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NEGO CASE LIST 8 SEC 119 - 125



- Parties: DECS (drawer), PNB (drawee bank), Abante (payee), Capitol (payee’s bank), PBCom (collecting bank)

- DECS wrote a check in favor of Abante against the PNB. Abante deposited check to Capitol, Capitol deposited to PBCom. PBCom sent the check to PNB for clearing.

- PNB initially cleared the check, credited PBCom.

- PNB returned the check, debited PBCom’s account because there was a material alteration (check number)

- W/N an alteration of the check number is a material alteratio n NO

- An alteration is said to be material if it alters the effect of the instrument. It means an unauthorized change in an instrument that purports to modify in any respect the obligation of a party or an unauthorized addition of words or numbers or other change to an incomplete instrument relating to the obligation of a party. In other words, a material alteration is one which changes the items which are required to be stated under Section 1 of the NIL.


- A check, dated Aug. 7, 1981 in the amount of P 97,650 was drawn by the Ministry of Education and Culture (now known as DECS) payable to F. Abante Marketing (Abante). The check was drawn against the PNB.

- Abante, a client of Capitol City Development Bank (Capitol), deposited the check in its saving accou nt in said bank. In turn, Capitol deposited the same in its account with PBCom, which then sent the check to PNB for clearing.

- PNB initially cleared the check. PBCom credited Capitol’s account for P97,650.

- Oct. 1981: PNB returned the check to PBCom and deb ited the amount from the latter’s account there being a material alteration of the check number.

- PBCom then proceeded to debit Capitol’s account and subsequently sent the check back to PNB. PNB, however, returned the check to PBCom.

- Capitol could no longer debit Abante’s account since he had withdrawn the amount of the check. Capitol sought clarification from PBCom and demanded re - crediting. PBCom also performed these steps against PNB.

- Capitol filed a suit with the RTC of Manila against PBCom, which filed a third - party complaint against PNB for indemnity with respect to Capitol’s claims. PNB then filed a fourth - party suit against Abante.

- RTC: PBCom should re - credit Capitol the amount plus 12% interest from Oct. 19,1981 , PNB should reimburse PBCom, Abante s hould reimburse. Attorney’s fees was also awarded to Capitol with the same reimbursement scheme.

- CA: modified RTC judgement, held that PBCom was exempt from liability. PNB should honor the check plus interest. PBCom to re - credit Capitol’s account with said amount.

- Motion for reconsideration by PNB was dismissed, hence this petition. Primary Issue:

W/N an alteration of the serial number of a check is a material alteration Secondary Issue:

W/N certification by DECS can be given weight in evidence W/N a drawee bank which failed to return a check within the 24 hour clearing period may recover the value of the check from the collecting bank W/N PNB is liable for attorney’s fees despite absence of malice or ill will


NEGO CASE LIST 8 SEC 119 - 125

- Sec. 125 of the NIL. PNB argues th at here is no hard and fast rule in the interpretation of the aforequoted provision of the NIL. It maintains that under Section 125 (f), any change that alters the effect of the instrument is a material alteration.


An alteration is said to be material if it alters the effect of the instrument. It means an unauthorized change in an instrument that purports to modify in any respect the obligation of a party or an unauthorized addition of words or numbers or other change to an incomplete instrument relating t o the obligation of a party. In other words, a material alteration is one which changes the items which are required to be stated under Section 1 of the NIL.


Justice Jose C. Vitug opines that “an innocent alteration (generally, changes on items other than those required to be stated under Sec. 1 of the NIL) and spoliation (alterations done by a stranger) will not avoid the instrument, but the holder may enforce it only according to its original tenor.”


Material Alterations:

§ (1) Substituting the words “or be arer” for “order.”

§ (2) Writing “protest waived” above blank indorsements.

§ (3) A change in the date from which interest is to run.

§ (4) A check was originally drawn as follows: “Iron County Bank, Crystal Falls, Mich. Aug. 5, 1901. Pay to G.L. or order $9 fif ty cents CTR.” The insertion of the figure 5 before the figure 9, the instrument being otherwise unchanged.

§ 5) Adding the words “with interest” with or without a fixed rate.

§ (6) An alteration in the maturity of a note, whether the time for payment is there by curtailed or extended.

§ (7) An instrument was payable “First Nat’l Bank,” the plaintiff added the word “Marion.”

§ (8) Plaintiff, without consent of the defendant, struck out the name of the defendant as payee and inserted the name of the maker of the orig inal note.

§ (9) Striking out the name of the payee and substituting that of the person who actually discounted the note.

§ (10) Substituting the address of the maker for the name of a co - maker.


The case at the bench is unique in the sense that what was altered is the serial number of the check in question, an item which, it can readily be observed, is not an essential requisite for negotiability under Sec. 1 of the NIL. The aforementioned altera tion did not change the relations between the parties. The name of the drawer and the drawee were not altered. The intended payee was the same. The sum of money due to the payee remained the same.


The check’s serial number is not the sole indication of i ts origin. As succinctly found by the CA, the name of the government agency which issued the subject check was prominently printed therein. The check’s issuer was therefore sufficiently identified, rendering the referral to the serial number redundant an d inconsequential.

- PNB claims that even if the author of the certification issued by the DECS was not presented, still the best evidence of the material alteration would be the disputed check itself and the serial number thereon. PNB thus assails the refu sal of the CA to give weight to the

certification because the author thereof was not presented to identify it and to be cross - examined thereon.

o The one who signed the certification was not presented before the trial court to prove that the said document wa s really the document he prepared and that the signature below the said document is his own signature. Neither did petitioner present an eyewitness to the execution of the questioned document who could possibly identify it. Absent this proof, we cannot ru le on the authenticity of the contents of the certification.

NEGO CASE LIST 8 SEC 119 - 125

- Since there is no material alteration in the check, PNB has no right to dishonor it and return it to PBCom, the same being in all respects negotiable. PNB cannot then recover from PBCom

- However, the amount of P10,000.00 as attorney’s fees is hereby deleted. In their respective decisions, the RTC and the CA failed to explicitly state the rationale for the said award.


Emergency Recit :

ü Bill of exchange was presented for encashment by American Bank (AB); dishonored.

ü Duly protested

ü AB alleged that Macondray et al (Mac) are liable under their indorsement.

o Submitted an alleged form of the negotiable instrument in question.

ü Indorsement stated that protest, demand, and notice of nonpayment was waived

ü Court found that the waiver was added after Mac et al affixed their signature on the instrument

ü Ruled that such was a material alteration.

ü As Mac et al did not make, authorize, or assent to the alteration, IT IS AVOIDED



Action by the American Bank (indorser) against:


Macondray & Co . as indorser and


V. S. Wolff as drawer

All parties to a certain bill of exchange , which, as set out in the complaint of the plaintiff, is as follows (emphasis supplied by digest author):

MANILA, P. I., August 12, 1902.


At sight pay to my order three hundred dollars, value received, and charge to my account.

To F. H. TAYLOR & Co.,


Louisville, Kentucky.


V. S. Wolff. The signature is O. K. payment guaranteed. Protest, demand, and notice of nonpaymen t waived . Macondray & Company.

Pay to First National Bank of San Francisco, or order. American Bank, Manila, P. I. H. B. Mulford, cashier.

Pay to 3rd National Bank or order. The First National Bank of San Francisco. James K. Lynch, cashier.

This alleged bill of exchange, in the alleged form as it appears above, was sent to the correspondent of the said American Bank in the United States for payment,

NEGO CASE LIST 8 SEC 119 - 125

o Payment was not made for the reasons that appear in a protest made by a notary public in the United States ( G aston – the entire protest of the not ary public is cited in the case; I included it at the bottom of the digest for those who want to see it , but it’s not important with respect to the topic at hand ) .

American Bank claims the right to recov er of the defendant the amount of said bill of exchange, together with the expenses incurred by the protest, upon the theory that the defendant guaranteed the payment of said bill of exchange in the following form, as appears upon the said bill of exchange , as the same is set out in the petition of the plaintiff ( see the cited negotiable instrument; 1 st indorsement)

The defendant, by its representative, Atherton Macondray, testified:


T hat he did not intend to guarantee the payment of said bill of exchange;


T hat he only certified that the signature, V. S. Wolff, to said bill of exchange was genuine, and


T hat the statement that appears in the above alleged indorsement "Payment guarantee d. Protest, demand, and notice of nonpayment waived" was not written on said indorsement at the time he signed the firm name of Macondray & Co

The plaintiff, American Bank , by its representative, H. B. Mulford, cashier, in his testimony stated that this st atement "Payment guaranteed. Protest, demand, and notice of nonpayment waived" were written on said bill of exchange before the same was signed by Macondray & Co.



W/N Macondray & Co. is liable upon said bill of exchange as an indorser

[Court explain s issue further] If the indorsement was made by Macondray & Co. in the form alleged by the plaintiff, said company is clearly liable as an indorser upon said bill of exchange, providing the same was duly protested for nonpayment.

No question is raised as to the legality of the protest.



[ Macondray et al not liable] The judgment of the lower court is reversed, with the costs of both instances to be charged against the plaintiff. So ordered.



Court examined


the alleged indorsement of Macondray & Co. which appeared upon the said bill of exchange at the time of the trial, and


the indorsement of said company at the time of the trial, and


the indorsement of said company at the time of the protest of said bill of exchange,


[IMPORTANT] Held that the examination showed beyond peradventure 1 of doubt that the contention of the defendant is true:


That part of the indorsement which says "Payment guaranteed. Protest, demand, and notice of nonpayment waived" was added by some person after the signature of the defendant, Macondray & Co., and after the protest of said bill .


We therefore hold that the indorsement made by Macondray & Co. was changed, after said indorsement by said company, by adding thereto the statement "Payment guaranteed. Protest, demand, and notice of nonpayment waived,"

The liability of an indorser of a bill of exchange, after due protest and notice of nonpayment and dishonor, is the same as that of the original obligors on such a contract.

[REDALERT!] Any material alteration in the terms of this contract by the holder of the same, without the consent of the obligor, will relieve such obligor from all liability thereon.

o The defendant is relieved from liability by reason of this ma teria l alteration in his indorsement

1 Uncertainty or doubt as to whether something is the case

NEGO CASE LIST 8 SEC 119 - 125


We hold that his original indorsement created no liability whatever.


The original indorsement by the defendant was for the purpose only of assuring the plaintif f that the signature of V. S. Wolff, as attached to the original bill of exchange, was genuine — that is to say, that the person who signed the said bill of exchange was in fact V. S. Wolff, the person whom he represented himself to be.


It was an indorsement for identification of the person only, and not for the purpose of incurring any liability as to the payment of such bill of exchange.

PROTEST (FOR THOSE OF YE WHO WANT TO SEE IT) State of Kentucky, City of Louisville, Jefferson County } ss.

On this 25th day of September, 1902, I. C. W. Dieruff, notary public, duly authorized and appointed as such, and residing in the city of Louisville, at the petition of the Third National Bank of Louisville, Kentucky, went

with the original bill of exchange , a true copy of which is hereto annexed, and made a diligent search for said F.

H. Taylor & Company, in order to demand payment of the same, but I was unable to find said F. H. Taylor &

Company, nor a representative of said company with authority to pay the same. I went also to various banks and demanded payment, which was denied.

Therefore, I, the said notary public, have protested and for these reasons do solemnly protest against the

drawer, indorser, and against all other persons, for the exchange, reex change, and all the expenses, damages, and interest sustained, or that will be sustained, by reason of the nonpayment an dishonor of said bill of


Protest and copy


For information


Postage stamps



Made and protested in said city and county, and my notarial seal affixed the said day and year, being written in my office, as required by the law.

C. W. DIERUFF, Notary Public .



in the case of Montinola vs. PNB, Montinola filed a complaint against PNB to collect P100k, the

value of a check that was supposedly indorsed to him. The story of this check starts with RAMOS, who was an employee under LAYA, the latter being a Provinc ial Treasurer. Ramos then became a disbursing officer of USAFFE, and after having received funds (in emergency notes, which was money then, and a check) from another province, and presenting it to Laya in his own province, Laya gave him more emergency note s and this check for P100k. Money here was to be used to fund gorillas against the japs. Unfortunately, Ramos was captured and released almost a year later.

NEGO CASE LIST 8 SEC 119 - 125

Eventually, Ramos indorses check to Montilano. Circumstances surrounding the negotiation are very cloudy, but it CFI has found that Ramos indorsed P30,000 of emergency money of the check to Montillano, for P90,000 worth of Japanese Military Notes. He is now trying to enforce payment of this check, which appears to be in very bad shape and has been held to have been altered – mainly in the manner of how the indorsement was done and written, as well as whether the maker was an agent of PNB or signing as Provincial Treasurer.

SC held Montinola couldn’t collect because: There was a material alteration, there was no valid indorsement, he was not a holder in due course, he did not take in good faith, and the indorser indorsed in his own name when it should’ve been in his capacity as disbursing officer of USAFFE.

FACTS (this has already been shortened a lot. It’s here in case he decided to test)

1. In August, 1947, Enrique P. MONTINOLA (MONTINOLA) filed a complaint in the CFI of Manila against the PNB and the Provincial Treasurer of Misamis Oriental, Ubaldo LAYA (LAYA), to collect the sum of P100,000, the amount of CHECK No. 1382 issued on May 2, 1942 by the Provincial Treasurer of Misamis Oriental, to Mariano V. RAMOS (RAMOS) and supposedly indorsed to MONTINOLA. a. After hearing, the court rendered a decision DISMISSING the complaint with costs against MONTINOLA.

2. Background Story about CHECK

a. There is no dispute as to the following facts. In April and May, 1942, LAYA was the Provincial Treasurer of Misamis Oriental.

i. As such Provincial Treasurer he was ex officio agent of the PNB branch in the province.

b. RAMOS worke d under LAYA as assistant agent in the bank branch aforementioned. In April of that year 1942, the currency being used in Mindanao, particularly Misamis Oriental and Lanao which had not yet been occupied by the Japanese invading forces, was the emergency c urrency.

c. April 26, 1942, LAYA recommended RAMOS to be inducted into the US Armed Forces in the Far East (USAFFE) as disbursing officer.

i. As such, he went to neighboring proving Lanao to get a cash advance,

P800,000, to be used by USAFFE.

ii. Provincial Treasur er of Lanao did not have cash, so instead he gave RAMOS P300,000 in emergency notes, and a check for P500,000.

iii. May 2, 1942, RAMOS went to LAYA to encash check, but LAYA did not have cash. Instead, LAYA gave RAMOS P400,000 in emergency notes, and the CHECK No. 1382 for P100,000, drawn on PNB.

1. LAYA had deposited P500,000 in PNB Cebu, whereat the CHECK is

expected to be deposited and against.

d. RAMOS did not get to encash CHECK. Same day the CHECK was issued, he became a

prisoner of war until February 1943. He resumed life as a civilian, not anymore a member of USAFFE.

3. Sometime late 1944 – January 1945, Ramos allegedly indorsed CHECK to MONTINOLA.

4. This negotiation and transfer are now in controversy.

a. MONTINOLA claims:

i. RAMOS indorsed the check to him. They went to President of PNB in Manila. PNB President said check was good.

ii. RAMOS agreed to sell the CHECK for P850,000 Japanese military notes (different from emergency notes). P450,000 paid in the Jap. Mil. Notes, P400,0 00 payable in kind – medicines.

NEGO CASE LIST 8 SEC 119 - 125

iii. The indorsement at the back of CHECK was described in detail by CFI.

b. RAMOS claims:

i. The agreement between himself and MONTINOLA regarding the transfer of

the CHECK was that he was selling only P30,000 of the CHECK.

ii. The indorsement read: “Pay to the order of Enrique P. MONTINOLA P30,000 only. The balance to be deposited in the PNB to the credit of RAMOS.”

iii. In addition, MONTINOLA was to pay him P90,000 in Jap. Mil. Notes.

1. Half was paid by virtue of two checks. The other ha lf is still unpaid.

5. The CHECK – a description.

a. The indorsement inscribed at the back of CHECK mentioned by RAMOS is now gone. The one mentioned by MONTINOLA is found there.

b. During filing of complaint, MONTINOLA claimed the CHECK was lost. In lieu of this,

he filed a photostic (?) copy. During the trial, MONTINOLA presented the actual check. However, it was in bad shape.

i. It was badly mutilated, bottled, torn and partly burned. It is pasted all over with cellophane. Seems to have been cut and torn into 3. The re’s a big blotch of indelible ink. It looked freaky and nasty.

ii. Difficult, if not impossible, to read some of the words and figures.

c. In explanation of the condition, MONTINOLA says that after receiving the CHECK,

RAMOS demanded that it be returned, and if not, the latter would inflict physical harm with his Guerilla friends.

i. To discourage RAMOS from getting it back, he had to resort to a brilliant mutilation of CHECK.

6. The INDORSEMENT written at the back – SC cites CFI’s well - written decision (in very gre at detail)

a. According to MONTINOLA story, he paid P850,000, in Jap. Mil. Notes and in kind. True?

i. One thing difficult to understand is why RAMOS should go into the laborious task of placing the rubber stamp "Pay to the order of" and afterwards move

to the typewriter and write the words "Enrique P. MONTINOLA" "and "517 Isabel Street", and finally sign his name too far below the main indorsement.

ii. Other circumstances that bear heavily on the claim of MONTINOLA is the present condition of check, which is accept ed in court to have been done by MONTINOLA. Acts done by him to a document he claims to contain his life savings, approximate intentional cancellation.

1. His excuse for this – in order to disinterest RAMOS from retrieving it – is super stupid. (read the cas e for funny details)

a. CFI: Why is he so scared of RAMOS? Why not call police?

2. The only logical conclusion is that MONTINOLA didn’t invest enough

in that check to have adopted a “what do I care?” attitude. (case)

iii. There’s also the issue of allegedly losing t he check at the time of filing of complaint.

1. Comparing the 2 checks shows major discrepancies.

2. Also unbelievable, again because the check is supposedly vital to

him, that he took extreme pains and precautions to save CHECK from possible ravages of war, re gistered it with General Auditing Office, took a pic of it, etc.

iv. MONTINOLA was not so sure as to what he had testified to in reference to the consideration he paid for the CHECK. In court he testified paying part in cash, then presented evidence in court showing a letter he himself wrote mentioning nothing about cash (just goods).

NEGO CASE LIST 8 SEC 119 - 125

b. Bottom line is, CFI concludes that the RAMOS story is the correct story (Bullet #4 - B).

7. The NIL AGENCY issues – SC again cites CFI decision

a. At the beginning, we stated that Provin cial Treasurer LAYA was ex officio of PNB

Branch in that province. On the face of CHECK, we now find the words in parenthesis "Agent, Phil. National Bank" under the signature of LAYA, purportedly saying that the CHECK was issued by LAYA as agent of PNB.

i. I f this is true, the bank becomes drawee and drawer of CHECK.

ii. MONTINOLA wants to hold PNB as drawer, for if not, PNB, as payee, need

not pay since it is a mere drawee only. It has not yet accepted.

b. CFI finds:

i. LAYA testified that when he issued this check, these words were not there. RAMOS corroborated this.

1. Reason: if he signed as agent, it would be countersigned by cashier of PNB. Instead, it was signed by provincial auditor, who is not in any way connected to PNB.

ii. Preponderance of evidence supports LAYA’ s testimony.

1. Court also finds that LAYA deposited amount in PNB Cebu branch in his capacity as Provincial Treasurer, expecting that the check will be cashed against that.

2. Also, at time of issuance of CHECK, LAYA already knew that Manila

and Cebu were occupied and he wouldn’t have issued checks as a bank employee drawn against the central office of same bank.

iii. Bottom line is, there’s no reason why LAYA would issue check as a gent of PNB. PNB does not fund USAFFE, government does.

8. OTHER facts and things considered

a. Could RAMOS be the culprit in adding the words, etc.?

i. No. Even before induction to USAFFE, he was already assistant of LAYA.

1. He would have known the procedure regar ding who should countersign and stuff.

b. During the transcription of the record on appeal, many omissions were made by MONTINOLA

i. He did not mention the part about LAYA signing as agent of PNB.

c. It would seem the original Annex “A”, containing the photostatic copy, is unexplainably gone. The new Annex “B”, seems not to be the same as the original.

d. Annex “B”, the new photostatic copy with the court, does not seem to be a faithful

and accurate reproduction of the CHECK. Court goes on to discuss relative positioni ng of letters and marks, etc.

9. Note that the check was payable on demand. But it was issued 2.5 years ago. It is now stale. The intimation of MONTINOLA that he met with the President of PNB, etc., has been flatly



1. W/N MONTINOLA ca n collect. - NO, CFI decision affirmed. Not to mention, criminal charges can be filed against him.


On the basis of the facts above related there are several reasons why the complaint of

NEGO CASE LIST 8 SEC 119 - 125

MONTINOLA cannot prosper:


The insertion of the words "Agent, Phil. National Bank" which converts the bank from a mere drawee to a drawer and therefore changes its liability, constitutes a material alteration of the instrument without the consent of the parties liable thereon, and s o discharges the instrument. (Section 124 of the Negotiable Instruments Law).


The CHECK was not legally negotiated within the meaning of the Negotiable Instruments Law. Section 32 of the same law provides that "the indorsement must be an indorsement of th e entire instrument. An indorsement which purports to

transfer to the indorsee a part only of the amount payable,

(as in this case) does

not operate as a negotiation of the instrument." MONTINOLA may therefore not be

regarded as an indorsee.


At most he may be regarded as a mere assignee of the P30,000 sold to him by RAMOS, in which case, as such assignee, he is subject to all defenses available to the drawer Provincial Treasurer of Misamis Oriental and against RAMOS.


Neither can MONTINOLA be conside red as a holder in due course because section 52 of said law defines a holder in due course as a holder who has taken the instrument under certain conditions, one of which is that he became the holder before it was overdue.


When MONTINOLA received the CHE CK, it was long overdue.


And, MONTINOLA is not even a holder because section 191 of the same law defines holder as the payee or indorsee of a bill or note and MONTINOLA is not a payee. Neither is he an indorsee for as already stated, at most he can be con sidered only as assignee.


Neither could it be said that he took it in good faith. As already stated, he has not paid the full amount of P90,000 for which RAMOS sold him P30,000 of the value of the CHECK.

§ In the second place, as was stated by the trial co urt in its decision, MONTINOLA speculated on the CHECK and took a chance on its being paid after the war. MONTINOLA must have known that at the time the CHECK was issued in May, 1942, the money circulating in Mindanao and the Visayas was only the emergency notes and that the CHECK was intended to be payable in that currency.

§ Also, he should have known that a CHECK for such a large amount of P100,000 could not have been issued to RAMOS in his private capacity but rather in his capacity as disbursing officer of the USAFFE, and that at the time that RAMOS sold a part of the CHECK to him, RAMOS was no longer connected with the USAFFE but already a civilian who needed the money only for himself and his family.

As already stated, as a mere assignee MONTINOLA is s ubject to all the defenses available against assignor RAMOS. And, RAMOS had he retained the CHECK may not now collect its value because it had been issued to him as disbursing officer. As observed by the trial court, the CHECK was issued to RAMOS not as a person but RAMOS as the disbursing officer of the USAFFE. Therefore, he had no right to indorse it personally to plaintiff. It was negotiated in breach of trust, hence he transferred nothing to the plaintiff.


NEGO CASE LIST 8 SEC 119 - 125

Emergency Recit:

Corazon Victoriano provided pieces of jewelry to Nora Moulic so that the latter may sell the same. As security for the jewelry, Moulic issued to Victoriano two post dated checks in the aggregate amount of P100,000.00. Moulic was not able t o sell the jewelry so she returned the same to Victoriano. Victoriano was however unable to return the checks as Victoriano had already negotiated the checks to State Investment. To save herself from paying State w/o compensation, she withdrew all her money with Equitable Bank, and closed her account. The checks were subsequently dishonored. STATE demanded Moulic to pay, and a lleged that it had given her a notice of dishonor. Moulic also refused to pay because she said the checks were merely used as security for the jewelry.

ISSUE: Whether or not State Investment House is entitled to be paid?

HELD: Yes. State Investment is a h older in due course as it met all the requirements to be one pursuant to Section 52 of the Negotiable Instruments Law. In particular, it is clearly shown that: (a) on their faces the post - dated checks were complete and regular: (b) State Investment bought these checks from Victoriano, before their due dates; (c) State Investment took these checks in good faith and for value, (d) State Investment was never informed nor made aware that these checks were merely issued to Victoriano as security and not for va lue.

Further, there is no need to issue a notice of dishonor to Moulic. After Moulic withdrew her funds, she could not have expected her checks to be honored. It would only be futile for State Investment to be sending her notices of dishonor for the two ch ecks. An exception under Sec. 114.


Private respondent Nora B. Moulic issued to Corazon Victoriano two (2) post - dated Equitable Banking Corporation (BANK) checks in the amount of Fifty Thousand Pesos (P50,000.00) each,


Which were security for pieces of jewelry to be sold on commission


One dated 30 August 1979 & the other, 30 September 1979.

Thereafter, the payee Victoriano negotiated the checks to petitioner State Investment House. Inc. (STATE).

MOULIC failed to sell the pieces of jewelry, so she returned them to the payee before maturity of the checks.

The checks could no longer be retrieved as they had already been negotiated. Consequently, before their maturity dates, MOULIC withdrew her funds from the drawee bank.

Upon presentment for payment, the checks were dishonored for insufficiency of funds.

On 20 December 1979 (allegedly)


STATE: we notified MOULIC of the dishonor of the checks and requested that it be paid in cash instead.


MOULIC: says that no such notice wa s given her.

On 6 October 1983, STATE sued to recover the value of the checks plus attorney's fees and expenses of litigation.

In her Answer, MOULIC contends that she incurred no obligation on the checks because the jewelry was never sold and the checks we re negotiated without her knowledge and consent.

She also instituted a Third - Party Complaint against Corazon Victoriano, who later assumed full responsibility for the checks.

Trial Court: dismissed the Complaint as well as the Third - Party Complaint, and or dered STATE to pay MOULIC P3,000.00 for attorney's fees.

NEGO CASE LIST 8 SEC 119 - 125

CA: affirmed decision on the ground that the Notice of Dishonor to MOULIC was made beyond the period prescribed by the Negotiable Instruments Law

o That even if STATE did serve such notice on MOULIC w ithin the reglementary period it would be of no consequence as the checks should never have been presented for payment. The sale of the jewelry was never effected; the checks, therefore, ceased to serve their purpose as security for the jewelry.

Issue :

NEGO: What is the liability of the drawer to a holder in due course if checks were issued to another merely as security? Held : In fine, MOULIC, as drawer, is liable for the value of the checks she issued to the holder in due course, STATE, without prejudi ce to any action for recompense she may pursue against the VICTORIANOs as Third - Party Defendants who had already been declared as in default. Ratio:


The negotiability of the checks is not in dispute. Indubitably, they were negotiable.

In this r egard, Sec. 52 of the Negotiable Instruments Law provides — Sec. 52. What constitutes a holder in due course . — A holder in due course is a holder who has taken the Instrument under the following conditions: (a) That it is complete and regular upon its fac e; (b) That he became the holder of it before it was overdue, and without notice that it was 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.

From the provision, a prima facie presumption exists that the holder of a negotiable instrument is a holder in due course.

Consequently, the burden of proving that STATE is not a holder in due course lies in the person who disputes the presumption. In this regard, MOULIC failed.

The evidence clearly shows that: (a) on their faces the post - dated checks were complete and regular: (b) petitioner bought these checks from the paye e, Corazon Victoriano, before their due dates; (c) petitioner STATE took these checks in good faith and for value, albeit at a discounted price; and, (d) STATE was never informed nor made aware that these checks were merely issued to payee as security and not for value.

Consequently, STATE is indeed a holder in due course. As such, it holds the instruments free from any defect of title of prior parties, and from defenses available to prior parties among themselves; STATE may, therefore, enforce full payment of the checks.

MOULIC cannot set up against STATE the defense that there was failure or absence of consideration.

o MOULIC can only invoke this defense against STATE if it was privy to the purpose for which they were issued and therefore is not a holder in due course.

That the post - dated checks were merely issued as security is not a ground for the discharge of the instrument as against a holder in due course.

For the only grounds are those outlined in Sec. 119 of the Negotiable Instruments Law:

Sec. 119. Instrument; how discharged . — A negotiable instrument is discharged: (a) By payment in due course by or on behalf of the principal debtor; (b) By payment in due course by the party accommodated, where the instrument is made or accepted for his accommodatio n; (c) By the intentional cancellation thereof by the holder; (d) By any other act which will discharge a simple contract for the payment of money; (e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right.

Ob viously, MOULIC may only invoke paragraphs (c) and (d) as possible grounds for the discharge of the instrument. But, the intentional cancellation contemplated under

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paragraph (c) is that cancellation effected by destroying the instrument either by tearing it up, burning it, or writing the word "cancelled" on the instrument. The act of destroying the instrument must also be made by the holder of the instrument intentionally. Since MOULIC failed to get back possession of the post - dated checks, the intentional cancellation of the said checks is altogether impossible.

On the other hand, the acts which will discharge a simple contract for the payment of money under paragraph (d) are determined by other existing legislations.


Sec. 119 does not specify what these acts are, e.g., Art. 1231 of the Civil Code. which enumerates the modes of extinguishing obligations.


Again, none of the modes outlined therein is applicable in the instan t case as Sec. 119 contemplates of a situation where the holder of the instrument is the creditor while its drawer is the debtor.

In the present action, the payee, Corazon Victoriano, was no longer MOULIC's creditor at the time the jewelry was returned.

C orrespondingly, MOULIC may not unilaterally discharge herself from her liability by the mere expediency of withdrawing her funds from the drawee bank. She is thus liable as she has no legal basis to excuse herself from liability on her checks to a holder in due course.

Moreover, the fact that STATE failed to give Notice of Dishonor to MOULIC is of no moment. The need for such notice is not absolute; there are exceptions under Sec. 114 of the Negotiable Instruments Law:

Sec. 114. When notice need not be give n to drawer . — Notice of dishonor is not required to be given to the drawer in the following cases: (a) Where the drawer and the drawee are the same person; (b) When the drawee is a fictitious person or a person not having capacity to contract; (c) When th e drawer is the person to whom the instrument is presented for payment: (d) Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument ; (e) Where the drawer had countermanded payment.

Indeed, MOULIC'S actuation s leave much to be desired. She did not retrieve the checks when she returned the jewelry. She simply withdrew her funds from her drawee bank and transferred them to another to protect herself.

After withdrawing her funds, she could not have expected her checks to be honored hence, there was no need to serve her Notice of Dishonor, which is simply bringing to the knowledge of the drawer or indorser of the instrument, either verbally or by writing, the fact that a specified instrument, upon proper proceedin gs taken, has not been accepted or has not been paid, and that the party notified is expected to pay it.

In addition, the Negotiable Instruments Law was enacted for the purpose of facilitating, not hindering or hampering transactions in commercial paper.

o 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.

The drawing and negotiation of a check have certain effects aside from the transfer of title or th e incurring of liability in regard to the instrument by the transferor.


The holder who takes the negotiated paper makes a contract with the parties on the face of the instrument.


There is an implied representation that funds or credit are available for the payment of the instrument in the bank upon which it is drawn. Consequently, the withdrawal of the money from the drawee bank to avoid liability on the checks cannot prejudice the rights of holders in due course.


In the instant case, such withdrawal renders the drawer, Nora B. Moulic, liable to STATE, a holder in due course of the checks.

Under the facts of this case, STATE could not expect payment as MOULIC left no funds with the drawee bank to meet her obligation on the checks, so that Notice of Dishonor would be futile.

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WHEREFORE, the petition is GRANTED. CA is REVERSED, private responde nt NORA B. MOULIC liable to petitioner STATE INVESTMENT HOUSE, INC., for the value of EBC Checks in the total amount of P100,000.00, P3,000.00 as attorney's fees, and the costs of suit, without prejudice to any action for recompense she may pursue against the VICTORIANOs as Third - Party Defendants.