Wednesday, May 17, 2006

Negotiable Instrument Law - New Cases

Spouses Eduardo and Epifania Evangelista vs Mercator Financing Co.(GR No 148864, Aug 21, 2003, Puno)

The promissory not in question is worded as follows:

“For value received, I/we jointly and severally promise to pay to the order of Mercator Financing Company ……..”

Are the spouses jointly and severally liable?

The SC held that under Section 17 (g) of the NIL and Article 1216 of the Civil Code, where the promissory note was executed jointly and severally by two or more persons, the payee of the promissory note had the right to hold any one of the two (2) signers of the promissory note responsible for the payment of the whole amount of the note.

Garcia vs Llamas
(Dec 8, 2003, Panganiban)

The accommodation party is liable on the instrument to a holder for value notwithstanding that such holder at the time of taking the instrument knew him to be only an accommodation party. It is not a valid defense that the accommodation party did not receive any valuable consideration when he executed the instrument. He is liable to a holder for value by virtue of his being an accommodation party.

An accommodation party to a negotiable instrument, inspite of the lack of consideration between him and the accommodated party, is liable to any other holder NOT to the accommodated party.

The relationship between an accommodation party and the party accommodated is that of a surety. It is a settled rule that a surety is bound equally and absolutely with the principal and is deemed an original promissory and debtor from the beginning. The liability is immediate and direct.

Samsung Construction Company Phils., Inc vs FEBTC
(GR No 129015, Aug 13, 2004, Tinga)

Petitioner maintains a current account with the respondent bank. The petitioner authorized Jong to sign checks in behalf of the company. The checks are in the custody of an accountant Kyu. On one occasion, a certain Gonzaga presented a check to FEBTC purportedly drawn by the Company in the amount of P999,500. The check was payable to cash and appeared to be signed by Jong. FEBTC upon ascertaining that there are sufficient fund to cover the check and finding the signature of Jong appears to be genuine paid Gonzaga. Later, the forgery was discovered. Samsung demanded that the amount paid to Gonzaga be credited back to its account because they have not authorized the encashment of the check. On the other hand, the respondent bank claimed negligence on the part of the petitioner in protecting its check.

Who should bear the loss?

The SC held that the FEBTC should bear the loss. Under Sec. 62 of NIL, among the warranties to be assumed by the acceptor is it admits the existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument. It is incumbent upon the drawee bank to ascertain the genuineness of the signature of its depositor. The respondent bank in this case did not exercise the degree of diligence required to enable it to detect the forgery.

***Aside from the warranties as an indorser, the collecting bank is made liable because it is privy to the depositor who negotiated the check because it knows him, his address and history for being a client thereof. Thus, it is in a better position to detect forgery or irregularity in the indorsement. (Associated bank v. CA, 252 SCRA 620). aka “Doctrine of Comparative Negligence”

Ilusorio vs CA
(GR No 139130, Nov 27, 2004)

The petitioner maintains a current account with Manila Banking Corp. He entrusts his checkbook and credit cards to his secretary. During the period 1980-81. His secretary was able to encash a total of 17 checks drawn against Manila Banking Corp. Ilusorio discovered these checks upon examination of his bank statements forwarded by the bank. And upon investigation, it was found out that his signatures was forged by his secretary on those 17 checks. Ilusorio demanded the return of amount by the drawee bank. The drawee bank contended negligence on the part of the petitioner.

Who should suffer the loss?

The SC held that Ilusorio was negligent. While it may be true that the signature of Ilusorio was forged by his secretary and that he did not authorized the encashment of these checks (claiming real defense of forgery on his part), Ilusorio’s previous conduct effectively precluded him from claiming forgery as a defense. The mere fact that these checks have been encashed for a period of almost two years, the petitioner should have detected the forgery. Further, the unusual degree of trust which he had accorded his secretary, such as unrestricted access to his credit cards an checkbooks amounts to negligence on his part and the proximate loss of his funds is attributable to this unusual degree of trust and confidence which he reposed to his secretary.

General Rule – drawee bank bears the loss because of Sec 62 of NIL.
Exception – Ilusorio case (negligence on the part of the drawer)

1. How about if it is the signature of the endorser which is forged? Is the drawee bank still liable?
2. How about if the drawee bank has already paid the holder when it discovered the forged endorsement of the payee? Who bears the loss?

No. The drawee bank should not be made liable. The collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior indorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the indorsements.
As between the drawer and the drawee bank, the drawee bank should bear the loss. The drawee bank shall have recourse against the collecting bank because such collecting bank guarantees that all prior endorsements are genuine. The collecting bank then can go against the forger.

In cases involving a forged check, where the drawer’s is forged, drawer can recover from the drawee bank. No drawee bank has a right to pay a forged check. If it does, it shall have to recredit the amount of check to the account of the drawer. The liability chain ends with drawee bank whose responsibility it is to know the drawer’s signature since the latter is its customer. (Associated Bank vs CA, 252 SCRA 620).
The endorser is liable on the instrument although the signature of the payee is forged because the endorser by his endorsement guaranteed that the instrument is genuine, therefore, impliedly, that the instrument is valid, otherwise, there would be nothing for the endorser to guarantee. (Republic vs Ebrada 65 SCRA 680).


  1. Amiable post and this mail helped me alot in my college assignement. Say thank you you as your information.

  2. hi. good day sir. i need help in my subject negotiable instruments. he told us that we should be able to explain and illustrate each section of this law.(he only required us to memorize section 1-10). i am not a law student, i am taking up business administration. i don't have any idea about this law. i need it badly. please help me. please.. :(
    please if you can send me in my email.

    thank you so much.