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EQUITABLE BANKING CORPORATION vs. INTERMEDIATE APPELLATE COURT and THE EDWARD J. NELL CO.

[May 25, 1988]

In 1975, Liberato Casals went to Edward J. Nell Company and expressed that he was interested in buying one of EJN’s garrett
skidders. EJN was a dealer of machineries, equipment and supplies. Casals represented himself as the majority stockholder,
president and general manager of Casville Enterprises, Inc., a firm engaged in the large scale production, procurement and
processing of logs and lumber products, which had a plywood plant in Sta. Ana, Metro Manila.

Casals was referred to EJN’s executive vice president, Apolonio Javier, for negotiation in connection with the manner of
payment. When Javier asked for cash payment for the skidders, Casals informed him that his corporation, Casville Enterprises,
Inc., had a credit line with Equitable Banking Corporation. Javier agreed to have the skidders paid by way of a domestic letter of
credit which Casals promised to open in plaintiffs favor, in lieu of cash payment. Accordingly, Casville ordered two units of
garrett skidders for P485,000/unit. (irrevocable domestic letter of credit to be issued in favor of EJN or ORDER payable in 36 months and will be opened
within 90 days after date of shipment; at first installment will be due 180 days after date of shipment.)

Casals handed to plaintiff a postdated check in the amount of P300,000 which was followed by another check of same date. EJN
considered these checks either as partial payment for the skidder that was already delivered to CDO or as reimbursement for
the marginal deposit that plaintiff was supposed to pay.

In a letter, Casville informed EJN that their application for a letter of credit for the payment of the Garrett skidders had been
approved by the Equitable Banking Corporation. However, they would need the sum of P300,000 to stand as collateral or
marginal deposit in favor of Equitable Banking Corporation and an additional amount of P100,000, also in favor of Equitable
Banking Corporation, to clear the title of the Estrada property belonging to Casals which had been approved as security for the
trust receipts to be issued by the bank, covering the above-mentioned equipment.

Although the marginal deposit was supposed to be produced by Casville Enterprises, EJN agreed to advance the necessary
amount in order to facilitate the transaction. Accordingly, EJN issued a check in the amount of P400,000 drawn against the First
National City Bank and made payable to the order of Equitable Banking Corporation and with the following notation or
memorandum: (a/c of Casville Enterprises Inc. for Marginal deposit and payment of balance on Estrada Property to be used as security for trust receipt for opening
L/C of Garrett Skidders in favor of the Edward J. Nell Co." Said check together with the cash disbursement voucher containing the explanation:Payment for marginal
deposit and other expenses re opening of L/C for account of Casville”

A covering letter was also sent but Severino Santos, EVP of defendant bank, did not accept them because the terms and
conditions required by the bank for the opening of the letter of credit had not yet been agreed on.

Casville wrote the bank applying for two letters of credit. Bank replied stating that it was ready to open the letters of credit upon
defendant's compliance of the following terms and conditions: [c) 30% cash margin deposit; d) Acceptable Real Estate Collateral to secure the
Trust Receipts; e) Chattel Mortgage on the equipment; and Ashville f) Other terms and conditions that our bank may impose.] Casville sent a copy of the
foregoing letter to the plaintiff. In said letter, EJN was informed of the requirements imposed by the defendant bank pointing
out that the "cash marginal required is 30% of P1,091,000.00 or P327,300.00 plus another P100,000.00 to clean up the Estrada
property or a total of P427,300.00" and that the check covering said amount should be made payable "to the Order of
EQUITABLE BANKING CORPORATION for the account of Casville Enterprises Inc."

EJN issued a check for P427,300.00, payable to the "order of EQUITABLE BANKING CORPORATION A/C CASVILLE ENTERPRISES,
INC." and drawn against the first National City Bank (Exhibit "E-l"). The check did not contain the notation found in the previous
check issued by the plaintiff but the substance of said notation was reproduced in a covering letter that went with the check.
Both the check and the covering letter were sent to defendant bank through Casals. Upon receiving the check for P427,300.00
entrusted to him, Casals immediately deposited it with the defendant bank and the bank teller accepted the same for deposit
in defendant Casville's checking account. After depositing said check, Casville, acting through Casals, then withdrew all the
amount deposited.

Plaintiff allowed some time before following up the application for the letters of credit knowing that it took time to process the
same. However, when the three checks issued to it by defendant Casville were dishonored, plaintiff became apprehensive and
sent Umali on November 29, 1976, to inquire about the status of the application for the letters of credit. When plaintiff was
informed that no letters of credit were opened by the defendant bank in its favor and then discovered that defendant Casville
had in the meanwhile withdrawn the entire amount of P427,300.00, without paying its obligation to the bank plaintiff filed the
instant action.

While the instant case was being tried, defendants Casals and Casville assigned the garrett skidder to plaintiff which credited in
favor of defendants the amount of P450,000.00, as partial satisfaction of plaintiff's claim against them.
Defendants Casals and Casville hardly disputed their liability to plaintiff. Not only did they show lack of interest in disputing
plaintiff's claim by not appearing in most of the hearings, but they also assigned to plaintiff the garrett skidder which is an action
of clear recognition of their liability.

W/N Equitable Banking Corporation is liable to private respondent Edward J. Nell Co. for the value of the second check issued
by NELL which was made payable to the order of EQUITABLE A/C OF CASVILLE ENTERPRISES INC. and which the Bank teller
credited to the account of Casville.

RTC: Casals and Casville Enterprises and Equitable Banking Corporation are ordered to pay plaintiff, jointly and severally, the
sum of P427,300, representing the amount of plaintiff's check which defendant bank erroneously credited to the account of
defendant Casville and which defendants Casal and Casville misappropriated; held the Bank liable for the mistake of its
employees; and ordered the Bank to pay NELL the value of the check in the sum of P427,300.00, with legal interest.

The Court finds that the check in question was payable only to the defendant bank and to no one else. Although the words
"A/C OF CASVILLE ENTERPRISES INC. "appear on the face of the check after or under the name of defendant bank, the payee
was still the latter. The addition of said words did not in any way make Casville Enterprises, Inc. the Payee of the instrument for
the words merely indicated for whose account or in connection with what account the check was issued by the plaintiff. Teller
should have exercised more prudence in the handling of check because it was not made out in the usual manner. Such mistake
was crucial and was, without doubt, the proximate cause of plaintiffs defraudation.

IAC: EJN made the subject check payable to the Bank’s order, for the account of Casville Enterprises, Inc. In the light of the other
facts, the directive was for the appellant bank to apply the value of the check as payment for the letter of credit which Casville
Enterprises, Inc. had previously applied for in favor of the appellee. The issuance of the subject check was precisely to meet the
bank's prior requirement of payment before issuing the letter of credit previously applied for by Casville Enterprises in favor of
the appellee;

SC: 1) The subject check was equivocal and patently ambiguous. By making the check read: Pay to the EQUITABLE BANKING
CORPORATION Order of A/C OF CASVILLE ENTERPRISES, INC. the payee ceased to be indicated with reasonable certainty in
contravention of Section 8 of the Negotiable Instruments Law. 3 As worded, it could be accepted as deposit to the account of the
party named after the symbols "A/C," or payable to the Bank as trustee, or as an agent, for Casville Enterprises, Inc., with the
latter being the ultimate beneficiary. That ambiguity is to be taken contra proferentem that is, construed against NELL who
caused the ambiguity and could have also avoided it by the exercise of a little more care. Thus, Article 1377 of the Civil Code,
provides: The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity.

2) Contrary to the finding of respondent Appellate Court, the subject check was, initially, not non-negotiable. Neither was it a
crossed check. The rubber-stamping transversall on the face of the subject check of the words "Non-negotiable for Payee's
Account Only" between two (2) parallel lines, and "Non-negotiable, Teller- No. 4, August 17, 1976," separately boxed, was made
only by the Bank teller in accordance with customary bank practice, and not by NELL as the drawer of the check, and simply
meant that thereafter the same check could no longer be negotiated.

3) NELL's own acts and omissions in connection with the drawing, issuance and delivery of the 16 August 1976 check, Exhibit
"E-l," and its implicit trust in Casals, were the proximate cause of its own defraudation: (a) The original check of 5 August 1976,
Exhibit "2," was payable to the order solely of "Equitable Banking Corporation." NELL changed the payee in the subject check,
Exhibit "E", however, to "Equitable Banking Corporation, A/C of Casville Enterprises Inc.," upon Casals request. NELL also
eliminated both the cash disbursement voucher accompanying the check.

(b) NELL entrusted the subject check and its covering letter to Casals who, obviously, had his own antagonistic interests to
promote. NELL was extremely accommodating to Casals. Thus, to facilitate the sales transaction, NELL even advanced the
marginal deposit for the garrett skidder. It is, indeed, abnormal for the seller of goods, the price of which is to be covered by a
letter of credit, to advance the marginal deposit for the same.

(d) NELL had received three postdated checks from Casville to secure the subject check and had accepted the deposit with it of
two (2) titles of real properties as collateral for said postdated checks. Thus, NELL was erroneously confident that its interests
were sufficiently protectedIn the last analysis, it was NELL's own acts, which put it into the power of Casals and Casville
Enterprises to perpetuate the fraud against it and, consequently, it must bear the loss.

... As between two innocent persons, one of whom must suffer the consequence of a breach of trust, the one
who made it possible by his act of confidence must bear the loss.
PHILIPPINE NATIONAL BANK vs. CONCEPCION MINING COMPANY, INC., ET AL., [July 31, 1962]

PNB instituted the present action to recover from Concepcion Mining Company and Jose Sarte the face of a promissory note the
pertinent part of which reads as follows:
Manila, March 12, 1954
NINETY DAYS after date, for value received, I promise to pay to the order of the Philippine National Bank . . . .
In case it is necessary to collect this note by or through an attorney-at-law, the makers and indorsers shall pay 10% of the amount due on the note as attorney's
fees, which in no case shall be less than P100 exclusive of all costs and fees allowed by law as stipulated in the contract of real estate mortgage. Demand and
Dishonor Waived. Holder may accept partial payment reserving his right of recourse again each and all indorsers.
(Purpose — mining industry)
CONCEPCION MINING COMPANY, INC.,
By:
(Sgd.) VICENTE LEGARDA
President
(Sgd.) VICENTE LEGARDA
(Sgd.) JOSE S SARTE

"Please issue check to —


Mr. Jose S. Sarte"

Concepcion Mining Company & Jose Sarte: alleged that the co-maker the promissory note, Don Vicente Legarda, died on
February 24, 1946 and his estate is in the process of judicial determination in Special Proceedings of CFI-Manila. On the basis of
this allegation it is prayed that the estate of said Legarda be included as party-defendant.

CFI-Manila: sentenced Concepcion Mining Company and Jose Sarte to pay jointly and severally to the plaintiff the amount of
P7,197.26 with interest. The inclusion of the estate of LEGARDA is unnecessary and immaterial, in accordance with the
provisions of Article 1216 of the Civil Code and Section 17 (g) of the Negotiable Instruments Law.

Section 17 (g) of the Negotiable Instruments Law provides as follows:


SEC. 17. Construction where instrument is ambiguous. — Where the language of the instrument is ambiguous or there are omissions therein, the
following rules of construction apply:
(g) Where an instrument containing the word "I promise to pay" is signed by two or more persons, they are deemed to be jointly and severally liable
thereon.

And Article 1216 of the Civil Code of the Philippines also provides as follows:
ART. 1216. The creditor may proceed against any one of the solidary debtors or some of them simultaneously. The demand made against one of them
shall not be an obstacle to those which may subsequently be directed against the others so long as the debt has not been fully collected.

As the promissory note was executed jointly and severally by the same parties, namely, Concepcion Mining Company, Inc. and
Vicente Legarda and Jose Sarte, the payee of the promissory note had the right to hold any one or any two of the signers of
the promissory note responsible for the payment of the amount of the note.

SC: This judgment of the lower court should be affirmed.

DISCREPANCIES IN THE PRINTED RECORD (on appeal)

We note, first, that the names of the defendants, who are evidently the Concepcion Mining Co., Inc. and Jose S. Sarte, do not
appear in the printed record on appeal. The title of the complaint set forth in the record on appeal does not contain the name of
Jose Sarte, when it should, as two defendants are named in the complaint and the only defense of the defendants is the non-
inclusion of the deceased Vicente L. Legarda as a defendant in the action.

We also note that the copy of the promissory note which is set forth in the record on appeal does not contain the name of the
third maker Jose S. Sarte. Fortunately, the brief of appellee on page 4 sets forth said name of Jose S. Sarte as one of the co-
maker of the promissory note. Evidently, there is an attempt to mislead the court into believing that Jose S. Sarte is no one of
the co-makers. The attorney for the defendants Atty. Jose S. Sarte himself and he should be held primarily responsible for the
correctness of the record on appeal. We, therefore, order the said Atty. Jose S. Sarte to explain why in his record on appeal his
own name as one of the defendants does not appear and neither does his name appear as one of the co-signers of the
promissory note in question. So ordered.
REPUBLIC PLANTERS BANK vs.CA and FERMIN CANLAS [December 21, 1992]

Shozo Yamaguchi and Fermin Canlas were President/Chief Operating Officer and Treasurer respectively, of Worldwide Garment
Manufacturing, Inc. By virtue of Board Resolution, Shozo Yamaguchi and Fermin Canlas were authorized to apply for credit
facilities with the Republic Planters Bank in the forms of export advances and letters of credit/trust receipts accommodations.
Republic Planters issued nine promissory notes, each of which were uniformly worded in the following manner:
___________, after date, for value received, I/we, jointly and severaIly promise to pay to the ORDER of the REPUBLIC PLANTERS BANK, at
its office in Manila, Philippines, the sum of ___________ PESOS(....) Philippine Currency...

On the right bottom margin of the promissory notes appeared the signatures of Shozo Yamaguchi and Fermin Canlas above their
printed names with the phrase "and (in) his personal capacity" typewritten below. At the bottom of the promissory notes
appeared: "Please credit proceeds of this note to:

________ Savings Account ______XX Current Account


No. 1372-00257-6
of WORLDWIDE GARMENT MFG. CORP.

In the promissory notes, the name Worldwide Garment Manufacturing, Inc. was apparently rubber stamped above the
signatures of defendant and private respondent. Worldwide Garment Manufacturing, Inc. noted to change its corporate name
to Pinch Manufacturing Corporation.

REPUBLIC PLANTERS filed a complaint for the recovery of sums of money covered by the nine promissory notes. The
complainant was originally brought against Worldwide Garment Manufacturing, Inc. but it was later amended to drop
Worldwide Manufacturing, Inc. as defendant and substitute Pinch Manufacturing Corporation it its place. Only Fermin Canlas
filed an Amended Answer wherein he denied having issued the promissory notes in question since, according to him, he was not
an officer of Pinch Manufacturing Corporation, but instead of Worldwide Garment Manufacturing, Inc., and that when he issued
said promissory notes in behalf of Worldwide Garment Manufacturing, Inc., the same were in blank, the typewritten entries
not appearing therein prior to the time he affixed his signature.

W/N Fermin Canlas is solidarily liable with Pinch Manufacturing and Shozo Yamaguchi, on the nine promissory notes.

SC: Fermin Canlas is solidarily liable on each of the promissory notes bearing his signature for the following reasons:

The promissory notes are negotiable instruments and must be governed by the Negotiable Instruments Law.

Under the Negotiable lnstruments Law, persons who write their names on the face of promissory notes are makers and are
liable as such. By signing the notes, the maker promises to pay to the order of the payee or any holder according to the tenor
thereof. Based on the above provisions of law, there is no denying that Fermin Canlas is one of the co-makers of the promissory
notes. As such, he cannot escape liability arising therefrom.

Where an instrument containing the words "I promise to pay" is signed by two or more persons, they are deemed to be jointly
and severally liable thereon. An instrument which begins" with "I" ,We" , or "Either of us" promise to, pay, when signed by two
or more persons, makes them solidarily liable. The fact that the singular pronoun is used indicates that the promise is individual
as to each other; meaning that each of the co-signers is deemed to have made an independent singular promise to pay the notes
in full.

In the case at bar, the solidary liability of private respondent Fermin Canlas is made clearer and certain, without reason for
ambiguity, by the presence of the phrase "joint and several1" as describing the unconditional promise to pay to the order of
Republic Planters Bank. A joint and several obligation in common law corresponds to a civil law solidary obligation; that is, one
of several debtors bound in such wise that each is liable for the entire amount, and not merely for his proportionate share. 9 By
making a joint and several promise to pay to the order of Republic Planters Bank, private respondent Fermin Canlas assumed the
solidary liability of a debtor and the payee may choose to enforce the notes against him alone or jointly with Yamaguchi and
Pinch Manufacturing Corporation as solidary debtors.

As to whether the interpolation of the phrase "and (in) his personal capacity" below the signatures of the makers in the notes
will affect the liability of the makers, We do not find it necessary to resolve and decide. With or without the presence of said
phrase, private respondent Fermin Canlas is primarily liable as a co-maker of each of the notes and his liability is that of a
solidary debtor.

1
JOINT AND SEVERAL NOTE - one in which the makers bind themselves both jointly and individually to the payee so that all may be sued together for its
enforcement, or the creditor may select one or more as the object of the suit.
The corporation, upon such change in its name, is in no sense a new corporation, nor the successor of the original corporation. It
is the same corporation with a different name, and its character is in no respect changed. A change in the corporate name does
not make a new corporation, and whether effected by special act or under a general law, has no affect on the identity of the
corporation, or on its property, rights, or liabilities.

As a general rule, officers or directors under the old corporate name bear no personal liability for acts done or contracts entered
into by officers of the corporation, if duly authorized. Inasmuch as such officers acted in their capacity as agent of the old
corporation and the change of name meant only the continuation of the old juridical entity, the corporation bearing the same
name is still bound by the acts of its agents if authorized by the Board.

Under the Negotiable Instruments Law, the liability of a person signing as an agent is specifically provided for as follows:

Sec. 20. Liability of a person signing as agent and so forth. Where the instrument contains or a person adds to
his signature words indicating that he signs for or on behalf of a principal , or in a representative capacity, he is
not liable on the instrument if he was duly authorized; but the mere addition of words describing him as an
agent, or as filling a representative character, without disclosing his principal, does not exempt him from
personal liability.

Where the agent signs his name but nowhere in the instrument has he disclosed the fact that he is acting in a representative
capacity or the name of the third party for whom he might have acted as agent, the agent is personally liable to take holder of
the instrument and cannot be permitted to prove that he was merely acting as agent of another and parol or extrinsic evidence
is not admissible to avoid the agent's personal liability. 13

On the private respondent's contention that the promissory notes were delivered to him in blank for his signature, we rule
otherwise. A careful examination of the notes in question shows that they are the stereotype printed form of promissory notes
generally used by commercial banking institutions to be signed by their clients in obtaining loans. Such printed notes are
incomplete because there are blank spaces to be filled up on material particulars such as payee's name, amount of the loan, rate
of interest, date of issue and the maturity date. The terms and conditions of the loan are printed on the note for the borrower-
debtor's perusal. An incomplete instrument which has been delivered to the borrower for his signature is governed by Section
14 of the Negotiable Instruments Law which provides, in so far as relevant to this case, thus:

Sec. 14. Blanks: when may be filled. — Where the instrument is wanting in any material particular, the person in possesion thereof has
a prima facie authority to complete it by filling up the blanks therein... In order, however, that any such instrument when completed may
be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in accordance with the
authority given and within a reasonable time...

Proof that the notes were signed in blank was only the self-serving testimony of Fermin Canlas, so that the trial court
''doubts Canlas signed in blank the promissory notes". SC chose to believe the bank's testimony that the notes were
filled up before they were given to Fermin Canlas and Shozo Yamaguchi for their signatures as joint and several
promissors. For signing the notes above their typewritten names, they bound themselves as unconditional makers.
We take judicial notice of the customary procedure of commercial banks of requiring their clientele to sign
promissory notes prepared by the banks in printed form with blank spaces already filled up as per agreed terms of
the loan, leaving the borrowers-debtors to do nothing but read the terms and conditions therein printed and to sign
as makers or co-makers. When the notes were given to Fermin Canlas for his signature, the notes were complete in
the sense that the spaces for the material particular had been filled up by the bank as per agreement. The notes
were not incomplete instruments; neither were they given to private respondent Fermin Canlas in blank as he
claims. Thus, Section 14 of the NegotiabIe Instruments Law is not applicable.

SC: Judgement is hereby rendered declaring Fermin Canlas jointly and severally liable on all the nine promissory
notes with the following sums and at 16% interest per annum from the dates indicated, to wit:
CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and RODOLFO T. VERGARA vs. IFC LEASING AND ACCEPTANCE
CORPORATION, [April 30, 1987]

Consolidated Plywood is a corporation engaged in the logging business. It needed two additional units of tractors. Atlantic Gulf
& Pacific Company of Manila, through its sister company, Industrial Products Marketing (the "seller-assignor"), a corporation
dealing in tractors and other heavy equipment business, offered to sell to petitioner-corporation two "Used" tractors.

Consolidated Plywood requested Industrial Products Marketing to inspect the job site. After conducting said inspection, the
Industrial Products Marketing assured Consolidated Plywood that the "Used" Tractors which were being offered were fit for
the job, and gave the corresponding warranty of 90 days performance of the machines and availability of parts.

With said assurance and warranty, Consolidated Plywood agreed to purchase on installment said Tractors. It also paid the down
payment of P210,000. Industrial Products Marketing issued the sales invoice for the two units of tractors and 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, Industrial Products
Marketing by means of a deed of assignment assigned its rights and interest in the chattel mortgage in favor of IFC Leasing.
Industrial Products Marketing then delivered the tractors to Consolidated Plywood’s job site and, as agreed, stationed its own
mechanics to supervise the operations of the machines. Barely fourteen days had elapsed after their delivery when one of the
tractors broke down and after another nine days, the other tractor likewise broke down. Industrial was advised of the fact that
the tractors broke down and requested to provide prompt attention under the warranty. Industrial sent 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.

Because of the breaking down of the tractors, the road building and simultaneous logging operations of petitioner-corporation
were delayed and Industrial was advised that the payments of the installments as listed in the promissory note would likewise
be delayed until the seller-assignor completely fulfills its obligation under its warranty. Since the tractors were no longer
serviceable, petitioner Wee asked Industrial to pull out the units and have them reconditioned, and thereafter to offer them for
sale. The proceeds were to be given to Consolidated Plywood and the excess, if any, to be divided between Industrial and
Consolidated which offered to bear one-half of the reconditioning cost. Industrial did nothing with regard to the request, until
the complaint in this case was filed by IFC Leasing against Consolidated Plywood.

IFC Leasing filed the complaint against the petitioners for the recovery of the principal sum of P1,093,789.71. Consolidated
Plywood prayed for the dismissal of the complaint.

CFI: ordered Consolidated to pay jointly and severally in their official and personal capacities the sum of P1,093,798.71.

IAC: affirming the decision of the trial court.

ISSUE OF WARRANTY: aside from the fact that no provision of warranty appears or is provided in the Deed of Sale of the
tractors and even admitting that in a contract of sale unless a contrary intention appears, there is an implied warranty, the
defense of breach of warranty, if there is any, does not lie in favor of Consolidated Plywood and against IFC Leasing who is the
assignee of the promissory note and a holder of the same in due course. Warranty lies in this case only between Industrial
Products Marketing and Consolidated Plywood Industries, Inc. Breach of warranty if any, is not a defense available to
Consolidated Plywood either to withdraw from the contract and/or demand a proportionate reduction of the price with
damages in either case (Art. 1567, New Civil Code).

IFC Leasing is a financing corporation engaged in financing and receivable discounting extending credit facilities to consumers
and industrial, commercial or agricultural enterprises by discounting or factoring commercial papers or accounts receivable duly
authorized pursuant to R.A. 5980 otherwise known as the Financing Act.

A study of the questioned promissory note reveals that it is a negotiable instrument which was discounted or sold to IFC Leasing
for P800,000, considering the following: it is in writing and signed by the maker; it contains an unconditional promise to pay a
certain sum of money payable at a fixed or determinable future time; it is payable to order (Sec. 1, NIL); The promissory note
was negotiated when it was transferred and delivered by IPM to IFC and duly endorsed to the latter (Sec. 30, NIL); it was taken in
the conditions that the note was complete and regular upon its face before the same was overdue and without notice, that it
had been previously dishonored and that the note is in good faith and for value without notice of any infirmity or defect in the
title of IPM (Sec. 52, NIL); that IFC Leasing and Acceptance Corporation held 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 against all parties liable thereon (Sec. 57, NIL); the appellants engaged that they would pay the note
according to its tenor, and admit the existence of the payee IPM and its capacity to endorse (Sec. 60, NIL).
W/N the promissory note in question is a negotiable instrument so as to bar completely all the available defenses of the
petitioner against the respondent-assignee.

1. Industrial breached its express 90-day warranty. Consolidated Plywood was clearly a victim of a warranty not honored by the maker.
It is patent then, that Industrial is liable for its breach of warranty against the petitioner. This liability as a general rule, extends to the
corporation to whom it assigned its rights and interests unless the assignee is a holder in due course of the promissory note in
question, assuming the note is negotiable, in which case the latter's rights are based on the negotiable instrument and assuming
further that the petitioner's defenses may not prevail against it.

2. Consolidated notified Industrial’s's sister company, AG & P, about the breakdown based on the express 90-day warranty, with which
the latter complied by sending its mechanics. However, the tractors became totally unserviceable and useless for the purpose for
which they were purchased.

3. Consolidated thereafter, unilaterally rescinded its contract with Industrial. (Articles 1191 and 1567 of the Civil Code) Consolidated,
having unilaterally and extrajudicially rescinded its contract with Industrial, necessarily can no longer sue the seller-assignor except by
way of counterclaim if the seller-assignor sues it because of the rescission.

SC: The promissory note in question is not a negotiable instrument.

FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the INDUSTRIAL PRODUCTS MARKETING, the sum of P 1,093,789.71,
the said principal sum, to be payable in 24 monthly installments.

The instrument in order to be considered negotiable must contain the so-called 'words of negotiability, must be payable to
'order' or 'bearer'. These words serve as an expression of consent that the instrument may be transferred. This consent is
indispensable since a maker assumes greater risk under a negotiable instrument than under a non-negotiable one

SEC. 8. WHEN PAYABLE TO ORDER. — The instrument is payable to order where it is drawn payable to the
order of a specified person or to him or his order. . . .

xxx xxx xxx

These are the only two ways by which an instrument may be made payable to order. There must always be a specified person
named in the instrument. It means that 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."

Therefore, considering that the subject promissory note is not a negotiable instrument, it follows that IFC can never be a holder
in due course but remains a mere assignee of the note in question. Thus, Consolidated may raise against IFC all defenses
available to it as against Industrial Products Marketing. (Deed of Sale with Chattel Mortgage with the promissory note)

Even conceding for purposes of discussion that the promissory note in question is a negotiable instrument, IFC cannot be a
holder in due course for a more significant reason.

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 Consolidated, Industrial, and IFC. Therefore, IFC 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.

Lastly, IFC failed to present any evidence to prove that it had no knowledge of any fact, which would justify its act of taking the
promissory note as not amounting to bad faith. A financing company is not a holder in good faith as to the buyer.

IFC, a financing company which actively participated in the sale on installment of the 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 Industrial. 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. ... "
RAUL SESBREÑO vs.CA; DELTA MOTORS CORPORATION AND PILIPINAS BANK (May 24, 1993)

In 1981, Raul Sesbreño made a money market placement in the amount of P300,000 with Philippine Underwriters Finance
Corporation (Philfinance2),; the placement, with a term of 32 days, would mature on March 13, 1981.

Philfinance, issued the following documents to petitioner:

(a) Certificate of Confirmation of Sale (DMC Promissory note)

(b) the Certificate of Securities Delivery Receipt indicating the sale of DMC PN to petitioner, with the notation
that the said security was in custodianship of Pilipinas Bank, as per Denominated Custodian Receipt ("DCR")

(c) post-dated checks payable on March 13, 1981, with Sesbreño as payee, Philfinance as drawer, and Insular
Bank of Asia and America as drawee, in the total amount of P304,533.33.

March 13, 1981, Sesbreño sought to encash the postdated checks issued by Philfinance. However, the checks were dishonored
for having been drawn against insufficient funds.

Philfinance delivered Sesbreño the DCR issued by Pilipinas Bank.”This confirms that as a duly Custodian Bank, and upon
instruction of PHILIPPINE UNDERWRITES FINANCE CORPORATION, we have in our custody the following securities to you the
extent herein indicated.”

Sesbreño approached Ms. Elizabeth de Villa of Pilipinas Bank and handed her a demand letter informing the bank that his
placement with Philfinance in the amount reflected in the DCR had remained unpaid and outstanding, and that he in effect was
asking for the physical delivery of the underlying promissory note. Sesbreño then examined the DMC PN and found that: the
security had been issued on April 10, 1980; that it would mature on 6 April 1981; that it had a face value of P2,300,833.33, with
the Philfinance as "payee" and private respondent "Delta" as "maker;" and that on face of the promissory note was stamped
"NON-NEGOTIABLE." Pilipinas did not deliver the Note, nor any certificate of participation in respect thereof, to petitioner.

Sesbreño later made similar demand letters, again asking private respondent Pilipinas for physical delivery of the original of
DMC PN. Pilipinas allegedly referred all of Sesbreño’s demand letters to Philfinance for written instructions, as has been
supposedly agreed upon in "Securities Custodianship Agreement" between Pilipinas and Philfinance. Philfinance did not provide
the appropriate instructions; Pilipinas never released DMC PN to petitioner.

Sesbreño made a demand upon Delta for the partial satisfaction of DMC PN, explaining that Philfinance, as payee thereof, had
assigned to him said Note to the extent of P307,933.33. Delta denied any liability to Sesbreño and explained that it had
previously agreed with Philfinance to offset its DMC PN against Philfinance PN issued in favor of Delta.

Philfinance was placed under the joint management of the Securities and Exchange Commission and the Central Bank. Pilipinas
delivered to the SEC DMC PN, which to date remains in the custody of the SEC.

Sesbreño: failed to collect his investment and interest thereon, filed an action for damages with RTC-Cebu City against DMC and
Pilipinas

RTC: dismissed the complaint and counterclaims for lack of merit and for lack of cause of action

CA: denied the appeal and held that from the evidence on record, if there is anyone that appears liable for the travails of
Sesbreño , it is Philfinance. The act of Philfinance in accepting the investment of plaintiff and charging it against DMC PN No.
when its entire face value was already obligated or earmarked for set-off or compensation is difficult to comprehend and may
have been motivated with bad faith. Philfinance, therefore, is solely and legally obligated to return the investment of
Sesbreño, together with its earnings, and to answer all the damages plaintiff has suffered incident thereto. Unfortunately for
plaintiff, Philfinance was not impleaded as one of the defendants in this case at bar

Sesbreño: Court of Appeals gravely erred:

(i) in concluding that he cannot recover from private respondent Delta his assigned portion of DMC PN No. 2731;

(ii) in failing to hold private respondent Pilipinas solidarily liable on the DMC PN No. 2731 in view of the provisions
stipulated in DCR No. 10805 issued in favor r of petitioner, and

2
an entity engaged in the business of buying and selling debt instruments and other securities, and more generally, in money market transactions.
(iii) in refusing to pierce the veil of corporate entity between Philfinance, and private respondents Delta and Pilipinas,
considering that the three (3) entities belong to the "Silverio Group of Companies" under the leadership of Mr.
Ricardo Silverio, Sr.

TWO sets of relationships which we need to address:

1. Relationship between petitioner and Delta: Delta promissory note which Philfinance sold "without recourse" to
Sesbreño, to the extent of P304,533.33. ("non-negotiable" as stamped on its face)

NEGOTIATION being defined as the transfer of an instrument from one person to another so as to constitute the transferee the
holder of the instrument (Sec. 30, Negotiable Instruments Law). A person not a holder cannot sue on the instrument in his own
name and cannot demand or receive payment. (Section 51, id.)

Sesbreño: admits that DMC PN was non-negotiable, but contends that the Note had been validly transferred, in part to him by
assignment. As a result of such transfer, Delta as debtor-maker of the Note, was obligated to pay Sesbreño the portion of that
Note assigned to him by the payee Philfinance.

Delta: DMC PN was not intended to be negotiated or otherwise transferred by Philfinance as manifested by the word "non-
negotiable" stamp across the face of the Note because maker Delta and payee Philfinance intended that this Note would be
offset against the outstanding obligation of Philfinance represented by Philfinance PN issued to Delta as payee;

SC: The negotiation of a negotiable instrument must be distinguished from the assignment or transfer of an instrument whether
that be negotiable or non-negotiable. Only an instrument qualifying as a negotiable instrument under the relevant statute may
be negotiated either by indorsement thereof coupled with delivery, or by delivery alone where the negotiable instrument is in
bearer form. A negotiable instrument may, however, instead of being negotiated, also be assigned or transferred. The legal
consequences of negotiation as distinguished from assignment of a negotiable instrument are, of course, different.

Delta's complaint that the partial assignment by Philfinance of DMC PN had been effected without the consent of Delta, we note
that such consent was not necessary for the validity and enforceability of the assignment in favor of petitioner. (Conventional
subrogation must be clearly established)

At the time Philfinance sold part of its rights under DMC PN to petitioner, no compensation had as yet taken place and indeed
none could have taken place. However, petitioner notified Delta of his rights as assignee after compensation had taken place by
operation of law because the offsetting instruments had both reached maturity. Court is compelled to uphold the defense of
compensation raised by private respondent Delta. Of course, Philfinance remains liable to petitioner under the terms of the
assignment made by Philfinance to petitioner.

2. Relationship between petitioner and Pilipinas.

SC: We find nothing in the DCR that establishes an obligation on the part of Pilipinas to pay petitioner the amount of
P307,933.33 nor any assumption of liability in solidum with Philfinance and Delta under DMC PN.

We do not, however, mean to suggest that Pilipinas has no responsibility and liability in respect of petitioner under the terms of
the DCR. Pilipinas had breached its undertaking under the DCR to petitioner Sesbreño.

A contract of deposit was constituted by the act of Philfinance in designating Pilipinas as custodian or depositary bank. The
depositor was initially Philfinance; the obligation of the depository was owed, however, to Sesbreño as beneficiary of the
custodianship or depository agreement. The custodianship or depositary agreement was established as an integral part of the
money market transaction entered into by petitioner with Philfinance. Sesbreño bought a portion of DMC PN; Philfinance as
assignor-vendor deposited that Note with Pilipinas in order that the thing sold would be placed outside the control of the
vendor.

In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the security deposited with it when petitioner first
demanded physical delivery thereof at the time DMC PN had not yet matured and therefore, compensation or offsetting against
Philfinance PN had not yet taken place. Instead of complying with the demand of the petitioner, Pilipinas purported to require
and await the instructions of Philfinance, in obvious contravention of its undertaking under the DCR to effect physical delivery of
the Note upon receipt of "written instructions" from Sesbreño. We conclude, therefore, that private respondent Pilipinas must
respond to petitioner for damages sustained by arising out of its breach of duty. By failing to deliver the Note to the petitioner
as depositor-beneficiary of the thing deposited, Pilipinas effectively and unlawfully deprived petitioner of the Note deposited
with it.

SC: Pilipinas bank is hereby ORDERED to indemnify petitioner for damages in the amount of P304,533.33, plus legal interest at
6% per annum counted from 2 April 1981.
Sps. FERDINAND and JOSEPHINE AGUILAR vs. CITYTRUST FINANCE CORPORATION [October 25, 2005]

In May 1992, Josephine Aguilar canvassed, via telephone, prices of cars from different car dealers listed in the yellow
pages of the PLDT directory, and World Cars sent its representative to the Aguilar residence bringing with them
calling cards, brochures and price list for different car models.

Josephine decided to purchase a white 1992 Nissan California at the agreed price of P370,000, payable in 90 days.
The two representatives returned to the Aguilar residence on May 30, 1992, bringing with them a white 1992 Nissan
California bearing Motor No. GA16-099086 and Chassis No. WGLB12-D10269, and the documents bearing on the
sale.

The Aguilars were made to sign a promissory note3, chattel mortgage4, disclosures and other documents the dates
of which were left blank and which showed that they would still be obliged to pay on installment in 12 months for
the car even if checks in full payment thereof in 90 days were to be issued. It was alleged to be only for formality,
for in case the checks were not cleared, the documents would take effect, otherwise they would be cancelled. Perez
asked Josephine to make the check payments payable to him, prompting her to call up Perez’ boss, a certain Lily
Paloma, to inquire whether Perez could collect payment to which Lily replied in the affirmative, the latter advising
her to just secure a receipt. Thus, THREE CHECKS were made payable to Perez in the total amount of P370,000, and
Perez issued Josephine World Cars Provisional Receipt, and ONE CHECK was made payable to World Cars which
represented payment of the premium on the car insurance.

In mid-June of 1992, Perez and Vangie went back to the Aguilar residence requesting that Check No. 112705 dated
June 30, 1992 payable to Perez in the amount of P111,000.00 be cancelled and that two checks in the total
amount of P111,000 be issued in replacement thereof, one in the amount of P4,150 to be made payable to Sunny
Motors, which appears to be a sales outlet of World Cars, for processing fee of the documents, and the other in the
amount of P106,850 to be again made payable to Perez. Josephine obliged and accordingly issued Check No.
112724 in the amount of P4,150 payable to Sunny Motors, and Check No. 112725 in the amount of P106,850
payable to Perez. The three other checks in the meantime were cleared. No official receipt for the checks having
been issued to Josephine, she warned Perez that if she did not get any by the end of July 1992, she would request for
stop payment of the last check she issued in his name, Check No. 112706 dated July 30, 1992 in the amount
of P111,000.00. Perez failed to deliver any receipt to Josephine, drawing her to advise FEBTC Del Monte to stop the
payment of Check No. 112706.

The clearing of Check No. 112706 having been stopped on Josephine’s advice, Perez repaired to the Aguilar
residence, asking the reason therefor. On being informed by Josephine of the reason, Perez explained that receipts
were in Bulacan where the main office of World Cars is, and he had no time to go there owing to its distance. Perez
then advised Josephine that if she did not issue another check to replace Check No. 112706, the 12-month
installment term of payment under the documents she and her husband signed would take effect. Not wanting to
be bound by the 12-month installment term, Josephine issued a check in the amount of P111,000 payable to Perez
who issued her Sunny Motor Sales Provisional Receipt. The said check was also cleared.

Later, Josephine received a letter advising her of her overdue account in the amount of P110,706.60 inclusive of
unpaid installments, plus accumulated penalty charges; and that if she failed to arrange for another payment
scheme, her account would be referred to its legal counsel for collection. It turned out that the last payment for the
car had been received.

3
Promissory note binding them to be jointly and severally liable to World Cars in the amount of P301,992.00, payable in 12 months, with a monthly
amortization of P25,166.00 and a late payment charge of 5% per month on each unpaid installment from due date until fully paid

4
Chattel Mortgage in favor of World Cars which embodied a deed of assignment in favor of Citytrust Finance Corporation.
The spouses Aguilar thus filed a complaint for annulment of chattel mortgage plus damages against Citytrust and
World Cars before the RTC-Quezon City.

CITYTRUST: disclaimed knowledge of the prior arrangement and the subsequent payments made by the Aguilars to
World Cars. It claimed that it accepted the endorsement and assignment of the promissory note and chattel
mortgage in good faith, relying on the terms and conditions thereof. Assuming that the Aguilars claim were true,
World Cars appeared to have violated the terms and conditions of the Receivables Financing Agreement. Citytrust
prayed in its Crossclaim against World Cars that it be ordered to pay whatever unpaid obligation due arising from
the promissory note.

WORLD CARS: it received only the check in the amount of P148,000 as downpayment for the car; and that the
Aguilars defaulted in the payment of their monthly amortizations to Citytrust. It should not be held accountable for
the personal and unilateral obligations of the Aguilars to Citytrust. [At the pre-trial conference, World Cars was declared as in default.]

ISSUE: W/N the Aguilars have duly paid the purchase price of the car, and if so, whether or not they can still be held liable to pay under the
promissory note and the chattel mortgage.

ISSUE: W/N Citytrust is entitled to the cross-claim prayed for against World Cars.

RTC: found Perez to be an agent of World Cars, an extension of its personality as far as the sale of the car to the
Aguilars was concerned. Perez was authorized to receive payment for the car, hence, all payments made to him for
the purchase of the car were payments made to his principal, World Cars. The Aguilars had no intention to be bound
by the promissory note which they signed in favor of World Cars or its assignee nor by the terms of the Chattel
Mortgage. Aguilars had paid World Cars the full purchase price of the car, and Citytrust as the assignee of World
Cars had no right to collect from them the amount stated in the Chattel Mortgage cum Deed of Assignment which
is simulated and, therefore, void, following Art. 1346 of the Civil Code.

CA: modified the judgment of the trial court and ordered the Aguilars to pay Citytrust the amount of P252,486.58
representing the unpaid balance of the promissory note.

SC: Clearly, Perez was the agent of World Cars and was duly authorized to accept payment for the car. Since the
Aguilars payment to Perez is deemed payment to World Cars, the promissory note, chattel mortgage and other
accessory documents they executed which were to take effect only in the event the checks would be
dishonored were deemed nullified, all the checks having been cleared. Since the condition for the instruments to
become effective was not fulfilled, the obligation on the part of the Aguilars to be bound thereby did not arise and
World Cars did not thus acquire rights thereunder.

As no right against the Aguilars was acquired by World Cars under the promissory note and chattel mortgage, it had
nothing to assign to Citytrust. Consequently, Citytrust cannot enforce the instruments against the Aguilars, for an
assignee cannot acquire greater rights than those pertaining to the assignor.

At all events, the Aguilars having fully paid the car before they became aware of the assignment of the instruments
to Citytrust when they received notice thereof by Citytrust, they were released of their obligation thereunder.
ARTICLE 1626 provides “The debtor who, before having knowledge of the assignment, pays his creditor, shall be
released from the obligation.”

While Citytrust cannot enforce the instruments against the Aguilars, under the RFA, World Cars guarantees to
Citytrust that it has full right and legal authority to make the assignment or discounting. Thus, under the terms and
conditions of the RFA, upon violation of the dealers warranties and undertakings, defendant Citytrust Finance
Corporation is entitled to recourse the discounted/assigned installments papers to the former.