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Law 108: Negotiable Instruments

First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

[Ch 6&7 -

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CHAPTER VI: DISCHARGE

FOX V KROEGER

119 Tex. 511, 35 S.W. (2d) 679 (1931) ~kooky~

FACTS:

SUBJECT: promissory note for $769.03, payable 12 mos. from June 28, 1921

MAKERS: Mrs. C.M. Fox as principal and J.H. Kroeger as surety

PAYEE: Levi State Bank & Trust Company

-Mrs. Fox as principal and Kroeger as surety executed the above note. Mrs. Fox died before its maturity. At maturity, on agreement with the payee, Kroeger executed and delivered his own note of the same amount to the payee. The payee bank then assigned the principal note to Kroeger. More than two years later Kroeger sued BJ Fox, executor of Mrs. Fox’s estate. ISSUE:

WON the payment of Kroeger as surety discharged the obligation

HELD: NO

-Under the Texas statute (Sec 119 and 121 taken together), the payment by the principal debtor or by the party accommodated discharges the instrument, but payment by a party secondarily liable, other than the principal debtor or party accommodated, does not extinguish or discharge the debt. By sec 121, the party accommodated is excluded from those secondarily liable, payment by whom does not discharge the instrument. The statute requires payment by the principal debtor to discharge a negotiable promissory note, and that the payment thereof by the surety does not discharge the obligation.

Disposition Affirmed.

NOTE: the other issue in the case is regarding the right of the surety to collect from the principal what he has paid the creditor. Court held: where the surety pays the debt of the principal, he has his election to either pursue his legal remedies and bring an action on an assumpsit, or the obligation implied by law in his favor for reimbursement by the principal; or he can prosecute an action on the very debt itself, and in either event he stands in the shoes of the original creditor as to any securities and rights of priority.

EQUITABLE BANKING CORP V IAC

G.R. No. L-74451, May 25, 1988, 161 SCRA 518 ~aida rose~

FACTS

-In 1975 Casals (who represented himself as general manager of Casville Enterprises, a business engaged in processing and procurement of lumber products) went to Edward J. Nell Co. and told the company’s sales engineer Claustro of his interest in purchasing a Garrett skidder, one of the many merchandise the company was selling.

-Casals was referred to Javier, Nell’s EVP, who asked for cash payment for the skidders. Casals said that Casvile had a credit line with Equitable Bank. Javier then agreed to have two units of skidders paid by way of domestic letter of credit instead of cash. Each unit was to cost P485,000. The domestic letter of credit was to be payable in 36 months and was to be opened within 90 days after date of shipment of the skidders. The first installement was to be due 180 days after shipment and interest was pegged at 14% p.a.

-Casals requested that one unit be delivered to Cagayan de Oro before April 24, 1976 together with all its accessories. The letter of credit was to be opened on or before June 30, 1976. The skidder was shipped on May 3.

-June 15, 1976 – Casals handed Nell Co. a check amounting to P300,000 postdated August 4, 1976 followed by another check with the same date. Nell Co. considered the checks as partial payment for the skidder or as reimbursement for the marginal deposit due from Casals.

-Casals informed Nell Co. that its application for a letter of credit had been approved by Equitable but informed the company that a sum of P400,000 was needed to stand as collateral in favor of Equitable. The amount include P100,000 to clear the title of the Estrada property which was to act as security for the trust receipts issued by the bank. To facilitate the transaction, Nell Co. issued a check for the said amount in favor of Equitable even if the marginal deposit was supposed to be produced by Casville.

-Casals wrote Equitable to apply for two letters of credit (an on sight letter of credit for P485,000, a 36-month letter of credit for P606,000 and cash marginal deposit of P300,000) to cover its purchase of the skidders. The skidders were to be mortgaged as security. The bank responded favorably, stipulating a required 30% cash margin deposit, a real estate collateral and chattel mortgage of the equipment.

-Casville sent three postdated checks to Nell Co. attached to a letter informing the latter of the bank requirements. The cash margin deposit was to amount to P327,300 and adding the P100,000 needed for the Estrada property, the total amount due to Equitable was P427,300. The postdated checks from Casville

were intended to cover the checks issued by Nell Co. to Equitable. The postdated checks amounted to P427,300.

-Nell Co. issued a check worth P427,300 payable to Equitable Bank. The check was made payable to the “order of Equitable Banking Corp. A/C of Casville Enterprises.” The check was sent to Equitable through Casals. Casals deposited the check in Equitable Bank and the teller accepted it as deposit in Casals checking account. Casals then withdrew the amount deposited. -Upon presentation for encashment, Nell Co. discovered that the three checks amounting to P427,300 were all dishonored for having been drawn against a closed account. Nell Co. checked the status of the letter of credit and was informed by Equitable that no letter of credit had been opened and that the entire amount of P427,300 had been withdrawn.

-Casals and Casville recognized their liability towards Nell Co. so they assigned the Garrett skidder to the latter for the amount of P450,000 as partial satisfaction.

-In determining the liability of Equitable Bank to Nell Co., the trial court held that Casals, Casville and Equitable Bank were solidarily liable to Nell Co. for the amount of P427,300 erroneously credited by Equitable to Casville’s account.

ISSUE

WON Equitable is liable to Nell Co. HELD: NO

-The check was patently ambiguous. By making the check read “Pay to Equitable Banking Corp., order of A/C of Casville Enterprises,” the payee ceased to be indicated with reasonable certainty. As worded it could be accepted as deposit to the account of the party named after the symbols A/C or payable to the bank as trustee or as agent for Casville Enterprises with the latter being the ultimate beneficiary. The ambiguity was to be construed against Nell Co. who caused the ambiguity.

-The check was also initially negotiable and neither was it crossed. The crossing of the check and the stamping of the words “non-negotiable” were made by the bank and not by Nell. It simply meant that the same check would thereafter be no longer negotiated.

-Nell’s own acts and omissions were the proximate causes of its own defraudation.

Disposition Petition granted.

IN RE HARNAUGH’S ESTATE 320 Pa. 209, 182 Atl. 394 (1936) ~lora~

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Law 108: Negotiable Instruments

First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

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FACTS

SUBJECT: P/N in the sum of $7,677.17, due April1, 1919 MAKER: Decedent

PAYEE: Flora Moore, administrator of Peyton Harbaugh INDORSEE: Jessie P. Harbaugh

-Peyton, claimant and decedent were all children of Flora Moore.

ISSUE

WON the maker of a negotiable instrument who makes payment to the payee after the latter, before maturity, has indorsed the note to another, may be relieved of liability on the note if evidence is received showing that the payee acted as the indorsee’s agent or that payment was in fact received by the indorsee.

HELD: YES.

-Payment to the payee of a negotiable instrument when title and possession of the instrument has passed to another before maturity will not protect the maker. -If the holder receives payment through an agent or the surrounding circumstances show that money in discharge of the instrument actually reached his hands he cannot recover merely because he retains possession of the instrument.

-In this case, there is no testimony on record to show agency and therefore appellee, to sustain her position, must show that the indorsee received the money in discharge of the note.

-Payment is always an affirmative defense and the burden of proving it rests on the party asserting it. It must be shown by preponderance of evidence.

-The auditor and the court below found that the claimant indorsee holder had received payment of the note in question.

-April 4, 1919: decedent gave a check to Flora M. Moore for $13, 249. 40 which included the amount due on the note and certain other items payable by decedent to Flora Moore.

-The findings of fact of an auditor will not be disturbed unless they are unsupported by the evidence.

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Law 108: Negotiable Instruments

First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

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JONES’ ADM’RS V COLEMAN

121 Va. 86, 92 S.E. 910 (1917) ~marge~

FACTS

SUBJECT: negotiable promissory note for $500, allegedly dated 1 Jan 1915 , payable at Bank of Brunswick, Lawrenceville, Virginia, 365 days after date. Said note waives the benefit of the homestead exemption.

MAKER: Reps Jones, now deceased

PAYEE: Kate D. Coleman, Jones’ domestic servant for 15-16 yrs

-Kate presented his claim against WR Jones and Jack Shell, administrators of [the estate of] Reps Jones. She moved for judgment on the basis of the notice she filed in court. [motion for judgment on the pleadings? ^_^] -Jury was waived. Case was submitted to TC judge. -To sustain the motion, Kate presented a mutilated paper, upon which there was neither date nor signature; both apparently destroyed by burning. The paper originally was a printed blank form of a negotiable instrument note, payable at the bank of Lawrenceville. The mutilated remnant shows that the figures “500” and “365” as well as the name “Kate D. Coleman” and the words “five hundred” had been inserted in ink. Evidence showed that these words and figures were written by Reps Jones himself.

-Kate’s brother Beverly (an ignorant man) gave a vague and unsatisfactory testimony re: existence of the subject note. He testified that sometime in 1914 he saw in Kate’s room in a sewing machine drawer a note for $500 with Reps Jones name on it, and that after Jones’ death, Kate showed him a mutilated envelope w/ the subject mutilated (partly burned) paper.

-There was no attempt to explain or account for the mutilation of the paper.

-TC judge rendered judgment in favor of plaintiff Kate Coleman.

ISSUE

WON plaintiff may recover on the basis of the mutilated note

HELD: NO.

-A cancellation made unintentional[ly] or under a mistake, or w/o the authority of the holder is inoperative; but where an instrument or any signature thereon appears to have been cancelled, the burden of proof lies on the party who alleges that the cancellation was made unintentionally or under a mistake or without authority. [Sec. 123, NIL]

-It is assumed that the date and the signature were originally upon the paper presented. There was no explanation why the same have been destroyed by burning. The presumption is that the burning was intentional and done for the purpose of cancelling the instrument. This presumption can only be overcome by evidence showing that such burning was done “unintentionally, or under a mistake, or without authority.” Plaintiff failed to sustain this burden.

Disposition Judgment reversed. Kate’s motion

dismissed.

MANCHESTER V PARSONS 75 W. Va. 93, 84 S.E. 885 (1915) ~anton~

FACTS

SUBJECT: promissory note executed on Sept. 33, 1910, for $800.

MAKER: L.W. Parsons

PAYEE: Burton & Co. indorsed to Manchester

-L.W. Parsons executed his negotiable note on Sept. 33, 1910, for $800 payable to the order of Burton & Co., 18 months from date, and delivered the same to the payee for value.

-The note was negotiated to Manchester (plaintiff), for value about Nov. 1, 1910.

-June 3, 1911: Parsons sold and delivered to the payee some Percheron Colts for $1,675, with the understanding between the parties that this transaction was to pay the note, and the balance was to be paid for the execution and delivery by Burton & Co. of their note payable to Parsons.

-Manchester is suing Parsons for payment. Parsons put up the defense of payment.

ISSUE:WON there was discharge (payment) of the instrument.

HELD: NO.

-Negotiable paper in the hands of a holder in due course is not discharged by payment made to his transferor, either before or after the transfer.

-The uncontradicted testimony of L.A. Burton (the surviving partner of Lee Whorton) is that it had been indorsed to Manchester, for value, on November 1,

1910, and therefore the payment to the original holders did not discharge it. The delivery of the Colts was on June 3, 1911, almost a year after the indorsement of the note to Manchester.

-Sec. 119 of the NIL describes how a note may be discharged. Subsection 4 reads “by any other act which will discharge a simple contract for the payment of money.”

-This provision must be interpreted with reference to the general purpose of the NIL. Reading Sec. 4, it is apparent that it was never the legislative intent to make a radical change in the general law as would be brought by the literal interpretation argued by Parsons. The legislature did not contemplate making so vital a change in the law, as to permit equities between the original parties to a negotiable instrument to defeat the title of an innocent holder for value in due course. -The acts which will discharge a simple contract for payment of money, in order to effect a discharge of negotiable paper, must be necessarily limited to such acts as relate to and affect the holder of the paper demanding payment of it. It does not include a holder in due course.

-It would injuriously affect the value of commercial paper, by putting it on a plane with simple contracts for the payment of money.

-The elements constituting what a holder in due course is, and the rights of an HDC must be considered in construing Sec. 119. The rights of a bona fide assignee of such a note, in due course, are not affected by the equities of the maker.

-Payment by Parsons to Burton & Co. before the note became due, whether before or after they had negotiated it, could not defeat collection by an innocent bystander for holder for value who acquired it in due course.

Disposition Judgment is affirmed.

SCHWARTZMAN V POST

94 App. Div. 474, 84 NYS 922, 87 NYS 872 (1903) ~jonas~

FACTS

-Defendant Post executed a note for $5,000 payable to his own order on demand, indorsed by him, his father and by defendant Postawalsky. The note was delivered to plaintiff Schwartzman in payment of his interest in a partnership of which he & Postawalsky were members. -Subequently, Post paid $2,750, & a 3rd party paid

$500. The payment was made on the condition that the note for $5,000 be surrendered to him.

-Schwartzman sued Post for the balance due on the note, but as Post had possession of the same, he did not allege that he was the holder thereof. At the

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Law 108: Negotiable Instruments

First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

[Ch 6&7 -

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conclusion of the case, defendant moved to dismiss the complaint on the ground that the surrender of the note to defendant constituted a discharge thereof.

ISSUE

WON the instrument has been discharged HELD: YES

Ratio Subdivision 5 of Section 200 of the Negotiable

Instruments Law provides that a negotiable instrument is discharged “when the principal debtor becomes the holder of the instrument at or after maturity in his own right”.

Reasoning Post was the maker of the note, & primarily

liable thereon. It was surrendered to him, & he became the “holder” thereof without fraud or mistake, in “his own right”.

DEFINITIONS:

Holder – Sec. 2: “Holder means the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof.”

Person Primarily Liable on Instrument – Sec. 3: “The person ‘primarily’ liable on an instrument is the person who, by the terms of the instrument, is absolutely required to pay the same.”

In his own right – merely excludes such a case as that of a maker acquiring the instrument in purely a representative capacity.

Disposition Judgment reversed. McGLYNN V GRANSTROM

168 Min 164, 210 NW 892 (1926) ~monch~

FACTS

SUBJECT: Promissory note MAKER: not named PAYEE: McGlynn INDORSERS: Granstrom

-The action was brought by payee McGlynn against indorser Granstorm for recovery of the note. McGlynn denied liability and said that the payee was a party to an oral contract between the maker and third parties which discharged the maker from liability. And according to Sec 120 of the NIL, if the maker is discharged, so is the indorser.

-McGlynn relies on Sec 122 of the NIL, saying that such renunciation must be made in writing and thus the contract did not have an effect of releasing the maker from its obligation. There was also no delivery of the note to the maker.

-The lower court ruled in favor of the indorser.

ISSUE

WON the oral contract released the maker (and thus the indorser too)

HELD: YES

-The requirement of writing in Sec 122 pertains only to renunciation. It does no apply to Sec 119 and 120 which talks about discharge.

Reasoning

-Sec 122, which speaks of renunciation, should be distinguished from Sec 119 and 120, which speaks of discharge. Since renunciation and discharge are separated, it suggests that one is different from the other. Under S122, renunciation should be in writing. In S119 and 120, no requirement exists. If there was an intention to apply the requirement of writing to S199 and 120, why the need to change the terminology between the two?

-Examining the instances in S119 and S120, it would be radical and impractical to require writing in the discharge of the instrument.

-History: French law - obligation by a bill of exchange could be voluntarily remitted by the holder without consideration. The principle was approved by Foster v Dawber and it was held there that it applies to bills and notes. It was adopted by the English Bills of Exchange Act, where the written requirement was added. In that form and meaning it came to our uniform statute. That meaning cannot be expanded without impringing upon the intended effect of other provisions of the statute, particularly S119 and S120. So, we are constrained to hold that the renunciation, which under S120 must be in writing, is one accomplished by the unilateral act of the holder. Ordinarily, but not always, it will be without consideration.

-Gorin v Wiley: S122 does not apply to novation which discharged the makers of a note.

-Hall v Wichita: S122 inapplicable to an oral novation. S122 intended to deal only “with the formal and express release of common law” while Sec 119 was intended “to continue in effect other recognized methods of discharging obligations of this character” -In these cases, it can be seen that the requirement in S122 was intended to apply only to renunciation and not extend to discharge in S199 and S120.

McCORMICK V SHEA 99 NY Supp. 467 (1906) ~ice~

FACTS

SUBJECT: Promissory Note MAKER: Thomas Shea

PAYEE: John McCormick INDORSER: Annie Shea

-Before maturity Annie Shea as indorser was cancelled through the representative of the attorney of Shea in the presence of McCormick. Defendant claims that the cancellation was part of their claims against each other while plaintiff claims that the cancellation was not authorized and that there was no consideration for such cancellation. Also, plaintiff claims that even if he did agree, the effect would only be to release the indorser as a person secondarily liable.

ISSUE

Who bears the burden of proving the cancellation without authority?

HELD

-A cancellation made unintentionally or under a mistake or without the authority of the holder is inoperative; but where an instrument or any signature thereon appears to have been cancelled, the burden of proof lies on the party who alleges that the cancellation was made unintentionally or under a mistake or without authority.

-The burden of proof was with the plaintiff

Disposition: Judgment affirmed.

ROBERTS V CHAPPELL

63 Ohio Apple 397, 26 NE 2d 930 ~rean~

FACTS

SUBJECT: Promissory note

MAKER: George Daily, Audrey Daily, Lewis Daily PAYEE/INDORSER: Chappell

HOLDER: Roberts

-George Daily, Audrey Daily, Lewis Daily executed a note for S237 payable to the order of Chappell. The latter indorsed it to Roberts. Upon presentment, the note was dishonored. Roberts sued Chappell

-Defense of Chappell: No claim against the estate of Lewis Daily (now dead) was filed by Roberts. The estate has now been administered and closed. Roberts should have presented the note to the administrator. Since he failed to do so, Chappell should be discharged.

-Chappell bases his claim on S8225 of the General Code which says that a person secondarily liable on the instrument is discharged by the discharge of a prior party.

ISSUE

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Law 108: Negotiable Instruments

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AY 2008-09

Prof. Rogelio V. Quevedo

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HELD: NO

-The discharge of a prior party referred to is a discharge by an act of the holder and not a discharge accomplished by operation of law.

Reasoning

- Romero case: discharge in the NIL contemplates some affirmative act by the holder and does not contemplate passive conduct. This interpretation is in accord with the Ohio law relating to suretyship. Under such law, mere failure to claim of a creditor against the estate does not discharge the surety. The rule relating to sureties becomes important since the rights and duties of sureties correspond to that of indorsers. -The words “discharge by a prior party must be given its common and accepted meaning. Prior to the enactment of the law, such meaning refers to a discharge by an act of the holder and not a discharge accomplished by operation of law.

CORLEY V FRENCH

154 Tenn. 672, 294 S.W. 513 (1927) ~eva~

FACTS

SUBJECT: Note for $2,500 MAKER: Volunteer Mfg. Co. PAYEE-HOLDER: Corley

INDORSERS: French Nichol, et al.

-Note contained a waiver of presentment and notice, and was made payable at the American National Bank. The note was not presented at this bank on the day of maturity nor thereafter. The maker had funds on deposit in this bank at the date of maturity of the note sufficient to pay it. The maker was later adjudged bankrupt.

-Corley sued French and other indorsers.

-Defense: discharge by constructive tender of payment and by laches in failing to collect from the maker. -Nichol was held liable. The other indorsers were discharged in bankruptcy.

ISSUE

WON French is liable on the note as indorser. HELD: YES.

-While the effect of the waiver was to make the indorser liable without the necessity of presentment, French did not become technically or strictly “primarily” liable (CA found French liable saying that he became primarily liable). French continued to be secondarily

liable, but without the right to interpose the defense based upon want of presentment, notice and protest. His obligation by virtue of the waiver became absolute and unconditional with respect to defenses so grounded.

-Every indorser who has waived presentment is liable to the holder without reference to presentment. No steps need be taken by the holder upon maturity to charge the waiving indorser, who engages that it shall be paid according to its tenor, without presentment, and whether proceedings on dishonor be taken or not. -The Negotiable Instrument Act provides that “when the instrument is dishonored by non-payment, an immediate right of recourse to all parties secondarily liable thereon accrues to the holder.” So, without presentment, the holder has his right of recourse upon dishonor that is failure to pay, against those primarily liable, and against those secondarily liable who have waived presentment, or those as to whom, not having so waived, the prescribed steps have been taken. (ON THE TOPIC)

-Defense insists that he is “secondarily liable” only, despite his waiver, in the meaning of this term as used in Sec.120, by which it is provided that one so liable only is discharged “by a valid tender of payment made by a prior topic”, and that constructive tender by the maker “primarily liable” took place under the provision of Sec.70 which states that: “If the instrument is, by its terms, payable at a special place and he (the person primarily liable) is able and willing to pay it there at maturity, such ability and willingness are equivalent to a tender of payment upon his part.”

-This section is without direct application to a party to the instrument who has voluntarily waived presentment of payment. However, in the instant case, while under Sec70, presentment was not necessary to charge the maker, if it appears that the maker had been both able and willing (as does not appear) to pay the note at the bank named therein at maturity, a constructive tender would have accrued as to him, and such tender might have constituted such “a valid tender of payment made by the prior party” as would have operated to discharge the indorser.

-BUT while there is evidence that the maker had funds in the bank at the maturity of the note (to show “ability”, there is no evidence of “willingness” on the part of the maker to have such application made of its funds of deposit, and these element must concur to be equivalent to a tender of payment upon his part. -Sec.87 provides: “Where the instrument is made payable at a bank, it is equivalent to an order to the bank to pay the same for the account of the principal debtor thereon.” Under this section, it is both the right

and the duty of the bank to pay the note from the funds of the maker on deposit with it, which discharged the indorser. In the present case, the bank has the right to so apply its depositor’s fund only when the bank is the place of payment and the payee and holder of the instrument as well. Thus, no tender was made by or on behalf of the maker primarily liable on the instrument which operated to discharge the indorser.

Dispositive CA affirmed.

MAGLIONE V PENTA

266 Mass. 413, 165 N.E. 424 (1929) ~javi~

FACTS

SUBJECT: a note secured by mortgage MAKER/MORTGAGOR: unnamed PAYEE /INDORSER/DEFENDANT/: PENTA INDORSEE/HOLDER/PLAINTIFF:MAGLIONE

-Penta is a payee of a note secured by mortgage. Penta indorsed the note and assigned the mortgage to Maglione. A subsequent foreclosure (on the mortgage) was instituted by Maglione. But he dropped the foreclosure suit (mortgagor paid $300).

-Some months later, Penta inquired of Maglione whether the note and mortgage have been paid. Maglione said that he had a satisfactory arrangement with the maker-mortgagor.

-Maker defaulted so Maglione sued indorser Penta -Jury found that Maglione had entered into a valid and binding agreement with maker to extend deadline of note

ISSUE

WON Penta being secondarily liable for the note, is discharged from liability in lieu of Maglione’s agreement with maker-mortgagor

HELD: YES

-If the plaintiff made a valid and binding agreement with the makers of the note extending the time of payment without the knowledge and consent of the surety, the surety is thereby discharged.

-As an indorser, Penta was secondarily liable. But the jury found that there was a valid and binding agreement between Maglione and the makers thereby discharging Penta from his liability.

CHAPTER VII: OTHER FORMS

OF COMMERCIAL PAPER

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AY 2008-09

Prof. Rogelio V. Quevedo

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LEE, MICO METALS CORP v. CA and PBC

375 SCRA 579; De Leon, Jr; Feb 1, 2002 ~kitik~

FACTS

-A petition for review of the decision of the CA ordering

defendants-appellees jointly and severally to pay plaintiff PBCom a certain sum arising from ordinary loans, letters of credit and trust receipt transactions granted by the plaintiff plus legal interest until fully paid.

-On March 2, 1979, Charles Lee, as President of MICO wrote private respondent Philippine Bank of Communications (PBCom) requesting for a grant of a discounting loan/credit line in the sum of Three Million Pesos (P3,000,000.00) for the purpose of carrying out MICO’s line of business as well as to maintain its volume of business.On the same day, Charles Lee requested for another discounting loan/credit line of Three Million Pesos (P3,000,000.00) from PBCom for the purpose of opening letters of credit and trust receipts.

-On March 26, 1979, MICO availed of the first loan of One Million Pesos (P1,000,000.00) from PBCom. Upon maturity of the loan, MICO caused the same to be renewed, the last renewal of which was made on May 21, 1982 under a promissory note. Two more loans to complete the three million were availed by MICO under the same terms.

-As security for the loans, MICO through its Vice-President and General Manager, Mariano Sio, executed on May 16, 1979 a Deed of Real Estate Mortgage over its properties situated in Pasig, Metro Manila.

-On March 26, 1979 Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap and Richard Velasco, in their personal capacities executed a Surety Agreement in favor of PBCom whereby the petitioners jointly and severally, guaranteed the prompt payment on due dates or at maturity of overdrafts, promissory notes, discounts, drafts, letters of credit, bills of exchange, trust receipts, and other obligations of every kind and nature, for which MICO may be held accountable by PBCom.

-On July 14, 1980, petitioner Charles Lee, in his capacity as president of MICO, wrote PBCom and applied for an additional loan in the sum of Four Million Pesos (P4,000,000.00). The loan was intended for the expansion and modernization of the company’s machineries. Upon approval of the said application for loan, MICO availed of the additional loan of Four Million Pesos (P4,000,000.00) as evidenced by a promissory note.

-As per agreement, the proceeds of all the loan

availments were credited to MICO’s current checking account with PBCom. To induce the PBCom to increase the credit line of MICO, Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap, Richard Velasco and Alfonso Co (hereinafter referred to as petitioners-sureties), executed another surety agreement in favor of PBCom on July 28, 1980, whereby they jointly and severally guaranteed the prompt payment on due dates or at maturity of overdrafts, promissory notes, discounts, drafts, letters of credit, bills of exchange, trust receipts and all other obligations of any kind and nature for which MICO may be held accountable by PBCom. -On two occasions, MICO filed with PBCom an application for a domestic letter of credit. The corresponding irrevocable letters of credit was approved. Thereafter, the domestic letters of credit was negotiated and accepted by MICO as evidenced by the corresponding bank draft issued for the purpose. After the suppliers of the merchandise was paid, trust receipts upon MICO’s own initiative, was executed in favor of PBCom.

On three occasions MICO applied for authority to open a foreign letter of credit in favor of various corporations and thus, the corresponding letter of credits was then issued by PBCom with cables sent to the beneficiaries advising that said beneficiaries may draw funds from the account of PBCom in its correspondent bank’s New York Office. As in past transactions, MICO executed in favor of PBCom a corresponding trust receipt. In all the transactions involving foreign letters of credit, PBCom turned over to MICO the necessary documents such as the bills of lading and commercial invoices to enable the latter to withdraw the goods from the port of Manila.

-Upon maturity of all credit availments obtained by MICO from PBCom, the latter made a demand for payment. For failure of petitioner MICO to pay the obligations incurred despite repeated demands, private respondent PBCom extrajudicially foreclosed MICO’s real estate mortgage. Aside from the unpaid balance of Five Million Four Hundred Forty-One Thousand Six Hundred Sixty-Three Pesos and Ninety Centavos (P5,441,663.90), MICO likewise had another standing obligation in the sum of Four Hundred Sixty-One Thousand Six Hundred Pesos and Six Centavos (P461,600.06) representing its trust receipts liabilities to private respondent. PBCom then demanded the settlement of the aforesaid obligations from herein petitioners-sureties who, however, refused to acknowledge their obligations to PBCom under the surety agreements. Hence, PBCom filed a complaint with prayer for writ of preliminary attachment before the Regional Trial Court of Manila.

-Petitioners (MICO and herein petitioners-sureties) denied all the allegations of the complaint filed by respondent PBCom, and alleged that: a) MICO was not granted the alleged loans and neither did it receive the proceeds of the aforesaid loans and since no loan was ever released to or received by MICO, the corresponding real estate mortgage and the surety agreements signed concededly by the petitioners-sureties are null and void.

-The trial court gave credence to the testimonies of herein petitioners and dismissed the complaint filed by PBCom. In ruling for herein petitioners, the trial court said that PBCom failed to adequately prove that the proceeds of the loans were ever delivered to MICO. Hence, inasmuch as no consideration ever passed from PBCom to MICO, all the documents involved therein, such as the promissory notes, real estate mortgage including the surety agreements were all void or nonexistent for lack of cause or consideration. The trial court said that the lack of proof as regards the existence of the merchandise covered by the letters of credit bolstered the claim of herein petitioners that no purchases of the goods were really made and that the letters of credit transactions were simply resorted to by the PBCom and Chua Siok Suy to accommodate the latter in his financial requirements.

-CA reversed the said decision and pronounced: “Every negotiable instrument is deemed prima facie to have been issued for valuable consideration and every person whose signature appears thereon to have become a party thereto for value”, the Court of Appeals said that while the subject promissory notes and letters of credit issued by the PBCom made no mention of delivery of cash, it is presumed that said negotiable instruments were issued for valuable consideration. -Petitioners contend that there was no proof that the proceeds of the loans or the goods under the trust receipts were ever delivered to and received by MICO. ISSUE

WON the proceeds of the loans and letters of credit transactions were ever delivered to MICO

HELD: YES

-In civil cases, the party having the burden of proof must establish his case by preponderance of evidence. During the trial of an action, the party who has the burden of proof upon an issue may be aided in establishing his claim or defense by the operation of a presumption, or, expressed differently, by the probative value which the law attaches to a specific state of facts. A presumption may operate against his adversary who has not introduced proof to rebut the presumption. The

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effect of a legal presumption upon a burden of proof is to create the necessity of presenting evidence to meet the legal presumption or the prima facie case created thereby, and which if no proof to the contrary is presented and offered, will prevail. The burden of proof remains where it is, but by the presumption the one who has that burden is relieved for the time being from introducing evidence in support of his averment, because the presumption stands in the place of evidence unless rebutted. Under Section 3, Rule 131 of the Rules of Court the following presumptions, among others, are satisfactory if uncontradicted: a) That there was a sufficient consideration for a contract and b) That a negotiable instrument was given or indorsed for sufficient consideration. As observed by the Court of Appeals, a similar presumption is found in Section 24 of the Negotiable Instruments Law which provides that every negotiable instrument is deemed prima facie to have been issued for valuable consideration and every person whose signature appears thereon to have become a party for value. Negotiable instruments which are meant to be substitutes for money, must conform to the following requisites to be considered as such a) it must be in writing; b) it must be signed by the maker or drawer; c) it must contain an unconditional promise or order to pay a sum certain in money; d) it must be payable on demand or at a fixed or determinable future time; e) it must be payable to order or bearer; and f) where it is a bill of exchange, the drawee must be named or otherwise indicated with reasonable certainty. Negotiable instruments include promissory notes, bills of exchange and checks. Letters of credit and trust receipts are, however, not negotiable instruments. But drafts issued in connection with letters of credit are negotiable instruments.

-Private respondent PBCom presented the following documentary evidence to prove petitioners’ credit availments and liabilities: Promissory Notes, Irrevocable letter of credits, drafts, trust receipts.

-The above-cited documents presented have not merely created a prima facie case but have actually proved the solidary obligation of MICO and the petitioners, as sureties of MICO, in favor of respondent PBCom. While the presumption found under the Negotiable Instruments Law may not necessarily be applicable to trust receipts and letters of credit, the presumption that the drafts drawn in connection with the letters of credit have sufficient consideration. Under Section 3(r), Rule 131 of the Rules of Court there is also a presumption that sufficient consideration was given in a contract. Hence, petitioners should

have presented credible evidence to rebut that presumption as well as the evidence presented by private respondent PBCom. The letters of credit show that the pertinent materials/merchandise have been received by MICO. The drafts signed by the beneficiary/suppliers in connection with the corresponding letters of credit proved that said suppliers were paid by PBCom for the account of MICO. On the other hand, aside from their bare denials petitioners did not present sufficient and competent evidence to rebut the evidence of private respondent PBCom. Petitioner MICO did not proffer a single piece of evidence, apart from its bare denials, to support its allegation that the loan transactions, real estate mortgage, letters of credit and trust receipts were issued allegedly without any consideration.

MERCER COUNTY V HACKETT US Supreme Court; 1 Wall. 83; 1863 ~brian b~

FACTS

SUBJECT: Bonds issued for stock in Pittsburgh and Erie (Railroad) Company [PEC] payable in 20 years

MAKERS: County of Mercer, Commonwealth of Pennsylvania

PAYEE: PEC or bearer BEARER: Hackett

-Legislature of Pennsylvania authorized Mercer’s commissioners to subscribe to stock of PEC, where the railroad if built would pass through their county and benefit it. The act, however, had a restriction wherein the bonds to be issued shall in no case be sold, assigned, or transferred by the PEC at less than par value.

-Rightly or wrongly – w/ or w/o authority – the bonds to the extent of several thousand of dollars were issued. The instruments were elegantly engraved, with such external indications as were calculated to arrest the eye, and through it to inspire confidence. It was signed by the Mercer commissioners, attested by their clerk, and authenticated by the county seal conspicuously put. It was announced as issued for stock in the PEC. The pertinent obligatory part, read:

“… the County of Mercer (Pennsylvania) is indebted to (PEC) in the full and just sum of ($1k), which sum said county agrees to pay, (20yrs after date), to (PEC) or bearer, annually… upon delivery of the coupons severally hereto annexed … the faith, credit and property of the County of Mercer are hereby solemnly pledged, under the authority of an act of Assembly of this Commonwealth…”

-A number of bonds were obtained, bona fide and for value paid, by Hackett. And the coupons, being due and unpaid, Hackett sued the county of Mercer.

-Circuit Court pointed out the “faith, credit and property…” part and declared that the instruments were on their face complete and perfect; exhibiting no defect in form of substance.

ISSUE

WON evidence of fraud practiced by the railroad company to whom these bonds were delivered, and by whom they were paid to bona fide holders for value, or the fact that they were negotiated at less than their par value, be received to defeat the recovery of Hackett HELD: NO

-The species of bonds is a modern invention, intended to pass by manual delivery, and to have qualities of negotiable paper; and their value depends mainly upon this character. Being issued by States and corporations they are necessarily under seal. But there is nothing immoral or contrary to good policy in making them negotiable, if the necessities of commerce require that they should be so. A mere technical dogma of the courts cannot prohibit the commercial world from inventing or using any species of security not known in the last century. When a corporation covenants by these means and obtains funds for the accomplishment of the useful enterprises of the day, it cannot be allowed to evade payment by parading some obsolete judicial decision that a bond, for some technical reason, cannot be made payable to bearer.

-The epidemic insanity of the people, the folly of county ofiicers, the knavery of railroad “speculators” are pleas which might have just weight in an application to restrain the issue or negotiation of these bonds, but cannot prevail to authorize their repudiation, after they have been negotiated and have come into the possession of bona fide holders

Disposition Judgment affirmed.

MANKER V AMERICAN SAVINGS & TRUST CO

Washington SC, 131 Wash. 430, 230 Pac. 406 (1924) ~mini~

FACTS

SUBJECT: 2 local improvement bonds which were stolen from the appellant’s safety deposit box. The bonds provide that:

- the holders shall have no claim against the city, except from the special assessment made for the improvement for which bond was issued

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- the city of seattle promises to pay… or bearer… out of the fund established by ordinance No. 36562 of said city ( local improvement fund district No. 3032)… and not otherwise

- the holders or owners of this bond shall look only to said fund for the payment of either the principal or interest in this bond

HOLDER: respondent bank (American Savings)

-The bonds were stolen and came into the possession of the respondent bank, which purchased it in due course of business. The respondent City of Seattle has the funds ready to pay the bonds.

ISSUE

(Who is entitled to the payment on the bonds, appellant or respondent bank?)

WON these bonds are negotiable instruments

HELD: NO, they are not negotiable instruments. Therefore the appellant is entitled to payment on the bonds.

-Negotiable instruments must contain an unconditional promise or order to pay a sum certain in money. An order or promise to pay only out of a particular fund is not unconditional. Therefore, these bonds, which provide for the particular fund out of which the bonds are to be paid, are not negotiable.

-Respondent bank argues that these bonds should be held negotiable as a matter of public policy, because large sums of money are now invested in securities of that sort, and to hold them as non-negotiable would be to destroy their market value, and few persons would assume the risk incident to purchasing these bonds, if they are not negotiable. The court cannot decide these questions upon a matter of public policy, however. Where the law is as plain as it is here, the decision must be governed by the law.

Disposition The appellant will be entitled to the

amount held by the city of Seattle for the exctinction of his bonds.

ENOCH V BRANDON

New York CA; 249 N.Y. 263, 164 N.E. 45; 1928 ~ricky~

FACTS

SUBJECT: series of bonds for $7,500,000 payable on Nov1, 1941 to bearer, or, if registered, to the registered holder. They are all equally secured by and entitled to the benefits and subject to the provisions of a trust mortgage and redeemable at 105% and interest at

certain dates. The bonds may become due in advance of maturity in case of default under the mortgage. The bonds contain a provision allowing it to be registered in the usual way, and, except where registered, “they are to be treated as negotiable, and all persons are invited by the company to act accordingly.”

MAKER/ISSUER: The Manitoba Power Company. It was obliged to create a sinking fund to provide for its purchase and redemption.

CONTROVERSY: It appears from the disposition of the case that some of these Manitoba bonds were purchased in due course from a thief; hence, the title of the purchaser was put in issue. The lower court (called the Trial Term) held that the bonds were negotiable hence the purchaser in due course may retain them but the Appellate Division reversed.

ISSUE

WON the bonds are negotiable instruments, hence, a purchaser in due course from a thief may retain them. HELD: YES.

Ratio The NIL deals with the form of the instrument –

with what a mere inspection of its face should disclose. Reference to the paper itself said to be negotiable determines its character.

Reasoning If in the bond or note anything appears

requiring reference to another document to determine whether in fact the unconditional promise to pay a fixed sum at a future date is modified or subject to some contingency, then the promise is no longer unconditional. The rule itself is not a difficult one. The trouble lies in its application to particular facts. There is no infallible test as to whether there is a modification of the promise. Because of differences in the words used, or in the arrangement of paragraphs, sentences, or clauses, each instrument must be interpreted by itself. The instrument must be considered as a whole and when the meaning is doubtful, the construction most favorable to the bondholder must be adopted.

-The bonds in this case, speaking of possible redemption, of acceleration of payment, of a sinking fund, and notice, it continues: “All as provided” in the trust mortgage, “to which reference is hereby made for a description of the property mortgaged and pledged, the nature and extent of the security, the rights of the holders of the bonds with respect thereto, the manner in which notice may be given to such holders, and the terms and conditions under which said bonds are issued and secured.”

-There is no modification of the promise to pay made in explicit terms. The provisions all have to do with the trust mortgage. They refer to the rights conferred by it

upon the bondholders and limit and explain those rights. They are speaking solely of security. It would never occur to a purchaser, scanning the bonds, that because of something contained in the mortgage he might be unable to collect the amount due him. It only means that the bonds are to be issued not only upon the general credit of the corporation but upon the faith of some collateral mortgage.

-The acceleration clause in case of the default, the privilege given the obligor to redeem before maturity at certain dates, the obligation to create a sinking fund or the fact that the bonds are payable to bearer, or, if registered, to the registered holder does not affect the bonds’ negotiability.

Disposition Decision of the Appellate Division

reversed and that of the Trial Term affirmed. ARANETA V PHIL. NAT’L BANK

95 Phil. 160 (1954) ~joey~

FACTS

-PNB granted Araneta’s application for a commercial letter of credit in favor of Allied National Corporation for $7,440.

-A draft for $4,013.13 was negotiated by PNB’s correspondent bank in London, Barclay’s Bank Ltd., against Araneta’s credit. PNB paid Barclay’s the amount of the draft.

-By the time the draft matured, the British pound was devaluated from the rate of $4.0325 to $2.80124. -On the first business day after the maturity of the draft, PNB sent Araneta a bill of P33,727.92 and on the same date Araneta forwarded to PNB a check for P23,194.37 in full payment of its indebtedness.

-The check was returned without acknowledgment. Araneta re-transmitted the check. PNB issued a receipt stating that it was received as partial payment and that there was still a P10,533.55 balance.

-PNB debited Araneta’s overdraft with the amount of the balance. Hence, Araneta filed present complaint. -CFI dismissed complaint

ISSUE

WON Araneta should be liable for the value of the draft under the devauated exhange rate

HELD: NO

-Araneta’s application for a commercial letter of credit, as granted by PNB, is the contract between the parties. -Although the plaintiff’s application provides for payment at maturity of the draft, this refers merely to the time when the plaintiff was bound to pay, and not

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to the rate of exchange at which the draft was drawn and presented or negotiated.

-The application provides that the plaintiff promised and agreed to pay at maturity in Philippine currency, the equivalent of any “amount that might be drawn or paid upon the faith” of the plaintiff’s credit and that the plaintiff agreed to “reimburse” the defendant bank in said manner.

-It is admitted that the PNB actually paid for the draft in question was P33,727.92. Moreover, the tern “reimburse” requires the return of something paid.

Disposition Appealed judgment is affirmed.

NATL RICE & CORN CORP V PAN-PHIL SHIPPING (CA) 51 O.G. No. 11, 5564; Sanchez

~chriscaps~ FACTS

-The parties entered into contract of purchase and sale, where Pan-Phil agreed to sell & deliver to NARIC 850 metric tons of Ecuadorian Fortuna Canilla rice at US $12.51, per 100 pounds net shipped weight final, CIF Manila.

-Goods were shipped in good condition fr Ecuador. -Contract calls for bond of P20K by Pan-Phil in favor of Naric. In accordance w/ this, Pan-Phil, as principal, and RF Navarro w/ Julian Salgado (deceased), as sureties, executed a bond. Appellants obligated themselves, jointly and severally, to answer for faithful performance by Pan-Phil of its obligations.

-The contract also provides that Naric agrees to open by cable an irrevocable letter of credit (LC) against full shipping docs w/ certificate of quality issued by representative of Naric, in favor of Nicholas Graver & Sons (agent of Pan-Phil), of California and/or assignee, for $2,579,155.42, payable in New York negotiation of drafts to expire not later than Jan 31, 1947.

-Accdg to contract, in case of non-shipment by Nov 30, 1948, except force majeure beyond control of Pan-Phil, Pan-Phil shall pay/reimburse Naric for bank commission and miscellaneous banking charges in connection w/ contract.

-Naric applied to PNB for opening of LC.

-PNB, on same date of contract, arranged w/ and transmitted by cable to Anglo-California Nat’l Bank irrevocable LC No. 25865, payable on sight against complete shipping docs w/ certificate as to weight, quality and moisture content of the rice.

-PNB charged Naric P12,907.77 for the opening of the

LC; PNB debited Naric’s account. -Pan-Phil failed to ship the rice. ISSUE

WON Pan-Phil is liable HELD: YES

-Naric complied w/ its obligations. Pan-Phil says non-shipment was due to causes beyond its control – that the rice wasn’t shipped bec Nicholas Graver & Sons relinquished its interest in the LC upon alleged ground that its terms didn’t conform w/ conditions of the contract. But one thing is certain. The LC is in accord with the contract. Mere refusal of beneficiary to use LC can’t be force majeur w/in meaning of the law. Pan-Phil’s liability to reimburse Naric for bank expenses is inescapable.

-Pan-Phil claims the LC was subsequently cancelled. But the LC, being irrevocable and in favor of a specified party, can’t be changed by Naric or the bank w/o consent of the beneficiary and Pan-Phil.

-It’s a banking practice for bank to collect commission & charges for its svcs in opening of LC irrespective of WON beneficiary uses the LC. First, because svcs were actually rendered by bank in negotiation of LC w/ the bank’s addressee at San Francisco and second, because the minute the said bank cabled the LC to its correspondent at San Francisco, the former became exposed to liability thereon until it was cancelled.

BPI V DE RENY FABRIC INDUSTRIES

35 SCRA 256; Castro; Sept 16, 1970 ~’del~

FACTS

-On 4 different occasions in 1961, De Reny through Aurora Carcereny (aka Aurora Gonzales), president and Aurora Tuyo, secretary of the corporation, applied to the BPI for 4 irrevocable commercial letters of credit (L/C) to cover the purchase of goods such as dyestuffs from their supplier J. B. Distributing Co.

-All the applications of the corporation were approved and the corresponding commercial L/C agreements were executed pursuant to banking procedures.

-Under the agreements, the aforementioned officers bound themselves personally as joint and solidary debtors with the corporation.

-As per bank regulations then in force, De Reny delivered to BPI peso marginal deposits as each L/C was opened.

-BPI then issued irrevocable commercial L/Cs addressed to its correspondent banks in the US with uniform

instructions for them to notify the beneficiary thereof, JB Distributing Co, that they have been authorized to negotiate the latter’s sight drafts up to the amounts mentioned therein, if accompanied upon presentation, by full set of negotiable clean “on board” ocean bills of lading, covering the merchandise appearing on the L/Cs (ie dyestuffs).

-Consequently, the corresponding banks debited the account of BPI w/ them up to the full value of the drafts presented by the JB Dist. Co. plus commission thereon, and thereafter, endorsed and forwarded all documents to BPI.

-As each of the shipments arrived, De Reny made partial payments to BPI however, further payments were discontinued subsequently as a result of the chemical test wherein it was found that the goods that arrived in Manila were not dyestuffs but were colored chalks.

-De Reny refused to take possession of the goods so BPI caused them to be deposited w/ a bonded warehouse and sued De Reny.

-The lower court ordered the defendants to pay BPI w/ interest.

ISSUE

WON it was the duty of the correspondent banks of BPI to take the necessary precaution to ensure that the goods shipped under the covering L/C conformed w/ the item appearing therein TF having failed to do so, no claim for recoupment could be had against the defendants

HELD: NO, defendants are liable for recoupment. -Under the terms and conditions of their commercial L/C agreement with BPI, the defendants agreed that BPI shall not be responsible for the “existence, character, quality, quantity, conditions, packing, value or delivery of the property purporting to be represented by documents; for any difference in character, quality, quantity, condition, or value of the property from that expressed in documents,” or for “partial or incomplete shipment, or failure or omission to ship any or all the property referred to in the Credit,” as well as “for any deviation from instructions, delay, default, or fraud by the shipper or anyone else in connection with the property the shippers or vendors and ourselves(purchasers) or any of us.”

-Having agreed to these terms, the defendants have to comply w/ their covenant.

-But even w/o said stipulation, they are still liable because banks, in providing financing in int’l business transactions such as those entered into by the defendants, do NOT deal with the property to be

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exported or shipped to the importer but deal only with documents (as per Art 10 of the Uniform Customs and Practices for Commercial Documentary Credits Fixed for the 13th Congress

of Int’l Chamber of Commerce)

-Having proved that there exists a custom in int’l banking and financing circles negating any duty on the part of a bank to verify whether what has been described in the L/Cs or drafts or shipping docs actually tallies with what was loaded in the ship, the defendants are bound by said established usage.

Disposition Judgment affirmed. SANTAMARIA V HSBC

Bautista-Angelo; 89 Phil. 780 (1951) ~jaja~

FACTS

-Santamaria bought 10,000 shares of the Batangas Minerals through the offices of Woo, Uy-Tioco & Naftaly, a stock brokerage firm and paid therefore the sum of P8,014.20 as shown by receipt Exh. “B.” The buyer received Stock Certificate No. 517, Exh. “E,” issued in the name of Woo Uy-Tioco & Naftaly and indorsed in blank by this firm. On March 9, 1937, Mrs. Santamaria placed an order for the purchase of 10,000 shares of the Crown Mines Inc. with R.J. Campos & Co. a brokerage firm and delivered Certificate No. 517 to the latter as security therefor with the understanding that said certificate would be returned to her upon payment of the 10,000 Crown Mines, Inc. shares. Exh. “D” is the receipt of the certificates in question signed by one Mr. Coscolluela, manager of the R.J. Campos & Co., Inc. According to certificate, Exh. “E,” R.J. Campos & Co., Inc. bought for Mrs. Josefa T. Santamaria 10,000 shares of the Crown Mines, Inc. at .225 a share, or the total amount of P2,250.00.

-At the time of the delivery of Stock Certificate No. 517 to R.J. Campos & Co., Inc. this certificate was in the same condition as that when Mrs. Santamaria received it from Woo, Uy-Tioco & Naftaly, with the sole difference that her name was later written in lead pencil on the upper right hand corner thereof.

-Two days later, on March 11, Mrs. Santamaria went to R.J. Campos & Co., Inc. to pay for her order of 10,000 Crown Mines shares and to get back Certificate No. 517. Coscolluela then informed her that R.J. Campos & Co., Inc. was no longer allowed to transact business due to the prohibition order from the Securities and Exchange Commission. She was also informed that her stock certificate was in the possession of the Hongkong & Shanghai Banking Corporation (HSBC). Certificate No. 517 came into the possession of the HSBC because R.J.

Campos & Co., Inc. had opened an overdraft account with this bank and to this effect it had executed on April 16, 1936 a document of hypothecation, Exh. “I,” by the term of which pledged to the said bank all the stocks, shares, and securities which I/We may hereafter come into their possession on my/our account and whether originally deposited for sale custody or for any other purpose whatever or which may hereafter be deposited by me/us in lieu of or in addition to the Stocks, Shares and Securities now deposited for any other purposes whatsoever.

-On March 11, 1937, as shown by Exh. “G,” Certificate No. 517, already indorsed by R.J. Campos & Co., Inc. to the HSBC, was sent by the latter to the office of the Batangas Minerals, Inc. with the request that the same be cancelled and a new certificate be issued in the name of R.W. Taplin as trustee and nominee of the banking corporation. Taplin was an officer of this institution in charge of the securities belonging to or claimed by the bank. As per this request the Batangas Minerals, Inc. on March 12, 1937, issued Certificate No. 715 in lieu of Certificate No. 517, in the name of Taplin as trustee and nominee of the HSBC.

-Mrs. Santamaria said she made the claim to the bank for her certificate, though she did not remember the exact date, but it was most likely on the following day of that when she went to Coscolluela for the purpose of paying her order for 10,000 shares of the Crown Mines, Inc. or else on March 13, 1937. In her interview with Taplin, the bank’s representatives, she informed him that the certificate belonged to her and she demanded that it be returned to her. Taplin then replied that the bank did not know anything about the transaction had between her and and R.J. Campos & Co., Inc. and that he could not do anything until the case of the bank with Campos shall have been terminated. This declaration was not contradicted by the adverse party.

-In Civil Case No. 51224, R.J. Campos & Co., Inc. was declared insolvent, and on July 12, 1937, the HSBC asked permission in the insolvency courts to sell the R.J. Campos & Co., Inc. securities listed in its motion by virtue of the document of hypothecation, court granted this motion.

-On June 13, 1938, the 10,000 shares of Batangas Minerals, Inc. represented by Certificate No. 715 were sold to the same bank by the Sheriff for P300.00 at the foreclosure sale authorized by said order. R.J. Campos, the president of R.J. Campos & Co., Inc. was prosecuted for estafa and found guilty of this crime and was sentenced by the Manila Court of First Instance in Criminal Case No. 54428, to an imprisonment and to indemnify the offended party, Mrs. Josefa Santamaria, in the amountof P8,041.20 representing the value of

the 10,000 shares of Batangas Minerals, Inc. (Exhs. “I” and “J”). The offended party and RW Taplin were among the witnesses for the prosecution in this criminal case No. 54428.

-When Mrs. Santamaria failed in her efforts to force the civil judgment rendered in her favor in the criminal case because the accused became insolvent, she filed her complaint in this case on October 11, 1940. At the trial both parties agreed that the 10,000 Batangas Minerals shares formerly represented by Certificate No. 517 and thereafter by Certificate No. 715, have no actual market value. Defendants-appellants contend in the first place that the trial court erred in finding that the plaintiff-appellee was not chargeable with negligence in the transaction which gave rise to this case.

ISSUE

WON defendant bank was obligated to inquire who the real owner of the shares represented by the certificate of stock was

HELD: NO.

-The certificate of stock in question was issued in the name of the brokerage firm—Woo, Uy-Tioco & Naftaly and that said indorsement was guaranteed by R.J. Campos & Co., Inc., which in turn indorsed it in blank. This certificate is what is known as street certificate. Upon its face, the holder was entitled to demand its transfer into his name from the issuing corporation. The Bank was not obligated to look beyond the certificate to ascertain the ownership of the stock at the time it received the same from R.J. Campos & Co., Inc. for it was given to the Bank pursuant to their letter of hypothecation. Even if said certificate had been in the name of the plaintiff but indorsed in blank, the Bank would still have been justified in believing that R.J. Campos & Co. Inc. had the title thereto for the reason that it is a well-known practice that a certificate of stock, indorsed in blank, is deemed quasi negotiable, and as such the transferee thereof is justified in believing that it belongs to the holder and transferor. -A mere claim of ownership does not establish the fact of ownership. The right of the plaintiff in such a case would be against the transferor. The fact that on the right margin of said certificate the name of the plaintiff appeared written, granting it to be true, cannot be considered sufficient reason to indicate that its owner was the plaintiff considering that said certificate was indorsed in blank by R.J. Campos & Co., Inc. and was transferred in due course by the latter to the Bank under their letter of hypothecation. Said indicium could

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