Philippine National Bank vs. Benito Seeto

An indorser of a check is wholly discharged from liability by an unreasonable delay in presenting the check for payment, irrespective of whether the indorser was actually injured by the delay; and parol evidence of oral assurances to refund the check’s value cannot create a separate liability where those assurances merely restate the ordinary obligations of a general indorser.

The Philippine National Bank maintained a Surigao agency and a Cebu branch. Benito Seeto negotiated at the Surigao agency a check drawn by Gan Yek Kiao against the Cebu branch of the Philippine National Bank of Communications. The dispute required application of the Negotiable Instruments Law, particularly the provisions on presentment of checks for payment and the liability of general indorsers.

On March 13, 1948, Benito Seeto called at the Surigao branch of the Philippine National Bank and presented Check No. A-21096, dated at Cebu on March 10, 1948, in the amount of P5,000, payable to cash or bearer, and drawn by Gan Yek Kiao against the Cebu branch of the Philippine National Bank of Communications. After consulting the branch employees, Seeto made a general and unqualified indorsement of the check. The bank’s agency accepted the check and paid Seeto P5,000.

The check was mailed to the bank’s Cebu branch on March 20, 1948, and was presented to the drawee bank for payment on April 9, 1948. It was dishonored for insufficient funds. The check was returned to the Surigao agency, which received it on April 14, 1948, and immediately wrote Seeto demanding refund of its value. A second demand was sent on April 26, 1948. Seeto answered by asking that the contemplated suit be deferred while he inquired into the reasons for dishonor, but he thereafter refused to refund. He claimed that the drawer had sufficient funds when the check was negotiated and that, had the Surigao agency not delayed forwarding the check until the drawer’s funds were exhausted, the check would have been paid.

PNB then filed a complaint in the Court of First Instance of Surigao. It alleged that Seeto had assured the Surigao agency that the drawer had sufficient funds with the drawee bank and that, relying on those assurances, the agency delivered P5,000 to Seeto after his general and unqualified indorsement. Seeto denied giving the assurances. At trial, PNB presented two witnesses who testified that the agency did not ordinarily cash out-of-town checks, that it cashed this check because Seeto assured them the drawer had sufficient funds, and that Seeto promised to refund the amount paid if the check was dishonored. Seeto denied having given those assurances.

The trial court found, despite Seeto’s denial, that he had undertaken to refund the check’s amount if it was dishonored. It reasoned that the Surigao agency could not independently verify the drawer’s solvency and must have required assurances to protect itself against loss. It also found no unreasonable delay in presentment and ordered Seeto to refund the amount he had received for the check.

On appeal, the Court of Appeals held that PNB had unreasonably retained and withheld the check and that the delay in presentment for payment was inexcusable, thereby discharging Seeto from liability. It also held that parol evidence was incompetent to show that one who signed a check as indorser was merely a surety or guarantor, and it rejected the evidence of Seeto’s alleged assurance and promise to refund. The Court of Appeals reversed the trial court and dismissed the complaint, with costs. The Supreme Court later found no reason to disturb the conclusion that there was unreasonable delay: the check was dated March 10, cashed on March 13, not mailed until March 20, and not presented for payment until April 9, with no excuse shown. PNB’s witnesses also admitted that subsequent checks issued by the same drawer against the same bank and cashed at the same Surigao agency were not dishonored, showing that the drawer had sufficient funds when he issued the check and that timely presentment would have resulted in payment.

• Sections 143 and 144 Inapplicable: Petitioner argued that Sections 143 and 144 of the Negotiable Instruments Law, which require presentment of a bill of exchange for acceptance, do not apply to a check because a check need not be presented for acceptance; Section 84, on the liability of persons secondarily liable when an instrument is dishonored, was the applicable provision.
• Indorser Not Discharged by Section 186’s Silence: Petitioner maintained that because Section 186 expressly discharges only the drawer from liability to the extent of loss caused by delay and is silent as to the indorser, the indorser may not be considered discharged under the principle inclusio unius est exclusio alterius.
• Parol Evidence of Collateral Assurances: Petitioner argued that Seeto’s oral assurances that the drawer had sufficient funds and that he would refund the check’s value if dishonored were a collateral agreement separate and distinct from the indorsement, induced the bank to cash the check, and were therefore admissible as an exception to the parol evidence rule.
• Place of Drawing: Petitioner also argued that Sections 143 and 144 were not proper and that it may not be presumed that the check was not drawn and executed in Cebu, the residence or place of business of the drawer.

• Denial of Assurances: Respondent denied having made the alleged assurances that the drawer had sufficient funds or that he would refund the amount if the check was dishonored.
• Sufficient Funds and Delay: Respondent claimed that the drawer had sufficient funds in the drawee bank at the time of negotiation and that, had petitioner’s Surigao agency not delayed forwarding the check until the drawer’s funds were exhausted, the check would have been paid.

• Applicability of Sections 143 and 144: Whether the Court of Appeals erred in applying Sections 143 and 144 of the Negotiable Instruments Law and declaring respondent discharged as indorser.
• Discharge of Indorser for Unreasonable Delay: Whether an indorser of a check is discharged from liability by an unreasonable delay in presenting the check for payment under Sections 84 and 186 of the Negotiable Instruments Law, irrespective of loss or injury.
• Parol Evidence on Oral Assurances: Whether parol evidence is admissible to prove respondent’s oral assurances to refund the check’s value in case of dishonor as a separate collateral agreement.

• Applicability of Sections 143 and 144: No, as to those sections. Sections 143 and 144 govern presentment of bills of exchange for acceptance and are inapplicable to checks; respondent’s discharge rests on Sections 84 and 186.
• Discharge of Indorser for Unreasonable Delay: Yes. An indorser is wholly discharged by unreasonable delay in presenting a check for payment, irrespective of loss or injury; Section 186 requires presentment within a reasonable time after issue.
• Parol Evidence on Oral Assurances: The evidence was erroneously rejected, but the error was without prejudice. The alleged assurances were merely the ordinary obligations of a general indorser under Section 66 and were discharged by the unreasonable delay.

• Applicability of Sections 143 and 144: Sections 143 and 144 govern presentation of a bill of exchange for acceptance; a check does not require presentment for acceptance, so those sections are inapplicable. Section 84, which gives the holder an immediate right of recourse against all parties secondarily liable when an instrument is dishonored by nonpayment, is applicable, but its application is subject to Section 186, which requires a check to be presented for payment within a reasonable time after issue. The silence of Section 186 as to the indorser does not mean the indorser escapes discharge; the indorser is a person secondarily liable, and his discharge is covered by Section 84. The drawer is discharged only to the extent of loss caused by unreasonable delay, but an indorser is wholly discharged irrespective of loss or injury because the drawer is not necessarily prejudiced while the indorser is actually or by legal presumption prejudiced. The Court cited decisions from state courts of the United States and found no authority sustaining the proposition that an indorser is not discharged for unreasonable delay; such a rule would be contrary to the negotiability of instruments, which are supposed to be passed on with promptness.
• Discharge of Indorser for Unreasonable Delay: The Court found the Court of Appeals’ conclusion of unreasonable delay correct and noted that petitioner did not claim it was erroneous. The check was dated March 10, 1948, cashed on March 13, 1948, not mailed until March 20, 1948, or ten days after issue, and not presented for payment until April 9, 1948. No excuse was given for the delay in mailing, and even assuming one week or ten days for the check to reach Cebu, there was no excuse for not presenting it until April 9, ten days after it reached Cebu. PNB’s witnesses admitted that checks issued by the same drawer after March 13, 1948, against the same bank and cashed at the same Surigao agency were not dishonored, showing the drawer had sufficient funds when he issued the check and that timely presentment would have resulted in payment. Consequently, the indorser was discharged.
• Parol Evidence on Oral Assurances: The Court held that petitioner’s contention was not entirely unfounded. Parol evidence is admissible to show that parties signing as principals did so merely as sureties, or to prove an independent agreement; prior or contemporaneous conversations in connection with a note or its indorsement may be proved by parol. If the alleged assurances that the drawer had funds and that Seeto would refund the check if the drawer had no funds induced the Surigao agency to depart from its ordinary practice of not cashing out-of-town checks, those assurances would be provable by parol, provided they did not vary, alter, or destroy the obligations attached by law to the indorsement. However, the alleged assurances to refund in case of dishonor were precisely the ordinary obligations of an indorser under Section 66, which provides that a general indorser engages that on due presentment the instrument shall be accepted or paid and that, if dishonored and the necessary proceedings on dishonor are taken, he will pay the amount to the holder. There was no express obligation that the drawer would always have funds or that the indorser would refund even if there was delay in presentment. Thus, while the Court of Appeals erred in disregarding the evidence of assurances, the error was without prejudice because those assurances formed part of the indorser’s obligations, which were discharged by the unreasonable delay.

• Indorser’s Discharge for Unreasonable Delay in Presentment — Under the Negotiable Instruments Law, a check must be presented for payment within a reasonable time after its issue. While Section 186 expressly discharges the drawer only to the extent of loss caused by delay, an indorser, as a party secondarily liable under Section 84, is wholly discharged by unreasonable delay irrespective of whether he was actually injured. The Court applied this to Seeto, finding the delay from March 10 to April 9 inexcusable and discharging him from liability.
• Parol Evidence and the Ordinary Obligations of an Indorser — Parol evidence may be admitted to prove an independent collateral agreement or that a signer was merely a surety, but it cannot be used to vary, alter, or destroy the obligations attached by law to an indorsement. Where the alleged oral assurances merely restate the general indorser’s statutory undertaking under Section 66 to pay the instrument if dishonored after due presentment and proceedings, they do not create a separate liability that survives the indorser’s discharge for unreasonable delay.
• Inclusio Unius Est Exclusio Alterius Not Applied to Section 186 — The silence of Section 186 as to the indorser does not imply that the indorser is not discharged by unreasonable delay; the indorser’s discharge is already covered by Section 84 because the indorser is a person secondarily liable on the instrument.
• Prompt Presentment as Essential to Negotiability — Negotiable instruments are supposed to be passed on with promptness in the ordinary course of business; retaining a check for such time as the holder wants hinders the smooth flow of commercial transactions. This principle supported the rule that an indorser is discharged by unreasonable delay.

• "A check must be presented for payment within a reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay." — This is the Court’s quotation of Section 186, the statutory basis for requiring timely presentment and, with Section 84, for discharging the indorser.
• "The silence of Section 186 as to the indorser is due to the fact that his discharge is already expressly covered by the provision of Section 84, the indorser being a person secondarily liable on the instrument." — This rejects petitioner’s inclusio unius argument and identifies the indorser’s statutory discharge.
• "although the drawer of a check is discharged only to the extent of loss caused by unreasonable delay in presentment, an indorser is wholly discharged thereby irrespective of any question of loss or injury." — This states the ratio decidendi on the distinct treatment of drawer and indorser.
• "the supposed assurances of refund in case of dishonor of the check are precisely the ordinary obligations of an indorser, and these obligations are, under the law, considered discharged by an unreasonable delay in the presentation of the check for payment." — This explains why the parol evidence error was without prejudice and why no separate liability survived.

• Tan Machan vs. De La Trinidad, et al., 4 Phil. 684 — Cited for the rule that parol evidence is admissible to show that parties signing as principals merely did so as sureties.
• Robles vs. Lizarraga Hermanos, 50 Phil. 387 — Cited for the rule that parol evidence is admissible to prove an independent agreement.
• Philips vs. Preston, 5 How. (U.S.) 278, 12 L. ed, 152 — Cited for the rule that any prior or contemporaneous conversation in connection with a note or its indorsement may be proved by parol evidence.
• Swift & Co. vs. Miller, 62 Ind. App. 312, 113 N.E. 447 — Cited, through Brannan’s Negotiable Instruments Law, for the rule that an indorser is wholly discharged by unreasonable delay irrespective of loss or injury.
• Nuzum vs. Sheppard, 87 W. Va. 243, 104 S.E. 587, 11 A.L.R. 1024 — Cited as supporting the proposition that the indorser of a check, unlike the drawer, is relieved of liability by unreasonable delay whether or not he is injured.
• Gough vs. Staats (N.Y.) — Cited for the rule that prejudice to the indorser from delay is immaterial; the law presumes he has been prejudiced.
• Caroll vs. Sweet (1891) 128 N.Y. 19, 13 L.R.A. 43, 27 N.E. 763 — Cited for the rule that presentment in due time is a condition of the indorser’s liability and that delay is not excused even if the drawer had no funds or was insolvent.
• Start vs. Tupper (Vt.) — Cited for the rule that only affirmative proof that the indorser knew there would be no funds can avoid the rule; otherwise failure to present the check in due course discharges the indorser even if presentment would have been unavailing.

• Section 84, Negotiable Instruments Law — Provides that when an instrument is dishonored by nonpayment, an immediate right of recourse to all parties secondarily liable thereon accrues to the holder. The Court held it applicable to the indorser, subject to the requirement of timely presentment under Section 186.
• Section 186, Negotiable Instruments Law — Requires a check to be presented for payment within a reasonable time after its issue or the drawer will be discharged from liability to the extent of loss caused by delay. The Court used this provision to require timely presentment and, with Section 84, to discharge the indorser for unreasonable delay.
• Section 66, Negotiable Instruments Law — Defines the liability of a general indorser, who engages that on due presentment the instrument shall be accepted or paid and that, if dishonored and the necessary proceedings on dishonor are taken, he will pay the amount to the holder. The Court used this to show that Seeto’s alleged assurances were merely ordinary indorser obligations.
• Sections 143 and 144, Negotiable Instruments Law — Govern presentation of a bill of exchange for acceptance. The Court held them inapplicable to a check because presentment for acceptance is not required.

Chief Justice Paras; Justices Feria, Bengzon, Padilla, Tuason, Montemayor, and Bautista Angelo concurred.