People of the Phils. v. Gilbert Reyes Wagas, G.R. No. 157943, September 4, 2013

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Facts: Gilbert Wagas ordered from Alberto Ligaray 200 bags of rice over the telephone. As payment, Wagas issued a check in favor of Ligaray. When the check was deposited it was dishonored due to insufficiency of funds. Ligaray notified Wagas and demanded payment from the latter but Wagas refused and failed to pay the amount, Ligaray filed a complaint for estafa before the RTC. RTC convicted Wagas of estafa because the RTC believed that the prosecution had proved that it was Wagas who issued the dishonored check, despite the fact that Ligaray had never met Wagas in person. Hence, this direct appeal.

Issue: Whether or not Wagas is guilty beyond reasonable doubt

Held: No. The Supreme Court acquitted Wagas. The check delivered to Ligaray was made payable to cash. Under the Negotiable Instruments Law, this type of check was payable to the bearer and could be negotiated by mere delivery without the need of an indorsement. This rendered it highly probable that Wagas had issued the check not to Ligaray, but to somebody else like Cañada, his brother-in-law, who then negotiated it to Ligaray.1wphi1 Relevantly, Ligaray confirmed that he did not himself see or meet Wagas at the time of the transaction and thereafter, and expressly stated that the person who signed for and received the stocks of rice was Cañada.

It bears stressing that the accused, to be guilty of estafa as charged, must have used the check in order to defraud the complainant. What the law punishes is the fraud or deceit, not the mere issuance of the worthless check. Wagas could not be held guilty of estafa simply because he had issued the check used to defraud Ligaray. The proof of guilt must still clearly show that it had been Wagas as the drawer who had defrauded Ligaray by means of the check.

Firestone Tire & Rubber Co. of the Phils. vs., Court of Appeals, et. al., G.R. No. 113236, March 5, 2001

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FACTS: Fojas-Arca Enterprises Company maintained a special account with respondent Luzon Development Bank which authorized and allowed the former to withdraw funds from its account through the medium of special withdrawal slips.  Fojas-Arca purchased on credit products from Firestone with a total amount of P4,896,000.00.  In payment of these purchases, Fojas-Arca delivered to plaintiff six special withdrawal slips drawn upon the respondent bank.   In turn, these were deposited by the plaintiff with its current account with the Citibank.  All of them were honored and paid by the Luzon Development Bank.  However, in a subsequent transaction involving the payment of withdrawal slips by Fojas-Arca for purchases on credit from petitioner, two withdrawal slips for the total sum of P2,078,092.80 were dishonored and not paid by respondent bank for the reason “NO ARRANGEMENT”.

As a consequence, the Citibank debited Firestone’s account for the total sum of P2,078,092.80 representing the aggregate amount of the above-two special withdrawal slips. Under such situation, plaintiff averred that the pecuniary losses it suffered is caused by and directly attributable to defendants gross negligence. Hence, Firestone filed a case before the RTC, but such was dismissed. The case was appealed by the CA.

ISSUE:

Whether or not the acceptance and payment of the special withdrawal slips gives the impression that it is a negotiable instrument like a check?

HELD: No.

The essence of negotiability which characterizes a negotiable paper as a credit instrument lies in its freedom to circulate freely as a substitute for money. The withdrawal slips in question lacked this character.  As the withdrawal slips in question were non-negotiable,  the rules governing the giving of immediate notice of dishonor of negotiable instruments do not apply.

The respondent bank was under no obligation to give immediate notice that it would not make payment on the subject withdrawal slips. Citibank should have known that withdrawal slips were not negotiable instruments.  It could not expect these slips to be treated as checks by other entities.  Payment or notice of dishonor from respondent bank could not be expected immediately, in contrast to the situation involving checks. Citibank was not bound to accept the withdrawal slips as a valid mode of deposit.  But having erroneously accepted them as such, Citibank – and petitioner as account-holder – must bear the risks attendant to the acceptance of these instruments.

It bears stressing that Citibank could not have missed the non-negotiable nature of the withdrawal slips. The essence of negotiability which characterizes a negotiable paper as a credit instrument lies in its freedom to circulate freely as a substitute for money. The withdrawal slips in question lacked this character.

A bank is under obligation to treat the accounts of its depositors with meticulous care, whether such account consists only of a few hundred pesos or of millions of pesos. The fact that the other withdrawal slips were honored and paid by respondent bank was no license for Citibank to presume that subsequent slips would be honored and paid immediately. By doing so, it failed in its fiduciary duty to treat the accounts of its clients with the highest degree of care.

Romeo C. Garcia vs. Dionisio V. Llamas, G.R. No. 154127. December 8, 2003

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Facts: A complaint for sum of money was filed by respondent Dionisio Llamas against Petitioner Romeo Garcia and Eduardo de Jesus alleging that the two borrowed Php 400, 000 from him. They bound themselves jointly and severally to pay the loan on or before January 23, 1997 with a 15% interest per month. The loan remained unpaid despite repeated demands by respondent.

Petitioner resisted the complaint alleging that he signed the promissory note merely as an accommodation party for de Jesus and the latter had already paid the loan by means of a check and that the issuance of the check and acceptance thereof novated or superseded the note.

The trial court rendered a judgment on the pleadings in favor of the respondent and directed petitioner to pay jointly and severally respondent the amounts of Php 400, 000 representing the principal amount plus interest at 15% per month from January 23, 1997 until the same shall have been fully paid, less the amount of Php 120,000 representing interests already paid.

The Court of Appeals ruled that no novation, express or implied, had taken place when respondent accepted the check from de Jesus. According to the CA, the check was issued precisely to pay for the loan that was covered by the promissory note jointly and severally undertaken by petitioner and de Jesus. Respondent’s acceptance of the check did not serve to make de Jesus the sole debtor because first, the obligation incurred by him and petitioner was joint and several; and second, the check which had been intended to extinguish the obligation bounced upon its presentment.

Issues: (1) Whether or not there was novation of the obligation

(2) Whether or not the defense that petitioner was only an accommodation party had any basis.

Held: For novation to take place, the following requisites must concur: (1) There must be a previous valid obligation; (2) the parties concerned must agree to a new contract; (3) the old contract must be extinguished; and (4) there must be a valid new contract.

The parties did not unequivocally declare that the old obligation had been extinguished by the issuance and the acceptance of the check or that the check would take the place of the note.

(2) By its terms, the note was made payable to a specific person rather than bearer to or order—a requisite for negotiability. Hence, petitioner cannot avail himself of the NIL’s provisions on the liabilities and defenses of an accommodation party. Besides, a non-negotiable note is merely a simple contract in writing and evidence of such intangible rights as may have been created by the assent of the parties. The promissory note is thus covered by the general provisions of the Civil Code, not by the NIL.

Even granting that the NIL was applicable, still petitioner would be liable for the note. An accommodation party is liable for the instrument to a holder for value even if, at the time of its taking, the latter knew the former to be only an accommodation party. The relation between an accommodation party and the party accommodated is, in effect, one of principal and surety. It is a settled rule that a surety is bound equally and absolutely with the principal and is deemed an original promissory debtor from the beginning. The liability is immediate and direct.

Caltex (Phils.), Inc. vs. Court of Appeals and Security Bank and Trust Co. G.R. No. 97753, Aug. 10, 1992

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FACTS:

Security bank issued Certificates of Time Deposits to Angel dela Cruz.  The same were given by Dela Cruz to Caltex in connection to his purchase of fuel products of the latter.  On a later date, Dela Cruz approached the bank manager,  communicated  the  loss  of  the  certificates  and  requested  for  a reissuance.

Upon compliance with some formal requirements, he was issued replacements.  Thereafter, he secured a loan from the bank where he assigned the certificates as security.    Here  comes  the  petitioner, averred  that  the  certificates  were  not  actually  lost  but  were  given  as security for payment for fuel purchases.

The bank demanded some proof of the agreement but the petitioner failed to comply.    The loan matured and the time deposits were terminated and then applied to the payment of the loan.

Petitioner demands the payment of the certificates but to no avail.

ISSUE:

Whether or not the certificates of time deposits (CTDs) are negotiable instruments?

HELD:

Yes. The Court held that the CTDs are negotiable instruments. The CTDs in question undoubtedly meet the requirements of the law for negotiability.

The Negotiable Instruments Law provides, an instrument to be negotiable must conform to certain requirements, hence,

1. It must be in writing and signed by the maker or drawer;
2. Must contain an unconditional promise or order to pay a sum certain in money;
3. Must be payable on demand, or at a fixed or determinable future time;
4. Must be payable to order or to bearer; and
5. Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.

The documents provide that the amounts deposited shall be repayable to the depositor.  And who, according to the document, is the depositor? It is the “bearer.” The documents do not say that the depositor is Angel de la Cruz and that the amounts deposited are repayable specifically to him. Rather, the amounts are to  be repayable to the  bearer  of  the  documents  or,  for  that  matter,  whosoever  may  be  the bearer at the time of presentment.

If  it  was  really  the  intention  of  respondent  bank  to  pay  the  amount  to Angel de la Cruz only, it could have with facility so expressed that fact in clear and categorical terms in the documents, instead of having the word “BEARER” stamped on the space provided for the name of the depositor in each  CTD.  On  the  wordings  of  the  documents,  therefore,  the  amounts deposited  are  repayable  to  whoever  may  be  the  bearer  thereof.

Thus, petitioner’s aforesaid witness merely declared that Angel de la Cruz is the depositor  “insofar  as  the  bank  is  concerned,”  but  obviously  other  parties not  privy  to  the  transaction  between  them  would  not  be  in  a  position  to know that the depositor is not the bearer stated in the  CTDs. Hence, the situation  would require any party dealing with the CTDs to go behind the plain  import  of  what  is  written  thereon  to  unravel  the  agreement  of  the parties  thereto  through  facts  aliunde.  This  need  for  resort  to  extrinsic evidence  is  what  is  sought  to  be  avoided  by  the  Negotiable  Instruments Law  and  calls  for  the  application  of  the  elementary  rule  that  the interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity.

Consolidated Plywood, et. al. vs. IFC Leasing , G.R. No. 72593, April 30, 1987

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Facts: Consolidated Plywood Industries Inc. (CPII) is a corporation engaged in the logging business. It had for its program of logging activities for the year 1978 the opening of additional roads, and simultaneous logging operations along the route of said roads, in its logging concession area at Baganga, Manay, and Caraga, Davao Oriental.

For this purpose, it needed 2 additional units of tractors. Cognizant of CPII’s need and purpose, Atlantic Gulf & Pacific Company of Manila, through its sister company and marketing arm, Industrial Products Marketing (IPM), a corporation dealing in tractors and other heavy equipment business, offered to sell to CPII 2 “Used” Allis Crawler Tractors, 1 an HD-21-B and the other an HD-16-B. After conducting said inspection, IPM assured CPII that the “Used” Allis Crawler Tractors which were being offered were fit for the job, and gave the corresponding warranty of 90 days performance of the machines and availability of parts. With said assurance and warranty, and relying on the IPM’s skill and judgment, CPII through Henry Wee and Rodolfo T. Vergara, president and vice-president, respectively, agreed to purchase on installment said 2 units of “Used” Allis Crawler Tractors. It also paid the down payment of P210,000.00. On 5 April 1978, IPM issued the sales invoice for the 2 units of tractors. At the same time, the deed of sale with chattel mortgage with promissory note was executed.

Barely 14 days had elapsed after their delivery when one of the tractors broke down and after another 9 days, the other tractor likewise broke down. IPM sent to the jobsite its mechanics to conduct the necessary repairs, but the tractors did not come out to be what they should be after the repairs were undertaken because the units were no longer serviceable. Because of the breaking down of the tractors, the road building and simultaneous logging operations of CPII were delayed and Vergara advised IPM that the payments of the installments as listed in the promissory note would likewise be delayed until IPM completely fulfills its obligation under its warranty.

Since the tractors were no longer serviceable, on 7 April 1979, Wee asked IPM to pull out the units and have them reconditioned, and thereafter to offer them for sale. The proceeds were to be given to IFC Leasing and the excess, if any, to be divided between IPM and CPII which offered to bear 1/2 of the reconditioning cost. No response to this letter was received by CPII and despite several follow-up calls, IPM did nothing with regard to the request, until the complaint in the case was filed by IFC Leasing against CPII, Wee, and Vergara. The complaint was filed by IFC Leasing against CPII, et al. for the recovery of the principal sum of P1,093,789.71, accrued interest of P151,618.86 as of 15 August 1979, accruing interest there after at the rate of 12% per annum, attorney’s fees of P249,081.71 and costs of suit.

CPII, et al. filed their amended answer praying for the dismissal of the complaint. In a decision dated 20 April 1981, the trial court rendered judgment, ordering CPII, et al. to pay jointly and severally in their official and personal capacities

On 17 July 1985, the Intermediate Appellate Court issued the decision affirming in toto the decision of the trial court.

Issue: Whether the promissory note in question is a negotiable instrument.

Held: No. The pertinent portion of the note provides that “”FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the INDUSTRIAL PRODUCTS MARKETING, the sum of P1,093,789.71, Philippine Currency, the said principal sum, to be payable in 24 monthly installments starting July 15, 1978 and every 15th of the month thereafter until fully paid.” Considering that paragraph (d), Section 1 of the Negotiable Instruments Law requires that a promissory note “must be payable to order or bearer,” it cannot be denied that the promissory note in question is not a negotiable instrument.

The instrument in order to be considered negotiable must contain the so called “words of negotiability” — i.e., must be payable to “order” or “bearer.” These words serve as an expression of consent that the instrument may be transferred. This consent is indispensable since a maker assumes greater risk under a negotiable instrument than under a non- negotiable one. Without the words “or order” or “to the order of,” the instrument is payable only to the person designated therein and is therefore non-negotiable. Any subsequent purchaser thereof will not enjoy the advantages of being a holder of a negotiable instrument, but will merely “step into the shoes” of the person designated in the instrument and will thus be open to all defenses available against the latter.

Therefore, considering that the subject promissory note is not a negotiable instrument, it follows that IFC Leasing can never be a holder in due course but remains a mere assignee of the note in question. Thus, CPII may raise against IFC Leasing all defenses available to it as against IPM. This being so, there was no need for CPII to implead IPM when it was sued by IFC Leasing because CPII’s defenses apply to both or either of them.

Violago vs. BA Finance, G.R. No. 158262, July 21, 2008

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FACTS: 1983: Avelino, President of Violago Motor Sales Corporation (VMSC), offered to sell a Toyota Cressida Model 1983 to increase the sales quota to his cousin, Pedro and his wife, Florencia.

Spouses wanted to pay a down payment of PhP 60.5K while the balance would be financed by BA Finance. They agreed that the spouses would pay the monthly installments to BA Finance while Avelino would take care of the documentation and approval of financing of the car.

On August 4, 1983, the spouses and Avelino signed a promissory note under which they bound themselves to pay jointly and severally to the order of VMSC the amount of PhP 209,601 in 36 monthly installments of PhP 5,822.25 a month, the first installment to be due and payable on September 16, 1983.

Avelino prepared a Disclosure Statement of Loan/Credit Transportation which showed the net purchase price of the vehicle, down payment, balance, and finance charges.

VMSC then issued a sales invoice in favor of the spouses with a detailed description of the Toyota Cressida car.

In turn, the spouses executed a chattel mortgage over the car in favor of VMSC as security for the amount of PhP 209,601.

VMSC, through Avelino, endorsed the promissory note to BA Finance without recourse. After receiving the amount of PhP 209,601,

VMSC executed a Deed of Assignment of its rights and interests under the promissory note and chattel mortgage in favor of BA Finance.

Meanwhile, the spouses remitted the amount of PhP 60,500 to VMSC through Avelino

spouses were unaware that the same car had already been sold in 1982 to Esmeraldo Violago, another cousin of Avelino.

Since VMSC failed to deliver the car, Pedro did not pay any monthly amortization to BA Finance.

March 1, 1984: BA Finance filed with the RTC a complaint for Replevin with Damages against the spouses

RTC: favored BA finance: , however, declared that they are entitled to be indemnified by Avelino

CA: affirmed – promissory note was a negotiable instrument and that BA Finance was a holder in due course

ISSUE: W/N the holder of an invalid promissory note may be considered a holder in due course

HELD: YES. CA reversed because Avelino and VMSC are the same negotiable:

Section 1. Form of negotiable instruments. – 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) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.

Section 52. What constitutes a holder in due course.––A holder in due course is a holder who has taken the instrument under the following conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.

1. the “Promissory Note”, Exhibit “A”, is complete and regular;
2. the “Promissory Note” was endorsed by the VMSC in favor of the Appellee;
3. the Appellee, when it accepted the Note, acted in good faith and for value;  the Appellee was never informed, before and at the time the “Promissory Note” was endorsed to the Appellee, that the vehicle sold to the Defendants- Appellants was not delivered to the latter and that VMSC had already previously sold the vehicle to Esmeraldo Violago.

Although Jose Olvido mortgaged the vehicle to Generoso Lopez, who assigned his rights to the BA Finance Corporation (Cebu Branch), the same occurred only on May 8, 1987, much later than August 4, 1983, when VMSC assigned its rights over the “Chattel Mortgage” by the Defendants-Appellants to the Appellee. Hence, Appellee was a holder in due course

Since BA Finance is a holder in due course, petitioners cannot raise the defense of non-delivery of the object and nullity of the sale against the corporation.

VMSC is a family-owned corporation of which Avelino was president. Avelino committed fraud in selling the vehicle to petitioners, a vehicle that was previously sold to Avelino’s other cousin, Esmeraldo  Avelino clearly defrauded petitioners. His actions were the proximate cause of petitioners’ loss. He cannot now hide behind the separate corporate personality of VMSC to escape from liability for the amount adjudged by the trial court in favor of petitioners.

Obligation was incurred in the name of the corporation, the petitioner [Arcilla] would still be personally liable therefor because for all legal intents and purposes, he and the corporation are one and the same

Rivera vs. Chua, G.R. No. 184458 January 14, 2015

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FACTS: The parties were friends and kumpadres for a long time already. Rivera obtained a loan from the Spouses Chua evidenced by a Promissory Note. The relevant parts of the note are the following:

(a) FOR VALUE RECEIVED, I, RODRIGO RIVERA promise to pay spouses SALVADOR C. CHUA and VIOLETA SY CHUA, the sum of One Hundred Twenty Thousand Philippine Currency (_120,000.00) on December 31, 1995.

(b) It is agreed and understood that failure on my part to pay the amount of (_120,000.00) One Hundred Twenty Thousand Pesos on December 31, 1995. I agree to pay the sum equivalent to FIVEPERCENT (5%) interest monthly from the date of default until the entire obligation is fully paid for.

Three years from the date of payment stipulated in the promissory note, Rivera, issued

and delivered to Spouses Chua two (2) checks drawn against his account at Philippine Commercial International Bank (PCIB) but upon presentment for payment, the two checks were dishonored forthe reason “account closed.” As of 31 May 1999, the amount due the Spouses Chua was pegged at P366,000.00 covering the principal of P120,000.00 plus five percent (5%) interest per month from 1 January 1996 to 31 May 1999.

The Spouses Chua alleged that they have repeatedly demanded payment from Rivera to no avail. Because of Rivera’s unjustified refusal to pay, the Spouses Chua were constrained to file a suit before the MeTC, Branch 30, Manila.

The MeTC ruled against Rivera requiring him to pay the spouses Chua P120,000.00 plus stipulated interest at the rate of 5% per month from 1 January 1996, and legal interest at the rate of 12% percent per annum from 11 June 1999 and was affirmed by the RTC of Manila. The Court of Appeals further affirmed the decision upon appeal of the two inferior courts but with modification of lowering the stipulated interest to 12% per annum. Hence, a petition at the Supreme Court.

ISSUES:

1. Whether or not the Promissory Note executed as evidence of loan falls under Negiotiable Instruments Law.

2. Whether or not a demand from spouses Chua is needed to make Rivera liable.

3. Whether or not the stipulated interest is unconscionable and should really be lowered.

Held: 1. NO, the Promissory Note executed as evidence of loan does not fall under Negotiable Instruments Law. The instrument is still governed by the Civil Code as to interpretation of their obligations. The Supreme Court held that the Instrument was not able to meet the requisites laid down by Section 1 of the Negotiable Instruments Law as the instrument was made out to specific persons, herein respondents, the Spouses Chua, and not to order or to bearer, or to the order of the Spouses Chua as payees.

cals not a negotiable instrument and therefore outside the coverage of Section 70 of the NIL which provides that presentment for payment is not necessary to charge the person liable on the instrument, Rivera is still liable under the terms of the Promissory Note that he issued. Article 1169 of the Civil Code explicitly provides that the demand by the creditor shall not be necessary in order that delay may exist when the obligation or the law expressly so declare. The clause in the Promissory Note containing the stipulation of interest (letter B in the above facts) which expressly requires the debtor (Rivera) to pay a 5% monthly interest from the “date of default” until the entire obligation is fully paid for. Theparties evidently agreed that the maturity of the obligation at a date certain, 31 December 1995, will give rise to the obligation to pay interest.

3. YES, the stipulated interest is unconscionable and should really be lowered. The Supreme Court held that as observed by Rivera, the stipulated interest of 5% per month or 60% per annum in addition to legal interests and attorney’s fees is, indeed, highly iniquitous and unreasonable and stipulated interest rates if illegal and are unconscionable the Court is allowed to temper interest rates when necessary. Since the interest rate agreed upon is void, the parties are considered to have no stipulation regarding the interest rate, thus, the rate of interest should be 12% per annum computed from the date of judicial or extrajudicial demand. However, the 12% per annum rate of legal interest is only applicable until 30 June 2013, before the advent and effectivity of Bangko Sentral ng Pilipinas (BSP) Circular No. 799, Series of 2013 reducing the rate of legal interest to 6% per annum. Pursuant to our ruling in Nacar v. Gallery Frames,30 BSP Circular No. 799 is prospectively applied from 1 July 2013.

Far East Bank & Trust vs Gold Palace Jewellery Co, G.R. No. 168274, August 20, 2008

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Facts: In June 1998, a foreigner, identified as Samuel Tagoe, purchased from the respondent Gold Palace Jewellery Co. several pieces of jewelry valued at P258,000.00. In payment of the same, he offered Foreign Draft No. M-069670 issued by the United Overseas Bank (Malaysia) addressed to the Land Bank of the Philippines, Manila (LBP), and payable to the respondent company for P380,000.00.

 

Yang issued Cash Invoice, to the foreigner, informing him that the pieces of jewelry would be released when the draft had already been cleared. Respondent Julie Yang-Go, the manager of Gold Palace deposited the draft in the company’s Far East account. LBP cleared the draft, and GoldPalace’s account with Far East was credited. The foreigner was then able to get the goods, and because the amount in the draft was more than the value of the goods purchased, she issued, as his change, Far East Check No. 173088 for P122,000.00. This check was later presented for encashment and was, in fact, paid by the said bank.

 

On June 1998, or after around three weeks, LBP informed Far East that the amount in said Foreign Draft had been materially altered from P300.00 to P380,000.00 and that it was returning the same. Intending to debit the amount from respondent’s account, Far East subsequently refunded the P380,000.00 earlier paid by LBP. Meanwhile, Far East was able to debit only P168,053.36 from the GoldPalace’s account as the respondent has already utilized their funds. This was debited without their permission. The bank informed the GoldPalace later thru a phone call.

 

On August 1998, petitioner demanded from respondents the payment of P211,946. Because Gold Palace did not heed the demand, Far East consequently instituted civil case for sum of money and damages before the RTC in Makati.

 

RTC ruled in favor of Far East, ordering Gold Palace to pay the former P211,946.64 as actual damages and P50,000.00 as attorney’s fees. The trial court ruled that, on the basis of its warranties as a general indorser, Gold Palace was liable to Far East.

 

On appeal, the CA, reversed the ruling of the trial court and awarded respondents’ counterclaim. It ruled in the main that Far East failed to undergo the proceedings on the protest of the foreign draft or to notify Gold Palace of the draft’s dishonor; thus, Far East could not charge Gold Palace on its secondary liability as an indorser.

 

Issue: Whether or not GoldPalace can be held liable

 

Held: No.  Act No. 2031, or the Negotiable Instruments Law (NIL), explicitly provides that the acceptor, by accepting the instrument, engages that he will pay it according to the tenor of his acceptance.  His actual payment of the amount in the check implies not only his assent to the order of the drawer and a recognition of his corresponding obligation to pay the aforementioned sum, but also, his clear compliance with that obligation. In this case, the drawee bank cleared and paid the subject foreign draft and forwarded the amount thereof to the collecting bank. The latter, Far East, then credited to GoldPalace’s account the payment it received. Following the plain language of the law, the drawee, by the said payment, recognized and complied with its obligation to pay in accordance with the tenor of his acceptance. Stated simply, LBP was liable on its payment of the check according to the tenor of the check at the time of payment, which was the raised amount.

 

SC also notes that Respondent Gold Palace was not a participant in the alteration of the draft, was not negligent, and was a holder in due course—it received the draft complete and regular on its face. Gold Palace relied on the drawee bank’s clearance and payment of the draft. Respondent is also protected by the said Section 62. Commercial policy favors the protection of any one who, in due course, changes his position on the faith of the drawee bank’s clearance and payment of a check or draft.

 

The fault is in LBP; having the most convenient means to correspond with UOB, did not first verify the amount of the draft before it cleared and paid the same. Gold Palace, on the other hand, had no facility to ascertain with the drawer, UOB Malaysia, the true amount in the draft. Thus, the collecting agent, Far East, should not have debited the money paid by the drawee bank from respondent company’s account.

 

When Gold Palace deposited the check with Far East, the latter, under the terms of the deposit and the provisions of the NIL, became an agent of the former for the collection of the amount in the draft. Far East then was able to collect from LBP. As the transaction in this case had been closed and the principal-agent relationship between the payee (GoldPalace) and the collecting bank (Far East) had already ceased, the latter in returning the amount to the drawee bank (LBP) was already acting on its own and should now be responsible for its own actions. The drawee bank had no right to recover what it paid.

 

Likewise, Far East cannot invoke the warranty of the payee/depositor who indorsed the instrument for collection to shift the burden it brought upon itself. This is precisely because the said indorsement is only for purposes of collection which, under Section 36 of the NIL, is a restrictive indorsement.^[47] It did not in any way transfer the title of the instrument to the collecting bank. Far East did not own the draft, it merely presented it for payment. Considering that the warranties of a general indorser as provided in Section 66 of the NIL are based upon a transfer of title and are available only to holders in due course. Without any legal right to do so, the collecting bank, therefore, could not debit respondent’s account for the amount it refunded to the drawee bank.

 

SC ruled that, for doing so, Far East must return what it had erroneously taken. The remedy under the law is not against Gold Palace but against the drawee-bank or the person responsible for the alteration.

HSBC vs. CIR, G.R. No. 166018, June 04, 2014

 

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Facts: HSBC performs custodial services on behalf of its investor-clients with respect to their passive investments in the Philippines, particularly investments in shares of stocks in domestic corporations. As a custodian bank, HSBC serves as the collection/payment agent.

HSBC’s investor-clients maintain Philippine peso and/or foreign currency accounts, which are managed by HSBC through instructions given through electronic messages. The said instructions are standard forms known in the banking industry as SWIFT, or “Society for Worldwide Interbank Financial Telecommunication.”

Pursuant to the electronic messages of its investor-clients, HSBC purchased and paid Documentary Stamp Tax (DST) from September to December 1997 and also from January to December 1998 amounting to P19,572,992.10 and P32,904,437.30, respectively.

BIR, thru its then Commissioner, issued BIR Ruling to the effect that instructions or advises from abroad on the management of funds located in the Philippines which do not involve transfer of funds from abroad are not subject to DST. A documentary stamp tax shall be imposed on any bill of exchange or order for payment purporting to be drawn in a foreign country but payable in the Philippines.

a. While the payor is residing outside the Philippines, he maintains a local and foreign currency account in the Philippines from where he will draw the money intended to pay a named recipient. The instruction or order to pay shall be made through an electronic message.

Consequently, there is no negotiable instrument to be made, signed or issued by the payee.

b. Such electronic instructions by the non-resident payor cannot be considered as a transaction per se considering that the same do not involve any transfer of funds from abroad or from the place where the instruction originates.

Under the Documentary Stamp Tax Law, the mere withdrawal of money from a bank deposit, local or foreign currency account, is not subject to DST, unless the account so maintained is a current or checking account, in which case, the issuance of the check or bank drafts is subject to the documentary stamp tax.

c. Likewise, the receipt of funds from another bank in the Philippines for deposit to the payee’s account and thereafter upon instruction of the non-resident depositor-payor, through an electronic message, the depository bank to debit his account and pay a named recipient shall not be subject to documentary stamp tax.

With the above BIR Ruling as its basis, HSBC filed on an administrative claim for the refund of allegedly representing erroneously paid DST to the BIR

As its claims for refund were not acted upon by the BIR, HSBC subsequently brought the matter to the CTA, which favored HSBC and ordered payment of refund or issuance of tax credit.

However, the CA reversed decisions of the CTA and ruled that the electronic messages of HSBC’s investor-clients are subject to DST.

a. DST is levied on the exercise by persons of certain privileges conferred by law for the creation, revision, or termination of specific legal relationships through the execution of specific instruments, independently of the legal status of the transactions giving rise thereto.

ISSUE: Whether or not the electronic messages are considered transactions  pertaining to negotiable instruments that warrant the payment of DST.

HELD:  NO.

The Court agrees with the CTA that the DST under Section 181 of the Tax Code is levied on the acceptance or payment of “a bill of exchange purporting to be drawn in a foreign country but payable in the Philippines” and that “a bill of exchange is 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 to bearer.”

The Court further agrees with the CTA that the electronic messages of HSBC’s investor-clients containing instructions to debit their respective local or foreign currency accounts in the Philippines and pay a certain named recipient also residing in the Philippines is not the transaction contemplated under Section 181 of the Tax Code as such instructions are “parallel to an automatic bank transfer of local funds from a savings account to a checking account maintained by a depositor in one bank.” The Court favorably adopts the finding of the CTA that the electronic messages “cannot be considered negotiable instruments as they lack the feature of negotiability, which, is the ability to be transferred” and that the said electronic messages are “mere memoranda” of the transaction consisting of the “actual debiting of the [investor-client-payor’s] local or foreign currency account in the Philippines” and “entered as such in the books of account of the local bank,” HSBC.

The instructions given through electronic messages that are subjected to DST in these cases are not negotiable instruments as they do not comply with the requisites of negotiability under Section 1 of the Negotiable Instruments Law.

The electronic messages are not signed by the investor-clients as supposed drawers of a bill of exchange; they do not contain an unconditional order to pay a sum certain in money as the payment is supposed to come from a specific fund or account of the investor-clients; and, they are not payable to order or bearer but to a specifically designated third party. Thus, the electronic messages are not bills of exchange. As there was no bill of exchange or order for the payment drawn abroad and made payable here in the Philippines, there could have been no acceptance or payment that will trigger the imposition of the DST under Section 181 of the Tax Code.