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No. An alteration is said to be material if it alters the What is the liability of a bank paying a certificate of
effect of the instrument. It means an unauthorized deposit payable to bearer without requiring its
change in an instrument that purports to modify in any surrender?
respect the obligation of a party or an unauthorized
addition of words or numbers or other change to an The bank remains liable to the holder if it paid the
incomplete instrument relating to the obligation of a certificate of deposit payable to bearer without
party. The alteration of the serial number of a check did requiring its surrender (Far East Bank & Trust Company
not change the relations between the parties nor the v. Querimit, G.R. No. 148582, Jan. 16, 2002).
effect of the instrument.
Hence, the alteration on the serial number of a check is
not a material alteration. (International Corporate Bank TRADERS ROYAL BANK V. RPN, G.R. NO. 138510, OCT.
vs. CA, G.R. No. 141968, Feb. 12, 2001) 10, 2002
Carmelo indorsed a check to Linas. Paolo stole
the check from Linas, forged the latter’s signature and
indorsed it to Johan. Denver Bank encashed the check
upon presentment thereof by Johan. Who is the party becomes identical to that of the original obligor.
liable? (Tuazon v. Heirs of Bartolome Ramos, G.R. No. 156262,
July 14, 2005).
The bank is the party liable. It is the primary duty of the
bank to know that the check was duly indorsed by the Can a collecting bank debit the account of the
original payee and, where it pays the amount of the depositor when the checks indorsed to it (bank) were
checks to a third person who has forged the signature of forged?
the payee, the loss falls on such bank who cashed the
checks. A bank engaged in business is invested with Yes, because the depositor of a check as indorser
public interest and it is its duty to protect its clients and warrants that it is genuine and in all respect what it
all persons who transact business with it. (Traders Royal purports to be. Thus, when the checks deposited had
Bank v. RPN, G.R. No. 138510, Oct. 10, 2002) forged indorsements and the collecting bank, as a
consequence of such forgery, was made to pay the
GULLAS V. PNB, G.R. NO. L-43191, NOV. 13, 1935- drawee bank, the collecting bank can debit the account
TREASURY WARRANTS of the depositor for his breach of warranty (Jai‐Alai
Corporation of The Philippines v. BPI, G.R. No. L-‐
Treasury warrants were indorsed by A and B. These 29432, Aug. 6, 1975).
were presented for encashment by PNB. Subsequently,
these were dishonored by the Insular Treasurer. On the right bottom margin of a Promissory Note
Because of the dishonor, PNB applied A’s deposit in appeared the signature of the corporation’s president
the PNB for payment of the warrant. Is the application and treasurer above their printed names with the
of the deposit of A properly enforced? phrase “and in his personal capacity.” The corporation
failed to pay its obligation. Are the officers liable?
No. The general indorser of a negotiable instrument
engages that if it be dishonored and the necessary Yes, persons who write their names on the face of
proceedings of dishonor be duly taken, he will pay the promissory notes are makers and liable as such. The
amount thereof to the holder. In this connection, it has officers are comakers and as such, they cannot escape
been held that notice of dishonor is necessary in order liability arising therefrom. (Republic Planters Bank v.
to charge an indorser and that the right of action CA, G.R. No. 93073, Dec. 21, 1992)
against him does not accrue until the notice is given
(Gullas v. PNB, G.R. No. L-43191, Nov. 13, 1935) What are words which depict the nature of the liability
of the makers/drawers?
TUAZON V. HEIRS OF BARTOLOME RAMOS, G.R. NO.
156262, JULY 14, 2005 An instrument which begins with “I”, or “Either of us”
promise to pay, when signed by two or more persons,
Phebean, the drawer issued a check to James. James, makes them solidarily liable. Also, the phrase “joint and
subsequently indorsed it to Trude. When Trude is several” binds the makers jointly and individually to the
about to encash the check, the drawee Union Bank payee so that all may be sued together for its
refused to encash it due to insufficiency of funds. enforcement, or the creditor may select one or more as
Trude sued James for payment of money. James the object of the suit. (Astro Electronics Corp. v. Phil.
alleged that the suit should be dismissed because Export and Foreign Loan Guarantee Corporation, G.R.
Phebean is an indispensable party. Does James’ No. 96073, Dec. 21, 2003)
argument hold water?
What is the effect of possession of a negotiable
No. There is no privity between the drawer and the instrument after presentment and dishonor?
holder. The drawer is merely secondarily liable. As
indorser, the buyer warranted that upon due It does not make the possessor a holder for value within
presentment, the checks were to be accepted or paid, the meaning of the law. It gives rise to no liability on the
or both, according to their tenor, and that in case they part of the maker or drawer or indorsers. (STELCO
were dishonored, she would pay the corresponding Marketing Corp. vs. CA, G.R. No. 96160, June 17, 1992)
amount. After an instrument is dishonored by non-
payment, indorsers cease to be merely secondarily
liable; they become principal debtors whose liability
REPUBLIC PLANTERS BANK V. CA 12. Inland bills
219 SCRA 736 13. Foreign bills
FACTS: DRAFT
Yamaguchi and Canlas are officers of the World
wide Garment Manufacturing, which later changed its > Common term for all bills of exchange and they
name to Pinch Manufacturing. They were authorized to are used synonymously
apply for credit facilities with the petitioner bank. The
two officers signed the promissory notes issued to secure IN BANK DRAFTS, DRAWER AND DRAWEE BANK ARE LI
the payment of the obligations. Later, ABLE TO PURCHASER OF DRAFT FOR NOT COMPLYING
the bank instituted an action for collection of money, WITH HIS INSTRUCTIONS
impleading also the two officers. The
trial court held the two officers personally liable also. >The drawee bank acting as “payor” bank is solely liable
for acts not done in accordance with the instructions of
the drawer bank or of the purchaser of the draft
HELD: > The drawee bank has the burden of proving that it
Canlass is solidarily liable on each of the promissory didn’t violate
notes to which his signature appears. The
promissory notes in question are negotiable TRADE ACCEPTANCE
instruments and thus, governed by the Negotiable
Instruments Law. > A bill of exchange payable to order and at a certain
maturity, drawn by a seller against the purchaser of
Under the Negotiable Instruments Law, persons who goods as drawee, for a fixed sum of money, showing on
write their names in the instrument are makers are its face the acceptance of the purchaser of goods and
liable as such. By signing the note, the maker promises that it has arisen out of a purchase of goods by the
to pay to the order of the payee or any holder the acceptor
tenor of the obligation. Based on the above provisions >A draft drawn by the seller on the purchaser of goods s
of the law, there is no denying that Canlass is one of old and accepted by such purchaser
the co-makers of the promissory note. >States upon its face that the obligation of the acceptor
arises out of purchase of goods from the drawer
Bill of exchange, defined. > Arises from credit obligations arising from the sale of
goods and must have a definite maturity
A bill of exchange is an unconditional order in writing
addressed by one person to another, signed by the BANKER’S ACCEPTANCE
person giving it, requiring the person to whom it is
addressed to pay on demand or at a fixed or > Draft of which the acceptor is a bank or banker
determinable future time a sum certain in money to engaged generally in the business of granting banker’s
order or to bearer. acceptance credit
> Similar to a trade acceptance
TYPES OF BILLS OF EXCHANGE > Drawn against the bank instead of the buyer
Q: What is the loan and security feature of the trust A: The law uses the word "may" in granting to the
receipt transaction? entruster the right to cancel the trust and take
possession of the goods. Consequently, the entrustee
A: A trust receipt arrangement is endowed with its own has the discretion to avail of such right or seek any
distinctive features and characteristics. Under that set- alternative action, such as a third party claim or a
up, a bank extends a loan covered by the Letter of separate civil action which it deems best to protect its
Credit, with the trust receipt as a security for the loan. right, at any time upon default or failure of the
In other words, the transaction involves a loan feature entrustee to comply with any of the terms and
represented by the letter of credit, and a security conditions of the trust agreement. (South City Homes,
feature which is in the covering trust receipt. A trust Inc. v. BA Finance Corporation, G.R. No. 135462, Dec.
receipt, therefore, is a security agreement, pursuant to 7, 2001)
which a bank acquires a "security interest" in the goods.
It secures an indebtedness and there can be no such Q. What is the effect of novation of a trust agreement?
thing as security interest that secures no obligation. A. Where the entruster and entrustee entered into an
(Sps. Vintola vs. Insular Bank of Asia and America, G.R. agreement which provides for conditions incompatible
No. 73271, May 29, 1987) with the trust receipt agreement, the obligation under
the trust receipt is extinguished. Hence, the breach in
Q: Who is the owner of the articles subject of the TR? the subsequent agreement does not give rise to a
A: The entrustee. A trust receipt has two features, the criminal liability under P.D. 115 but only civil liability.
loan and security features. The loan is brought about by (Philippine Bank v. Ong, G.R. No. 133176, Aug. 8, 2002)
the fact that the entruster financed the importation or
purchase of the goods under TR. Until and unless this
Q: Can deposits in a savings account opened by the Q: Bon took the goods of Angela without her consent
buyer subsequent to the TR transaction be applied to and deposited the same with a warehouseman. The
outstanding obligations under the TR account? latter issued to Bon a negotiable receipt which she
A: No, the receipt of the bank of a sum of money indorsed for value to Ryan. Between Angela and Ryan,
without reference to the trust receipt obligation does who has better right over the goods? Why?
not obligate the bank to apply the money received
against the trust receipt obligation. Neither does A: Ryan has better right to the goods. The goods are
compensation arise because compensation is not covered by a negotiable warehouse receipt which was
proper when one of the debts consists in civil liability indorsed to Ryan for value. The negotiation to Ryan
arising from criminal. (Metropolitan Bank and Trust Co. was not impaired by the fact that Bon took the goods
v. Tonda, G.R. No. 134436, Aug. 16, 2000). without the consent of Angela, as Ryan had no notice of
such fact. Moreover, Ryan is in possession of the
WAREHOUSE RECEIPTS LAW warehouse receipt and only he can surrender it to the
warehouseman. (Sec. 8, WRL)
Q: What is a warehouse receipt?
A: A written acknowledgment by the What is the exception to the independence principle?
warehouseman that he has received and holds certain
goods therein described in his warehouse for The “Fraud exception rule.” It provides that the
the person to whom the document is issued. The untruthfulness of a certificate accompanying a demand
warehouse receipt has two-fold functions, that is, it is a for payment under a standby letter of credit may
contract and a receipt. (Telengtan Bros. & Sons v. CA, qualify as fraud sufficient to support an injunction
G.R. No. L-‐110581, Sept 21, 1994) against payment. (Transfield v. Luzon Hydro, G.R. No.
146717, Nov. 22, 2004)
Q: Coco was issued by a warehouseman a negotiable
receipt for safekeeping by the latter of his goods. Can What is the exception to the independence principle?
the judgment creditor of Coco levy by execution the
goods covered by the negotiable receipt? The “Fraud exception rule.” It provides that the
untruthfulness of a certificate accompanying a demand
A: The goods cannot, while in the possession of the for payment under a standby letter of credit may
warehouseman, be attached by garnishment or qualify as fraud sufficient to support an injunction
otherwise, or be levied upon under an execution unless against payment. (Transfield v. Luzon Hydro, G.R. No.
the receipt be first surrendered to the warehouseman, 146717, Nov. 22, 2004)
or its negotiation enjoined. The warehouseman cannot
be compelled to deliver the actual possession of the What is the doctrine of strict compliance?
goods until the receipt is surrendered to it or The documents tendered by the seller/beneficiary must
impounded by the court. strictly conform to the terms of the letter of credit. The
tender of documents must include all documents
Q: Coco was issued by a warehouseman a negotiable required by the letter. Thus, a correspondent bank
receipt for safekeeping by the latter of his goods. Can which departs from what has been stipulated under the
the judgment creditor of Coco levy by execution the LC acts on its own risk and may not thereafter be able to
goods covered by the negotiable receipt? recover from the buyer or the issuing bank, as the case
may be, the money thus paid to the beneficiary. (Feati
A: The goods cannot, while in the possession of the Bank and Trust Company v. CA, G.R. No. 940209, Apr.
warehouseman, be attached by garnishment or 30, 1991)
otherwise, or be levied upon under an execution unless
the receipt be first surrendered to the warehouseman, What is the effect of the buyer’s failure to procure a
or its negotiation enjoined. The warehouseman cannot Letter of Credit to the main contract?
be compelled to deliver the actual possession of the
goods until the receipt is surrendered to it or The Letter of Credit is independent from the contract of
impounded by sale. Failure of the buyer to open the Letter of Credit
the court. does not prevent the birth of the Sales Contract.
(Reliance Commodities, Inc. v. Daewoo Industrial Co.
Ltd., G.R. No. 100831, Dec. 17, 1993) The opening of
the Letter of Credit is only a mode of payment. The LC is according to the terms and condition of the credit.
not an essential requisite to the contract of sale. (Prudential Bank and Trust Company v. IAC, G.R. No.
74886, Dec. 8, 1992)
What is the independence principle?
LETTERS OF CREDIT
The relationship of the buyer and the bank is separate
and distinct from the relationship of the buyer and What a is Letter of Credit (LC)?
seller in the main contract; the bank is not required to
investigate if the contract underlying the LC has been It is any arrangement, however named or described,
fulfilled or not because in transactions involving LC, whereby a bank (issuing bank), acting at the request
banks deal only with documents and not goods (BPI v. and on the instructions of a customer (applicant) or on
De Reny Fabric Industries, Inc., L-‐2481, Oct. 16, 1970). its own behalf, binds itself to:
In effect, the buyer has no course of action against the
issuing bank. 1. Pay to the order of, or accept and pay drafts drawn
by a third party (Beneficiary), or
In case the buyer was not able to pay its obligation 2. Authorize another bank to pay or to accept and pay
under the letter of credit, can the bank take possession such drafts, or
over the goods covered by the said letter of credit? 3. Authorizes another bank to negotiate, against
stipulated document(s),
No. The opening of a Letter of Credit did not vest
ownership of the goods in the bank in the absence of a Provided, the terms and conditions of the credit are
trust receipt agreement. A letter of credit is a mere complied with (Art. 2, Uniform Customs & Practice for
financial device developed by merchants as a Documentary Credits.)
convenient and relatively safe mode of dealing with the
sales of goods to satisfy the seemingly irreconcilable Note: They are in effect absolute undertakings to pay
interests of a seller, who refuses to part with his goods the money advanced or for the amount for which the
before he is paid, and a buyer, who wants to have credit is given on the faith of the instrument.
control of the goods before paying. (Transfield
Philippines, Inc. v. Luzon Hydro Corporation, G.R.
No. 146717, Nov. 22, 2004)