CONCEPTUAL FRAMEWORK
l. Birth/Creation of Negotiable Instruments (sec. 10-29) II. Life (sec. 30-69)
̇ Negotiability
̇ Holder in due course ̇ Parties
III. Death (sec. 70-189) ̇ Proceedings ̇ Defenses ̇ Discharge
ACT NO. 2031
February 03, 1911
THE NEGOTIABLE INSTRUMENTS LAW
Introduction
History and Development
The term commercial paper refers to written promises or obligations to pay sums of money that arise from the use of such instruments as drafts, promissory notes, checks and trade acceptances. (The most common instruments are checks and promissory notes.)4 However, the term commercial paper in its
broadest sense may refer to either negotiable or non-negotiable instruments.
During the early part of the Middle Ages, merchants and traders had to carry gold and silver to pay for the goods they purchased at the various international fairs. Obviously these precious metals were continually subject to loss or theft through the perils of travel.5
To eliminate the dangers of this sort, merchants began to deposit their gold and silver with bankers. When they needed
4 Business Law Text and Cases, Second Edition, Howell, Allison, Henley,
1981, page 400
funds to pay for goods they had purchased, they “drew” on them by giving the seller a written order addressed to the bank, telling it to deliver part of the gold or silver to the seller. These orders, called bills of exchange, were thus substitutes for money. Today, checks and the drafts and promissory notes that are payable on demand serve this same basic purpose.6
The second major purpose of commercial paper is to serve as credit device; this came about as a logical extension of the initial use of commercial paper. Soon after bills of exchange became established as substitutes for money, merchants who wished to purchase goods on credit discovered that sellers were sometimes willing to accept bills of exchange that were not payable until a stated time in the future—such as “ninety days after date.” If the seller was satisfied as to the commercial reputation of the bill’s drawer (the purchaser), he would take such an instrument (called a time bill or draft) and wait until the maturity date to collect it. In this way the seller/payee extended credit to the buyer/drawer.7
Soon thereafter ways were devised by which payees could sell these instruments to third parties, usually banks, and receive immediate cash in return. Since the banks would then have to wait for the maturity dates before receiving payment, the payees would have to sell them the paper at a discount—that is, perhaps five or ten percent less than the face amount. This meant, in effect, that the purchasing banks were charging the sellers interest in advance as compensation for their role in the transaction.8
Today, because of the widespread use of time notes and drafts, the credit aspect of commercial paper is as important to the business community as its “substitute for money” aspect.9
The negotiability of bills of exchange and promissory notes originated in the customs of merchants. The statute of Anne, which is declaratory of the common law, established the negotiability of promissory notes.10
6 Ibid. (italics supplied) 7 Ibid, pages 401-402. 8 Ibid.
9 Ibid.
Negotiable Instrument; definition
A negotiable instrument is a special contract which on its face is signed by the maker or drawer, making an unqualified promise or order to pay on demand or at a fixed or determinable future time, a sum certain in money, to order or bearer, and when it is addressed to a drawee, the latter must be named or otherwise indicated therein with reasonable certainty.
Or simply stated: It is a special contract which complies with the requirements laid down under Section 1 of the Negotiable Instruments Law.
Purpose of the enactment of the Negotiable Instruments Law
The Negotiable Instruments Law was enacted for the purpose of facilitating, not hindering or hampering transactions in commercial paper. Thus, the said statute should not be tampered with haphazardly or lightly. Nor should it be brushed aside in order to meet the necessities in a single case.11
Functions of a Negotiable Instrument
1. Substitute for money—merchants often do not want to carry cash for fear of loss or theft.
2. Credit device—some forms of negotiable instruments extend credit from one party to another.
3. Recordkeeping device—these records are used for financial statements, tax returns, and the like.
Negotiable Instrument as a substitute for money
The essence of negotiability which characterizes a negotiable paper as a credit instrument lies in its freedom to circulate freely as a substitute for money.12 (Firestone Tire & Rubber Company of the Philippines vs. Court of Appeals and Luzon Development Bank, G.R. No. 113236, March 5, 2011, [Quisumbing, J.])
11 State Investment House, Inc. v. Court of Appeals, 217 SCRA 32 (1993),
cited in Osmeña vs. Citibank, March 23, 2004
Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does not, by itself, operate as payment (See. 189, Act 2031 on Neg. Inst..; Art. 1249, Civil Code; Bryan Landon Co. v. American Bank, 7 Phil. 255; Tan Suncor v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check, whether a manager’s check or ordinary cheek, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor. Mere delivery of checks does not discharge the obligation under a judgment. The obligation is not extinguished and remains suspended until the payment by commercial document is actually realized (Art. 1249, Civil Code, par. 3).13
Words of Negotiability
The language of negotiability which characterize a negotiable paper as a credit instrument is its freedom to circulate as a substitute for money. Hence, freedom of negotiability is the touchstone relating to the protection of holders in due course, and the freedom of negotiability is the foundation for the protection which the law throws around a holder in due course (11 Am. Jur. 2d, 32).
As held in Caltex (Philippines), Inc vs. Court of Appeals,14 “The accepted rule is that the negotiability or non-negotiability of an instrument is determined from the writing, that is, from the face of the instrument itself. In the construction of a bill or note, the intention of the parties is to control, if it can be legally ascertained. While the writing may be read in the light of the surrounding circumstance in order to more perfectly understand the intent and meaning of the parties, yet as they have constituted the writing to be the only outward and visible expression of their meaning, no other words are to be added to it or substituted in its stead. The duty of the court in such case is to ascertain, not what the parties may have secretly intended as contradistinguished from what their words express, but what is the meaning of the words they have used. What the
parties meant must be determined by what they said.”
13 Philippine Airlines, Inc. vs. Court of Appeals, G.R. No. L-49188, Jan. 30,
1990, [Gutierrez, J.]
Quasi-Negotiable Instruments
In one case, that of Capco vs. Macaset15, the Supreme Court had an occasion to rule that: “[c]ertificates of stocks are considered as “quasi-negotiable” instruments. When the owner or shareholder of these certificates signs the printed form of sale or assignment at the back of every stock certificate without filling in the blanks provided for the name of the transferee as well as for the name of the attorney-in-fact, the said owner or shareholder, in effect, confers on another all the indicia of ownership of the said stock certificates. (Campos and Lopez-Campos, Notes and Cases on Negotiable Instruments Law, 1971 ed., p 605)”
The phrase quasi-negotiable has been termed as unhappy one; and certainly it is far from satisfactory, as it conveys no accurate, well-defined meaning. But still it described better than any other short-hand expression the nature of those instruments which, while not negotiable in the sense of the law merchant, are so framed and so dealt with, as frequently to convey as good a title to the transferee as it they were negotiable. (Daniel, The Elements of Negotiable Instruments Law, page 27)
Very frequently by application of the principles of estoppels, and to effectuate the ends of justice and the intention of the parties, the courts decree a better title to the transferee than actually existed in his transferrer; and the result reached in many cases is the same as would be reached if the instrument were negotiable.16 Types of Negotiable Instruments.
The Philippine Negotiable Instruments Law was basically lifted from the provisions of the United States Uniform Currency Act, in which Secs. 13-104 thereof specified four types of instruments (e.g. drafts, checks, certificates of deposit, and notes). In the Philippine setting, however, Act 2031 (Negotiable Instruments Law) provides for three (e.g., promissory notes, bills of exchange, checks), noteworthy is the inclusion of Drafts and Certificates of Time Deposit through the decisions of the Supreme Court interpreting our law on negotiable instruments.
15 G.R. No. 90888, September 13, 1990 16 Railroad Co. v. Howard, 7 Wall. 415
At present, in Philippine jurisdiction, we generally recognize five types of negotiable instruments, to wit:
1. Promissory Notes17
2. Bills of Exchange18
3. Check19
4. Draft20
5. Certificates of Time Deposit21 2002 Bar Question:
A. Define the following: (1) a negotiable promissory note, (2) a bill of exchange and (3) a check. (3%) B. You are Pedro Cruz. Draft the appropriate contract
language for (1) your negotiable promissory note and (2) your check, each containing the essential elements of a negotiable instrument. (2%)
ANSWER:
A. (1) Sec. 184, Act. 2031—it is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer.
(2) Sec. 126, Act 2031—is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer.
(3) Sec. 185, Act 2031—it is a bill of exchange drawn on a bank payable on demand.
17 Sec. 184, Act 2031, Negotiable Instruments Law. 18 Sec. 126, ibid.
19 Sec. 185, ibid.
20 BPI vs. Commissioner of Internal Revenue,
21 Caltex (Philippines), Inc. vs. Court of Appeals, G.R. No. 97753, August 10,
B. (1) September 1, 2002
I promise to pay Pancho Dela Torre, or order, ONE HUNDRED THOUSAND PESOS (Php 100,000.00), on December 25, 2002.
(Sgd) Pedro Cruz
(2) Bank of the Philippine Islands-Malate, Manila September 1, 2002
Pay to the order of Pancho Dela Torre, the amount of ONE HUNDRED THOUSAND PESOS (Php 100,000.00).
(Sgd) Pedro Cruz
1. What is a Promissory Note?
It is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer. (Sec. 184, Negotiable Instruments Law)
In the case of Pentacapital Investment Corporation vs. Makilito B. Mahinay,22 citing Sierra vs. Court of Appeals,23 it was
held that:
“A promissory note is a solemn acknowledgment of a debt and a formal commitment to repay it on the date and under the conditions agreed upon by the borrower and the lender. A person who signs such an instrument is bound to honor it as a legitimate obligation duly assumed by him through the signature he affixes thereto as a token of his good faith. If he reneges on his promise without cause, he forfeits the sympathy and assistance of this Court and deserves instead its sharp repudiation.”
22 G.R. No. 171736, July 5, 2010, [Nachura, J.:] 23 G.R. No. 90270, July 24, 1992, 211 SCRA 785, 795
Test to determine a promissory note
“To constitute a good promissory note, no precise words of contract are necessary, provided they amount, in legal effect, to a promise to pay. In other words, if over and above the mere acknowledgment of the debtor there may be collected from the words used a promise to pay it, the instrument may be regarded as a promissory note. (Jimenez vs. Bucoy, G.R. No. L-10221, February 28, 1958, [Bengzon, J.])
“Due A. B. $325, payable on demand,” or “I acknowledge myself to be indebted to A in $ 109, to be paid on demand, for value received,” or “I.O.U. $85 to be paid on May 5th,” are held to
be promissory notes, significance being given to words of payment as indicating a promise to pay. (1 Daniel Neg. Inst., see 39 and cases cited [Cowan vs. Hallack, (Colo.) 13 Pacific Reporter 700, 703) (Supra)
“An acknowledgment may become a promise by the addition of words by which a promise of payment is naturally implied, such as, “payable”, “payable on a given day”, “payable on demand”, “paid…when called for,”…(10 Corpus Juris Secundump p. 523.) (supra)
Who are the parties to a Promissory Note?
The maker, he is the person who drafted and issued the promissory note, and made a promise that upon demand or at a fixed or determinable future time, he will pay a sum certain in money to order or to bearer to the holder of the instrument or to a holder in due course.
The payee, is the person in whose favor the promissory note was issued.
Intimidation, vitiation of consent in promissory notes
Carmela Brobio Mangahas vs. Eufrocina Brobio G.R. No. 183852, October 20, 2010
FACTS: On January 10, 2002, Pacifico S. Brobio (Pacifico) died intestate, leaving three parcels of land. He was survived by his wife, respondent Eufrocina A. Brobio, and four legitimate and three illegitimate children; petitioner Carmela Brobio Mangahas is one of the illegitimate children.
On May 12, 2002, the heirs of the deceased executed a Deed of Extrajudicial Settlement of Estate of the Late Pacifico Brobio with Waiver. In the Deed, petitioner and Pacifico’s other children, in consideration of their love and affection for respondent and the sum of P150,000.00, waived and ceded their respective shares over the three parcels of land in favor of respondent. According to petitioner, respondent promised to give her an additional amount for her share in her father’s estate. Thus, after the signing of the Deed, petitioner demanded from respondent the promised additional amount, but respondent refused to pay, claiming that she had no more money.
A year later, while processing her tax obligations with the Bureau of Internal Revenue (BIR), respondent was required to submit an original copy of the Deed. Left with no more original copy of the Deed, respondent summoned petitioner to her office on May 31, 2003 and asked her to countersign a copy of the Deed. Petitioner refused to countersign the document, demanding that respondent first give her the additional amount that she promised. Considering the value of the three parcels of land (which she claimed to be worth P20M), petitioner asked for P1M, but respondent begged her to lower the amount. Petitioner agreed to lower it to P600, 000.00. Because respondent did not have the money at that time and petitioner refused to countersign the Deed without any assurance that the amount would be paid, respondent executed a promissory note. Petitioner agreed to sign the Deed when respondent signed the promissory note which read —
31 May 2003
This is to promise that I will give [a] (sic) Financial Assistance to CARMELA B. MANGAHAS the amount of P600,000.00 Six Hundred Thousand only on June 15, 2003.
(SGD)
EUFROCINA A. BROBIO
When the promissory note fell due, respondent failed and refused to pay despite demand. Petitioner made several more demands upon respondent but the latter kept on insisting that she had no money.
ISSUES: Was intimidation used to execute the promissory note
subject of the case?
RULING: Contracts are voidable where consent thereto is given
through mistake, violence, intimidation, undue influence, or fraud. In determining whether consent is vitiated by any of these circumstances, courts are given a wide latitude in weighing the facts or circumstances in a given case and in deciding in favor of what they believe actually occurred, considering the age, physical infirmity, intelligence, relationship, and conduct of the parties at the time of the execution of the contract and subsequent thereto, irrespective of whether the contract is in a public or private writing.
Nowhere is it alleged that mistake, violence, fraud, or intimidation attended the execution of the promissory note. Still, respondent insists that she was “forced” into signing the promissory note because petitioner would not sign the document required by the BIR. In one case, the Court – in characterizing a similar argument by respondents therein – held that such allegation is tantamount to saying that the other party exerted undue influence upon them. However, the Court said that the fact that respondents were “forced” to sign the documents does not amount to vitiated consent.
There is undue influence when a person takes improper advantage of his power over the will of another, depriving the latter of a reasonable freedom of choice. For undue influence to be present, the influence exerted must have so overpowered or subjugated the mind of a contracting party as to destroy his free agency, making him express the will of another rather than his own.
Respondent may have desperately needed petitioner’s signature on the Deed, but there is no showing that she was deprived of free agency when she signed the promissory note. Being forced into a situation does not amount to vitiated consent where it is not shown that the party is deprived of free will and choice. Respondent still had a choice: she could have refused to execute the promissory note and resorted to judicial means to obtain petitioner’s signature. Instead, respondent chose to execute the promissory note to obtain petitioner’s signature, thereby agreeing to pay the amount demanded by petitioner.
Contrary to the CA’s findings, the situation did not amount to intimidation that vitiated consent. There is
intimidation when one of the contracting parties is compelled to give his consent by a reasonable and well-grounded fear of an imminent and grave evil upon his person or property, or upon the person or property of his spouse, descendants, or ascendants. Certainly, the payment of penalties for delayed payment of taxes would not qualify as a “reasonable and well-grounded fear of an imminent and grave evil.” (emphasis supplied) We join the RTC
in holding that courts will not set aside contracts merely because solicitation, importunity, argument, persuasion, or appeal to affection was used to obtain the consent of the other party. Influence obtained by persuasion or argument or by appeal to affection is not prohibited either in law or morals and is not obnoxious even in courts of equity.
Question:
Does the reference to the penalty charges in the promissory note constitute substantial compliance with the disclosure requirement of the Truth in Lending Act?
ANSWER: Yes.
The Court has affirmed that financial charges are amply disclosed if stated in the promissory note.
In the case of Development Bank of the Philippines vs. Arcilla, Jr. The Court there said, “Under Circular 158 of the Central Bank, the lender is required to include the information required by R.A. 3765 in the contract covering the credit transaction or any other document to be acknowledged and signed by the borrower. In addition, the contract or document shall specify additional charges, if any, which will be collected in case certain stipulations in the contract are not met by the debtor.” In this case, the promissory notes signed by the Yus contained data, including penalty charges, required by the Truth in Lending Act. They cannot avoid liability based on a rigid interpretation of the Truth in Lending Act that contravenes its goal. (Bank of the Philippine Islands, Inc. vs. Sps Yu, G.R. No. 184122 January 20, 2010, [Abad, J.]) 2. Bill of Exchange defined.
A Bill of Exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. (Sec. 126, Negotiable Instruments Law)
In the once celebrated case of Manuel Bastida vs. The Acting Commissioner of Customs and The Court of Tax Appeals,24 it was
held that:
“[A]s bills exchange they are, fundamentally, negotiable instruments. And a negotiable instrument “is more like
money than a contract right or chose in action.”25 As
such, it may be the “subject of conversion (Knight vs. Seney 290 Ill. 11) or of replevin (Rothwell vs. Taylor 303 Ill. 263.)26
it may also be the “subject of sale, like any other goods or wares.”27 As the Tax Court aptly observed, “checks may be
bought and sold like a commodity. As a matter of fact in the United States the deposit of a check with a bank is considered a sale (Helvering vs. Stein [CA 4] 115 F 2d 468; Burton vs. United States, 196 US 283, 49 L ed 482).” Money orders, also considered as bills of exchange of limited negotiability, possess the same attributes as other negotiable instruments. Thus, they may, be bought and sold like checks.” (emphasis supplied)
As long as a commercial paper conforms with the definition of a bill of exchange, that paper is considered a bill of exchange.
The nature of acceptance is important only in the determination of the kind of liabilities of the parties involved, but not in the determination of whether a commercial paper is a bill of exchange or not. (Philippine Bank of Commerce vs. Aruego, G.R. No. L-25836-37, January 31, 1981, [Fernandez, J.]) (emphasis supplied)
Illustrative Case:
Philippine Bank of Commerce vs. Jose M. Aruego G.R. Nos. L-25836-37, January 31, 1981 FERNANDEZ, J.:
FACTS: On December 1, 1959, the Philippine Bank of Commerce instituted an action against Jose M. Aruego Civil Case No. 42066 for the recovery of the total sum of about P35, 000.00 with daily interest thereon from November 17, 1959 until fully paid and commission equivalent to 3/8% for every thirty (30) days or fraction thereof plus attorney’s fees equivalent to 10% of the total amount due and costs. The complaint filed by the Philippine Bank of Commerce contains Twenty-Two
25 Ludwig Teller, Bills and Notes, p. 6 (1948) 26 Ibid., pp. 6-7
(22) causes of action referring to Twenty-Two (22) transactions entered into by the said Bank and Aruego on different dates covering the period from August 28, 1950 to March 14, 1951. The sum sought to be recovered represents the cost of the printing of “World Current Events”, a periodical published by the defendant. To facilitate the payment of the printing the defendant obtained a credit accommodation from the plaintiff. Thus, for every printing of the “World Current Events”, the printer Encal Press and Photo Engraving, collected the cost of printing by drawing a draft against the plaintiff, said draft being sent later to the defendant for acceptance. As an added security for the payment of the amounts advanced to Encal Press and Photo Engraving, the plaintiff bank also required the defendant Aruego to execute a trust receipt in favor of said bank wherein said defendant undertook to hold in trust for plaintiff the periodicals and to sell the same with the promise to turn over to the plaintiff the proceeds of the sale of said publication to answer for the payment of all obligations arising from the draft.
Defendant contends that the drafts signed by him were not really bills of exchange but mere pieces of evidence of indebtedness because payments were made before acceptance.
ISSUE: Is his contention tenable?
RULING: The contention is without merit.Under the Negotiable
Instruments Law, a bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. As long as a commercial paper conforms with the definition of a bill of exchange, that paper is considered a bill of exchange. The nature of acceptance is important only in the determination of the kind of liabilities of the parties involved, but not in the determination of whether a commercial paper is a bill of exchange or not.
From the definition, does the bill of exchange operate as an assignment of funds in the hands of the drawee?
A bill in itself does not operate as an assignment of the funds in the hands of the drawee available for the payment thereof. (Sec. 127, Negotiable Instruments Law)
Doctrine of Equitable Assignment
The doctrine of equitable assignment is the creature of courts of equity, and the phrase “equitable assignment” is used because, by the technicalities of pleadings at law, no legal assignment can be effectuated.28 It is contended that the bill, whether for the whole
of the fund or debt, or only a part, may be evidence to show an assignment; and that with other circumstances indicating that such was the intention, will vest in the holder an exclusive claim to the debt or fund, and bind it in the hands of the drawee after notice.29
The bill for the entire amount of debt or fund should operate as an equitable assignment thereof.30
Moreover, it may be regarded as a settled doctrine that an order founded upon a good consideration, given for a specific debt or fund owing by or in the hands of a third person, operates as, or rather is evidence of, an equitable assignment of the demand to the holder.31
Who are the parties to a bill of exchange?
The drawer, is the person drawing an instrument making an unconditional order in writing to the drawee, requiring him to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer.
The drawee, is the person being required by the drawer to pay on demand or at a fixed or determinable future time a sum certain in money to the payee, or his order, or to the bearer of the instrument.
28 Bank of Commerce v. Bogy, 44 Mo. 15; Grammel v. Cramer, 55 Mich. 201 29 Daniel on Negotiable Instruments, page 18; Mandeville v. Welch, 5 Whaet.
277; Buckner v. Sayre, 17 B. Monroe, 754, cited in the Elements of Negotiable Instruments Law, Daniel, page 8
30 Supra
The payee, is the person in whose favor the bill of exchange was issued.
What is the rule if the Bill of Exchange is addressed to more than one drawee?
A bill may be addressed to two or more drawees jointly, whether they are partners of not.
But not to two or more drawees in the alternative or in succession.
Example:
To: Lancelot Borja and/or Margaux Borja Bo. Obrero, Iloilo City
In the above instance, the drawee is addressed to two or more persons jointly, whether they are partners or not. Thus, payment of any one of them extinguishes the entire obligation.
To: Lancelot Borja, and in his incapacity or insolvency, Margaux Borja;
Lancelot Borja, Margaux Borja, or Mizpah Borja in succession.
In the second instance, the bill was addressed to two or more drawees in the alternative or in succession, such is not allowed under the law.
Bills of exchange are either foreign or inland
Foreign Bill of Exchange—when drawn in one State or country, and made payable in another State or country;32
Inland Bill of Exchange—when drawn, and made payable, in the same State or country.33
32 The Elements of Negotiable Instruments Law, Daniel, page 5 33 Ibid
Difference between bills and notes
In their original structure, a bill of exchange and a promissory note do not strongly resemble each other. In a bill, there are three original parties: drawer, drawee, and payee; in a note only two: maker and payee. In a bill the acceptor is the primary debtor. In a note the maker is the only debtor. But if the note be transferred to a third party by the payee, it becomes strikingly similar to a bill. The indorser becomes then, as it were, the drawer; the maker, the acceptor; and the indorsee, the payee.34 (The Elements of the
Law of Negotiable Instruments, by: John W. Daniel, 1908)
Bank notes or bank bills
Bank notes or bank bills (as they are equally as often called)
are the promissory notes of incorporated banks, designed to circulate like money, and payable to bearer on demand.35
The terms “bank notes” and “bank bills” are of the like signification, and for the purposes of interpretation, both in criminal and civil jurisprudence, are equivalent and interchangeable.36
In form and substance they are promissory notes, and they are governed by very many of the principles which apply to the negotiable notes of individuals given in the course of trade. But they are designed to constitute a circulating medium, and this circumstance imparts to them peculiar characteristics, and essentially varies the rules which govern promissory notes in general. They have been held not securities for money, but money itself.37
Chief Characteristics of—
Bank Bills
• Always payable on demand;38
34 Daniel on Negotiable Instruments, page 29
35 The Elements of Negotiable Instruments Law, Daniel, page 15 (Bold
supplied)
36 Ibid
37 Soutcot v. Watson, 3 Atk. 226; Daniel on Negotiable Instruments, page
1664, ibid
• Usually payable to bearer, though sometimes expressed to be payable to a person named or bearer;39
• A lawful tender in payment of debts, unless objected to because they are not money.40
Bank Notes
• Are not, legally speaking, money, but in a popular sense are often spoken of as money, and are conventionally used in its stead with the like effect.41
3. Draft, defined.
A draft is a form of a bill of exchange used mainly in transactions between persons physically remote from each other, an order made by one person, say the buyer of goods, addressed to a person having in his possession funds of such buyer ordering the addressee to pay the purchase price to the seller of the goods, and where the order is made by one bank to another, it is referred to as a bank draft. (Bank of the Philippine Islands vs. Commission of Internal Revenue, 496 SCRA 601)
In order for a draft to work, one of two general conditions must exist. Either the drawee must owe the drawer a debt (in which case the drawer is simply telling the drawee to pay the debt or a portion of it to a third party) or some kind of agreement or relationship must exist between the parties under which the drawee has consented to the drawing of the draft upon him or her. If neither of these conditions existed, obviously the drawee would not obey the order to pay the amount of the draft to the payee or to any subsequent holder of the instrument.42
A trade acceptance is a draft or bill of exchange drawn by the seller of the goods on the purchaser of those goods and accepted (signed) by the purchaser. The purpose of the transaction is to enable the seller to raise money on the paper before the purchaser’s obligation matures under the sales contract.43
39 Ibid, page 1665 40 Ibid, page 1672a 41 Ibid, page 1672
42 Business Law Text and Cases, Second Edition, Howell, Allison, Henley,
To illustrate, X corporation has sold goods to Y company. Due to the fact that Y company still wishes to utilize the cash instead of paying in cash, X corporation (drawer) draws a trade acceptance on Y company for the purchase of the goods. The instrument orders Y company to pay the amount due to the order of X corporation on a particular future time. It is then presented to an officer of Y company who accepts it by signing the same and returns it to X corporation. The acceptance in effect, would be a promise of Y company to pay X corporation when the same becomes due. It can now be negotiated to a third person, say X corporation’s bank and receives cash immediately.
Nature of Draft, as distinguished from Bill of Exchange
The case of Republic of the Philippines vs. Philippine
National Bank, et al44, laid down a detailed discussion of the
nature of Drafts, to wit:
“To begin with, we may say that a demand draft is a bill of exchange payable on demand (Arnd vs. Aylesworth, 145 Iowa 185; Ward vs. City Trust Company, 102 N.Y.S. 50; Bank of Republic vs. Republic State Bank, 42 S.W. 2d, 27). Considered as a bill of exchange, a draft is said to be, like the former, an open letter of request from, and an order by, one person on another to pay a sum of money therein mentioned to a third person, on demand or at a future time therein specified (13 Words and Phrases, 371). As a matter of fact, the term “draft” is often used, and is the common term, for all bills of exchange. And the words “draft” and “bill of exchange” are used indiscriminately (Ennis vs. Coshoctan Nat. Bank, 108 S.E., 811; Hinnermann vs. Rosenback, 39 N.Y. 98, 100, 101; Wilson vs. Bechenau, 48 Supp. 272, 275). On the other hand, a bill of exchange within the meaning of our Negotiable Instruments Law (Act No. 2031) does not operate as an assignment of funds in the hands of the drawee who is not liable on the instrument until he accepts it. This is the clear import of Section 127. It says: “A bill of exchange of itself does not operate as an assignment of the funds in the hands of the drawee available for the payment thereon and the drawee is not liable on the bill unless and until he accepts the same.” In other words, in order
43 Ibid.
that a drawee may be liable on the draft and then become obligated to the payee it is necessary that he first accepts the same. In fact, our law requires that with regard to drafts or
bills of exchange there is need that they be presented whether for acceptance or for payment within a reasonable time after their issuance or after their last negotiation thereon as the case may be (Section 71, Act 2031). Failure to make such presentment will discharge the drawer from liability or to the extent of the loss caused by the delay (Section 186, Ibid.) (emphasis supplied)
Since it is admitted that the demand drafts herein involved have not been presented either for acceptance or for payment, the inevitable consequence is that the appellee bank never had any chance of accepting or rejecting them. Verily, appellee bank never became a debtor of the payee concerned and as such the aforesaid drafts cannot be considered as credits subject to escheat within the meaning of the law.”
Demand Draft distinguished from a cashier’s or manager’s check
In the very same case of Republic of the Philippines vs.
Philippine National Bank, et al, it has been held that: “a demand
draft is very different from a cashier’s or manager’s check, contrary to appellant’s pretense, for it has been held that the latter is a primary obligation of the bank which issues it and constitutes its written promise to pay on demand. Thus, a cashier’s check has been clearly characterized In Re Bank of the United States, 277 N.Y.S. 96, 100, as follows:
A cashier’s check issued by a bank, however, is not an ordinary draft. The latter is a bill of exchange payable on demand. It is an order upon a third party purporting to drawn upon a deposit of funds. (Drinkall vs. Movious State Bank, 11 N.D. 10, 88 N.W. 724, 57 L.R.A. 341, 95 Am. St. Rep. 693; State vs. Tyler County State Bank (Tex. Com. App.) 277 S.W. 625, 42 A.L.R. 1347). A cashier’s check is of a very different character. It is the primary obligation of the bank which issues it (Nissenbaum vs. State, 38 Ga. App. 253, S.E. 776) and constituted its written promise to pay upon demand (Steinmetz vs. Schultz, 59 S.D. 603, 241 N.W. 734)
The following definitions cited by the appellant also confirm this view:
A cashier’s check is a check of the bank’s cashier on his or another bank. It is in effect a bill of exchange drawn by a bank on itself and accepted in advance by the act of issuance (10 C.J.S. 409)
A cashier’s check issued on request of a depositor is the substantial equivalent of a certified check and the deposit represented by the check passes to the credit of the checkholder, who is thereafter a depositor to that amount. (Lummus Cotton Gin Co. vs. Walker, 70 So. 754, 756, 195 Ala. 552)
A cashier’s check, being merely bill of exchange drawn by a bank on itself, and accepted in advance by the act of issuance, is not subject to countermand by the payee after indorsement, and has the same legal effects as a certificate deposit or a certified check. (Walker vs. Sellers, 77 So. 715; 201 Ala. 189)
A demand draft is not therefore of the same category as a cashier’s check which should come within the purview of the law.”
4. Certificates of Time Deposit; Negotiable Instrument.
A certificate of deposit is a receipt of a bank or banker for a certain sum of money received upon deposit, and it is generally framed in such a form as to constitute a promissory note, payable to the depositor, or to the depositor or order, or to bearer. (The Elements of Negotiable Instruments Law, Daniel, page 16)
In order, however, to be negotiable, a certificate of deposit must possess the requisite features of certainty in respect to parties, and time and mode of payment and the same causes which deprive bills and notes of negotiability would affect it in like manner. (ibid)
Illustrative case:
Caltex (Philippines), Inc. vs. Court of Appeals and Security Bank and Trust Company
G.R. No. 97753, August 10, 1992 REGALADO, J.:
Facts: On various dates Security Bank and Trust Company (SBTC) issued 280 certificates of time deposit (CTD) in favor of one Angel dela Cruz who deposited with SBTC the aggregate amount of Php 1,200,000.00. A sample text of the certificates of time deposit is reproduced below:
SECURITY BANK AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101 Metro Manila, Philippines
SUCAT OFFICEP 4,000.00 CERTIFICATE OF DEPOSIT Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____.
This is to Certify that BEARER has deposited in this Bank the sum of PESOS: FOUR THOUSAND ONLY, SECURITY BANK SUCAT OFFICE P4,000 & 00 CTS Pesos, Philippine Currency, repayable to said depositor 731 days. after date, upon presentation and surrender of this certificate, with interest at the rate of 16% per cent per annum.
(Sgd. Illegible) (Sgd. Illegible) ___________ ___________ AUTHORIZED SIGNATURES Angel dela Cruz delivered the said CTDs to Caltex (Philippines) Inc. (Caltex) in connection with his purchased of fuel products from the latter. Sometime in March 1982, Angel dela Cruz informed SBTC that he lost all the certificates of time deposit in dispute. On March 25, 1982, Angel dela Cruz negotiated and obtained loan from defendant bank in the amount of Php 875,000.00. On the same date, said depositor
executed a notarized Deed of Assignment of Time Deposit stated, among others, that dela Cruz surrenders to SBTC “full control of the indicated time deposits from and after date” of the assignment and further authorizes said bank to pre-terminate, set-off and “apply the said time deposits to the payment of whatever amount or amounts may be due” on the loan upon its maturity.
Sometime in 1982, plaintiff’s agent went to the defendant bank and presented for verification the CTD declared lost by Angel dela Cruz alleging that the same were delivered to herein plaintiff “as security for purchases made with Caltex. On November 26 1982, defendant received a letter from herein plaintiff formally informing it of its possession of the CTD’s in question and of its decision to pre-terminate the same. Accordingly, defendant bank rejected the plaintiff’s demand and claim for payment of value of the CTDs. In April 1983, the loan in the amount of Php 875,000.00 with defendant bank matured and fell due, and the latter set-off and applied the time deposits in question to the payment of the matured loan.
Plaintiff filed the instant complaint praying that the defendant bank be ordered to pay it the aggregate value of the certificates of time deposit of Php 1,120,000.00 plus interest and compounded interest therein at 16% per annum, moral and exemplary damages as well as attorney’s fees.Trial court rendered its decision dismissing the instant complaint.
Issue: Whether or not the Certificates of Time Deposit are considered as negotiable instruments?
Ruling: The CTDs in question are negotiable instruments. Section 1 Act No. 2031, otherwise known as the Negotiable Instruments Law, enumerates the requisites for an instrument to become negotiable.
The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties’
bone of contention is with regard to requisite (d) set forth above. x x x
The documents provide that the amounts deposited shall be repayable to the depositor. And who, according to the document, is the depositor? It is the “bearer”. The documents do not say that the depositor is Angel dela Cruz and that the amounts deposited are repayable specifically to him. Rather, the amounts are to be repayable to the bearer of the documents or, for that matter, whosoever may be the bearer at the time of presentment.
x x x
On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is determined from the writing, that is, from the fact of the instrument itself45.
In the construction of a bill or note, the intention of the parties is to control, if it can be legally ascertained.46
While the writing may be read in the light of the surrounding circumstances in order to prove perfectly understanding the intent and meaning of the parties, yet as they have constituted the writing to be the only outward and visible expression of their meaning, no other words are to be added to it or substituted instead. The duty of the court in such case is to ascertain, not what the parties may have secretly intended as contradistinguished from what their words express, but what is the meaning of the words they have used. What the parties meant must be determined by what they said.47
Certificates of Time Deposit; Issued without Valuable Consideration; Not Covered by the Philippine Deposit Insurance Corporation.
45 11 Am. Jur. 2d, Bills and Notes, 79. 46 Ibid, 86.
Illustrative Case:
Philippine Deposit Insurance Corporation vs. Court of Appeals and John Francis Cotaoco
G.R. No. 118917, December 22, 1997 KAPUNAN, J:
Petitioner Philippine Deposit Insurance Corporation (PDIC) seeks the reversal of the decision of the Court of Appeals affirming with modification the decision of the Regional Trial Court holding petitioner liable for the value of thirteen (13) certificates of time deposit (CTDs) in the possession of private respondents.
The facts, as found by the Court of Appeals, are as follows: On September 22, 1983, plaintiffs-appellees invested in money market placements with the Premiere Financing Corporation (PFC) in the sum of P10,000.00 each for which they were issued by the PFC corresponding promissory notes and checks. On the same date (September 22, 1983), John Francis Cotaoco, for and in behalf of plaintiffs-appellees, went to the PFC to encash the promissory notes and checks, but the PFC referred him to the Regent Saving Bank (RSB). Instead of paying the promissory notes and checks, the RSB, upon agreement of Cotaoco, issued the subject 13 certificates of time deposit with Nos. 09648 to 09660, inclusive, each stating, among others, that the same certifies that the bearer thereof has deposited with the RSB the sum of P10,000.00; that the certificate shall bear 14% interest per annum; that the certificate is insured up to P15,000.00 with the PDIC; and that the maturity date thereof is on November 3, 1983 (Exhs. “B”, “B-1 to “B-12”).
On the aforesaid maturity dated (November 3, 1983), Cotaoco went to the RSB to encash the said certificates. Thereat, RSB Executive Vice President Jose M. Damian requested Cotaoco for a deferment or an extension of a few days to enable the RSB to raise the amount to pay for the same (Exh. “D”). Cotaoco agreed. Despite said extension, the RSB still failed to pay the value of the certificates. Instead, RSB advised Cotaoco to file a claim with the PDIC.
Meanwhile, on June 15, 1984, the Monetary Board of the Central Bank issued Resolution No. 788 (Exh. “2”, Records, p. 159) suspending the operations of the RSB. Eventually, the records of RSB were secured and its deposit liabilities were eventually determined. On December 7, 1984, the Monetary Board issued Resolution No. 1496 (Exh. “1”) liquidating the RSB. Subsequently, a masterlist or inventory of the RSB assets and liabilities was prepared. However, the certificates of time deposit of plaintiffs-appellees were not included in the list on the ground that the certificates were not funded by the PFC or duly recorded as liabilities of RSB.
On September 4, 1984, plaintiffs-appellees filed with the PDIC their respective claims for the amount of the certificates (Exhs. “C,” “C-1” to “C-12”). Sabina Yu, James Ngkaion, Elaine Ngkaion and Jeffrey Ngkaion, who have similar claims on their certificates of time deposit with the RSB, likewise filed their claims with the PDIC. To their dismay, PDIC refused the aforesaid claims on the ground that the Traders Royal Bank Check No. 299255 dated September 22, 1983 for the amount of P125,846.07 (Exh. “B”) issued by PFC for the aforementioned certificates was returned by the drawee bank for having been drawn against insufficient funds; and said check was not replaced by the PFC, resulting in the cancellation of the certificates as indebtedness or liabilities of RSB.48
Consequently, on March 31, 1987, private respondents filed an action for collection against PDIC, RSB and the Central Bank. On September 14, 1987, the trial court, declared the Central Bank in default for failing to file an answer.
On May 29, 1989, the trial court rendered its decision ordering the defendants therein to pay plaintiffs, jointly and severally, the amount corresponding to the latter’s certificates of time deposit.
Both PDIC and RSB appealed. The Central Bank, on the other hand, filed a petition for certiorari, prohibition and mandamus
before the Court of Appeals praying that the writ of execution issued by the trial court against it be set aside.
On February 8, 1995, the Court of Appeals rendered its decision granting the Central Bank’s petition but dismissing the appeals of PDIC and RSB. Hence, this petition by PDIC assigning the following errors:
I
THE CA ERRED IN HOLDING THAT THE SUBJECT CTDS ARE NEGOTIABLE INSTRUMENTS
II
THE CA ERRED IN HOLDING THAT THE CTDS WERE ACQUIRED FOR VALUE AND CONSIDERATION
III
THE CA ERRED WHEN IT HELD THAT BECAUSE THE CTDS STATE THAT THESE WERE INSURED PETITIONER
SHOULD BE HELD LIABLE FOR THE SAME.
We deal jointly with petitioner’s first and third assigned errors.
Relying on this Court’s ruling in Caltex (Philippines), Inc. v. Court of Appeals and Security Bank and Trust Company,49 the
Court of Appeals concluded that the subject CTDs are negotiable. Petitioner, on the other hand, contends that the CTDs are non-negotiable since they do not contain an unconditional promise or order to pay a sum certain in money nor are they made payable to order or bearer, as required by Section 1 of the Negotiable Instruments Law.
Whether the CTDs in question are negotiable or not is, however, immaterial in the present case. The Philippine Deposit Insurance Corporation was created by law and, as such, is governed primarily by the provisions of the special law creating it.50 The liability of the PDIC for insured deposits therefore is
49 212 SCRA 448 (1992). 50 Section 4, Corporation Code.
statutory and, under Republic Act No. 3591,51 as amended, such
liability rests upon the existence of deposits with the insured bank, not on the negotiability or non-negotiability of the certificates evidencing these deposits.
The authority for this conclusion finds support in decisions by American state courts applying their respective bank guaranty laws. Invariably, the plaintiffs in these cases argued that the negotiability of the certificates of deposit in their possession entitled them to be paid out of the bank guaranty fund, a contention that the courts uniformly rejected.
Thus, the plaintiffs in Fourth Nat. Bank of Wichita v. Wilson52 argued that:
. . . the court should hold the certificates to be guaranteed because they are negotiable instruments, and were acquired by the present holders in due course; otherwise it is said certificates of deposit will be deprived of the quality of commercial paper. Certificates of deposit have been regarded as the highest form of collateral. They are of wide currency in the banking and business worlds, and are particularly useful to persons of small means, because they bear interest, and may be readily cashed; therefore to deprive them of the benefit of the guaranty fund would be a calamity. . . .
The Supreme Court of Kansas, however, found the plaintiffs’ contention to be without merit, ruling thus:
. . . The argument confuses negotiability of commercial paper with statutory guaranty of deposits. The guaranty is something extrinsic to all forms of evidence of bank obligation; and negotiability of instruments has no dependence on existence or nonexistence of the guaranty. . . . Whatever the status of the plaintiffs may be as holders in due course under the Negotiable Instruments Law, they cannot be assignees of a deposit which was not made, and
51 Entitled “An Act Establishing The Philippine Deposit Insurance Corporation,
Defining Its Powers And Duties And For Other Purposes.”
cannot be entitled to the benefit of a guaranty which did not come into existence. . . .
In arriving at the above decision, the Kansas Supreme Court relied on its earlier ruling in American State Bank v. Foster,53 which
arose from the same facts as the Fourth National Bank case. There, the Court held:
. . . Even if the plaintiff were to be regarded as an innocent purchaser of the certificates as negotiable instruments, its situation would be in no wise bettered so far as relate to a claim against the guaranty fund. The fund protects deposits only. And if no deposit is made, or no deposit within the protection of the guaranty law, the transfer of a certificate cannot impose a liability on the fund. . . . where a certificate of deposit is given under such circumstances that it is not protected by the guaranty fund, although that fact is not indicated by anything on its face, its indorsement to an innocent holder cannot confer that quality upon it.
In like fashion did the Supreme Court of Nebraska brush aside a similar contention in State v. Farmers’ Stale Bank:54
In this contention we think the appellants fail to distinguish between the liability of the maker of a negotiable instrument, which rests upon the law pertaining to negotiable paper, and the liability of the guaranty fund, which is purely statutory. The circumstances under which the guaranty fund may be liable are entirely apart from the law pertaining to negotiable paper. A holder of a certificate of deposit in a bank who seeks to hold the guaranty fund liable for its payment must show that the transaction leading up to the issuance of the certificate was such that the law holds the guaranty fund liable for its payment. . . .
The Farmers’ State Bank ruling was reiterated by the Nebraska Supreme Court in State v. Home State Bank of Dunning55 and in State v. Kilgore State Bank.56 The same ruling was adopted
by the Supreme Court of South Dakota in Mildenstein v. Hirning.57
53 204 Pac. 709, 110 Kan. 520 (1922). 54 196 N.W. 908, 111 Neb. 117 (1923). 55 201 N.W. 971, 113 Neb. 93 (1925). 56 205 N.W. 297 (1925).
In the case at bar, the Court of Appeals initially found the subject CTDs to be negotiable. Subsequently, however, respondent court deemed the issue immaterial, albeit for entirely different reasons.
. . . Besides, whether the certificates are negotiable or not is of no moment. The fact remains that the certificates categorically state that their bearer [sic] have a deposit in the RSB; that the same will mature on November 3, 1993; and that the certificates are insured by PDIC.58
We disagree with respondent court’s rationale. The fact that the certificates state that the certificates are insured by PDIC does not ipso facto make the latter liable for the same should the contingency insured against arise. As stated earlier, the deposit liability of PDIC is determined by the provisions of R.A. No. 3519, and statements in the certificates that the same are insured by PDIC are not binding upon the latter.
. . . The mere fact that a certificate recites on its face that a certain sum has been deposited, or that officers of the bank may have stated that the deposit is protected by the guaranty law, does not make the guaranty fund liable for payment, if in fact a deposit has not been made . . . . The banks have nothing to do with the guaranty fund as such. It is a fund raised by assessments against all state banks, administered by officers of the state to protect deposits in banks. . . .59
We come now to petitioner’s second assigned error. In order that a claim for deposit insurance with the PDIC may prosper, the law requires that a corresponding deposit be placed in the insured bank. This is implicit from a reading of the following provisions of R.A. 3519:
Sec. 1. There is hereby created a Philippine Deposit Insurance Corporation . . . which shall insure, as provided, the deposits of all banks which are entitled to the benefits of insurance under this Act . . . . (Emphasis supplied).
57 207 N.W. 979 (1926). 58 Rollo, p. 38.
xxx xxx xxx Sec. 10(a) . . .
xxx xxx xxx
(c) Whenever an insured bank shall have been closed on account of insolvency, payment of the insured deposits in such bank shall be made by the Corporation as soon as possible . . . .(Emphasis supplied.)
A deposit as defined in Section 3(f) of R.A. No. 3591, may be constituted only if money or the equivalent of money is received by a bank:
Sec. 3. As used in this Act —
(f) The term “deposit” means the unpaid balance of money or its equivalent received by a bank in the usual course of business and for which it has given or is obliged to give credit to a commercial, checking, savings, time or thrift account or which is evidenced by passbook, check and/or certificate of deposit printed or issued in accordance with Central Bank rules and regulations and other applicable laws, together with such other obligations of a bank which, consistent with banking usage and practices, the Board of Directors shall determine and prescribe by regulations to be deposit liabilities of the Bank . . . . (Emphasis ours.)
Did RSB receive money or its equivalent when it issued the certificates of time deposit? The Court of Appeals, in resolving who between RSB and PFC issued the certificates to private respondents, answered this question in the negative. A perusal of the impugned decision, however, reveals that such finding is grounded entirely on speculation, and thus, cannot bind this Court:60
Equally unimpressive is the contention of PDIC and RSB that the certificates were issued to PFC which did not acquire
the same for value because the check issued by the latter for the certificates bounced for insufficiency of funds. First, granting arguendo that the certificates were originally issued in favor of PFC, such issuance could only give rise to the presumption that the amount stated in the certificates have been deposited to RSB. Had not PFC deposited the amount stated therein, then RSB would have surely refused to issue the certificates certifying to such fact. Second, why did not RSB demand that PFC pay the certificates or file a claim against PFC on the ground that the latter failed to pay for the value of the certificates? It could very well be that the reason why RSB did not run after PFC for payment of the value of the certificates was because the instruments were issued to the latter by RSB for value or were already paid to RSB by plaintiffs-appellees. Third, if it is true that at the time RSB issued the certificates to PFC, the instruments were paid for with checks still to be encashed, then why did not RSB specifically state in the certificates that the validity thereof hinges on the encashment of said check? Fourth, even if it is true that PFC did not deposit with or pay the RSB the amount stated in the certificates, the latter is not be such reason freed from civil liability to plaintiffs-appellees. For, by issuing the certificates, RSB bound itself to pay the amount stated therein to whoever is the bearer upon its presentment for encashment. Truly, there is no reason to depart from the established principle that where a bank issues a certificate of deposit acknowledging a deposit made with a third person or an officer of the bank, or with another bank representing it to be the certificate of the bank, upon which assurance the depositor accepts it, the bank is liable for the amount of the deposit (Michis, Banks and Banking, Vol. 5A, pp. 48-49, as cited in the Decision on p. 3 thereof).61
Moreover, such finding totally ignores the evidence presented by defendants. Cardola de Jesus, RSB Deputy Liquidator, testified that RSB received three (3) checks in consideration for the issuance of several CTDs, including the ones in dispute. The first check amounted to P159,153.93, the second, P121,665.95, and the third, P125,846.07 In consideration of the third check, private respondents received thirteen (13) certificates of deposit with Nos. 09648 to 09660, inclusive, with a value of
P10,000.00 each or a total of P130,000.00. To conform with the value of the third check, CTD No. 09648 was “chopped,” and only the sum of P5,846.07 was credited in favor of private respondents. The first two checks “made good in the clearing” while the third was returned for being “drawn against insufficient funds.”
The check in question appears on the records as Exhibit “3” (for Regent),62 and is described in RSB’s offer or evidence as
“Traders Royal Bank Check No. 292555 dated September 22, 1983 covering the amount or P125,846.07 . . . issued by Premiere Financing Corporation.”63 At the back of said check are the words
“Refer to Drawer,”64 indicating that the drawee bank (Traders Royal
Bank) refused to pay the value represented by said check. By reason of the check’s dishonor, RSB cancelled the corresponding as evidence by an RSB “ticket” dated November 4, 1983.65
These pieces of evidence convincingly show that the subject CTDs were indeed issued without RSB receiving any money therefor. No deposit, as defined in Section 3 (f) of R.A. No. 3591, therefore came into existence. Accordingly, petitioner PDIC cannot be held liable for value of the certificates of time deposit held by private respondents.
ACCORDINGLY, the instant petition is hereby GRANTED and the decision of the Court of Appeals REVERSED. Petitioner is absolved from any liability to private respondents.
SO ORDERED.
Davide, Jr., Bellosillo and Vitug, JJ., concur.
5. Check defined.
A check is a bill of exchange drawn on a bank payable on demand. (Sec. 185, Negotiable Instruments Law)
A check is (1) a draft or order (2) upon a bank or banking house, (3) purporting to be drawn upon a deposit of funds (4) for the payment at all events of a certain sum of money, (5) to a
62 Records, p. 161. 63 Id., at 155.
64 Exhibit 3-1 (Regent).
certain person therein named, or to him or his order, or to bearer, and (6) payable instantly on demand.66
Except as herein otherwise provided, the provisions of this Act applicable to a bill of exchange payable on demand apply to a check.
A check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to his account. (Equitable PCI Bank vs. Ong, 502 SCRA 119)
Check and Inland Bills of Exchange, distinguished
The Supreme Court of the United States, in the leading case of Merchants Bank v. State Bank, says of checks when contrasted with bills of exchange: “Bank checks are not inland bills of exchange, but have many of the properties of such commercial paper, and many of the rules of the law merchants are alike applicable to both. Each is for a specified sum, payable in money—in both cases, there is a drawer, a drawee, and payee. Without acceptance, no action can be maintained by the holder, upon either, against drawee. The chief points of difference are that (1) a check is always drawn on a bank or banker; (2) the drawer is not discharged by the laches of the holder in presentment, unless he can show that he has sustained some injury by the default; (3) it is not due until payment is demanded, and the statute of limitations runs only from that time; (4) it is, by its fact, the appropriation of so much money of the drawer, in the hands of the drawee, to the payment of an admitted liability of the drawer; (5) it is not necessary that the drawer of a bill should have funds in the hands of the drawee—a check in such case would be a fraud.”67
A check is a draft or order
A bill is also a draft or order; and it is often said that a check is, in legal effect, a bill of exchange drawn on a bank or banking
66 Blair & Hoge v. Wilson, 28 Gratt. 170; Ridgely Bank v. Patton, 109 Ill, 484,
cited in Daniel, page 17
67 Merchants’ Bank v. State Bank, 10 Wall. 647, cited in Daniel, page 18
house, with some peculiarities.68 In some cases it is called a bill
payable on demand,69 and in others an inland bill, or in the nature
of an inland bill, payable on demand;70 and the expression that a
check is “like a bill” has been criticized on the ground that “nihil simile est idem,” whereas “checks are bills, or rather bill is the genus, and check is a species,”71 In form a check is a bill on a
banking house, and it is perfectly correct to say that it is a bill with some peculiarities, or in other words, a species of bill of exchange. (Daniel, page 18)
Characteristics of a check
A check has the character of negotiability and at the same time it constitutes an evidence of indebtedness. By mutual agreement of the parties, the negotiable character of a check may be waived and the instrument may be treated simply as proof of an obligation. (Sps. Pacheco vs. Court of Appeals, G.R. No. 126670, December 2, 1999, [Ynares-Santiago, J.])
A check is a negotiable instrument that serves as a substitute for money and as a convenient form of payment in financial transactions and negotiations. The use of checks as payment allows commercial and banking transactions to proceed without the actual handling of money, thus, doing away with the need to physically count bills and coins whenever payment is made. It permits commercial and banking transactions to be carried out quickly and efficiently. But the convenience afforded by checks is damaged by unfunded checks that adversely affect confidence in our commercial and banking activities, and ultimately injure public interest. (Mitra vs. People of the Philippines, G.R. No. 191404, July 5, 2010)
As a general rule, checks and other papers deposited in a bank for collection remain the property of the depositor, and the bank performs the service of collection as his agent, even though it is authorized to apply the proceeds on a debt of the owner.” (7
68 Billgerry v. Branch, 19 Gratt. 418; Cruger v. Armstrong, 3 Johns. Cas. 5;
State v. Crawford, 13 La. Ann. 301, ibid
69 Harker v. Anderson, 21 Wend. 372; Edwards on Bills, 396, ibid
70 Merchant’s Bank v. Spicer, 6 Wend. 445; Purell v. Allemong, 22 Gratt. 742,
ibid
C. J., sec. 245, pp. 597, 598; Richardson vs. New Orleans Coffee Co., 102 Fed., 785; Philadelphia vs. Eckles, 98 Fed., 485; Commercial Nat. Bank vs. Armstrong, 148 U. S., 50; St. Louis, etc. R. Co. vs. Johnston, 133 U. S., 566; Ward vs. Smith, 19 Law ed., 207; Carpenter vs. National Shawmut Bank, 187 Fed., 1.)72 Is Check considered a ‘legal tender’?
A check, whether a manager’s check or ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor. (Tibajia vs. CA, G.R. No. 100290, June 4, 1993, [Padilla, J.]) However, in the case of Fortunado vs. Court of Appeals73 the Supreme Court stressed that, “We are not, by this decision, sanctioning the use of a check for the payment of obligations over the objections of the creditor.”
In Cebu International Finance Corporation vs. Courts
of Appeals, Vicente Alegre74, the High Court ruled that: “[i]n a
loan transaction, the obligation to pay a sum certain in money may be paid in money, which is the legal tender or, by the use of a check. A check is not a legal tender, and therefore cannot constitute valid tender of payment. In Philippine Airlines, Inc. vs. Court of Appeals75, this Court held that: “[s]ince a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does not, by itself, operate as payment (citation omitted).”
Moreover, the following provisions support the ruling of the
Tibajia case, to wit:
a. Article 1249 (NCC) The payment of debts in money shall
be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall
72 Chinese Grocer’s Association vs. American Apothecaries Co., G.R. No.
L-43667, March 31, 1938, [Villa-Real, J.:]
73 G.R. No. 78556, 25 Paril 1991, 196 SCRA 269. 74 G.R. No. 123031, October 12, 1999
produce the effect of payment only when they have been cashed, or when through the fault of the creditor they may have been impaired.
In the meantime, the action derived from the original obligation shall be held in abeyance.
b. Section 1 (R.A. 529) Every provision contained in, or
made with respect to, any obligation which purports to give the obligee the right to require payment in gold or in any particular kind of coin or currency other than Philippine currency or in an amount of money of the Philippines measured thereby, shall be as it is hereby declared against public policy null and void, and of no effect, and no such provision shall be contained in, or made with respect to, any obligation thereafter incurred. Every obligation heretofore and hereafter incurred, whether or not any such provision as to payment contained therein or made with respect thereto, shall be discharged upon payment in any coin or currency which at the time of payment is legal tender for public and private debts.
c. Section 63 (R.A. 265, Central Bank Act) Legal Character—Checks representing deposit money do not have legal tender power and their acceptance in the payment of debts, both public and private, is at the option of the creditor: Provided, however, that a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to his account.
However, noteworthy is the fact that the prohibition in Section 1 of R.A. 529 does not apply when:
a. Transactions were the funds involved are the proceeds of loans or investments made directly or indirectly, through bona fide intermediaries or agents, by foreign governments, their agencies and instrumentalities, and international financial and banking institutions so long as the funds are Identifiable, as having emanated from the sources enumerated above;
b. Transactions affecting high priority economic projects for agricultural industrial and power development as may be determined by the National Economic Council which are financed by or through foreign funds;
c. Forward exchange transactions entered into between banks or between banks and individuals or juridical persons;
d. Import-export and other international banking financial investment and industrial transactions.
With the exception of the cases enumerated in items (a), (b), (c) and (d) in the foregoing provision, in, which cases the terms of the parties’ agreement shall apply, every other domestic obligation heretofore or hereinafter incurred whether or not any such provision as to payment is contained therein or made with respect thereto, shall be discharged upon payment in any coin or currency which at the time of payment is legal tender for public and private debts: Provided, that if the obligation was incurred prior to the enactment of this Act and required payment in a particular kind of coin or currency other than Philippine currency, it shall be discharged in Philippine currency measured at the prevailing rates of exchange at the time the obligation was incurred, except in case of a loan made in foreign currency stipulated to be payable in the currency in which case the rate of exchange prevailing at the time of the stipulated date of payment shall prevail. All coins and currency, including Central Bank notes, heretofore and hereinafter issued and drawn by the Government of the Philippines shall be legal tender for all debts, public and private. (As amended by RA 4100, Section 1, approved June 19, 1964)
Under the above-quoted provision of Republic Act 529, if the obligation was incurred prior to the enactment of the Act and require payment in a particular kind of coin or currency other than the Philippine currency the same shall be discharged in Philippine currency measured at the prevailing rate of exchange at the time the obligation was incurred. As we have adverted to, Republic Act 529 was enacted on June 16, 1950. In the case now before us the obligation of the appellant to pay the appellee the 20% of $ 140,000.00, or the sum of $ 28,000.00, accrued on August 25,