NEGOTIABLE INSTRUMENTS LAW PDF

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NEGOTIABLE INSTRUMENTS LAW I. INTRODUCTION provide that an accommodation party is one who has signed an instrument as maker, drawer, acceptor of indorser without receiving value A. GOVERNING LAWS – ACT No. 2031 effective June 2, 1911 (which therefor, but is held liable on the instrument to a holder ...

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NEGOTIABLE INSTRUMENTS LAW I.

INTRODUCTION

A.

GOVERNING LAWS – ACT No. 2031 effective June 2, 1911 (which amended some of the provisions of the Rules of the Law Merchant), the Code of Commerce and the Civil Code.

B.

APPLICABILITY OF THE NEGOTIABLE INSTRUMENTS LAW – the Act applies only to negotiable instruments or those that meet the requirements under Sec. 1 of Act No. 2031. KRAUFFMAN VS. PNB (GR No. 16454, Sept. 29, 1921) - Herein plaintiff was entitled to P98,000 of the Philippine Fiber and Produce Company’s dividend for the year 1917. George B. Wicks, treasurer of the Company, requested that a telegraphic transfer of $45,000 to the plaintiff in New York City. Wicks drew and delivered a check for the amount of P90,355.50, total cost of said transfer, including exchange and cost of message which was accepted by the officer selling the exchange in payment of the transfer in question. As evidence of this transaction a document was made out and delivered to Wicks, which is referred to by the bank's assistant cashier as its official receipt. On the same day the Philippine National Bank dispatched to its New York agency a cablegram for $45,000. However, the bank's representative in New York replied suggesting the advisability of withholding this money from Kauffman. The PNB dispatched to its New York agency another message to withhold the Kauffman payment as suggested. Meanwhile, upon advice of Wicks that the money has been placed to his credit, Kauffman presented himself at the office of the Philippine National Bank in New York and demanded the money. By this time, however, the message from the Philippine National Bank directing the withholding of payment had been received in New York, and payment was therefore refused. Thus the present complaint to recover said sum, with interest and costs. ISSUE: WON Act No. 2031 is applicable in the above case? HELD: NO. The provisions of the Negotiable Instruments Law to come into operation, there must be a document in existence of the character described in section 1 of the Law; and no rights properly speaking arise in respect to said instrument until it is delivered. In the case before us there was an order transmitted by the defendant bank to its New York branch, for the payment of a specified sum of money to George A. Kauffman. But this order was not made payable "to order or "to bearer," as required in Section 1(d) of that Act; and inasmuch as it never left the possession of the bank, or its representative in New York City, there was no delivery in the sense intended in Section 16 of the same Law. In this connection it is unnecessary to point out that the official receipt delivered by the bank to the purchaser of the telegraphic order, and already set out above, cannot itself be viewed in the light of a negotiable instrument, although it affords complete proof of the obligation actually assumed by the bank. GSIS VS. CA (GR No. L-40824, Feb. 23, 1989) - Private respondents, Mr. and Mrs. Isabelo R. Racho, together with the Lagasca spouses, executed a deed of mortgage in favor of petitioner GSIS. Subsequently, another deed of mortgage was executed in connection with earlier two loans granted. A parcel of land, co-owned by said mortgagor spouses, was given as security under the aforesaid two deeds and they also executed a "promissory note". The Lagasca spouses executed an instrument denominated "Assumption of Mortgage" under which they obligated themselves to assume obligation to the GSIS. This undertaking was not fulfilled. Upon failure of the mortgagors to comply with the conditions of the mortgage, particularly the payment of the amortizations due, GSIS extra-judicially foreclosed the mortgage and caused the mortgaged property to be sold at public auction. Private respondents filed a complaint against the petitioner and the Lagasca spouses praying that the extrajudicial foreclosure be declared null and void. In their aforesaid complaint, they alleged that they signed the mortgage contracts not as sureties or guarantors for the Lagasca spouses but they merely gave their common property to the said co-owners who were solely benefited by the loans from the GSIS. Trial court dismissed the case. CA reversed decision stating that the respondents are that only of an accommodation party. ISSUE: WON the NIL is applicable to the promissory note and mortgage deed? HELD: No. Both parties relied on the provisions of Section 29 of Act No. 2031, otherwise known as the Negotiable Instruments Law, which

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provide that an accommodation party is one who has signed an instrument as maker, drawer, acceptor of indorser without receiving value therefor, but is held liable on the instrument to a holder for value although the latter knew him to be only an accommodation party. This approach of both parties appears to be misdirected and their reliance misplaced. The promissory note hereinbefore quoted, as well as the mortgage deeds subject of this case, are clearly not negotiable instruments. These documents do not comply with the fourth requisite to be considered as such under Section 1 of Act No. 2031 because they are neither payable to order nor to bearer. The note is payable to a specified party, the GSIS. Absent the aforesaid requisite, the provisions of Act No. 2031 would not apply, governance shall be afforded, instead, by the provisions of the Civil Code and special laws on mortgages. C.

CONCEPT OF NEGOTIABLE INSTRUMENTS 1.

DEFINITION: Negotiable Instruments are written statements signed by the maker or drawer containing an unconditional promise or order to pay a sum certain money, payable on demand or at a fixed or determinable future time, to order or to bearer.

2.

FUNCTIONS OF NEGOTIABLE INSTRUMENTS a. Substitute for money - although they are not considered legal tender. One of its distinct characteristics is its negotiability which allows it to go from hand to hand in the commercial markets and to take the part of money in commercial transactions free from all personal defenses available against the original owner. b. Media of exchange – they thus increase the purchasing medium in circulation. They are a safe and convenient means of doing business that eliminate the risk of dealing in cash. c. Medium of credit transactions – they allow men of undoubted credit (such as those with illiquid properties) to carry on business enterprise upon their promissory notes, bills of exchange and checks knowing that other businessmen will treat these promises as cash. Checks are primarily used for immediate payment (substitute for money); while ordinary bill of exchange and the promissory note are intended for the circulation of credits (credit instruments)

3.

LEGAL TENDER – that amount which the creditor can be compelled to accept as payment.

Sec. 52, New Central Bank Act

Sec. 60

Legal Tender Power. — All notes and coins issued by the

Bangko Sentral shall be fully guaranteed by the Government of the Republic of the Philippines and shall be legal tender in the Philippines for all debts, both public and private: Provided, however, That, unless otherwise fixed by the Monetary Board, coins shall be legal tender in amounts not exceeding Fifty pesos (P50.00) for denominations of Twentyfive centavos and above, and in amounts not exceeding Twenty pesos (P20.00) for denominations of Ten centavos. Legal Character. — Checks representing demand deposits do not have legal tender power and their acceptance in the payment of debts, both public and private, is at the option of the creditor: Provided, however, That a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to his account

TIBAJIA VS. CA (GR No. 100290, June 4, 1993) - A writ of attachment was issued by the trial court in connection to the collection of a sum of money filed by Eden Tan against the Tibajia spouses. The fund was then on deposit with the cashier of the Regional Trial Court of Pasig. The Tibajia spouses thereafter delivered to the Deputy Sheriff the total money judgment in the form of Cashier's Check worth P262,750.00. However, Eden Tan, refused to accept the payment made and instead insisted that the garnished funds deposited with the cashier of the Regional Trial Court

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 NEGOTIABLE INSTRUMENTS LAW (Act No. 2031) based on the book of Aquino and De Leon and Audio Lecture of Dean Sundiang

of Pasig be withdrawn to satisfy the judgment obligation. Petitioners filed a motion to lift the writ of execution on the ground that the judgment debt had already been paid but was denied by the trial court on the ground that payment in cashier's check is not payment in legal tender. When the petitioners' motion for reconsideration was denied, the spouses Tibajia filed herein petition. ISSUE: WON the delivery of the cashier's check is considered payment in legal tender? HELD: No. A check, whether a manager's check or ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor. (Philippine Airlines, Inc. vs. Court of Appeals and Roman Catholic Bishop of Malolos, Inc. vs. Intermediate Appellate Court). The ruling in the two (2) abovementioned cases decided by the Supreme Court applies the statutory provisions which lay down the rule that a check is not legal tender and that a creditor may validly refuse payment by check, whether it be a manager's, cashier's or personal check. PAL VS. CA (GR No. 49188, Jan. 30, 1990) - CFI Manila ruled in favor of Amelia Tan [under the name and style of Able Printing Press] in a complaint for damages against petitioner Philippine Airlines. On appeal, the CA upheld the decision of the CFI with minor modifications as to the damages to be awarded. The corresponding writ of execution was duly referred to Deputy Sheriff Emilio Z. Reyes for enforcement with checks in the name of the latter. Four months later, Amelia Tan moved for the issuance of an alias writ of execution since the judgment remained unsatisfied. The petitioner filed an opposition to the motion for the issuance of an alias writ of execution stating that it had already fully paid its obligation to plaintiff through the deputy sheriff of the respondent court, Emilio Z. Reyes, as evidenced by cash vouchers properly signed and received by said Emilio Z. Reyes. On March 3,1978, the Court of Appeals denied the issuance of the alias writ for being premature, ordering the executing sheriff Emilio Z. Reyes to appear with his return and explain the reason for his failure to surrender the amounts paid to him by petitioner PAL. However, the order could not be served upon Deputy Sheriff Reyes because he already absconded or disappeared. ISSUE: WON the payment rendered through a check made by PAL to the absconding sheriff in his name operate to satisfy the judgment debt? HELD: Under ordinary circumstances, payment by the judgment debtor to the sheriff should be valid payment to extinguish the judgment debt. There are circumstances, however, which compel a different conclusion such as when the payment made by the petitioner to the absconding sheriff was not in cash or legal tender but in checks. The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired. In the meantime, the action derived from the original obligation shall be held in abeyance. Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does not, by itself, operate as payment. A check, whether a manager’s check or ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor. Mere delivery of checks does not discharge the obligation under a judgment. The obligation is not extinguished and remains suspended until the payment by commercial document is actually realized (Art. 1249, Civil Code, par. 3). PAL created a situation which permitted the said Sheriff to personally encash said checks and misappropriate the proceeds thereof to his exclusive personal benefit. For the prejudice that resulted, the petitioner himself must bear the fault. As between two innocent persons, one of whom must suffer the consequence of a breach of trust, the one who made it possible by his act of confidence must bear the loss. D.

CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS 1.

2.

NEGOTIABILITY – is that quality or attribute of a bill or note whereby it may pass from one person to another similar to money, so as to give the holder in due course the right to collect on the instrument the sum payable for himself free from any defect in the title of any of the prior parties or defenses available to them among themselves. ACCUMULATION OF SECONDARY CONTRACTS – as they are transferred from one person to another. Once an instrument is issued, additional parties can become involved.

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E.

INCIDENTS IN THE LIFE OF NEGOTIABLE INSTRUMENTS PROMISSORY NOTE BILL OF EXCHANGE Preparation & Signing Issuance Negotiation Presentment for Acceptance Acceptance Dishonor by Non-acceptance Presentment for payment Dishonor by Non-payment Notice of Dishonor Payment Discharge

F.

G.

KINDS OF NEGOTIABLE INSTRUMENTS 1.

PROMISSORY NOTES (Sec. 184, NIL) – An unconditional promise in writing mace by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer. a. Parties to a Negotiable Promissory Note are (1) Maker and (2) Payee; b. Kinds of Negotiable Promissory Note include certificates of deposits, bank notes, due bills and bonds.

2.

BILLS OF EXCHANGE (Sec. 126, 185, NIL) – An unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or bearer. a. Parties to a Bill of Exchange are (1) Drawer, (2) Payee and (3) Drawee; b. Kinds of Bills of Exchange include drafts, trade acceptances and banker’s acceptances.

WHEN BILLS TREATED AS NOTES

Sec. 130

Sec. 17(e)

When bill may be treated as promissory note. - Where in a bill the drawer and drawee are the same person or where the drawee is a fictitious person or a person not having capacity to contract, the holder may treat the instrument at his option either as a bill of exchange or as a promissory note Construction where instrument is ambiguous. - Where the language of the instrument is ambiguous or there are omissions therein, the following rules of construction apply: (e) Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election;

H.

BILLS AND NOTES DISTINGUISHED

PROMISSORY NOTES 2 parties – Maker and Payee Maker cannot be the payee There is unconditional PROMISE by the maker Presentment for payment without prior acceptance Liability of the maker is primary and absolute I.

BILLS OF EXCHANGE 3 parties – Drawer, Payee and Drawee Drawer and payee may be the same person There is unconditional ORDER by the drawer to the drawee Some Bills need prior acceptance by the drawee before presentment for payment Liability of the drawer is secondary and conditional

NEGOTIABLE INSTRUMENTS COMPARE WITH OTHER PAPERS (Negotiability vs. Assignability) SESBRENO VS. CA (GR No. 89252, May 24, 1993) - Petitioner Sesbreno made a money market placement in the amount of P300,000 with the

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 NEGOTIABLE INSTRUMENTS LAW (Act No. 2031) based on the book of Aquino and De Leon and Audio Lecture of Dean Sundiang

Philippine Underwriters Finance Corporation (PhilFinance), with a term of 32 days. PhilFinance issued to Sesbreno (1) the Certificate of Confirmation of Sale of a Delta Motor Corporation Promissory Note, (2) the Certificate of Securities Delivery Receipt indicating the sale of the note with notation that said security was in the custody of Pilipinas Bank, and (3) post-dated checks drawn against the Insular Bank of Asia and America for P304,533.33 payable on March 13, 1981. The checks were dishonored for having been drawn against insufficient funds. Pilipinas Bank never released the note, nor any instrument related thereto, to Sesbreno; but Sesbreno learned that the Delta Promissory Note maturing on 6 April 1981, has a face value of P2,300,833.33 with PhilFinance as payee and Delta Motors as maker; and was stamped “non-negotiable” on its face. PhilFrance was later on placed under the custody of the Securities and Exchange Commission. As Sesbreno was unable to collect his investment and interest thereon, he filed an action for damages against Delta Motors and Pilipinas Bank. Delta Motors contends that said promissory note was not intended to be negotiated or otherwise transferred by Philfinance as manifested by the word "non-negotiable" stamped across the face of the Note. The trial court and the CA dismissed petitioner’s complaint and appeal, respectively, for lack of cause of action. If anything, petitioner has a cause of action against Philfrance, which, however, was not impleaded. ISSUE: WON the non-negotiability of a promissory note prevents its assignment? HELD: No. A negotiable instrument, instead of being negotiated, may also be assigned or transferred. The legal consequences of negotiation and assignment of the instrument are different. A nonnegotiable instrument may not be negotiated but may be assigned or transferred, absent an express prohibition against assignment or transfer written in the face of the instrument. The subject promissory note, while marked "non-negotiable," was not at the same time stamped "non-transferable" or "non-assignable." It contained no stipulation which prohibited Philfinance from assigning or transferring such note, in whole or in part. J.

II. FORM AND INTERPRETATION OF NEGOTIABLE INSTRUMENTS A.

CALTEX VS. COURT OF APPEALS (GR No. 97753, Aug. 10, 1992) Respondent bank issued 280 certificates of time deposit (CTDs) in favor of Angel dela Cruz who delivered the same to herein petitioner in connection with his purchased fuel products. Eventually, dela Cruz executed and delivered an Affidavit of Loss for the reissuance of the CTDs. Dela Cruz later on obtained a loan from respondent bank and negotiated the said CTDs, executing a Deed of Assignment of Time Deposit which stated, among others, that the bank has full control of the indicated time deposits from and after date of the assignment and may set-off such and apply the same to the payment of amount or amounts that may be due on the loan upon maturity. Petitioner then went to the Sucat branch for verification of the CTDs declared lost, alleging that the same were delivered to herein petitioner as “security for purchases made with Caltex Philippines, Inc.” and requested that the CTDs be pre-terminated, which was refused by the respondent bank due to the failure of petitioner to present requested documents to prove such allegation. Petitioner then filed a complaint in the RTC, which was dismissed. On appeal, the CA affirmed the decision of the RTC. Thus, the present petition. ISSUE: WON the CTDs are considered negotiable? HELD: Yes. A sample text of the certificates of time deposit is reproduced below: SECURITY BANK AND TRUST COMPANY 6778 Ayala Ave., Makati No. 90101 Metro Manila, Philippines SUCAT OFFICE P4,000.00 CERTIFICATE OF DEPOSIT Rate 16% Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____ This is to Certify that B E A R E...