CASE DIGEST: NEGOTIABLE INSTRUMENTS LAW

STATE INVESTMENT HOUSE, INC. VS. COURT OF APPEALS
GR 101163, January 11, 1993
1ST Division Bellosillo

FATS:
Nora Moulic issued to Corazon Victoriano, as security for pieces of jewelry to be sold on commission, 2 post-dated Equitable Banking Corporation. Thereafter, the payee negotiated the checks to the State Investment House Inc. (SIHI). Moulic failed to sell the pieces of jewelry, so she returned them to the payee before maturity of the checks. The checks, however, could no longer be retrieved as they had already been negotiated. Consequently, before their maturity dates, Moulic withdrew her funds from the drawee bank. Upon presentment for payment, the checks were dishonored for insufficiency of funds. SIHI allegedly notified Moulic of the dishonor of the checks and requested that it be paid in cash instead, although Moulic avers that no such notice was given her. SIHI sued to recover the value of the checks. Moulic contends that she incurred no obligation on the checks because the jewelry was never sold and the checks were negotiated without her knowledge and consent. She also instituted a Third-Party Complaint against Corazon Victoriano, who later assumed full responsibility for the checks. The trial court dismissed the Complaint as well as the Third-Party Complaint. SIHI elevated the order of dismissal to the Court of Appeals, but the appellate court affirmed the trial court on the ground that the Notice of Dishonor to Moulic was made beyond the period prescribed by the Negotiable Instruments Law and that even if SIHI did serve such notice on Moulic within the reglementary period it would be of no consequence as the checks should never have been presented for payment. SIHI filed the petition for review.

ISSUE:
WON the alleged issuance of the post-dated checks as mere security is a ground for the discharge of the instrument?

HELD
Section 119 of the Negotiable Instrument Law outlined the grounds in which an instrument is discharged. The grounds are:
(a) payment by or on behalf of the principal debtor;
(b) payment by accommodated;
(c) intentional cancellation of instrument by the holder;
(d) any act which discharges a contract;
(e) reacquisition of principal debtor in his own right.

Section 119 of the NIL is exclusive to its enumerations. Obviously, MOULIC may only invoke paragraphs (c) and (d) as possible grounds for the discharge of the instrument. But, the intentional cancellation contemplated under paragraph (c) is that cancellation effected by destroying the instrument either by tearing it up, burning it, or writing the word "cancelled" on the instrument. The act of destroying the instrument must also be made by the holder of the instrument intentionally. Since MOULIC failed to get back possession of the post-dated checks, the intentional cancellation of the said checks is altogether impossible. On the other hand, the acts which will discharge a simple contract for the payment of money under paragraph (d) are determined by other existing legislations since Section 119 does not specify what these acts are, e.g., Art. 1231 of the Civil Code which enumerates the modes of extinguishing obligations, such as:
a. Payment or performance;
b. Loss of the thing due;
c. Condonation or remission of debts;
d. Confusion or merger of rights of creditor and debtor;
e. Compensation;
f. Novation

Again, none of the modes outlined therein is applicable in the instant case as Section 119 contemplates of a situation where the holder of the instrument is the creditor while its drawer is the debtor. Herein, the payee, Corazon Victoriano, was no longer MOULIC's creditor at the time the jewelry was returned. Correspondingly, MOULIC may not unilaterally discharge herself from her liability by the mere expediency of withdrawing her funds from the drawee bank. She is thus liable as she has no legal basis to excuse herself from liability on her checks to a holder in due course.