Domondon Merc 2007 Pre-Week

8/13/2019 Domondon Merc 2007 Pre-Week

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PRE-BAR REVIEW DIVISION

2007 PRE-WEEK REVIEW NOTES

“DOMONDON‟s CUT AND PASTE The BAR STAR NOTES”

selective in the use of review materials. “Domondon‟s Cut and Paste, The

Bar Star Notes” were specially prepared to help you focus on the areas that

are probable sources of questions to be given during the 2007 Bar

Examination in Mercantile Law. The areas were identified by the author

through statistical analysis using data f rom Bar Examination questions in

Mercantile Law given during the period 1913 up to 2006. The essence ofselected Supreme Court decisions up to February 2007 are also included. In

order to have a most effective Pre-Week Review, you should read

“Domondon‟s Cut and Paste, The Bar Star Notes” in the following sequence:

1. You should first read and master the areas marked

the high statistical probability that 70% to 90% of the 2007 Bar Examination

in Mercantile Law may be sourced from these areas. You should note that,

except in very instances (usually enumerations and distinctions), the

suggested answers rarely exceed three sentences. This is so, because you

could “CUT” the suggested answers and “PASTE” them as your answers to

the Bar Questions. Of course, there may be a need to adjust the conceptthat is “PASTED” in order to be appropriate to the requirements and factual

circumstances of the actual Bar Examination Questions you would be

answering. To optimize use of the read “Domondon‟s Cut and Paste, The

Bar Star Notes,” it is suggested that you cover the SUGGESTED ANSWER

and then read the question. Try answering the question mentally before you

check whether your answer is correct or not. This would train you in

analyzing questions and formulating answers quickly. You would not miss

any area because you are forced to read the notes with an interactive mind.

If you could recollect a great number of the answers to the areas marked

reading, whether it is your first or nth reading. To facilitate your

should write the notes you take during the Pre-Week Reviews you attend

directly opposite

MERCANTILE LAW

VER. 2007.08.13 copyrighted 2007

Prepared by Prof. Abelardo T. Domondon

form of textual materials and representative review questions were specially

prepared by Prof. Domondon for the exclusive use of Bar Candidates who

attended his 2007 lectures in Mercantile Law , conducted by Primus

Information, Center, Inc,, and others he has personally authorized.

During the Pre-Week from September 10 – 15, 2007, you do not anymore

have the luxury of time to do a leisurely reading of your books and notes.Thus, you should be very

How to use the Notes: These Notes in the


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the concept you find difficulty understanding. If you intend to do a self-review

during the Pre-Week then you could annotate the “Domondon‟s Cut andPaste, The Bar Star Notes” by writing your own comments and notes.

Sometimes, it is easier to understand the concept if it is in your own

handwriting. There may be no need to highlight the areas marked

because all the areas in this section are equally dangerous. 2. After you

have mastered the areas marked

statistically probable that 10% to 20% of the questions may be sourced from

these areas, especially more so, the so-called “crazy questions.” You could

if you so desire, highlight certain of these areas, although it is not advisableto spend a lot of time here, if you have not yet mastered the areas marked

answers were purposely made to be lengthy in order to serve as explanatory

devices. This is so because you do not have time anymore to refer back to

your review materials. If you still could not understand the concepts after

reading these Notes, then refer to the Doctrines and Illustrative cases as

well as to your other review materials. The materials are arranged in

accordance with the bar examination coverage. The actual bar questions

may not be so arranged. Likewise, these Notes are only indicative of the

areas from where Bar questions may be sourced. The questions shown inthese Notes may or may not be exactly worded in the actual Bar questions.

Finally, the purpose of “Domondon‟s Cut and Paste, The Bar Star Notes” is

not to teach you Mercantile Law but to provide a scientifically prepared guide

on the areas where you should focus during the “Pre-Week”, not only to

enable you pass the Bar, but also to place among the “TOP TEN.”

These materials are copyrighted and/or based on the writer‟s book on Guide

to Mercantile Law and future revisions. It is prohibited to reproduce any part

of these Notes in any form or any means, electronic or mechanical, including

photocopying without the written permission of the author. These materials

are authorized for the use only of Bar reviewees the author has personallyauthorized. Unauthorized users shall not be prosecuted but SHALL BE

SUBJECT TO THE LAW OF KARMA SUCH THAT THEY WILL NEVER

PASS THE BAR OR WOULD BE UNHAPPY IN LIFE for stealing the

intellectual property of the author. Only copies with the signature of Prof.

Domondon, or his authorized representative and the corresponding number

on this page are considered authorized copies. Holders of authorized copies

are requested not to lend their copies for reproduction through Xerox or

otherwise.

AUTHORIZED SIGNATURE:

PRIMUS CONTROL NO. __________

MERCANTILE LAW

(1) CODE OF COMMERCE

WARNING:


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(a) Merchants and Transactions . Articles 1 to 63.

Commercial

(b) Letters of Credit under the Code of Commerce (Articles 567 to 572,

inclusive)

SUGGESTED ANSWER: A letter of c redit is one whereby one person

requests some other person to advance money or give credit to a thirdperson, and promises that he will repay these to the person making the

advancement, or accept the bills drawn upon himself for the like amount.

(Bank of

Philippine Islands v. Commissioner of Internal Revenue, G. R. No. 137002,

July 27, 2006)

1. What is meant by the theory of manifestation in the perfection of contracts

as adopted in the Code of Commerce ? SUGGESTED ANSWER: A theory

in the perfection of contracts which recognizes that the contract is perfected

at the time when the acceptance is made by the offeree. 2. What is the

theory of cognition in the perfection of contracts recognized under the Civil

Code ? SUGGESTED ANSWER: The contract is perfected at the time the

acceptance came to the knowledge of the offeror. 3. What is a joint account

? SUGGESTED ANSWER: A joint account is a transaction of merchants

where other merchants agree to contribute the amount of capital agreed

upon, and participating in the favorable or unfavorable results thereof in the

proportion they may determine. 4. Distinguish joint account from partnership.

SUGGESTED ANSWER: The following are the distinctions: a. A partnership

has a firm name WHILE a joint account has none and is conducted in the

name of the ostensible partner. b. A partnership has a juridical personalityand may sue and be sued under its firm name WHILE a joint account has no

juridical personality and can sue and be sued only in the name of the

ostensible partner. c. A partnership has a common fund WHILE a joint

account has none. d. In a partnership, all general partners have the right of

management WHILE in a joint account the ostensible partner manages its

business operations. e. Liquidation of a partnership may, by agreement, be

entrusted to a partner or partners WHILE in a joint account liquidation

thereof can only be done by the ostensible partner.

NOTES AND COMMENTS: a. UCP rules govern letters of credit. Since

letters of

credit have gained general acceptability in international trade transactions,

the International Chamber of Commerce (ICC) has published from t ime to

time updates on the Uniform Customs and Practice (UCP) for Documentary

Credits to standardize practices in the l/c area, the latest of the revisions

being that in 1993. There being no specific provisions which govern the legal

complexities arising from transactions involving letters of credit, not onlybetween or among banks themselves but also between banks and the seller

or the buyer, as the case may be, the applicability of UCP is undeniable.

(Ibid., Bank of America, NT & SA v. Court of Appeals, et al., G. R. No.

105395, 10 December 1993, 228 SCRA 357) Thus, the observance of the

UCP is justified by Article 2 of the Code of Commerce which provides that in

the absence of any particular provision in the Code, commercial transactions

shall be governed by usages and customs generally observed. (Ibid., citing

Bank of Philippine Islands v, De Reny Fabric Industries, Inc., 146 Phil. 269;


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35 SCRA 256 (1970) b. Draft, defined. A draft is a form of bill of exchange

used mainly in transactions between persons physically remote from each

other. it is an order made by one person, say the buyer of goods, addressed

to a person having in his possession funds of such buyer ordering the

addressee to pay the purchase price to the seller of the goods. Where theorder is made by one bank to another, it is referred to as a bank draft. (Bank

of Philippine Islands v. Commissioner of Internal Revenue, G. R. No.

137002, July 27, 2006) c. Foreign bill of exchange, defined. An inland bill of

exchange is a bill which is, or on its face purports to be, both drawn and

payable within the Philippines. Any other bill is a foreign bill. (Sec. 129,

N.I.L.)


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are the three distinct and independent contracts in a letter of credit?

SUGGESTED ANSWER: The three distinct and independent contracts are:

a. The contract of sale between the buyer and the seller; b. The contract of

the buyer with the issuing bank, and c. The letter of credit proper in which

the bank promises to pay the seller pursuant to the terms and conditionsstated therein. (Keng Hua Paper Products Co., Inc. v. Court of Appeals, et

al.,

286 SCRA 257)

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confirming bank from a notifying bank. SUGGESTED ANSWER: A

confirming bank adds its credit to the letter of credit and therefore is liable if

the opening importer fails to pay the exporter while a notifying bank being

merely one who gives advice as to the existence does not incur any such

liability.

4. BV agreed to sell to AC, a Ship and Merchandise Broker, 2,500 cubic

meters of logs at $27 per cubic meter FOB. After inspecting the logs, CD

issued a purchase order. On the arrangements made upon instruction of the

consignee, H & T Corporation of Los Angeles, California, the SP Bank of

Los Angeles issued an irrevocable letter of credit available at sight in favor

of BV for the total purchase price of the logs, The letter of credit was mailed

to FE Bank with the instruction “to forward it to the beneficiary.” The letter of

credit provided that the draft to be drawn is on SP Bank and that it be

accompanied by, among other things, a certification from AC, stating that the

logs have been approved prior to shipment in accordance with the terms and

conditions of the purchase order. Before loading on the vessel chartered by

AC, the logs were inspected by customs inspectors and representatives ofthe Bureau of Forestry, who certified to the good condition and exportability

of the logs. After the loading was completed, the Chief Mate of the vessel

issued a mate‟s receipt of the cargo which stated that the logs are

in good condition. However, AC refused to issue the required certification in

the letter of credit. Because of the absence of the certification, FE Bank

refused to advance payment on the letter of credit. a. May FE Bank be held

liable under the letter of credit? Explain. b. Under the facts stated above, theseller, BV, argued that FE Bank, by accepting the obligation to notify him

that the irrevocable letter of credit has been transmitted to it on his behalf,

has confirmed the letter of credit. Consequently, FE Bank is liable under the

letter of credit. is the argument tenable ? Explain. SUGGESTED ANSWER:

a. No. Without the certification from AC, which is a condition in the letter of

credit, FE has no obligation to advance payment of the letter of credit. (Feati

Bank v. Court of Appeals, et

al., 196 SCRA 576)

b. No. FE Bank is merely a notifying bank because there is no showing that

it has added its credit to the letter of credit.


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Turnkey Contract whereby Transfield, as Turnkey Contractor, undertook to

construct, on a turnkey basis, a 70 Megawatt power station (PROJECT). To

ensure Transfield‟s compliance with the contracted target completion date it

opened, with ANZ Bank, in favor of LHC two standby letters of credit

(SECURITIES) on 20 March 2000. As a result of some problems that beset

the PROJECT completion arbitration was resorted to. Foreseeing that LHC

would call on the SECURITIES Transfield advised ANZ Bank of the

arbitration proceedings with the warning that until resolution of the arbitration

no payment on the SECURITIES should be made to LHC or its

representatives otherwise it would be subject to damages. LHC then

demanded from ANZ Bank payment of the SECURITIES by surrendering the

required drafts and documents required under the L/C and was in fact paid.Did ANZ act correctly under the premises ? Is it liable for damages to

Transfield ? Reason out your answer.


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SUGGESTED ANSWER: Yes, ANZ acted correctly under the premises. The

engagement of ANZ Bank as the issuance bank is to pay LHC, thebeneficiary of the credit once the draft and required documents are

presented to it. The so-called :independence pr inciple” assures LHC, the

beneficiary, of prompt payment independent of any breach in the main

contract and precludes ANZ, the issuing bank from determining whether the

main contract is actually accomplished or not. Under this principles issuing

banks, such as ANZ, assume no liability or responsibility for the form,

sufficiency, accuracy, genuineness, falsification or legal effect of any

documents, or for the general and/or particular conditions stipulated in the

documents superimposed thereon, nor do they assume any liability or

responsibility for the description, quantity, weight, quality, condition, packing,

delivery, value or existence of the goods represented by any documents, or

for the good faith or acts and/or omissions, solvency, performance, or

standing of the consignor, the carriers, or the insurers of the goods, or any

other person whomsoever. (Transfield Philippines, Inc. v. Luzon

Hydro Corporation, et al., G. R. No. 146717, November 22, 2004 citing

various authorities)

(i) Bulk Sales Law (Act 3952)

engaged in the business of trading auto spare parts, both wholesale and

retail. Scared by what he perceived as the political and economic instability

besetting country, he decided to emigrate to Canada with his entire family.

He liquidated all his assets including his auto spare parts business “lock,

stock and barrel” to his compadre for US$1,500,000.00 which he planned to

reinvest in Canada. a. Is he covered by the provisions of the Bulk Sales Law

? b. In the affirmative, what must be done by the parties so as to comply with

the law ? c. Suppose “X” submitted a false statement on the schedule of his

creditors. What is the effect of such false statement to his compadre ?

d. What is the right of his creditor s, if “X” failed to comply with the procedure

steps required by law under question letter (b) hereof ? SUGGESTED

ANSWER: a. Yes. “X” is covered by the Bulk Sales Law. The sale of his

business “lock, stock and barrel” to his compadre is considered as a sales in

bulk under the Bulk Sales Act because it is a: 1) Sale, transfer, or disposition

is other than in the ordinary course of business; 2) Sale of all or substantially

all of the business; and 3) Sale of all or substantially all of the fixtures and

equipments. b. Since the sale is covered by the Bulk Sales Law, “X” must

comply with the following requirements in order to make the sale valid: 1) X‟s

affidavit listing all the names of all his creditors, the nature and amount of

credits due them; 2) “X”, as the seller, should prepare an inventory of the

stocks to be sold and informs all the creditors ten (10) days before the sale

or the projected sale in bulk; and 3) Nos. 1) & 2) are registered with the

Bureau of Domestic Trade. c. If X‟s compadre does not have knowledge of

the falsity of the schedule, the sale is valid. However, if the vendee has

knowledge of such falsity, the sale is void because he is in bad faith. d. The

recourse of the creditors is to question the validity of the sale from “X” to his

compadre, so as to recover what were sold to his compadre. NOTES AND

COMMENTS: a. Purpose of Bulk Sales Law. To prevent secret or

fraudulent sale of the business, which could lead to its closure, to the

detriment of the creditors.

ilure to observe the requirements under the

Bulk Sales Act ? SUGGESTED ANSWER:


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a. The sale is null and void; b. The purchaser holds the property he bought

in trust for the seller; c. The purchaser is liable to the seller‟s creditors forproperties he bought and already disposed of by him; and d. The purchaser

has the right to demand from the seller the return of the purchase price plus

damages.

of stock of goods, wares, merchandise, provision, or materials otherwise

than in the ordinary course of trade and the regular prosecution of the

business of the vendor are not deemed to be a sale or transfer in bulk ?SUGGESTED ANSWER: a. When the sale, t ransfer or disposition is in the

ordinary course of business; b. When there is a waiver of the provisions of

the Bulk Sales Law of all the creditors; c. When the sale, transfer or

disposition is by virtue of a judicial order.

BAR: 4. Excel Corporation sold its assets to Microsoft, Inc., after complying

with the requirements of the Bulk Sales Law. Subsequently, one of the

creditors of Excel Corporation tried to collect the amount due it, but found

out that Excel Corporation had no more assets left. The creditor then sued

Microsoft, Inc., on the theory that Microsoft, Inc., is a mere alter ego of ExcelCorporation. Will the suit prosper ? Explain. SUGGESTED ANSWER: The

suit will not prosper. The sale by Excel Corporation of its assets to Microsoft,

Inc. did not result in the transfer of its liabilities to Microsoft, Inc., nor in the

assumption of such liabilities by Microsoft, Inc. Furthermore, there is nothing

in the problem which shows that there was a merger of consolidation, nor an

agreement on the part of Microsoft, Inc., to assume Excel Corporation‟s

liabilities. 5. The shares of stock of Aldrin, Inc., engaged in the wholesale of

paper products, is owned 100% by Justin. He decided to sell all of his

shares of stock to James and

Jerome. Is this a sale in bulk subject to the Bulk Sales Act ? Explain briefly.SUGGESTED ANSWER: No. The transaction is a sale of the shares of

stock and not of the business which would result to detriment of the

creditors. The business still continues and the creditors may proceed against

the same corporation which owed them. There was merely a change in

ownership of the business.

(ii) The Warehouse Receipts Law (Act 2137 in relation to the General

Bonded Warehouse Act, Act 3893)

1. XYZ Warehouse, Inc. issued five (5) warehouse receipts (quedans) for

sugar to Mia Therese Merchandising. which were substantially in the form

and contains the terms prescribed for negotiable warehouse receipts by

Section 2 of Act No. 2137. The five (5) quedans were subsequently

negotiated and endorsed by Mia Therese to Ma. Regina who used these

quedans as security for loans obtained from Joy Banking Corporation in the

amount of P35 million. The quedans were endorsed by Ma. Regina to Joy

Bank. Upon failure of Ma. Regina to pay Joy Bank the Bank now demanded

from XYZ Warehouse, Inc. the release to it of the sugar covered by the five(5) quedans. XYZ refused claiming ownership because the check payment

made by Mia Therese of the sugar covered by the five (5) quedans bounced.

After XYZ‟s claim of ownership was dismissed, it now refuses to release the

sugar until Joy Bank pays storage fees. Is XYZ justified in refusing to

release the sugar until the storage fees are paid ? SUGGESTED ANSWER:

Yes. A warehouseman shall have a lien on goods deposited for all lawful

charges for storage and preservation of the goods (Sec. 27, Warehouse


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Receipts Law). A warehouseman need not deliver until the lien is satisfied

(Sec. 31, Warehouse Receipts Law) and in accordance with Sec. 29 of the

Warehouse Receipts Law, the warehouseman loses his lien upon goods by

surrendering possession thereof.


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In this case, XYZ‟s claim for storage fees was incompatible with its claim of

ownership hence it could not have waived its right to storage fees.(Philippine National Bank, v. Judge

Se, Jr., et al., G.R. No. 119231, April 18, 1996)

NOTES AND COMMENTS:

receipt

is a written acknowledgment by the warehouseman that he has received

goods from the depositor and holds the same in trust for him. -negotiable warehouse receipt. defined. A receipt in which it is stated that the

goods received will be delivered to the depositor or to any other specified

person. (Sec. 4, The Warehouse Receipts Law.) A non-negotiable receipt

shall have plainly placed upon its face by the issuing warehouseman, “non-

negotiable” or “not negotiable.” Upon failure to do so, a holder who

purchased it for value supposing it to be negotiable, may, at his option treat

such receipt as imposing upon the warehouseman the same liabilities he

would have incurred had the receipt been negotiable. (Sec. 7, The

Warehouse Receipts Law.)receipt in which it is stated that the goods received will be delivered to the

bearer or to the order of any person named in such receipt. (Sec. 5, The

Warehouse Receipts Law)

a. I would advice the Warehouse Company not to deliver the goods to the

sheriff, otherwise it may be held liable for conversion. It should deliver only

to Patrick, the person who deposited the goods and upon presentation of the

warehouse receipt. b. Yes, because Roberto would be a person who has

stepped into the shoes of Patrick who made the deposit.

NOTES AND COMMENTS:

Instances where warehousemen bound or obligated to deliver. A

warehouseman, in the absence of some

lawful excuse provided by Act No. 2137, The Warehouse Receipts Law, is

bound to deliver the goods upon a demand made either by the holder of a

receipt for the goods or by the depositor; if such demand is accompanied

with: 1) An offer to satisfy warehouseman‟s lien; 2) An offer to surrender the

receipt, if negotiable, with such indorsements as would be necessary for thenegotiation of the receipt; and 3) A readiness and willingness to sign, when

the goods are delivered, an acknowledgment that they have been delivered,

if such signature is requested by the warehouseman. In case the

warehouseman refuses or fails to deliver the goods in compliance with a

demand by the holder or depositor so accompanied, the burden shall be

upon the warehouseman to establish the existence of a lawful excuse for

such refusal. (Sec. 8, WRL) If the above are not present, then the

warehouse could legally refuse to make delivery. These are the defenses a

warehouseman could use to justify his REFUSAL to deliver.

bags of cement. Warehouse Company issued a receipt expressly providing


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that the goods be delivered to the order of said Patrick. A month after,

Paolo, one of Patrick‟s creditors obtained judgment against Patrick for

P50,000.00. Acting upon a writ of execution the sheriff proceeded to levy on

the cement and directed Warehouse Company to deliver to him the

deposited cement. a. What advice will you give Warehouse Company ?Explain your answer briefly. b. Assuming that a week prior to the levy,

Patrick sold the receipt to Roberto on the basis of which, Roberto filed a

claim with the sheriff. Would Roberto, the buyer of the receipt, have better

rights to the cement than Paolo, the creditor? Explain your answers briefly.

SUGGESTED ANSWERS:

Justification of warehouseman in making

delivery. A warehouseman is justified in delivering the goods to one

who is: 1) The person lawfully entitled to the possession of the goods, or his

agent; 2) A person who is either himself entitled to delivery by the terms of

the non-negotiable receipt issued for the goods, or who has written authority

from the person so entitled either indorsed upon the receipt or written upon

another paper; or 3) A person in possession of a negotiable receipt by the

terms of which the goods are deliverable to him or order, or to the bearer, or

which has been indorsed to him or in blank by the person to whom delivery

was promised by the terms of


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the receipt or by his mediate or immediate indorser. (Sec. 9, WRL)

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The above may be used by the warehouseman to defend himself WHY HE

DELIVERED.

without a valid indorsement the goods covered by a negotiable warehouse

receipt deliverable to the depositor or his order.

authority: The warehouseman is also liable

even with indorsement or with authority , he is likewise liable, if prior to

delivery he had either: 1) been requested, by or on behalf of the person

lawfully entitled to a right of property or possession in the goods, not to

make such delivery; or 2) Had information that the delivery about to be made

was to one not lawfully entitled to the possession of the goods. (Sec. 10,

WRL)

2) When can the warehouseman be obliged to deliver the palay to Albert ?

SUGGESTED ANSWER: 1) Baldo, the purchaser of the receipt. As the

person in possession of a negotiable receipt, by reason of Albert‟s

negotiation, Baldo‟s right is superior to that of Sammy who is not in a

possession to present any negotiable receipt to enable the warehouseman

to effect delivery. 2) The warehouseman can be obliged to deliver the palay

to Albert, if Baldo indorses the receipt back to him. Since Albert is again the

holder, he could upon surrender of the receipt, demand delivery of the palay.

5. A deposited goods with BC Warehouse Corporation which issued the

corresponding warehouse receipt to the order of A. A endorsed the

warehouse receipt to D who paid for the value of the goods deposited.

Before D could withdraw the goods, E informed BC Warehouse Corporationthat the goods belonged to him and were taken by A without his consent. E

wants to get the goods but D also wants to withdraw the goods. Who has a

better right to the goods ? Why ? SUGGESTED ANSWER: D has a better

right to the goods because he is the holder of the negotiable warehouse

receipt which was duly endorsed for value to him by A the person whose

name appears on the receipt. 6. Samantha stored hardware materials in a

bonded warehouse of Warren, a licensed warehouseman under the General

Bonded Warehouse Law (Act 3893, as amended). Warren issued the

corresponding warehouse receipt in the form he ordinarily uses for such

purpose in the course of his business. All the essential terms required underSection 2 of the Warehouse Receipts Law (Act 2137, as amended) are

embodied in the form. In addition, the receipt issued to Samantha contains a

stipulation that Warren would not responsible for the loss of all or any portion

of the hardware materials covered by the receipt even if such loss is caused

by the negligence of Warren or his representatives or employees. Samantha

endorsed and negotiated the warehouse receipt to Britney, who

pledged 500 bales of tobacco deposited in a warehouse to said bank and

endorsed in blank the warehouse receipt. Before Raoul could pay for the

loan, the tobacco disappeared from the warehouse. Who should bear the

loss – the pledgor or the bank ? Why ? SUGGESTED ANSWER: The

pledgor should bear the loss. Where a warehouse receipt is pledged, the

ownership of the goods remains with the depositor or his transferee. Any

contract or real security, such as a pledge, does not result to an assumption


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of risk of loss by the creditor..

cavans of palay on credit. Albert deposited the palay in William‟s warehouse.

William issued to Albert a negotiable warehouse receipt in the name of

Albert. Thereafter, Albert negotiated the receipt to Baldo who purchased the

said receipt for value and in good faith. 1) Who has a better right to thedeposit, Sammy, the unpaid vendor, or Baldo, the purchaser of the receipt

for value and in good faith ? Why ?


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demanded delivery of the goods. Warren could not deliver because the

goods were nowhere to be found in his warehouse. He claims that he is notliable because of the free-from-liability clause stipulated in the receipt. Do

you agree with Warren‟s contention ? Explain. SUGGESTED ANSWER: No.

The “free-from-liability” clause is void. The law requires the warehouseman

to exercise due diligence in the care and custody of the things deposited in

his warehouse.

(iii) Receipts

Presidential Decree 115 on Trust

Herminio opened a letter of credit with the Bank of Philippine Islands for the

importation of certain equipment. He failed to pay and also failed to deliver

the equipment despite demand. He now assails the constitutionality of P.D.

No. 115, the Trust Receipts Law on the ground that it constitutions

imprisonment for nonpayment of a debt. Rule on his contention.SUGGESTED ANSWER: Contention is bereft of merit. P.D. No. 115, is a

declaration by the legislative authority to make the act punishable under its

authority to prescribe certain acts as pernicious and inimical to public

welfare under the exercise of police power. (Tiomico v. Court of Appeals, et

al., G.R. No. 122539,

March 4, 1999)

pursuant to which a bank acquires a “security interest” in the goods. It

secures an indebtedness and there can be no such thing as security interest

that secures no obligation. (Ching v. Court of Appeals, et al., G.R. No.

110844, April 27, 2000) b. Nature of a trust receipt. A trust receipt partakes

of the nature of a security transaction. It could never be a mere additional or

side document. Otherwise, a party to a trust receipt agreement could easily

renege on its obligation thereunder, undermining the importance and

defeating with impunity the purpose of such an indispensable tool in

commercial transactions. (Ching v. Court of Appeals, et al., G.R. No.

110844, April 27, 2000) c. Purpose of Trust Receipts Law. It punishes

dishonesty and abuse of confidence in the handling of money or goods to

the prejudice of public order. (Ong v. Court of Appeals, et al., G. R. No.

119858, April 29, 2003) d. Acts and omissions penalized. The TrustReceipts Law is violated whenever the entrustee fails to: 1 ) turn over the

proceeds of the sale, or 2) return the goods covered by the trust receipt if

the goods are not sold. (Ong v. Court of Appeals, et al., G. R. No. 119858,

April 29, 2003) Returning the goods results to absence of criminal liability

but the entrustee is still liable for the balance of what he owes the entruster.

e. Violation of Trust Receipts Law is criminal in character. Return of the

goods if unsold merely extinguishes the

entrustee‟s criminal liability. He is still civilly liable for the unpaid loan.

(Vintola v. IBAA, 159 SCRA 140) The mere failure to account or return gives

rise to the crime which is malum prohibitum. There is no requirement to

prove intent to defraud. (Ong v. Court of Appeals, et al., G. R. No. 119858,

April 29, 2003)


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NOTES AND COMMENTS:

considered

as a security transaction intended to aid in financing importers and retail

dealers who do not have sufficient funds or resources to finance the

importation or purchase of merchandise who may not be able to acquire

credit except through utilization, as collateral, of the merchandise imported

or purchased. The goods are held as security by the lending institution for

the loan obligation. (Nacu vs. Court of Appeals, et al., G.R. 108638, March

11, 1994) Alternative definition: A trust receipt is a document in which is

expressed a security transaction whereunder the lender, having no prior title

to the goods on which the loan is to be given and not having possession

which remains in the borrower, lends his money to the borrower on security

of the goods which the borrower is privileged to sell clear of the lien with an

agreement to pay all or part of the proceeds of the sale to the lender. It is asecurity agreement

f. Trusts receipts and domestic letters of credit are contracts of adhesion and

any ambiguities must be held strictly against the bank. (Security Bank &

Trust Company v.

Court of Appeals, et al., G.R. No. 115997, November 27, 2000)

g. Persons criminally liable for violation in case of corporations, are the

officers or employers or other persons

responsible for the offense are liable to suffer the penalty of imprisonment.

SUGGESTED ANSWER: An entrustee is one having or taking possession of

goods, documents or instruments under a


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10

trust receipt transaction, and any successor in interest of such person for the

purpose of payment specified in the trust receipt agreement. [Ching v.Secretary of Justice, et al., G. R. No. 164317,

February 6, 2006 citing Sec. 3 (b) of P.D. No. 115]

What are the obligations of an entrustee ? SUGGESTED ANSWER: The

entrustee is obliged to: a. hold the goods, documents or instruments in trust

for the entruster and shall dispose of them strictly in accordance with the

terms and conditions of the trust receipt; b. receive the proceeds in trust for

the entruster and turn over the same to rthe entruster or as appears trust

receipt; c. insure the goods the goods for their total value against loss from

fire, theft, pilferage or other casualties; d. keep said goods or proceeds

thereof whether in money or whatever form, separate and capable of

identification as property of the entruster; e. return the goods, documents or

instruments in the event of non-sale or upon demand of the entruster; and f.

observe all other terms and conditions of the trust receipt not contrary to the

Trust Receipts Law. (Ching v. Secretary of Justice, et al., G. R. No. 164317,

February 6, 2006 citing Sec. 9 of P.D. No. 115)

a. Negotiability. The ability of the instrument to be transferred from one hand

to another, and for the holder to have the right to hold the instrument and to

collect the sum certain in money. b. Accumulation of secondary contracts.

As the instrument is transferred from one hand to another, contracts are

entered into between those who are parties to each transfer independently

of the contract between the previous and subsequent parties. NOTES AND

COMMENTS: a. Characteristics of negotiable paper. The language of

negotiability which characterizes negotiable paper as a credit instrument is

its freedom to circulate as a substitute for money. (Traders Royal Bank v.

Court of Appeals, 269 SCRA 15)

(2) Negotiable 2031)

Instruments

Law (Act No.

SUGGESTED ANSWER: a. Subject matter of a negotiable document is

goods while that of a negotiable instrument is money. b. Parties prior to the

holder of a negotiable document may not beheld liable while the essence ofa negotiable in that liability attaches to prior parties. c. There is need for

notices of dishonor in negotiable instrument to hold prior parties liable while

there is no concept of notices of dishonor in negotiable documents.

What are the requisites of a negotiable instrument ? SUGGESTED

ANSWER: An instrument to be negotiable must conform to the following

requirements: a. It must be in writing and signed by the maker or drawer; b.

It must contain an unconditional promise or order to pay a sum certain in

money; c. It must be payable to order to bearer; d. Where the instrument is


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addressed to a drawee, he must be named or otherwise indicated therein

with reasonable certainty. (Sec. 1, N.I.L.)

What is a negotiable instrument ? SUGGESTED ANSWER: A negotiableinstrument is a written contract signed by the maker or drawer which

contains an unconditional promise or order to pay a sum certain in money to

order or to bearer which by its form and face is intended as a substitute for

money and passes from one hand to another as money, so as to give a

holder in due course the right to hold the instrument and collect the sum for

himself. 2. Give the characteristics of a negotiable instrument. SUGGESTED

ANSWER: The characteristics of a negotiable instrument are:


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ANALYTICAL STEPS FOR SOLVING PROBLEMS INVOLVING

NEGOTIABILITY OF INSTRUMENTS. NOTE: This area is one of the most

popular areas under Negotiable Instruments Law. The bar candidate should

master the analytical steps: a. Look for the DATE: 1) If dated. The date is

prima facie the true date of the instrument. Negotiability is not affected. 2) Ifante-dated or post-dated. Negotiability not affected UNLESS ante-dated or

post-dated for fraudulent purpose. 3) No date. Negotiable character not

affected. 4) If no date, true date may be inserted. a) If instrument payable at

fixed period after date (1) Wrong date is inserted (a) No effect on instrument,

if holder in due course (b) Instrument invalid, if not holder in due course b.

Look for SIGNATURE of maker (PN) or drawer (BE). 1) If no signature, not

negotiable. 2) If signed, negotiable. c. Look for UNCONDITIONAL

PROMISE (PN) or UNCONDITIONAL ORDER (BE). If present, negotiable 1)

Conditional and not negotiable, if promise or order depends upon: a) A

future event which may or may not happen b) A past event unknown to theparties 2) Conditional and not negotiable if promise or order to pay out of a

particular fund. Example: "Pay B or order P10,000.00 out of my money in

your hands." Not negotiable because it is conditional being payable out of a

particular fund and no other. 3) Unconditional and negotiable even if

indicates a particular fund out of which reimbursement is to be made or

particular account to be debited. Example: "Pay B or order P10,000.00 and

reimburse yourself out of my money in your hands." Negotiable because

there is no

11

condition as to source of funds only with respect to reimbursement which

occurs after the instrument is paid. 4) Unconditional and negotiable if

dependent upon a future event which is certain to happen even if time of

happening is not known. 5) Unconditional and negotiable even if statement

of the transaction is given. Example: "I promise to pay B or orderP1,000,000.00 in payment of the house I bought from him on March 17,

2005." 6) Conditional and not negotiable because qualified. Example: "I

promise to pay B or order P1,000, 000.00 subject to the terms and

conditions of the March 17, 2005 Deed of Sale for the sale of his house." d.

Is the sum CERTAIN IN MONEY ? If so, negotiable 1) Not negotiable, if not

in money. Example: "I promise to pay B or order the equivalent of

P50,000.00 in carabaos." 2) Negotiable even if holder has election require

something to be done in lieu of money. Example: "To C: Pay to B or order

P50,000.00 or 50 cavans of rice at the option of the holder." 3) If at the

option of the drawer, not negotiable because it is conditional. e. Is theinstrument payable ON DEMAND or AT A FIXED OR DETERMINABLE

FUTURE TIME ? If so, negotiable. 1) If not, not negotiable. 2) Not

negotiable, if payable on contingency. Happening of the event does not cure

the defect. Example: "Pay to B or order P100,000.00, two (2) days after he

passes the Bar." Negotiable: 3) Payable on demand and negotiable when

expressed to be payable on demand, at sight or presentation, no time for

payment is expressed on the instrument, or when the instrument is overdue.

4) Payable at a determinable future t ime and negotiable if payable at a f ixed

period after date


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12

or sight, on or before a fixed or determinable future t ime specified therein, or

on or before a fixed period after occurrence of a certain event thoughhappening be uncertain. f. Is the instrument payable TO ORDER or

BEARER ? If so, then negotiable. If not, not negotiable. g. If the instrument

is addressed to a drawee, is he named or otherwise indicated on the

instrument with reasonable certainty ? If so negotiable. If not, not negotiable.

llments from Autocars, Inc. for

P550,000.00. He made a down payment of P50,000.00 and executed a

promissory note for the balance. The company subsequently indorsed thenote to California Finance Corporation which financed the purchase. The

promissory note reads:

“For value received, I promise to pay Autocars, Inc. or order at its office in

Makati City, the sum of P500,000.00 with interest at twelve percent (12%)

per annum, payable in equal installments of P50,000.00 monthly for ten (10)

months starting October 21, 2005. Manila, September 21, 2005. (Sgd.) Miky

Pay to the order of California Finance Corp. Autocars, Inc. By: (Sgd.)

Manager Because Miky defaulted in the payment of his installments,

California Finance Corporation initiated a case against her for sum ofmoney. Miky argued that the

promissory note is merely an assignment of credit, a nonnegotiable

instrument open to all defenses available to the assignor and, therefore,

California Finance Corporation is not a holder in due course. a) Is the

promissory note a mere assignment of credit or a negotiable instrument ?

Why ? b) Is the California Finance Corporation a holder in due course ?

Explain briefly. SUGGESTED ANSWER: a) The promissory note is a

negotiable instrument because it conforms to the requirements of a

negotiable instrument. It is in writing signed by the maker Miky, it contains

an unconditional promise to pay a sum certain in money at a fixed ordeterminable future time. The sum is a sum certain although it is payable in

installments with interest. b) California Finance Corporation is a holder in

due course because it took the instrument complete and regular upon its

face, that it is not overdue and without notice that it had been previously

dishonored, that it took the instrument in good faith and for value, and that it

had no notice of any infirmity in the instrument or defect in Autocars, Inc.‟s

title.

-negotiability of the following notes:

Manila, September 1, 2005 P2,500.00 I promise to pay Pedro San Juan or

order the sum of P2,500.00. (Sgd.) NOEL CASTRO SUGGESTED

ANSWER: It is negotiable because it is in writing signed by the maker, Noel

Castro, it contains an unconditional promise to pay a sum P2,500.00 which

is a sum certain in money, it is payable on demand as no date of maturity is

shown, and it is payable to order.


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13

Manila, June 3, 2005 P10,000.00 For value received, I promise to pay

Sergio Dee or order the sum of P10,000.00 in five (5) installments, with thefirst installment payable on October 5, 2005 and the other installments on or

before the fifth day of the succeeding month thereafter. (Sgd.) LITO VILLA

SUGGESTED ANSWER: The promissory note is negotiable. It is in writing

and signed by the maker Lito Villa. I t contains an unconditional promise to

pay Sergio Dee or order, a sum certain in money (although to be paid in

installments), at a fixed and determinable future time within five (5) months

from October 5, 2003.

instruments because they are conditional in character, being payable out of

a specific fund.

instrument if: (a) it is not dated; or (b) the day and the month, but not the

year of its maturity, is given; or (c) it is not payable to “cash”; or (d) it names

two alternative drawees ? SUGGESTED ANSWER: (a) Yes. The lack of a

date does not impair the negotiability of a instrument. If there is no date, the

true date may be inserted. (b) No. The instrument is not payable at a fixed or

determinable future time. (c) Yes. The instrument is payable to bearer

because the name of the payee does not purport to be the name of any

person. (d) No. The order is conditional if addressed to two or more drawees

in the alternative or in succession.

SITUATIONS INVOLVING NEGOTIABLE INSTRUMENTS. Another area

that the reader should master: If the reviewee would be able to solve all of

the following problems, he would be able to answer any question given with

respect to irregular instruments. SUMMARY OF SITUATIONS a. Incomplete

instrument 1) Delivered a) With forgery and alteration b) Without forgery and

alteration 2) Not delivered a) With forgery and alteration b) Without forgeryand alteration b. Complete instrument 1) Delivered a) With forgery and

alteration b) Without forgery and alteration 2) Not delivered a) With forgery

and alteration

d explain whether the following are negotiable instruments

under the Negotiable Instruments Law: (i) Postal Money Order; (ii) A

certificate of time deposit which states “This is to certify that bearer has

deposited in this bank the sum of FOUR THOUSAND PESOS (P4,000.00)

only, repayable to the depositor 200 days after date.” (iii) Letters of credit;

(iv) Warehouse receipts; (v) Treasury warrants payable from a specific fund.

SUGGESTED ANSWER: The subject of postal money order, a certificate of

time deposit and letters of credit is money but they are not negotiable

instruments because they do not bear the words of negotiability “to order,” or

“to bearer.” While it is true, that warehouse receipts may be negotiable but

their subject is goods and not money. Thus, they are not negotiable

instruments. Finally, treasury warrants are not negotiable


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14

b) Without forgery and alteration

Holder has prima facie authority to fill up blanks 1) Signature on blank paper

delivered by signatory with intention of making it a negotiable instrument,

prima facie authority to fill it up for any amount. 2) Party prior to completion

bound if filled up a) In accordance with authority b) Within reasonable time b.

Irrespective of compliance with no. 2) above prior parties still bound but only

to holder in due course. c. The rules apply whether the instrument is a

promissory note or bill of exchange, whether payable to bearer or order.

a.

given and within a reasonable time. There is likewise conclusive

presumption of delivery. Ana a very busy businessperson does not have

time to sign checks one by one. So, she signs several checks in blank and

instructs Beth, her personal assistant, to safekeep the checks and fill them

out when and as required to pay her accounts as they fall due. Beth fills outone of the checks by placing her name as payee, fills in the amount of

P50,000.00, endorses and delivers the check to Carlos who accepts it in

good faith as payment for goods sold to Beth. Ana learns of the dishonesty

foisted upon her by Beth. Ana was able to instruct the Bank in time to

dishonor the check. When Carlos encashes the check, it is dishonored. Can

Carlos hold Ana liable for the P50,000.00 value of the check ? Explain

briefly. SUGGESTED ANSWER: Yes, assuming that the Carlos gave notice

of dishonor to Ana. This is a case of an incomplete instrument but delivered

as it was entrusted to Beth, Ana‟s personal assistant. This is so because

Carlos is a holder in due course who does not have any knowledge of the

extent of authority given to Beth, that the check is for the payments of Ana‟s

account only. Moreover under the doctrine of comparative negligence, asbetween Ana and Carlos, both innocent parties, it was the negligence of Ana

in entrusting the check to Beth which is the proximate cause of the loss.

ILLUSTRATIVE PROBLEMS: BUT DELIVERED INSTRUMENTS.

INCOMPLETE

Meg issued a negotiable promissory note to Leon authorizing Leon to fill up

the amount in blank up to P10,000.00. Leon however, filled it up to

P25,000.00. Could Leon collect P25,000.00 from Meg ? SUGGESTED

ANSWER: No, because the instrument was not strictly filled up in

accordance with the authority given. Supposing in the above problem, Leonnegotiated the instrument to Mara who knows that Meg's instructions was for

Leon to fill it up to P10,000.00 only. Could Mara collect P25,000.00 from

Meg ? SUGGESTED ANSWER: No, because Mara is not a holder in due

course. She knew of the instrument's infirmity when the instrument was

negotiated to her. Meg could interpose the personal defense of want of

authority. Supposing further, in the above problem, that Mara did not know

of the lack of authority, may Mara collect the P25,000.00 from Meg ?


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SUGGESTED ANSWER: Yes, because Mara is a holder in due course, she

not being aware of any infirmity in the instrument at the time she took it. She

may thus enforce it as if it had been filled up strictly in accordance with the

authority

a. Completed and delivered with authority, valid. b. Completed and delivered

without authority 1) Valid against party whose signature was placed after

delivery like indorser. Reason: Indorser warrants the instrument is in all

respect what it purports to be. 2) Not valid against party whose signature

was placed before delivery, if not a holder in due course. Reason: Delivery is

essential to validity. However, with respect to a holder in


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15

due course, there is prima facie presumption of delivery which may be

rebutted. c. Rules apply whether 1) Promissory note or bill of exchange 2)Payable to bearer or order 3) With or without forgery and material alteration.

ILLUSTRATIVE PROBLEMS: NOT DELIVERED INSTRUMENT.

INCOMPLETE

his safe. This was stolen

by Edwin who filled in the amount and placed a fictitious person as payee

signed the name of the payee and indorsed the same to Paolo, Paolo to

Patrick, Patrick to Sally, Sally to Jeddah, Jeddah to Rhia. All of the

subsequent indorsers as well as the holder were all holders in due course.

May Rhia proceed against Pocholo in case of dishonor by the drawee bank

? SUGGESTED ANSWER: No, because there was no valid delivery which is

essential to the validity of the instrument. Under the same set of facts, if

Pocholo as well as the drawee bank dishonors the check, may Rhia proceedagainst Jeddah ? SUGGESTED ANSWER: Yes, because Jeddah as an

indorser warrants that the instrument is what it purports to be and if it is

dishonored and necessary proceedings for dishonor taken, she shall pay the

holder, Rhia. Under the same set of facts, in case of dishonor by the drawee

bank and/or Pocholo and the other indorsers, is Edwin liable ?

SUGGESTED ANSWER: Yes, because he was responsible for the theft, the

filling up and subsequent negotiation of the instrument. Supposing under the

same set of facts, that the drawee bank upon presentation by Rhia

encashed the check and Pocholo now sues the bank, what defenses may

the drawee bank raise against Pocholo ? SUGGESTED ANSWER:

a. Rhia is a holder in due course, therefore there is a prima facie showing of

delivery which Pocholo must now rebut with proof of non-delivery. b.

Negligence on Pocholo's part which resulted in the loss of the check. c.

Good faith on the part of the bank. It 's obligation is to deliver on a genuine

signature of Pocholo. It is not obligated to know the signature of the payee

as in this case, the payee did not encash the check, hence no way of

identifying. d. As between two innocent parties, the one who made possible

the loss should be liable. Here Pocholo made possible the loss as he signed

the blank check knowing fully well that if stolen, it could be negotiated.

Furthermore, Pocholo should have immediately advised the bank to stop

payment. e. Under the above problem, if the incomplete check was delivered

by Pocholo to Edwin for safekeeping, there is valid delivery. NOTE: The

reader should solve the problem as if there is an incomplete but delivered

instrument, 12. Rochelle left her friend and classmate Lora inside her car.

Lora stole a blank check which she found in Rochelle's car, forged

Rochelle's signature and encashed the same with the Union Bank (the

drawee-depository). Is the bank liable despite allegations that Rochelle was

negligent ? SUGGESTEDANSWER: Yes. Reasons: a. Under the

circumstances, Rochelle could not be considered negligent as she could nothave expected that Lora would remove a check from her checkbook. He had

no reason to suspect that a classmate and friend would breach her trust. b.

A bank is bound to know the signatures of its clients and if it pays on a

forged check, it is considered as having paid out of its own funds.

DELIVERED INSTRUMENT.


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a. Without forgery and alteration, all parties bound. b. With forged

indorsement and/or alteration 1) Order instruments a) Order promissory note


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16

Prior parties not bound. Reason: Forged signature wholly inoperative unless

estoppel sets in, then prior parties bound. (2) Subsequent parties bound.Reason: Bound on warranties of indorsers unless otherwise specified (a)

Whether or not holder in due course (b) Only forged signature is inoperative

b) Order bill of exchange (1) Drawee cannot charge drawer's account (a) If

charged drawer has right to recover (2) Drawer has no right against

collecting bank (3) Drawee can recover from collecting bank (4) Collecting

bank bears loss (a) Can recover from person it paid (5) Payee can recover

from (a) Drawer (b) Collecting bank (c) Payee cannot recover from drawee

(6) Drawer not liable to the collecting bank 2) Bearer instruments a) Bearer

promissory note (1) Prior parties liable (2) Forged signatory not liable to

party not holder in due course b) Bearer bill of exchange (1) Drawee bank

liable

(1)

Dennis makes a promissory note payable to the order of Kay, who indorses

it to Micky. Somehow, Freddie obtains possession of the note and forging

the signature of Micky endorses it to Angelo who then indorses it to Bea.

State the rights and liabilities of the parties. SUGGESTED ANSWER: Mickywhose indorsement is forged and the parties prior to him including the

maker, Dennis and the payee, Kay cannot be held liable to the holder Bea,

whether or not she is a holder in due course. Reasons: a. An order note can

be negotiated only by indorsement completed by delivery. A forged

indorsement is wholly inoperative and does not transfer any rights. b. No

right to retain the note, give discharge therefore, or enforce payment could

be acquired under a forged indorsement. c. Since the predecessor of the

holder obtained the note by fraudulent and unlawful means, then there are

no rights that are transferred. d. Angelo is liable to Bea because of Angelo's

warranties as a general indorser that the instrument is what it purports to be

and that he shall pay in case of dishonor.

ILLUSTRATIVE PROBLEM: RIGHTS OF PARTIES IN FORGED

INDORSEMENT OF BILL OF EXCHANGE PAYABLE TO ORDER.

ILLUSTRATIVE PROBLEM: RIGHTS PARTIES IN FORGEDINDORSEMENT PROMISSORY NOTE PAYABLE TO ORDER.

OF OF

a check to Nellie or order as the payee with Eastern Bank

as the drawee. Fidel fraudulently obtains the check and forges Nellie's

signature. Fidel then deposits it in Daya Bank (Collecting Bank). WesternBank indorses the check to Eastern Bank through the clearing house. Fidel

then withdraws from Daya Bank, the proceeds of the check. What are the

rights of the parties ? SUGGESTED ANSWER: a. Drawer's account (Tina''s)

cannot be charged (debited, deducted, subtracted or reduced) by the

drawee (Eastern Bank), for the amount paid, and if her account is charged,

Tina can recover from Eastern Bank.


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17

Reason: The depository (drawee Eastern Bank) owes to the depositor

(drawer Tina), an absolute and contractual duty to pay the check only to theperson to whom made payable or upon his genuine indorsement. The

drawer authorizes and directs the drawee to pay only to the payee or to the

order of the payee not to another. b. Drawee (Eastern Bank's) defenses:

Drawer, Tina is precluded from raising the defense of forgery due to

estoppel on account of negligence, for example, if the payee Nellie advised

Tina of the loss, but she (Tina) did not inform Eastern Bank. c. Drawer (Tina)

has no right to recover from the collecting bank (Daya Bank). Reasons: 1)

Duty of collecting bank to exercise care in collecting is true only to the

purported payee. 2) The drawer does not suffer any damage caused by the

collecting bank as he can recover from the drawee bank which has no right

to charge the drawer's account. d. Drawee bank (Eastern Bank) can recover

from the collecting bank (Daya Bank). Reason: Since the check passed

through the clearing house, the collecting bank (Daya Bank) must have

indorsed the check to the drawee bank (Eastern Bank), therefore it is liable

on an indorser's warranty of genuineness and liability to pay in case of

dishonor. e. Collecting bank (Daya Bank) bears the loss but it can recover

from the person to whom it paid the check, Fidel. f. The payee (Nellie) can

still recover from the drawer (Tina). Reason: She st ill retained her claim as it

was not extinguished. Exception: The payee (Nellie) cannot recover if thecheck was impaired through her fault. g. The payee (Nellie) can recover

from the collecting bank (Daya Bank). Reason: Possession of the forged

instrument is unlawful and money collected is held in trust for rightful

owners. (Note: This is on the assumption that, the drawer's account was

charged by the drawee bank, otherwise the drawer would be unjustly

enriched) h. The payee (Nellie) cannot recover from the drawee bank

(Eastern Bank). Reason: There is no privity of contract.

i. Drawer (Tina) is not liable to the collecting bank (Daya Bank). Reason:

There is no privity of contract between Tina and Daya Bank. 15. On June 19,

2003, Triumph Lumber Corporation opened a current account deposit with

Security Bank and authorized withdrawals on the basis of any of threesignatures of Triumph‟s president, treasurer and general manager appearing

on the specimen signature cards. On March 23, 2005, Triumph discovered

that the door of its office was forced open, including that of the filing cabinet

where its savings account passbook, check booklets and other bank

documents were kept. This was not reported to the police, neither was Solid

Bank advised. On the same day of the burglary, Triumph made three

separate deposits totaling P374,554.10, and immediately after said deposits,

three (3) Triumph checks totaling P300,000.00 were successively presented

to Solid Bank for encashment. These were given due course following thestandard bank procedure for verification of the check signatures and

regularity of other particulars of the said check. Triumph now claims that due

to Solid Bank‟s gross and inexcusable negligence in determining the forgery

of the drawer‟s signatures, the three checks which were all drawn against its

current account were encashed by unauthorized persons. It then demanded

that Solid Bank credits back its account the value of the checks it claimed

were wrongfully encashed. Rebuffed in its demand, Triumph sues Solid

Bank. Will the suit prosper ? SUGGESTED ANSWER: No. The loss resulted

from Triumph‟s negligence. Under the above circumstances a prudent and

reasonable man would have gone over the check booklets after the burglaryand have discovered that three checks were missing. The bank would have

been then immediately advised. (Security Bank & Trust Company v. Triumph

Lumber and Construction Corporation, G.R. No. 126696, January 21, 1999)

NOTES AND COMMENTS: The above cited case was decided as shown

above because of Triumph‟s failure to prove forgery. It is the author‟s view

that had Triumph been able to prove forgery, the


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bank would NOT have been liable as shown by the following discussion.

18

a. Checks with forged indorsements should be differentiated from checks

bearing forged signatures of the drawer. (Associated Bank v. Court of

Appeals, et al., and its

companion case Philippine National Bank v. Court of Appeals, et al., 252

SCRA 620) b. Effect of forged signature. When a signature is forged or

made without authority of the person whose signature it purports to be, it is

wholly inoperative, and no right to retain the instrument, or to give a

discharge therefor, or to enforce payment against any party thereto, can be

acquired through or under such signature unless the party against whom it is

sought to enforce such right is precluded from setting up the forgery or want

of authority. (Sec. 23, Negotiable Instruments Law) Sec. 23 does not avoid

the instrument but only the forged signature. Thus, a forged indorsement

does not operate as the payee‟s indorsement.

c. A person may be bound under a forged signature.

if he is precluded from setting up the forgery or want of authority. Parties

who warrant or admit the genuineness of the signature in question and those

who, by their acts, silence or negligence are estopped from setting up the

defense of forgery are precluded from using this defense. Indorsers, persons

negotiating by deliver and acceptors are warrantors of the genuineness of

the signatures on the instrument. In bearer instruments, the signature of the

payee or holder is not necessary to pass title to the instrument. Hence, when

the indorsement is a forgery, only the person whose signature is forged can

raised the defense of forgery even against a holder in due course.

(Associated Bank v. Court of Appeals, et al., supra)

d. Effects of a forged indorsement on an instrument payable to order.

1) Where the instrument is payable to order at the time of the forgery, the

signature of the rightful holder is essential to transfer title to the same

instrument. When the holder‟s indorsement is forged all parties prior to the

forgery may raise the real defense of forgery against all parties subsequent

thereto. 2) An indorser of an order instrument warrants “that the instrument

is genuine and in all respects what it purports to be; that he has good title to

it; that all prior parties had capacity to contract; and that the instrument is at

the time of his indorsement valid and subsisting.” He cannot interpose thedefense that signatures prior to him are forged.

3) A collecting bank where a check is deposited and which indorses the

check upon presentment with the drawee bank is a general indorser which

warrants the genuineness of the instrument. So, even if the indorsement on

the check deposited by the bank‟s client is forged, the collecting bank is

bound by its warranties as an indorser and cannot set up the defense of

forgery as against the drawee bank. Since a forged indorsement isinoperative, the collecting bank had no right to be paid by the drawee bank.

The collecting bank must necessarily return the money to the drawee bank

because it was paid wrongfully. This liability scheme operates without regard

to fault on the part of the collecting/presenting bank. Even if it was not

negligent, it would still be liable to the drawee bank because of his

indorsement. 4) The collecting bank or last endorser generally suffers the

loss because it has the duty to ascertain the genuineness of all prior


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endorsements considering that the act of presenting the check for payment

to the drawee is an assertion that the party making the presentment had

done its duty to ascertain the genuineness of the endorsements. 5)

Moreover, the collecting bank is made liable because it is privy to the

depositor who negotiated the check. The bank knows him, his address and

history because he is a client. It has taken a risk on the deposit. The bank is

also in a better position to detect forgery, fraud or irregularity in the

endorsement. 6) The drawee bank is not similarly situated as the collecting

bank because the drawee bank makes no warranty as to the genuineness of

the endorsements. The drawee bank‟s duty is but to verify the genuineness

of the drawer‟s signature and not of the endorsement because the dr awer is

its client. The drawee bank is under strict liability to pay the check to the

order of the payee. The drawer‟s instructions are reflected on the face and

by the terms of the check. Payment under a forged endorsement is not to

the drawer‟s order. When the drawee bank pays a person other than thepayee, it does not comply with the terms of the check and violates its duty to

charge its customer‟s (the drawer‟s) account only for properly payable items.

Where the drawee bank did not pay a holder or other person entitled to

receive payment, it has no right to reimbursement from the drawer. The

general rule then is that the drawee bank may not debit the drawer‟s account

and is not entitled to


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indemnification from the drawer. The risk of loss must perforce fall on the

drawee bank. 7) The chain of liability does not end with the drawee bank.

While the drawee bank may not debit the drawer‟s account, it may generally

pass liability back through the collection chain to the party who took from the

forger and. of course, to the forger himself, if available. The drawee bank

can seek reimbursement or a return of the amount it paid from the

presentor/collecting bank or person. Eventually, the loss falls on the party

who took the check from the forger (the collecting bank), or on the forger

himself. Hence, the drawee bank can recover the amount paid on the check

bearing the forged endorsement from the collecting bank. 8) A drawee bank

has the duty to promptly inform the presentor/collecting bank of the forgery

upon discovery. If the drawee bank delays in informing the

presentor/collecting bank of the forgery, thereby depriving said

presentor/collecting bank of the right to recover from the forger, the drawee

bank is deemed negligent and can no longer recover from thepresentor/collecting bank. 9) If the drawee bank can prove a failure by the

customer/drawer to exercise ordinary care that substantially contributed to

the making of the forged signature, the drawer is precluded from asserting

the forgery as a defense. If at the same t ime the drawee bank was also

negligent to the point of substantially contributing to the loss, then such loss

from the forgery can be apportioned between the negligent drawer and the

negligent bank. (Associated Bank, supra)

19

insure and to distribute the cost among its customers who use checks

makes the drawee an ideal party to spread the risk to insurance. (Samsung

Construction Company Philippines, Inc., v. Far East Bank and Trust

Company, et al., G. R. No. 129015, August 13, 2004) g. Bank liability

attaches even if not negligent. The bank‟s liability attaches even if it exerts

due diligence and care in preventing such faulty discharge. Forgeries often

deceive the eye of the most cautious experts, and when a bank has been so

deceived, it is a harsh rule which compels it to suffer although no one has

suffered by its being deceived. The forgery may be so bear like the genuine

as to defy detection by the depositor himself, and yet the bank is liable to the

depositor if it pays the check. .(Samsung Construction Company Philippines,

Inc., v. Far East Bank and Trust Company, et al., G. R. No. 129015, August

13, 2004 citing various authorities) If a loss, which must be borne be by one

or two innocent persons, can be traced to the neglect or fault of either, such

loss would be borne by the negligent party, even if innocent of intentional

fraud. (PNB v. National City Bank of New York, 63 Phil. 711 (1936) The

bank is so situated that it would have been the last bulwark in the detection

of the forgery.

ILLUSTRATIVE PROBLEM: RIGHTS OF PARTIES IN FORGED

INDORSEMENT OF PROMISSORY NOTE PAYABLE TO BEARER. OR OF

BEARER BILL OF EXCHANGE.

e. Effects where the drawer‟s signature was forged.

The drawer can recover from the drawee bank. No drawee bank has theright to pay a forged check. If it does, it shall have to recredit the amount of

the check to the amount of the drawer. The liability chain ends with the

drawee bank whose responsibility it is to know the drawer‟s signature since

the latter is its customer. (Associated Bank, supra)


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f. Rationale for bank‟s liability if it pays on a forged signature. If payment is

made the drawee cannot charge the

drawer‟s account. The traditional justification for the result is that the drawee

is in a superior position to detect forgery because he has the maker‟s

signature and is expected to know and compare it. The rule has a healthycautionary effect on banks by encouraging care in the comparison of the

signatures against those on the signature cards they have on file. Moreover,

the very opportunity of the drawee to

negotiates the note to Amboy by mere delivery thence to Raymond, thence

to Bunny, thence to Katrina. The instrument was lost and George who found

the note placed a signature purporting that of Kaktrina and negotiates thenote to Lina by mere delivery such that Lina is a holder in due course. May

Lina proceed against Nini, Raymond, Bunny and Katrina ? SUGGESTED

ANSWER: Yes. Reason: Forged indorsement is not necessary to the title of

the holder, Lina, because the instrument is a bearer instrument that passes

title by mere delivery. Supposing Lina is not a holder in due course may prior

parties be held liable ? SUGGESTED ANSWER: Yes, but not against Nellie

whose signature was forged. Reason: Estoppel.


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NOTES AND COMMENTS: a. Material alteration. An alteration is said to be

material

if it alters the effect of the instrument. It means an unauthorized change inan 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 he obligation

P267,692.50 representing the aggregate value of three checks payable to

him or his order but which were credited to Annabelle‟s account with BPI,

without his knowledge and endorsement. Consequently, BPI froze anotheraccount of Annabelle, not the account in which Julio‟s checks were

erroneously credited, since this


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21

account was already closed or had insufficient balances. It is from

Annabelle‟s account that Julio was paid. Thus, Annabelle sued BPIdemanding for the return of the P267,692.50 and damages. Is the court

correct in awarding the return to Annabelle of the amount debited, and in

awarding damages in her favor ? SUGGESTED ANSWER: The court erred

in ordering the return but was correct in awarding damages. It is clear that

there was no transfer of ownership of the check to Annabelle because of the

lack of indorsement. Order instruments are to be transferred only by

endorsement coupled with delivery. Thus, Annabelle was not entitled to the

check as ownership did not flow to her because of the lack of indorsement.

While it is true that BPI made a mistake in crediting Annabelle‟s account,

and it warranted “All prior endorsements and/or lack of endorsementsguaranteed,” as the collecting bank it had the right to debit Annabelle‟s other

account because it had the right of set-off. Annabelle has a right to damages

because had BPI adhered to the diligence expected of one engaged in the

banking business it would have avoided the incident and the damages

suffered by Annabelle. This is so even if BPI‟s negligence was not attended

with malice and bad faith. (Bank of

Philippine Islands, v. Court of Appeals, et al., G.R. No. 136202, January 25,

2007)

19. Ford Philippines, Inc. issued various crosschecks drawn against

CITIBANK, N.A., with the Commissioner of Internal Revenue. It appears that

Rivera Ford‟s General Ledger Accountant, prepared checks for payment to

the BIR. Instead, however, of delivering the same to the payee, Rivera

passed on the checks to Castro who was a pro-manager of the San Andres

Branch of PCIB. In connivance with Dulay, PCIB‟s Asst. Manager at its

Meralco Branch, Castro himself subsequently opened a Checking Account

in a name of a fictitious person denominated as “Reynaldo Reyes” in the

Meralco Branch of PCIBank where Dulay works as Asst. Manager. Thus, the

syndicate succeeded in encashing the checks and appropriating the value.

As a result of the BIR did not receive the tax payment, and Ford was forced

to pay the tax anew. Ford filed suit to recover from the drawee CITIBANK,

N.A. and the collecting bank PCIBank the value of the checks. Has Ford the

right to recover from the collecting bank and the drawee bank the value of

the checks intended as payment to the Commissioner of Internal Revenue.

SUGGESTED ANSWER: Yes. Ford could recover against CITIBANK, N.A.,

the drawee bank, and PCIBank, the collecting bank. However, Ford is guilty

of contributory negligence which could serve to limit the liability of the twobanks. PCIBank, the collecting bank, is liable because its employees were

able to perpetrate the scam in the apparent course of their employment. A

bank holding out its officers and agents as worthy of confidence will not be

permitted to shirk its responsibilities for fraud committed by these employees

even though no benefit accrued to the bank therefrom. Furthermore, Sec.

531 of CB Circular No. 580, Series of 1977 provides that any theft affecting

items in transit for clearing shall be to the account of the sending bank in this

case, PCIBank. CITIBANK, N.A., the drawee bank, is liable because it did

not discover the irregularity seasonably constituting negligence in its duty toperform which was incumbent upon it, which is to ensure that the amount of

the checks should be paid only to its designated payee. Ford is guilty of

contributory negligence which would mitigate the bank‟s liability. It failed as

the depositor to examine its passbook, statements of account, and cancelled

checks and to give notice within a reasonable time (or as required by

statute) of any discrepancy which it may in the exercise of due care and

diligence find therein. (PCIB v. Court of Appeals, et al.,


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G.R. Nos. 121413, 121479 & 128704, January 29, 2001)

NOTES AND COMMENTS: a. Forgery committed by drawer-payor‟s

confidential employee does not automatically result to bank‟s absolution.The mere fact that the forgery was committed by a

drawer-payor‟s confidential employee or agent, who by virtue of his position

had unusual facilities for perpetrating the fraud and imposing the forged

paper upon the bank, does not entitle the bank to shift the loss to the

drawer-payor, in the absence of some circumstance raising estoppel against

the drawer. the rule likewise applies to checks


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fraudulently negotiated or diverted by the confidential employees who hold

them in their possession. (PCIB v. Court of Appeals, et al., G.R. Nos.

121413, 121479 & 128704, January 29, 2001) The bare fact that the forgery

was committed by an employee of the party whose signature was forged

does not necessarily imply that such party‟s negligence was the cause for

the forgery. Employers do not possess the preternatural gift of cognition as

to the evil that may lurk within the hearts and minds of their employees.

(Samsung Construction Company Philippines, Inc. v. Far East Bank and

Trust Company, et al., G. R. No. 129015, August 13, 2004)

22

drawee were not altered. The intended payee was the same. The sum of

money due to the payee remained the same. An innocent alteration

(generally, changes on items other than those required to be stated under

Sec. 1, N.I.L.) and spoliation (alterations done by a stranger) will not avoid

the instrument, but the holder may enforce it only according to its original

tenor. (Vitug cited in Philippine National Bank v. Court of

Appeals, et al., 256 SCRA 491; International Corporate Bank, Inc. v. Court

of Appeals, et al., G. R. No. 129910, September 5, 2006 )

b. Relationship between payee and collecting bank.

The relationship between the payee or holder of commercial paper and the

bank to which it is sent for collection is, in the absence of agreement to the

contrary, that of principal and agent. A bank which receives such paper for

collection is the agent of the payee or holder. (PCIB v. Court of Appeals, et

al., G.R. Nos. 121413, 121479 & 128704, January 29, 2001)

NOTES AND COMMENTS: a. The salary check of a government officer oremployee does not belong to him before it is physically delivered to him.

Until that time the check belongs to the

government. Under Sec. 16 of the Negotiable Instruments Law, every

contract on a negotiable instrument is incomplete and revocable until

delivery of the instrument for the purpose of giving effect thereto. As

ordinarily understood, delivery means the transfer of the possession of the

instrument by the maker or drawer with intent to transfer title to the payee

and recognize him as the holder thereof. (De la Victoria vs. Burgos, et al.,

245 SCRA 374)

20. A check with serial number 7-3666-223-3, dated August 7, 2005 in the

amount of P97,650.00 was issued by "A" to "X" Marketing drawn against DE

Bank. the check clearly shows the name of "A" printed on its face. On

August 11, 2005, "X" Marketing a client of "R" Bank deposited the

questioned check in its savings account in said bank. In turn, "R" Bank

deposited the check with "Y" Bank which, in turn sent the check to DE Bank

for clearing. DE Bank cleared the check as good and thereafter, "Y" Bankcredited "R" Bank‟s account for the amount stated in the check. However, on

August 30, 2005, DE Bank returned the check to "Y" Bank and debited its

account for the amount covered by the check because there was a “material

alternation” of the check‟s number. "Y" Bank in turn debited "R" Bank‟s

account, and sent the check back to DE Bank. DE Bank however returned

the check to "Y" Bank. "R" Bank could not debit "X" Marketing‟s account

which was already closed. Was the alteration of the serial number of the


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check a material alteration affecting the negotiability of the check ?

SUGGESTED ANSWER: No, the alteration of the serial number is

immaterial or innocent alteration. The aforementioned alteration did not

change the relations between the parties. the name of the drawer and the

T.

a.

BUT

NOT

DELIVERED

Delivery completes the contract 1) Between immediate and remote parties

2) Delivery effectual b. If under authority 1) To a holder in due course a)

Valid delivery presumed b) Prior parties bound 2) If delivery conditional a)Prior parties not bound 21. A. Francisco Realty and Development

Corporation (AFRDC) represented by its president Adelia as well as Herby

Commercial and Construction Corporation (HCCC) represented by its

president Jaime entered into a contract with GSIS for the construction of

housing units and land development. GSIS partially paid on the contract the

amount of P500,000.00. Jaime discovered that from the GSIS payment

Adelia had received and signed seven


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23

checks of various dates and amounts drawn against IBAA and payable to

HCCC for completed and delivered work under the contract. Adelia forgedJaime‟s signature without his knowledge or consent, at the dorsal portion of

the said checks to make it appear that HCCC had indorsed the checks, and

then deposited the checks in her IBAA savings account. Adelia now claims

that she was authorized to sign Jaime‟s name on the check by virtue of a

Certification executed by Jaime in her favor giving her authority to collect all

the receivables of HCCC from GSIS, including the questioned checks. Will

the defense prosper ? SUGGESTED ANSWER: No. Where any person is

under obligation to indorse in a representative capacity, he may indorse in

such terms as to negative personal liability. An agent, when so signing,

should indicate that he is merely signing in behalf of the principal and mustdisclose the name of his principal; otherwise he shall be held personally

liable. Even assuming that Adelia was authorized by HCCC to sign Jaime‟s

name, still, Adelia, did not indorse the instrument in accordance with law.

Instead of signing Jaime‟s name, Adelia should have signed her own name

and expressly indicated that she was signing as an agent of HCCC.

(Francisco v. Court of Appeals, et al., G.R. No. 116320, November 29, 1999)

Brad Jolie makes a promissory note payable to bearer and delivers the

same to Angelina Pitt. Angelina Pitt, however, endorses it to X in this

manner: “Payable to X. Signed: Angelina.” Later, X, without endorsing thepromissory note, transfers and delivers the same to Michael. The note is

subsequently dishonored by Brad Jolie. May Michael proceed against Brad

Jolie for the note ? SUGGESTED ANSWER: Yes. The character of the note

being a bearer instrument is not affected by the special indorsement made

by Angelina Pitt. The note remained a bearer instrument and may be

negotiated by merely delivery, as it was negotiated to Michael, who became

the holder. Michael

being the holder may therefore proceed against the issuer of the note, Brad

Jolie.

ling to lend to your client the sum of P1,500,000.00

payable in five (5) years with interest at 12% per annum secured only by a

surety bond. Suppose the bank requires your client to secure the signature

of a

Documents

Domondon Merc 2007 Pre-Week