CHAPTER 2: TRANSFER
GREAT ASIAN SALES CENTER CORPORATION V CA 381 SCRA 557; CARPIO; April 25, 2002
FACTS
-Great Asian is engaged in the business of buying and selling household appliances. In March 1981, the board of directors of Great Asian approved a resolution authorizing its Treasurer and GM, Arsenio Lim Piat, Jr. to secure a loan from Bancasia in an amount not to exceed P1M and also authorized Arsenio to sign all papers, documents or promissory notes necessary to secure the loan. In Feb. 1982, the board of directors of Great Asian approved a 2nd resolution authorizing Great Asian to secure a discounting line with Bancasia in an amount not exceeding P2M and also designated Arsenio as the authorized signatory to sign all instruments, documents and checks necessary to secure the discounting line.
-In March 1981 and 1982, Tan Chong Lin signed 2 Surety Agreements in favor of Bancasia to guarantee, solidarily, the debts of Great Asian to Bancasia. Great Asian, through Arsenio, signed 4 Deeds of Assignment of Receivables, assigning to Bancasia 15 postdated checks issued by various customers in payment for appliances and other merchandise. Arsenio endorsed all the 15 checks by signing his name at the back of the checks. Eight of the dishonored checks bore the endorsement of Arsenio below the stamped name of “Great Asian Sales Center”, while the rest of the dishonored checks just bore the signature of Arsenio. The drawee banks dishonored the fifteen checks on maturity when deposited for collection by Bancasia, with any of the following as reason for the dishonor: “account closed”, “payment stopped”, “account under garnishment”, and “insufficiency of funds”. After the drawee bank dishonored the checks, Bancasia sent letters to Tan Chong Lin, notifying him of the dishonor and demanding payment from him. Neither Great Asian nor Tan Chong Lin paid Bancasia the dishonored checks.
-In June 1982, Bancasia filed a complaint for collection of a sum of money against Great Asian and Tan Chong Lin. Great Asian raised the alleged lack of authority of Arsenio to sign the Deeds of Assignment as well as the absence of consideration and consent of all the parties to the Surety Agreements signed by Tan Chong Lin.
ISSUES
1. WON Arsenio had authority to execute the Deeds of Assignment and thus bind Great Asian
2. WON Great Asian is liable to Bancasia under the Deeds of Assignment for breach of contract pursuant to the civil code, independent of the negotiable instruments law
3. WON Tan Chong Lin is liable to Great Asian under the surety agreements.
HELD 1. YES
-The Corporation Code of the Philippines vests in the board of directors the exercise of the corporate powers of the corporation, save in those instances where the Code requires stockholders’ approval for certain specific acts. In the ordinary course of business, a corporation can borrow funds or dispose of assets of the corporation only on authority of the board of directors. The board of directors normally designates one or more corporate officers to sign loan documents or deeds of assignment for the corporation.
-To secure a credit accommodation from Bancasia, the board of directors of Great Asian adopted 2 board resolutions on different dates. (text of resolutions shown in case) As plain as daylight, the 2 board resolutions clearly authorized Great Asian to secure a loan or discounting line from Bancasia. The 2 board resolutions also categorically designated Arsenio as the authorized signatory to sign and deliver all the implementing documents, including checks, for Great Asian. There is no iota of doubt whatsoever about the purpose of the 2 board resolutions, and about the authority of Arsenio to act and sign for Great Asian. Arsenio had all the proper and necessary authority from
the board of directors of Great Asian to sign the Deeds of Assignment and to endorse the fifteen postdated checks. Arsenio signed the Deeds of Assignment as agent and authorized signatory of Great Asian under an authority expressly granted by its board of directors. The signature of Arsenio on the Deeds of Assignment is effectively also the signature of the board of directors of Great Asian, binding on the board of directors and on Great Asian itself. 2. YES
-Bancasia’s complaint against Great Asian is founded on the latter’s breach of contract under the Deeds of Assignment. The Deeds of Assignment uniformly provided for one vital suspensive condition: in case the drawers fail to pay the checks on maturity, Great Asian obligated itself to pay Bancasia the full face value of the dishonored checks, including penalty and attorney’s fees. The failure of the drawers to pay the checks is a suspensive condition, the happening of which gives rise to Bancasia’s right to demand payment from Great Asian. This conditional obligation of Great Asian arises from its written contracts with Bancasia as embodied in the Deeds of Assignment.
-By express provision in the Deeds of Assignment, Great Asian unconditionally obligated itself to pay Bancasia the full value of the dishonored checks. In short, Great Asian sold the postdated checks on with
recourse basis against itself. This is an obligation that Great Asian is bound to faithfully comply because it has the force of law as between Great Asian and Bancasia, as provided in Art 1159 of the Civil Code. Great Asian and Bancasia agreed on this specific with recourse stipulation, despite the fact that the receivables were negotiable instruments with the endorsement of Arsenio. The contracting parties had the right to adopt the stipulation which is separate and distinct from the warranties of an endorser under the Negotiable Instruments Law.
-The explicit with recourse stipulation against Great Asian effectively enlarges, by agreement of the parties, the liability of Great Asian beyond that of a mere endorser of a negotiable instrument. Thus, whether or not Bancasia gives notice of dishonor to Great Asian, the latter remains liable to Bancasia because of the with recourse stipulation which is independent of the warranties of an endorser under the Negotiable Instruments Law.
-There is nothing in the Negotiable Instruments Law or in the Financing Company Act, that prohibits Great Asian and Bancasia parties from adopting the with recourse stipulation uniformly found in the Deeds of Assignment. Instead of being negotiated, a negotiable instrument may be assigned. Assignment of a negotiable instrument is actually the principal mode of conveying accounts receivable under the Financing Company Act. Since in discounting of receivables the assignee is subrogated as creditor of the receivable, the endorsement of the negotiable instrument becomes necessary to enable the assignee to collect from the drawer. This is particularly true with checks because collecting banks will not accept checks unless endorsed by the payee. The purpose of the endorsement is merely to facilitate collection of the proceeds of the checks.
-The purpose of the endorsement is not to make the assignee finance company a holder in due course because policy considerations militate against according finance companies the rights of a holder in due course. Otherwise, consumers who purchase appliances on installment, giving their promissory notes or checks to the seller, will have no defense against the finance company should the appliances
later turn out to be defective. Thus, the endorsement does not operate to make the finance company a holder in due course. For its own protection, therefore, the finance company usually requires the assignor, in a separate and distinct contract, to pay the finance company in the event of dishonor of the notes or checks.
-As endorsee of Great Asian, Bancasia had the option to proceed against Great Asian under the Negotiable Instruments Law. Had it so proceeded, the Negotiable Instruments Law would have governed Bancasia’s cause of action. Bancasia, however, did not choose this route. Instead, Bancasia decided to sue Great Asian for breach of contract under the Civil Code, a right that Bancasia had under the express with recourse stipulation in the Deeds of Assignment. The exercise by Bancasia of its option to sue for breach of
contract under the Civil Code will not leave Great Asian holding an empty bag. Great Asian, after paying Bancasia, is subrogated back as creditor of the receivables. Great Asian can then proceed against the drawers who issued the checks. Even if Bancasia failed to give timely notice of dishonor, still there would be no prejudice whatever to Great Asian. Under the Negotiable Instruments Law, notice of dishonor is not required if the drawer has no right to expect or require the bank to honor the check, or if the drawer has countermanded payment. In the instant case, all the checks were dishonored for any of the following reasons: “account closed”, “account under garnishment”, insufficiency of funds”, or “payment stopped”. In the first three instances, the drawers had no right to expect or require the bank to honor the checks, and in the last instance, the drawers had countermanded payment.
3. YES
-Tan Chong Lin, by signing the Surety Agreements, explicitly and unconditionally bound himself to pay Bancasia, solidarily with Great Asian, if the drawers of the checks fail to pay on due date. The condition on which Tan Chong Lin’s obligation hinged had happened. As surety, Tan Chong Lin automatically became liable for the entire obligation to the same extent as Great Asian.
CHAPTER III: HOLDER IN DUE COURSE [Cases cited in Campos] YANG V. COURT OF APPEALS
409 SCRA 159
FACTS:
Yang and Chandimari entered into an agreement that the latter would issue to the former a manager’s check in exchange for two checks that Yang has payable to the order of David. The difference in amount would be the profit of the two of them. It was further agreed upon that Yang would secure a dollar draft, which Chandimari would exchange with another dollar draft to be secured from a Hong Kong bank. At the agreed time of rendezvous, it was reported by Yang’s messenger that Chandimari didn't show up and the drafts and checks were allegedly stolen. This wasn't true however. Chandimari was able to get hold of the drafts and checks. He was even able to deliver to David the two checks and was able to get money in return. Consequently, Yang asked for the stoppage of payment of the checks she believe to be lost, relying on the report of her messenger. The stoppage order was eventually lifted by the banks and the drafts and checks were able to be encashed. Yang then filed an action for injunction and damages against the banks,
Chandimari and David. The
trial court and CA held in favor of David as a holder
in due course.
HELD:
Every holder of a negotiable instrument is presumed to be a holder in due course. This is specially true if one is a holder because he is the payee or indorsee of the instrument. In the case at bar, it is evident that David was the payee of the checks. The
prima facie presumption of him being a holder in due course is in his favor. Nonetheless, this presumption is disputable. On whether he took the check under the conditions set forth in Section 52 must be proven. Petitioner relies on two
arguments on why
David isn’t a holder in due course—first, because he took the checks without valuable consideration; and second, he failed to inquire on Chandimari’s title to the checks given to him. The law gives rise to the presumption of valuable consideration. Petitioner has the burden of debunking such presumption, which it failed to do so. Her allegation that David received the checks without consideration is unsupported and
devoid of any evidence.
Furthermore, petitioner wasn't able to show any circumstance which should have placed David in inquiry as to why and wherefore of the possession of the checks by Chandimari. David wasn't a privy to the transactions between Yang and Chandimari. Instead, Chandimari and David had the agreement between themselves of the delivery of the checks. David even inquired with the banks on the genuineness of the checks in issue. At that time, he wasn't aware of any request for the
stoppage of payment. Under
these circumstances, David had no obligation to ascertain from Chandimari what the nature of the latter’s title to the checks was, if any, or the nature of
his possession.
ATRIUM MANAGEMENT CORPORATION VS. COURT OF APPEALS Facts:
Hi-Cement Corporation through its corporate signatories, Lourdes M. de Leon, treasurer, and the late Antonio de las Alas, Chairman, issued checks in favor of E.T. Henry and Co. Inc., as payee. E.T. Henry and Co., Inc., in turn, endorsed the four checks to Atrium Management Corporation for valuable consideration. Upon presentment for payment, the drawee bank dishonored all four checks for the common reason "payment stopped". On 3 January 1983, Atrium Management Corporation filed with the Regional Trial Court, Manila an action for collection of the proceeds of four postdated checks in the total amount of P2 million, after its demand for payment of the value of the checks was denied. After due proceedings, on 20 July 1989, the trial court rendered a decision ordering Lourdes M. de Leon, her husband Rafael de Leon, E.T. Henry and Co., Inc. and Hi-Cement Corporation to pay Atrium jointly and severally, the amount of P2 million corresponding to the value of the four checks, plus interest and attorney's fees. On appeal to the Court
of Appeals, on 17 March 1993, the Court of Appeals promulgated its decision modifying the decision of the trial court, absolving Hi-Cement Corporation from liability and dismissing the complaint as against it. The appellate court ruled that: (1) Lourdes M. de Leon was not authorized to issue the subject checks in favor of E.T. Henry, Inc.; (2) The issuance of the subject checks by Lourdes M. de Leon and the late Antonio de las Alas constituted ultra vires acts; and (3) The subject checks were not issued for valuable consideration. Hence, Atrium filed the petition. Issue [1]: Whether the issuance of the checks was an
ultra vires act.
Held [1]: The record reveals that Hi-Cement Corporation issued the four (4) checks to extend financial assistance to E.T. Henry, not as payment of the balance of the P30 million pesos cost of hydro oil delivered by E.T. Henry to Hi-Cement. Why else would petitioner de Leon ask for counterpart checks from E.T. Henry if the checks were in payment for
hydro oil delivered by E.T. Henry to Cement? Hi-Cement, however, maintains that the checks were not issued for consideration and that Lourdes and E.T. Henry engaged in a "kiting operation" to raise funds for E.T. Henry, who admittedly was in need of financial assistance. There was no sufficient evidence to show that such is the case. Lourdes M. de Leon is the treasurer of the corporation and is authorized to sign checks for the corporation. At the time of the issuance of the checks, there were sufficient funds in the bank to cover payment of the amount of P2 million pesos. Thus, the act of issuing the checks was well within the ambit of a valid corporate act, for it was for securing a loan to finance the activities of the corporation, hence, not an ultra vires act. An ultra vires act is one committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the power conferred upon it by law" The term "ultra vires" is "distinguished from an illegal act for the former is merely voidable which may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated. Issue [2]: Whether Lourdes M. de Leon and Antonio de
las Alas were personally liable for the checks issued as corporate officers and authorized signatories of the check.
Held [2]: Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when: (1) He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons; (2) He consents to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; (3) He agrees to hold himself personally and solidarily liable with the corporation; or (4) He is made, by a specific provision of law, to personally answer for his corporate action." Herein, Lourdes M. de Leon and Antonio de las Alas as treasurer and Chairman of Hi-Cement were authorized to issue the checks. However, Ms. de Leon was negligent when she signed the confirmation letter requested by Mr. Yap of Atrium and Mr. Henry of E.T. Henry for the rediscounting of the crossed checks issued in favor of E.T. Henry. She was aware that the checks were strictly endorsed for deposit only to the payee's account and not to be further negotiated. What is more, the confirmation letter contained a clause that was not true, that is, "that the checks issued to E.T. Henry were in payment of Hydro oil bought by Hi-Cement from E.T. Henry". Her negligence resulted in damage to the corporation. Hence, Ms. de Leon may be held personally liable therefor.
BATAAN CIGAR AND CIGARETTE FACTORY VS. CA Facts: Bataan Cigar & Cigarette Factory, Inc. (BCCFI), a
corporation involved in the manufacturing of cigarettes, engaged one of its suppliers, King Tim Pua George (George King), to deliver 2,000 bales of tobacco leaf starting October 1978. In consideration thereof, BCCFI, on 13 July 1978 issued crossed checks post dated sometime in March 1979 in the total amount of P820,000. Relying on the supplier's representation that he would complete delivery within 3 months from 5 December 1978, BCCFI agreed to purchase additional 2,500 bales of tobacco leaves, despite the supplier's failure to deliver in accordance with their earlier agreement. Again, BCCFI issued postdated crossed checks in the total amount of P1,100,000, payable sometime in September 1979. During these times, George King was simultaneously dealing with State Investment House Inc. (SIHI). On 19 July 1978, he sold at a discount check TCBT 551826 bearing an amount of P164,000.00, post dated 31 March 1979, drawn by BCCFI, naming George King as payee to SIHI. On 19 December and 26, 1978, he again sold to SIHI checks TCBT 608967 & 608968, both in the amount of P100,000.00, post dated September 15 & 30, 1979 respectively, drawn by BCCFI in favor of George King. In as much as George King failed to deliver the bales of tobacco leaf as agreed despite its demand, BCCFI issued on 30 March 1979, a stop payment order on all checks payable to George King, including check TCBT 551826. Subsequently, stop payment was also ordered on checks TCBT
608967 & 608968 on September 14 & 28, 1979, respectively, due to George King's failure to deliver the tobacco leaves.
Efforts of SIHI to collect from BCCFI having failed, it instituted the present case with the Regional Trial Court, naming only BCCFI as party defendant. The trial court pronounced SIHI as having a valid claim being a holder in due course. It further said that the non-inclusion of King Tim Pua George as party defendant is immaterial in this case, since he, as payee, is not an indispensable party.
Raised in the Court of Appeals, the appellate court affirmed the decision of the trial court. Hence, the present petition for review.
The Supreme Court granted the petition, finding that the court a quo erred in the application of law; and thus reversed the decision of the Regional Trial Court as affirmed by the Court of Appeals’ with cost against SIHI.
1. Section 52 NIL; Holder in Due Course Section 52 of the The Negotiable Instruments Law states what constitutes a holder in due course, thus “A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it had been previously
dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it."
2. Section 59 NIL
Section 59 of the NIL further states that every holder is deemed prima facie a holder in due course. However, when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims, acquired the title as holder in due course.
3. SIHI vs. IAC on all fours
The facts in thepresent case are on all fours to the case of State Investment House, Inc. (the very respondent in this case) v. Intermediate Appellate Court wherein the Court made a discourse on the effects of crossing of checks.
4. Check defined; Kinds
A check is defined by law as a bill of exchange drawn on a bank payable on demand. There are a variety of checks, the more popular of which are the memorandum check, cashier's check, traveler's check and crossed check. Crossed check is one where two parallel lines are drawn across its face or across a corner thereof. It may be crossed generally or specially.
5. Crossed check
A check is crossed specially when the name of a particular banker or a company is written between the parallel lines drawn. It is crossed generally when only the words "and company" are written or nothing is written at all between the parallel lines. It may be issued so that presentment can be made only by a bank. Veritably the Negotiable Instruments Law (NIL) does not mention "crossed checks," although Article 541 of the Code of Commerce refers to such instruments.
6. General viewpoint and English setting on crossed check: Negotiability of a check not affected According to commentators, the negotiability of a check is not affected by its being crossed, whether specially or generally. It may legally be negotiated from one person to another as long as the one who encashes the check with the drawee bank is another bank, or if it is specially crossed, by the bank
mentioned between the parallel lines. This is specially true in England where the Negotiable Instrument Law originated.
7. Philippine setting: Effects of a crossed check In the Philippine business setting, beset with bouncing checks, forging of checks, and so forth that banks have become quite guarded in encashing checks, particularly those which name a specific payee. Unless one is a valued client, a bank will not even accept second indorsements on checks. In order to preserve the credit worthiness of checks, jurisprudence has pronounced that crossing of a check should have the following effects: (a) the check may not be encashed but only deposited in the bank; (b) the check may be negotiated only once — to one who has an account with a bank; (c) and the act of crossing the check serves as warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose, otherwise, he is not a holder in due course.
8. Crossed check should put holder on inquiry to ascertain indorser’s title or nature of possession; Effects of failure, Section 52 (c) NIL Crossing of checks should put the holder on inquiry and upon him devolves the duty to ascertain the indorser's title to the check or the nature of his possession. Failing in this respect, the holder is declared guilty of gross negligence amounting to legal absence of good faith, contrary to Sec. 52(c) of the Negotiable Instruments Law, and as such the consensus of authority is to the effect that the holder of the check is not a holder in due course. In the present case, BCCFI's defense in stopping payment is as good to SIHI as it is to George King; because the checks were issued with the intention that George King would supply BCCFI with the bales of tobacco leaf. There being failure of consideration, SIHI is not a holder in due course. Consequently, BCCFI cannot be obliged to pay the checks.
9. SIHI can collect from immediate indorser, George King
It does not mean, however, that SIHI could not recover from the checks. The only disadvantage of a holder who is not a holder in due course is that the instrument is subject to defenses as if it were non-negotiable. Hence, SIHI can collect from the immediate indorser, in this case, George King.
BPI V ALFRED BEARWIN & CO. (1928) ~ricky~
NATURE
Appeal by Anselmo Diaz against the CFI of Iloilo’s order for him to satisfy 2 promissory notes he issued in favor of Alfred Berwin & Co.
FACTS
-The Bank of the Philippine Islands (BPI) filed a collection suit against Alfred Berwin & Co (ABC). Diaz, ABC’s debtor, was given notice, when the preliminary attachment was ordered, not to deliver the payment of his debt to ABC. The CFI of Iloilo rendered judgment in favor of BPI.
-To effect the execution of the judgment, BPI prayed that Diaz be summoned to testify concerning the credit of ABC against him. Diaz acknowledged his indebtedness in the sum of P20,000, the balance of credit for a greater amount. The P20,000 was evidenced by two promissory notes he issued in favor of ABC.
-It does not appear, however, from the record whether such promissory notes are still in the hands of ABC. It was not known whether ABC is still the
holder in due course of the promissory notes or whether it had already been alienated.
ISSUE
WON Diaz may be compelled to pay Alfred Berwin & Co., or the sheriff as a credit in favor of said corporation. HELD: NO.
Reasoning Diaz cannot be compelled to pay the amount of the said promissory notes to any person save the holder of such documents in due course, for said person is the one entitled to receive it. To compel Diaz to pay ABC would be to expose him to the situation in which, having paid the amount of the promissory notes without settling the same, a holder in due course may appear and within all reason demand its full payment.
- The fact that he was given notice when the preliminary attachment was ordered does not change the situation because the debt was secured by negotiable instruments. Notwithstanding such notice, it was beyond Diaz’s power to prevent ABC from negotiating the promissory notes.
Disposition Order revoked.
ELGIN NAT’L BANK V GOECKE (1920) ~joey~
FACTS
-Elgin National Brewing Company executed two demand notes, one for $3K (Note A) and the other for $2500 (Note B), each payable to the maker’s order and indorsed in blank ink by it & by 5 accommodation indorsers, including Frank A. Goecke, the company manager. The accommodation indorsers signed on representation that the proceeds were to be used to pay for supplies for the brewery.
-Both notes were diverted by Goecke from their intended purpose. Note A was indorsed to Elgin National Bank as collateral security for a note (Note C) earlier executed by Goecke as maker, the last renewal of which was made on Nov. 22, 1912 for 6 months. Note B was indorsed to the same bank as payment for 5 other notes earlier executed by the brewing company as maker and purchased by the bank. The bank did not know of the diversion of the two demand notes from their intended purpose.
-Brewing company defaulted. Bank sued all 5 accommodation indorsers.
-TC ruled in favor of the bank. Appellate court affirmed.
ISSUE
WON the accommodation indorsers are liable to the bank notwithstanding the diversion of the proceeds of the notes
HELD: YES
Ratio An indorsee of a negotiable note who has taken it, before its maturity, as collateral security for a pre-existing debt and without any express agreement, is deemed a holder for a valuable consideration, and that he holds it free from latent defenses on the part of the maker.
Reasoning
-The accommodation indorsers are liable to the bank on the notes, although the bank at the time of taking the instruments knew that they were only accommodation parties, if the bank is a holder for value, as the notes were indorsed to it before maturity and without notice for their restricted use and purpose.
-As for Note B, it is clear that the bank is a holder for value. The consideration paid by the bank for this note was the cancellation and surrender by it of the 5 other notes executed by the brewing company. -Note A was not delivered to the bank and accepted by it
as security until Dec. 10, 1912. There is no proof in the record that at the time Note C was renewed on Nov. 22 there was an agreement that Note A was to be put up as collateral and in part consideration for the extension of Note C. Thus, it is argued by the accommodation parties that mere delivery of Note A, without agreement for further extension of time or other agreement for Note C, does not make the bank a bona fide holder for value. This contention is without merit. See ratio
MERCHANTS’ NAT’L BANK OF ST. PAUL V STA. MARIA SUGAR CO. (1914) ~chriscaps~
FACTS
-Sta. Maria gave netotiable note payable to order of American Hoist & Derrick Co (payee).
-Payee deposited the note in Merchants’ Natl Bank, w/c gave depositor credit representing the principal & accrued interest ($2,427.36).
-After this, there were subsequent deposits and withdrawals. The smallest balance during this period was $6,294.04.
-Discounting bank had no knowledge of claimed defense of maker until receipt of its letter.
-The Bank sued the maker. Maker (Sta. Maria) claimed that the Bank is not a holder for value and not a holder in due course.
ISSUE: WON the Bank is a holder in due course
HELD: YES
-Until 1 month after plaintiff had discounted the instrument, it had no knowledge or suspicion of any infirmity.
-Mere discounting of the note and placing the amount of said discount to the credit of the holder would not then have constituted a transfer for value because the bank would have parted with nothing, there would have been a mere bookkeeping entry. But if the sum had subsequently been checked out, then value would have passed.
-We should agree with opinion of Justice Brewer: The first debits are to be charged against the first credits. It follows therefore, that the bank was a bona fide holder for value.
NAT’L BANK OF COMMERCE V MORGAN (1921) ~edel~
FACTS
-Nat’l Hay Company (NHC) deposited with NBC a draft and a bill of lading.
-Said items were received by the NBC and were then credited to the account of NHC.
-Eventually, the draft with the bill of lading attached was forwarded by NBC to the First National Bank of Birmingham (FNBB) for collection and remittance to NBC and the amount of the draft was paid by the drawee to FNBB.
-Prior to remittance (of the proceeds of the draft) by the FNBB to NBC, Morgan (a creditor of the NHC) instituted attachment proceedings against NHC and service was sought to be perfected by the process of garnishment directed to FNBB.
-FNBB, in response to the garnishment, admitted that it held in its possession the proceeds of the draft but said that NBC had the right to claim said fund. NBC then laid claim to the fund.
-Morgan won at the circuit court. Hence, this appeal by NBC.
ISSUE
WON NBC received the draft as a mere collecting agent or as purchaser/ WON NBC is a holder for value
HELD
-NBC was a mere collector. TF, NBC was not a holder for value. FNBB was ordered to pay the proceeds of the draft to Morgan.
-(*Campos’ note: The ruling in this case represents the minority view that as long as the balance in the depositor’s account equals or exceeds the amount of the instrument deposited, the instrument cannot be considered withdrawn for the purpose of treating the bank as holder for value (as per sec.26 NIL.))
Reasoning In this case, NBC insists that it was a purchaser for value and that NHC’s account had never been overdrawn and it had balance to its credit in excess of the draft, continuously from the day the said draft was received until the day of the garnishment.
-The Court, however, denied their contention and held that the case of Fredonia v. Tommei was not in conflict with their holding. In said case, White’s account had been fully checked out and that the proceeds of the note had been fully exhausted, just as in the case at bar, if the proof showed that the NHC had checked out its entire balance at any time between the deposit of the draft and the notice of garnishment. But as had been held, the NHC here had a standing balance to its credit with the NBC throughout this period in excess of the draft.
-Furthermore, the Court thinks that their position is more just and equitable in view of the fact that a bank has the right to apply all unchecked deposits against the debt due it by the depositor. And they added that this holding cannot be of serious detriment to banks while a contrary view might result in furnishing a weapon to the negotiator of notes and bills against their creditors or persons having a right or equity in or against the instruments negotiated.
-All the other cases cited by NBC (ie. FOX v. Bank of Kansas, Dreilling v. First National Bank etc) were held to be contrary to the Court’s decision and to NBC’s contention as well.
(*Basically, NBC cannot be considered as a holder in due course (as per Sec.52(3)) or as a purchaser for value in this case since NBC credited the amount of the draft to the deposit account of NHC and NBC failed to show that the amount credited was absorbed by existing debts or subsequently checked out. Here, NHC had a balance on deposit in excess of the amount of the draft continuously from the negotiation till the garnishment. TF, NBC didn’t show that they have given value for the instrument ergo NBC not a holder/purchaser for value.)
UNAKA NAT’L BANK V BUTLER (1904) FACTS
-Harris drew a check for $15.25 on the Unaka National Bank payable to the order of Butler and delivered the check to the payee for value. The payee indorsed the check in blank and negotiated it to Davis who on the next day lost it on the highway, At the request of the indorsee, Davis, the drawer ordered payment stopped by notice to the drawee bank. The stop order was overlooked and the check was paid by the drawee to Ward & Fryberg, merchants who, within a week after the check’s issuance to the payee, had taken the check in payment of goods sold to “a customer who was unknown to them but who was supposed by them to be the owner.” The original payee, Butler, for the use of his indorsee Davis, the loser of the check, sued the drawee bank.
ISSUE
WON Ward & Fryberg purchased the check for value, in due of course of trade, and without actual knowledge of the infirmity in the title of the holder
HELD
YES. To constitute notice of an infirmity in an instrument, or defect of the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith. The purchaser of a negotiable instrument owes no duty to the former holders to actively inquire into the title of the party in possession, and that circumstances of suspicion and gross negligence are not of themselves bad faith, but only evidence tending to establish it.
-There is no doubt, upon this record, that Ward & Fryberg purchased this check for value, in due course of trade, and without actual knowledge of the infirmity of the title of the holder. It is equally clear that there was no bad faith in the transaction. The result is, they acquired a perfect title to the check by their purchase, and had the right to collect it; and at the same time, in consequence of the same facts, Davis lost his title, and is not entitle to recover its proceeds from the bank.
Disposition Judgment of the circuit court is reversed, and the suit dismissed.
DE OCAMPO V GATCHALIAN (1961) FACTS
-Anita Gatchalian was looking for a car to buy. Her friend Emil Fajardo brought Manuel Gonzales to her house because Manuel had a car to show her. Manuel said he was duly authorized by Ocampo Clinic to sell the car. Anita liked the car. Anita told Manuel to bring the car together with the registration the next day, so that Anita's husband can inspect it also. Manuel said that the owner would most likely not allow him to bring the registration unless there's a showing that the party interested in the purchase of the car is ready and willing to pay for it. So Anita issued a check for P600 in Ocampo's name.
-The next day, Manuel didn't come. Instead, he went to Ocampo Clinic and paid for her wife's outstanding balance of P441.75 with the clinic. He was given P158.25 cash as sukli. Meanwhile, when Manuel didn't come, Anita got suspicious and gave the bank a stop payment order on the check. Ocampo was not aware of the arrangement between Manuel and Anita at the time Manuel gave it to him as payment for wife's bills.
-Ocampo went after Anita. Ocampo won. Anita appealed. She contends that the check is not a negotiable instrument and that Ocampo is not a holder in due course.
ISSUES
1. WON original payee of the check can become a holder in due course
2. WON there was valid negotiation of the check (basically, WON Ocampo had NO NOTICE of defect of holder's title)
3. WON Ocampo is a holder in due course HELD
1. YES. Sec 191 of NIL defines HOLDER as the payee or indorsee of a bill or note, who is in possession of
it, or the bearer thereof. While Sec 52 defines a HDC as a HOLDER who has taken the instrument under the 4 conditions. Therefore, a payee can be a HDC. 2. YES. The check payable to Ocampo was entrusted to
Manuel. The latter then was the agent of Anita. When the agent (Manuel) of drawer (anita) negotiated the check with the intention of getting its value from Ocampo, negotitation took place through no fault of Ocampo, unless it can be shown that Ocampo should be considered as having notice of the defect in the possession of holder Manuel. 3. NO. Ocampo can't be a HDC because although he
had no notice of defect in title, he must also have taken the instrument in good faith. These facts should have put him on guard and inquired into the title of Manuel:
a. Anita had no obligation or liability to Ocampo Clinic; b. the amount on the check didn't correspond exactly to
Manuel's utang; and
c. the check had two parallel lines in the upper left hand corner, which in practice means that the check was for deposit only and cant be converted into cash. -It would've been easy for Ocampo to inquire because he
knew Anita's husband. His failure to do so is gross neglect in not finding out the nature of the title and possession of Manuel, which amounts to legal absence of good faith. He therefore cannot be considered a holder in good faith. Sec 52 requires the holder to be in good faith to be considered a HDC. Therefore, Ocampo cannot be a HDC.
-The presumption in Sec 59 that every holder is a HDC cannot apply in this case because there were suspicious circumstances that should have put the person in to inquiry as to the title of the holder who negotiated the instrument to him. The test is of the reasonable prudent man and good faith.
CHIANG YIA MIN vs. COURT OF APPEALS Facts:
US$100,000.00 was sent by Hang Lung Bank Ltd. Of Hong Kong on February 7, 1979 through the Pacific Banking Corporation to RCBC. The remittance was for petitioner’s own account and was intended to qualify him as a foreign investor under Philippine laws. It was sent by petitioner himself prior to his arrival in the Philippines.
When petitioner checked on his money sometime in mid-1985, he found out that the dollar deposit was transferred to the Shaw Boulevard branch of respondent bank and converted to a peso account, which had a balance of only P1,362.10 as of October 29, 1979.
A letter of respondent bank dated August 9, 1985 stated that petitioner’s Current Account was opened on February 8, 1979, with an initial deposit of P729,752.20; a total of P728,390.00 was withdrawn by way of five checks apparently issued by petitioner in favor of Papercon (Phils.), Inc., and a business venture of Tom Pek. Thus, the balance of the account was reduced to P1,362.10 as of October 29, 1979 and no transactions were made on the account since.
In the same letter, the bank stated that it was no longer able to locate the microfilm copies of the issued checks, specimen signature cards, and other records related to the questioned account, since the account had been inactive for more than five years.
Petitioner: he did not cause the transfer of his money to the Shaw Boulevard branch of RCBC, as his instructions in the telegraphic transfer were for the money to be remitted to the RCBC head office in Makati, nor its conversion to pesos and the subsequent withdrawals. Nor did he authorize anyone to perform these acts.
Bank: should it be made liable to petitioner, said third-party defendants as payees and beneficiaries of the issued checks should be held solidarily liable with it Papercon: did not deny receiving the checks worth
P712,700.00 but argued that unless proven otherwise, the said checks should be presumed to have been issued in their favor for a sufficient and valuable consideration.
TC: withdrawals were not made by petitioner nor authorized by him, and held respondent bank liable CA: the opening of the current account and the
withdrawals therefrom were authorized by petitioner; accordingly, it reversed the decision of the RTC and absolved private respondents of liability
Issue: WON petitioner has proved, by a preponderance of the evidence, that bank connived with Papercon and Tom Pek in allowing the withdrawals from
Current Account, knowing these to be unauthorized by petitioner, and with the purpose of defrauding him.
Held: No. There is thus no evidence to demonstrate that bank and Papercon and Tom Pek colluded to defraud petitioner of his money. What the evidence in fact establishes is that the opening of the account and the withdrawals were authorized by petitioner, and that the signatures appearing on the questioned checks were petitioner’s
Ratio:
1. petitioner originally sued upon an allegation of negligence on the part of respondent bank’s officers and employees in allowing the said withdrawals 2. Under either theory of fraud or negligence, it is
incumbent upon petitioner to show that the withdrawals were not authorized by him. If he is unable to do so, his allegations of fraud or negligence are unsubstantiated and the presumption that he authorized the said withdrawals will apply. 3. Petitioner's allegation was countered by the
testimony of Catalino Reyes, the accountant of Pioneer Business Forms (a business venture of Tom Pek).
He testified that he and his fellow employees were advised by Tom Pek to "personally help (Chiang Yia Min) in all his personal accounts. He also said that the opening of the account was done in haste, since petitioner was in a hurry to have the proceeds of the remittance credited to his checking account. Because Reyes was well-known to the officers and employees of RCBC-Shaw Boulevard, he was allowed to bring out of the bank the application form, depositor’s card, and other forms which required petitioner’s signature as depositor. He then filled out the forms, and brought them to petitioner for signing. He witnessed petitioner sign the forms. Then he brought the signed forms, and petitioner’s passport, back to the bank, which approved the opening of the current account upon a comparison of the signatures on the forms and the passport. This is supported by documentary evidence.
4. As established by the records, there were five issued checks: two made payable to Papercon, and three made payable to cash (these three checks were all negotiated to Tom Pek). Catalino Reyes testified that on two separate instances, petitioner asked him to prepare two of the five checks questioned in this case, specifically, the check for P700,000.00 and payable to Papercon, and the check for P12,700.00, and payable to cash. He witnessed petitioner study the information typed on the checks, sign the checks, and hand them over to Tom Pek. The microfilm copies of these checks were submitted in evidence. They all bear the signature of petitioner. 5. Confronted with such direct and positive evidence
that he authorized the opening of the account and signed the questioned checks, it is curious that petitioner did not take the witness stand to refute
Reyes’s testimony. He did present as his rebuttal witness a teller of Metrobank (in which he also maintained a checking account) who testified that she had assisted petitioner in some withdrawals with Metrobank and in these instances it was petitioner himself, unassisted, who filled out his checks. Thus, petitioner attempted to show that he prepared his own checks as a matter of practice. However, we note that the Metrobank teller testified to checks issued on December 1989, or long after the herein questioned checks were issued. It would neither be fair nor accurate to compare the practice of petitioner in issuing checks in 1979, when admittedly he was still unfamiliar with the English language, with the manner by which he prepared his checks ten years later.
6. The best witness to counter the testimony of Catalino Reyes would be petitioner himself, simply because, based on the statements of Reyes, the only persons present when petitioner allegedly instructed Reyes to open the account and signed the checks were Reyes, petitioner himself, and Tom Pek. (Tom Pek died during the course of the proceedings.) Besides, if indeed Catalino Reyes lied in saying that petitioner instructed the opening of the account and issued the checks, we cannot imagine a more natural reaction of petitioner than wanting to set the record right. 7. Moreover, petitioner’s signatures on the
questioned check amounts to prima facie evidence that he issued those checks. By denying that he issued the said checks it is he who puts into question the genuineness and authenticity of the signatures appearing thereon, and it is he who has the burden of proving that those signatures were forgeries. No shared of evidence was presented by petitioner to show that the signatures were not his. All that this petition relies on insofar as concerning the authenticity of the signatures is the finding of the trial court judge that there was a discrepancy between the signatures on the bank form and petitioner’s passport. The Court, however, believes that since what is at issue here is whether petitioner issued the questioned checks the essential comparison should be between the signatures appearing on the checks and the specimen signatures on the depositor’s card. The record is replete with documents bearing petitioner’s signature, among them, his residence certificate, alien certificate of registration, investor’s passport, tourist’s passport, and the application forms for an RCBC current account. From our examination of these records we find no significant disparity between the signatures on the checks and those on the abovesaid documents, and will not risk a finding of forgery where the same had not been clearly alleged nor proved. Forgery, as any other mechanism of fraud, must be proven clearly and convincingly, and the burden of proof lies on the party alleging forgery.
ON NEGLIGENCE OF BANK
Petitioner: capitalizes on the following purported irregularities surrounding the opening of the account: 1. the alleged depositor never appeared at the bank; 2. the person who transacted for the alleged depositor
was not shown to have been authorized for that purpose;
3. the application form and other documents required to open the account were brought out of the bank premises;
4. the application form, when submitted, was not properly accomplished, but was left blank on most of the required details.
SC: The arguments are unmeritorious for failure to show that such irregularities attending the opening of the account resulted in the unauthorized withdrawal of petitioner’s money. The evidence stands unrebutted that petitioner instructed the opening of the said account and signed the pertinent application forms. Quite contrary to petitioner’s insinuations of fraud or negligence, the evidence indicates that the reason why respondent bank relaxed its rules in handling petitioner’s application was because, in addition to having been referred by a well-known client, petitioner was in a hurry to have the remittance credited to his account.
OTHER FINDINGS:
1. There is no truth to petitioner’s contention that he could not have authorized the opening of Current Account because he was not yet in the country at the time. The fact is, by February 7, 1979, his 7-day visa had already expired and he was plainly an overstaying tourist, working against time to secure an investor’s visa to legitimize his stay in the Philippines, which explains the haste by which he ordered the withdrawal of the money and the opening of the account in RCBC.
2. It also strains credulity that an investor like petitioner would allow a substantial amount of money to lie insipid and unproductive in a bank account for six years before he bothered to check on it. The complaint was filed with the RTC only on June 29, 1987, or almost two years after his supposed discovery of the loss of his money.
3. Petitioner’s claim that he felt no need to check on the US$100,000.00 because he still had cash at hand was contradicted by his own testimony that in 1983 and 1984 he could not put up the money to fund a letter of credit, lost a major client in the process, and was put out of business.
4. Petitioner wrote the Shaw Boulevard branch of respondent bank to inquire about the status of his current account is fundamentally inconsistent with his position that he had no knowledge of the opening of the account in that branch.
5. As for Papercon and Tom Pek, upon the finding that the checks issued to them were in order, and there being indication that respondent bank colluded in paying the checks to them for any unlawful cause, or was otherwise deceived or misled into doing the same, the presumption lies that they were holders for value and in good faith.
STATE INVESTMENT HOUSE V IAC, SPS. CHUA (1989) ~chrislao~
FACTS
-New Sikatuna Wood Industries (New Sikatuna, for brevity) entered into a contract of loan with Chua. Chua's wife issued three postdated crossed checks (valued at almost 300K) payable to New Sikatuna. This loan was subject to the condition "if and when the deposits were made to back up the checks".
-New Sikatuna sold 11 checks including the said 3 checks at a discount to State Investment House. State Investment tried to deposit said checks but the same were dishonored by reason of "insufficient funds", "stop payment" and "account closed", respectively.
-State House Investment filed an action for collection against Spouses Chua. RTC ruled against the spouses. IAC REVERSED. Hence, this petition. ISSUE
WON State Investment House is a holder in due course and therefore not subject to the defense of the drawer (Spouses Chua) against the payee (New Sikatuna) due to absence of consideration
HELD
NO. IAC correctly relied on the HELD in Ocampo v. Gatchalian as regards the effects of crossing a
check: the check may not be encashed but only deposited in the bank; the check may be negotiated only once—to one who has an account with a bank; and the act of crossing the check serves as a warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose, otherwise he is not a holder in due course. -State Investment House's failure to inquire from the
holder, New Sikatuna, the purpose for which the 3 checks were crossed, despite the warning of the crossing, prevents State Investment from being considered in good faith and thus it is NOT a holder in due course.
-Since it is not a holder in due course, it is subject to personal defenses, such as lack of consideration between Spouses Chua and New Sikatuna. Under the facts, the checks were postdated and issued only as a loan to New Sikatuna, is and when deposits were made to back up the checks. No such deposits were made, hence no loan was ever made. The 3 checks were without consideration.
-although State Investment is not a holder in due course, it doesn't mean that it could not recover on the checks. The only disadvantage is that it is subject to defenses as if the instruments were non-negotiable.
CONSOLIDATED PLYWOOD INDUSTRIES, INC V IFC LEASING AND ACCEPTANCE CORP (1987) ~apple~
NATURE
Petition for review on certiorari of a decision of the IAC
FACTS
-Consolidated, a corporation engaged in the logging business, needed 2 units of tractors for its projects. -Atlantic Gulf & Pacific Company of Manila knew of the need and thus offered 2 used tractors to petitioner through its sister company and marketing arm, Industrial Products Marketing (the "seller-assignor").
-Petitioner inspected the tractors while seller-assignor assured petitioner-corporation that the "used" Allis Crawler Tractors which were being offered were fit for the job, and gave the corresponding warranty of ninety (90) days performance of the machines and availability of parts.
-With said assurance and warranty, and relying on the seller-assignor's skill and judgment, petitioner-corporation through petitioners Wee and Vergara, president and vice-president, respectively, agreed to purchase on installment said two (2) units of "Used" Allis Crawler Tractors. It also paid the down payment of Two Hundred Ten Thousand Pesos (P210,000.00).
-Seller-assignor issued the sales invoice for the two (2) units of tractors. At the same time, the deed of
sale with chattel mortgage with promissory note was executed. Simultaneously with the execution of the deed of sale with chattel mortgage with promissory note, the seller-assignor, by means of a deed of assignment, assigned its rights and interest in the chattel mortgage in favor of the respondent (IFC Leasing).
-Barely fourteen (14) days had elapsed after their delivery when one of the tractors broke down and after another nine (9) days, the other tractor likewise broke down.
-Vergara informed seller-assignor and asked for prompt action. The seller-assignor sent to the jobsite its mechanics to conduct the necessary repairs, but the tractors did not come out to be what they should be after the repairs were undertaken because the units were no longer serviceable.
-Since the tractors were no longer serviceable, Wee asked the seller-assignor to pull out the units and have them reconditioned, and thereafter to offer them for sale. The proceeds were to be given to the respondent and the excess, if any, to be divided between the seller-assignor and petitioner-corporation which offered to bear one-half (1/2) of the reconditioning cost.
-No response was received by the petitioner-corporation and despite several follow-up calls, the seller-assignor did nothing with regard to the request.
-IFC filed a complaint against Consolidated for the amount of the PN.
-TC and IAC granted the complaint.
ISSUE
WON the respondent is a holder in due course HELD: No.
(first of all, the instrument here was determined as not being a negotiable instrument because of the lack of the words of negotiability... nevertheless, the court discussed why the respondent cannot be considered a holder in the course had the instrument been negotiable)
-A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory Note, the Deed of Assignment and the Disclosure of Loan/Credit Transaction shows that said documents evidencing the sale on installment of the tractors were all executed on the same day by and among the buyer, which is herein petitioner Consolidated Plywood Industries, Inc.; the seller-assignor which is the Industrial Products Marketing; and the assignee-financing company, which is the respondent. -Therefore, the respondent had actual knowledge of the fact that the seller-assignor's right to collect the purchase price was not unconditional, and that it was subject to the condition that the tractors sold were not defective.
-The respondent knew that when the tractors turned out to be defective, it would be subject to the defense of failure of consideration and cannot recover the purchase price from the petitioners. -Even assuming for the sake of argument that the promissory note is negotiable, the respondent, which took the same with actual knowledge of the foregoing facts so that its action in taking the
instrument amounted to bad faith, is not a holder in due course, and therefore, subject to all defenses which the petitioners may raise against the seller-assignor.
-We subscribe to the view of Campos and Campos that a financing company is not a holder in good faith as to the buyer.
-As against the argument that such a rule would seriously affect "a certain mode of transacting business adopted throughout the State," a court in one case stated: It may be that our holding here will require some changes in business methods and will impose a greater burden on the finance companies. We think the buyer-Mr. & Mrs. General Public-should have some protection somewhere along the line. We believe the finance company is better able to bear the risk of the dealer's insolvency than the buyer and in a far better position to protect his interests against unscrupulous and insolvent dealers... If this opinion imposes great burdens on finance companies it is a potent argument in favor of a rule which will afford public protection to the general buying public against unscrupulous dealers in personal property... (Mutual Finance Co. v. Martin)
-The respondent, a financing company which actively participated in the sale on installment of the subject two Allis Crawler tractors, cannot be regarded as a holder in due course of said note. It follows that the respondent's rights under the promissory note involved in this case are subject to all defenses that the petitioners have against the seller-assignor, Industrial Products Marketing. For Section 58 of the Negotiable Instruments Law provides that "in the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were non-negotiable. ... "
Disposition Petition granted
SALAS V CA, FILINVEST FINANCE AND LEASING CORP (1990) ~RACH~
NATURE
Petition for review on certiorari FACTS
-Petitioner Juanita Salas bought a motor vehicle from the Violago Motor Sales Corporation (VMS) for P58,138.20 as evidenced by a promissory note. This note was subsequently endorsed to the respondent Filinvest Finance & Leasing Corporation which financed the purchase.
-Salas defaulted in her installments allegedly due to a discrepancy in the engine and chassis numbers of the vehicle delivered to her and those indicated in the sales invoice, certificate of registration and deed of chattel mortgage, which fact she discovered when the vehicle figured in an accident.
-Filinvest then filed a case for a sum of money against Salas. RTC ruled in favor of Filinvest and ordered Salas to pay the plaintiff the sum of P28,414.40 with interest
thereon at the rate of 14% from Oct 2, 1980 until the said sum is fully paid.
-Both parties appealed to the CA. Imputing fraud, bad faith and misrepresentation against VMS for having delivered a different vehicle to petitioner, the latter prayed for a reversal so that she may be absolved from the contract.
-CA merely modified ordering the defendant to pay the plaintiff the sum of P54,908.30 at 14% per annum from Oct 2, 1980 until full payment.
* Petitioner’s Arguments
-In the light of the provision of the law on sales by description which she alleges is applicable, no contract ever existed between her and VMS and therefore none had been assigned in favor of private respondent. -It is not necessary to implead VMS as a party to the case because VMS was earlier sued by her for "breach of contract with damages" before RTC Olongapo City. Such court originally ordered Salas to pay the remaining balance of the motor vehicle installments; this was later
reversed by the same court ordering VMS instead to return to Salas the sum of P17,855.70. Such decision is still pending consideration in the CA.
*Respondent’s Comment
-Issues and allegations are a mere rehash of those presented and already passed upon by the CA; judgment in the "breach of contract" suit cannot be invoked as an authority as it is still pending in CA.
-Petitioner's liability on the promissory note, the due execution and genuineness of which she never denied under oath is, under the foregoing factual milieu, as inevitable as it is clearly established.
ISSUE
1. WON the promissory note is a negotiable instrument (which will bar completely all the available defenses of Salas against Filinvest)
2. WON Filinvest is a holder in due course HELD
1. YES
Ratio The instrument in order to be considered negotiable must contain the so-called "words of negotiability i.e., must be payable to "order" or "bearer". Under Sec 8 of the Negotiable Instruments Law, there are only two ways by which an instrument may be made payable to order. There must always be a specified person named in the instrument and the bill or note is to be paid to the person designated in the instrument or to any person to whom he has indorsed and delivered the same. Without the words "or order or "to the order of", the instrument is payable only to the person designated therein and is therefore non-negotiable. Any subsequent purchaser thereof will not enjoy the advantages of being a holder of a negotiable instrument, but will merely "step into the shoes" of the person designated in the instrument and will thus be open to all defenses available against the latter.
Reasoning Requisites under the law have been complied with:
[a] it is in writing and signed by the maker Juanita Salas;
[b] it contains an unconditional promise to pay the amount of P58,138.20;
[c] it is payable at a fixed or determinable future time which is "P1,614.95 monthly for 36 months due and payable on the 21 st day of each month starting March 21, 1980 thru and inclusive of Feb. 21, 1983;"
[d] it is payable to Violago Motor Sales Corporation, or
order and as such,
[e] the drawee is named or indicated with certainty. -It was negotiated by indorsement in writing on the instrument itself payable to the Order of Filinvest Finance and Leasing Corporation and it is an indorsement of the entire instrument.
**This is not a simple case of assignment of credit as petitioner would have it appear, where the assignee merely steps into the shoes of, is open to all defenses available against and can enforce payment only to the same extent as, the assignor-vendor.
2. YES
Reasoning Filinvest had taken the instrument under the ff conditions:
[a] it is complete and regular upon its face;
[b] it became the holder thereof before it was overdue, and without notice that it had previously been dishonored;
[c] it took the same in good faith and for value; and [d] when it was negotiated to Filinvest, the latter had no notice of any infirmity in the instrument or defect in the title of VMS Corporation.
-Filinvest also holds the instrument free from any defect of title of prior parties, and free from defenses available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof. This being so, Salas cannot set up against respondent the defense of nullity of the contract of sale between her and VMS.
- Even assuming that there was deception made upon Salas, this issue cannot be resolved since VMS was never impleaded as a party. SC: “We can only extend our sympathies to Salas in this unfortunate incident.”
Disposition Assailed decision is hereby AFFIRMED.
COMMERCIAL CREDIT CORP V ORANGE COUNTY MACHINE WORKS (1950) ~cha~
NATURE
Appeal from judgment FACTS
-Orange County Machine Works (OCMW) was in the market for a Ferracute press. Ermac Company (Ermac) offered to sell to OCMW a Ferracute press for $5k (which Ermac would buy from a supplier). Commercial Credit Corp. (CCC) was asked to finance the transaction, and CCC agreed to do so after an assignment of the contract of sale between OCMW and Ermac was made in favor of CCC. -before the assignment, Ermac obtained similar financing
from CCC and CCC had some blank forms supplied to Ermac. One of these forms entitled “Industrial Conditional Sales Contract” is the agreement
between Ermac (to sell the press) and OCMW (to buy the press).
-the said contract stated the ff. (re: deferred payments): “the balance shown to be due hereunder (evidenced by
my note of even date to your order) is payable in 12 equal consecutive installments of $355.09 each, the first installment payable one month from date hereof. Said note is a negotiable instrument separate and apart from this contract, even though at the time of execution it may be temporarily attached hereto by perforation or otherwise.”
-Latter part of the contract (in a detachable portion): “This contract may be assigned and/or said note may be
negotiated without notice to me and when assigned and/or negotiated shall be free from any defense, counterclaim or cross complaint by me.”