law provides further:
Sec. 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.
Sec. 26. What constitutes holder for value. – Where value has at any time been given for the instrument, the holder
is deemed a holder for value in respect to all parties who become such prior to that time.
Sec. 28. Effect of want of consideration. – Absence or failure of consideration is a matter of defense as against any
person not a holder in due course; and partial failure of consideration is a defense pro tanto, whether the failure is
an ascertained and liquidated amount or otherwise.
manager's check

an order of the bank to pay, drawn upon itself, committing in effect its total resources, integrity and honor behind its
issuance

regarded substantially to be as good as the money it represents

same footing as a certified check

The object of certifying a check, as regards both parties, is to enable the holder to use it as money.

check operates as an assignment of a part of the funds to the creditors

Sec. 187. Certification of check; effect of. – Where a check is certified by the bank on which it is drawn, the
certification is equivalent to an acceptance

Section 63 of the Central Bank Act to the effect "that a check which has been cleared and credited to the account
of the creditor shall be equivalent to a delivery to the creditor in cash in an amount equal to the amount credited to
his account

Sec. 62. Liability of acceptor. – The acceptor by accepting the instruments engages that he will pay it according to
the tenor of his acceptance; and admits –
(a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument;
and
(b) The existence of the payee and his then capacity to indorse.

9. Security Bank & Trust Company vs. RCBC, G.R. Nos. 170984 & 170987, January 30,
2009;

FACTS:

January 9, 1981: Security Bank and Trust Company (SBTC) issued a manager’s check for P 8M, payable to "CASH,"
as proceeds of the loan granted to Guidon Construction and Development Corporation (GCDC)

deposited by Continental Manufacturing Corporation (CMC) in its Current Account with Rizal Commercial Banking
Corporation (RCBC)

Immediately, RCBC honored the P8M check and allowed CMC to withdraw

January 12, 1981: GCDC issued a "Stop Payment Order" to SBTC claiming that the P 8M check was released to a
3rd party by mistake

SBTC dishonored and returned the manager’s check to RCBC

February 13, 1981: RCBC filed a complaint for damages against SBTC with CFI then transferred to RTC

Following the rules of the Philippine Clearing House, RCBC and SBTC stopped returning the checks to each other.

By way of a temporary arrangement pending resolution of the case, the P 8 M check was equally divided between
RCBC and SBTC

May 9, 2000: RTC in favor of RCBC

CA: affirmed with modification RTC decision by adding interest

ISSUE: W/N SBTC should be held liable for its manager's check

HELD: YES. CA affirmed.

At the outset, it must be noted that the questioned check issued by SBTC is not just an ordinary check but a
manager’s check.

manager’s check

one drawn by a bank’s manager upon the bank itself

same footing as a certified check which is deemed to have been accepted by the bank that certified it

As the bank’s own check, a manager’s check becomes the primary obligation of the bank and is accepted in advance
by the act of its issuance

RCBC, in immediately crediting the amount of P8 million to CMC’s account, relied on the integrity and honor of the
check as it is regarded in commercial transactions

July 9, 1980 Memorandum: banks were given the discretion to allow immediate drawings on uncollected deposits
of manager’s checks, among others
important that banks should guard against injury attributable to negligence or bad faith on its part

banking business is impressed with public interest, the trust and confidence of the public in it is of paramount
importance

highest degree of diligence is expected, and high standards of integrity and performance are required of it

10. Salazar vs. JY Brothers, 20 October 2010

Before us is a petition for review seeking to annul and set aside the Decision1 dated September 29, 2005 and the
Resolution2 dated March 2, 2006 of the Court of Appeals (CA) in CA-G.R. CV No. 83104.

The facts, as found by the Court of Appeals, are not disputed, thus:

J.Y. Brothers Marketing (J.Y. Bros., for short) is a corporation engaged in the business of selling sugar, rice and
other commodities. On October 15, 1996, Anamer Salazar, a freelance sales agent, was approached by Isagani
Calleja and Jess Kallos, if she knew a supplier of rice. Answering in the positive, Salazar accompanied the two to
J.Y. Bros. As a consequence, Salazar with Calleja and Kallos procured from J. Y. Bros. 300 cavans of rice worth
₱214,000.00. As payment, Salazar negotiated and indorsed to J.Y. Bros. Prudential Bank Check No. 067481 dated
October 15, 1996 issued by Nena Jaucian Timario in the amount of ₱214,000.00 with the assurance that the check
is good as cash. On that assurance, J.Y. Bros. parted with 300 cavans of rice to Salazar. However, upon
presentment, the check was dishonored due to "closed account."

Informed of the dishonor of the check, Calleja, Kallos and Salazar delivered to J.Y. Bros. a replacement cross Solid
Bank Check No. PA365704 dated October 29, 1996 again issued by Nena Jaucian Timario in the amount of
₱214,000.00 but which, just the same, bounced due to insufficient funds. When despite the demand letter dated
February 27, 1997, Salazar failed to settle the amount due J.Y. Bros., the latter charged Salazar and Timario with
the crime of estafa before the Regional Trial Court of Legaspi City, docketed as Criminal Case No. 7474.

After the prosecution rested its case and with prior leave of court, Salazar submitted a demurrer to evidence. On
November 19, 2001, the court a quo rendered an Order, the dispositive portion of which reads:

WHEREFORE, premises considered, the accused Anamer D. Salazar is hereby ACQUITTED of the crime charged
but is hereby held liable for the value of the 300 bags of rice. Accused Anamer D. Salazar is therefore ordered to
pay J.Y. Brothers Marketing Corporation the sum of ₱214,000.00. Costs against the accused.

SO ORDERED.

Aggrieved, accused attempted a reconsideration on the civil aspect of the order and to allow her to present evidence
thereon. The motion was denied. Accused went up to the Supreme Court on a petition for review on certiorari under
Rule 45 of the Rules of Court. Docketed as G.R. 151931, in its Decision dated September 23, 2003, the High Court
ruled:

IN LIGHT OF ALL THE FOREGOING, the Petition is GRANTED. The Orders dated November 19, 2001 and January
14, 2002 are SET ASIDE and NULLIFIED. The Regional Trial Court of Legaspi City, Branch 5, is hereby DIRECTED
to set Criminal Case No. 7474 for the continuation of trial for the reception of the evidence-in-chief of the petitioner
on the civil aspect of the case and for the rebuttal evidence of the private complainant and the sur-rebuttal evidence
of the parties if they opt to adduce any.

SO ORDERED.3

The Regional Trial Court (RTC) of Legaspi City, Branch 5, then proceeded with the trial on the civil aspect of the
criminal case.
On April 1, 2004, the RTC rendered its Decision,4 the dispositive portion of which reads:

WHEREFORE, Premises Considered, judgment is rendered DISMISSING as against Anamer D. Salazar the civil
aspect of the above-entitled case. No pronouncement as to costs.

Place into the files (archive) the record of the above-entitled case as against the other accused Nena Jaucian
Timario. Let an alias (bench) warrant of arrest without expiry dated issue for her apprehension, and fix the amount
of the bail bond for her provisional liberty at 59,000.00 pesos.

SO ORDERED.5

The RTC found that the Prudential Bank check drawn by Timario for the amount of ₱214,000.00 was payable to
the order of respondent, and such check was a negotiable order instrument; that petitioner was not the payee
appearing in the check, but respondent who had not endorsed the check, much less delivered it to petitioner. It then
found that petitioner’s liability should be limited to the allegation in the amended information that "she endorsed and
negotiated said check," and since she had never been the holder of the check, petitioner's signing of her name on
the face of the dorsal side of the check did not produce the technical effect of an indorsement arising from
negotiation. The RTC ruled that after the Prudential Bank check was dishonored, it was replaced by a Solid Bank
check which, however, was also subsequently dishonored; that since the Solid Bank check was a crossed check,
which meant that such check was only for deposit in payee’s account, a condition that rendered such check non-
negotiable, the substitution of a non-negotiable Solid Bank check for a negotiable Prudential Bank check was an
essential change which had the effect of discharging from the obligation whoever may be the endorser of the
negotiable check. The RTC concluded that the absence of negotiability rendered nugatory the obligation arising
from the technical act of indorsing a check and, thus, had the effect of novation; and that the ultimate effect of such
substitution was to extinguish the obligation arising from the issuance of the Prudential Bank check.

Respondent filed an appeal with the CA on the sole assignment of error that:

IN BRIEF, THE LOWER COURT ERRED IN RULING THAT ACCUSED ANAMER SALAZAR BY INDORSING THE
CHECK (A) DID NOT BECOME A HOLDER OF THE CHECK, (B) DID NOT PRODUCE THE TECHNICAL EFFECT
OF AN INDORSEMENT ARISING FROM NEGOTIATION; AND (C) DID NOT INCUR CIVIL LIABILITY.6

After petitioner filed her appellees' brief, the case was submitted for decision. On September 29, 2005, the CA
rendered its assailed Decision, the decretal portion of which reads:

IN VIEW OF ALL THE FOREGOING, the instant appeal is GRANTED, the challenged Decision is REVERSED and
SET ASIDE, and a new one entered ordering the appellee to pay the appellant the amount of ₱214,000.00, plus
interest at the legal rate from the written demand until full payment. Costs against the appellee.7

In so ruling, the CA found that petitioner indorsed the Prudential Bank check, which was later replaced by a Solid
Bank check issued by Timario, also indorsed by petitioner as payment for the 300 cavans of rice bought from
respondent. The CA, applying Sections 63,8 669 and 2910 of the Negotiable Instruments Law, found that petitioner
was considered an indorser of the checks paid to respondent and considered her as an accommodation indorser,
who was liable on the instrument to a holder for value, notwithstanding that such holder at the time of the taking of
the instrument knew her only to be an accommodation party.

Respondent filed a motion for reconsideration, which the CA denied in a Resolution dated March 2, 2006.

Hence this petition, wherein petitioner raises the following assignment of errors:

1. THE COURT OF APPEALS ERRED IN IGNORING THE RAMIFICATIONS OF THE ISSUANCE OF THE
SOLIDBANK CHECK IN REPLACEMENT OF THE PRUDENTIAL BANK CHECK WHICH WOULD HAVE
RESULTED TO THE NOVATION OF THE OBLIGATION ARISING FROM THE ISSUANCE OF THE LATTER
CHECK.

2. THE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE REGIONAL TRIAL COURT OF
LEGASPI CITY, BRANCH 5, DISMISSING AS AGAINST THE PETITIONER THE CIVIL ASPECT OF THE
CRIMINAL ACTION ON THE GROUND OF NOVATION OF OBLIGATION ARISING FROM THE ISSUANCE OF
THE PRUDENTIAL BANK CHECK.

3. THE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION TANTAMOUNT TO LACK OR

EXCESS OF JURISDICTION WHEN IT DENIED THE MOTION FOR RECONSIDERATION OF THE PETITIONER
ON THE GROUND THAT THE ISSUE RAISED THEREIN HAD ALREADY BEEN PASSED UPON AND
CONSIDERED IN THE DECISION SOUGHT TO BE RECONSIDERED WHEN IN TRUTH AND IN FACT SUCH
ISSUE HAD NOT BEEN RESOLVED AS YET.11

Petitioner contends that the issuance of the Solid Bank check and the acceptance thereof by the respondent, in
replacement of the dishonored Prudential Bank check, amounted to novation that discharged the latter check; that
respondent's acceptance of the Solid Bank check, notwithstanding its eventual dishonor by the drawee bank, had
the effect of erasing whatever criminal responsibility, under Article 315 of the Revised Penal Code, the drawer or
indorser of the Prudential Bank check would have incurred in the issuance thereof in the amount of ₱214,000.00;
and that a check is a contract which is susceptible to a novation just like any other contract.

Respondent filed its Comment, echoing the findings of the CA. Petitioner filed her Reply thereto.

We find no merit in this petition.

Section 119 of the Negotiable Instrument Law provides, thus:

SECTION 119. Instrument; how discharged. – A negotiable instrument is discharged:

(a) By payment in due course by or on behalf of the principal debtor;

(b) By payment in due course by the party accommodated, where the instrument is made or accepted for his
accommodation;

(c) By the intentional cancellation thereof by the holder;

(d) By any other act which will discharge a simple contract for the payment of money;

(e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right. (Emphasis
ours)

And, under Article 1231 of the Civil Code, obligations are extinguished:

xxxx

(6) By novation.

Petitioner's claim that respondent's acceptance of the Solid Bank check which replaced the dishonored Prudential
bank check resulted to novation which discharged the latter check is unmeritorious.

In Foundation Specialists, Inc. v. Betonval Ready Concrete, Inc. and Stronghold Insurance Co., Inc.,12 we stated
the concept of novation, thus:
x x x Novation is done by the substitution or change of the obligation by a subsequent one which extinguishes the
first, either by changing the object or principal conditions, or by substituting the person of the debtor, or by
subrogating a third person in the rights of the creditor. Novation may:

[E]ither be extinctive or modificatory, much being dependent on the nature of the change and the intention of the
parties. Extinctive novation is never presumed; there must be an express intention to novate; in cases where it is
implied, the acts of the parties must clearly demonstrate their intent to dissolve the old obligation as the moving
consideration for the emergence of the new one. Implied novation necessitates that the incompatibility between the
old and new obligation be total on every point such that the old obligation is completely superceded by the new one.
The test of incompatibility is whether they can stand together, each one having an independent existence; if they
cannot and are irreconcilable, the subsequent obligation would also extinguish the first.

An extinctive novation would thus have the twin effects of, first, extinguishing an existing obligation and, second,
creating a new one in its stead. This kind of novation presupposes a confluence of four essential requisites: (1) a
previous valid obligation, (2) an agreement of all parties concerned to a new contract, (3) the extinguishment of the
old obligation, and (4) the birth of a valid new obligation. Novation is merely modificatory where the change brought
about by any subsequent agreement is merely incidental to the main obligation (e.g., a change in interest rates or
an extension of time to pay; in this instance, the new agreement will not have the effect of extinguishing the first but
would merely supplement it or supplant some but not all of its provisions.)

The obligation to pay a sum of money is not novated by an instrument that expressly recognizes the old, changes
only the terms of payment, adds other obligations not incompatible with the old ones or the new contract merely
supplements the old one.13

In Nyco Sales Corporation v. BA Finance Corporation,14 we found untenable petitioner Nyco's claim that novation
took place when the dishonored BPI check it endorsed to BA Finance Corporation was subsequently replaced by a
Security Bank check,15 and said:

There are only two ways which indicate the presence of novation and thereby produce the effect of extinguishing
an obligation by another which substitutes the same. First, novation must be explicitly stated and declared in
unequivocal terms as novation is never presumed. Secondly, the old and the new obligations must be incompatible
on every point.1avvphi1 The test of incompatibility is whether or not the two obligations can stand together, each
one having its independent existence. If they cannot, they are incompatible and the latter obligation novates the
first. In the instant case, there was no express agreement that BA Finance's acceptance of the SBTC check will
discharge Nyco from liability. Neither is there incompatibility because both checks were given precisely to terminate
a single obligation arising from Nyco's sale of credit to BA Finance. As novation speaks of two distinct obligations,
such is inapplicable to this case.16

In this case, respondent’s acceptance of the Solid Bank check, which replaced the dishonored Prudential Bank
check, did not result to novation as there was no express agreement to establish that petitioner was already
discharged from his liability to pay respondent the amount of ₱214,000.00 as payment for the 300 bags of rice. As
we said, novation is never presumed, there must be an express intention to novate. In fact, when the Solid Bank
check was delivered to respondent, the same was also indorsed by petitioner which shows petitioner’s recognition
of the existing obligation to respondent to pay ₱214,000.00 subject of the replaced Prudential Bank check.

Moreover, respondent’s acceptance of the Solid Bank check did not result to any incompatibility, since the two
checks − Prudential and Solid Bank checks − were precisely for the purpose of paying the amount of ₱214,000.00,
i.e., the credit obtained from the purchase of the 300 bags of rice from respondent. Indeed, there was no substantial
change in the object or principal condition of the obligation of petitioner as the indorser of the check to pay the
amount of ₱214,000.00. It would appear that respondent accepted the Solid Bank check to give petitioner the
chance to pay her obligation.

Petitioner also contends that the acceptance of the Solid Bank check, a non-negotiable check being a crossed
check, which replaced the dishonored Prudential Bank check, a negotiable check, is a new obligation in lieu of the
old obligation arising from the issuance of the Prudential Bank check, since there was an essential change in the
circumstance of each check.

Such argument deserves scant consideration.

Among the different types of checks issued by a drawer is the crossed check.17 The Negotiable Instruments Law
is silent with respect to crossed checks,18 although the Code of Commerce makes reference to such instruments.19
We have taken judicial cognizance of the practice that a check with two parallel lines in the upper left hand corner
means that it could only be deposited and could not be converted into cash.20 Thus, the effect of crossing a check
relates to the mode of payment, meaning that the drawer had intended the check for deposit only by the rightful
person, i.e., the payee named therein.21 The change in the mode of paying the obligation was not a change in any
of the objects or principal condition of the contract for novation to take place.22

Considering that when the Solid Bank check, which replaced the Prudential Bank check, was presented for
payment, the same was again dishonored; thus, the obligation which was secured by the Prudential Bank check
was not extinguished and the Prudential Bank check was not discharged. Thus, we found no reversible error
committed by the CA in holding petitioner liable as an accommodation indorser for the payment of the dishonored
Prudential Bank check.

WHEREFORE, the petition is DENIED. The Decision dated September 29, 2005 and the Resolution dated March
2, 2006, of the Court of Appeals in CA-G.R. CV No. 83104, are AFFIRMED.