EL BANCO ESPAÑOL-FILIPINO, PLAINTIFF AND APPELLEE, VS. MCKAY & ZOELLER, DEFENDANTS AND APPELLANTS.

An appeal from a judgment upon the pleadings condemning the defendants to pay
the plaintiff the sum of P4,600 with interest and costs.

The note which forms the basis of this action and which is copied in the
complaint is as follows:

			“APRIL 10, 1911.
	“Three months and five days after date, for value received, I promise to pay to Levy Hermanos or order four thousand and -six hundred pesos, Philippine currency (P4,600.00). Due July 15, 1911.
			“McKAY & ZOELLER,
			“G. McKAY,
		“Member of the firm.”

 

The third paragraph of the complaint reads: “That on July 7, 1911, the said
Levy Hermanos, in whose favor the promissory note was made, indorsed and
transferred to the plaintiff, for value received, the said promissory note; and
that the present plaintiff is at this time the owner and holder of the said
promissory note.”

The defendants, in their answer, admit paragraph one of the complaint, in
which are alleged the personality and residence of the parties, and deny each
and every other allegation; and as a special defense allege that the note in
question is not a negotiable one; that the payees are the real parties in
interest in the collection of said note, they having transferred it to the
plaintiff for collection only; that said note was given in part payment for a
certain number of diamonds purchased from the payees; that the payees stated and
guaranteed that said diamonds were genuine, first-class, blue-water diamonds,
when, as a matter of fact, they were not; that it was through these false
representations that the defendants were induced to purchase the diamonds,
paying therefor P9,200 of which P4,600 was paid in cash and the balance secured
by the execution and delivery of the note in question; and that they have
offered to return the diamonds and are now ready and willing to return them, but
the payees refuse to accept them. The defendants ask in their counterclaim that
the payees be made parties to this action; that judgment be rendered against the
plaintiff and the payees for the sum of P4,600; for the rescission of the
contract of sale of the diamonds; for the cancellation of the note; and for the
costs of the cause.

The plaintiff demurred to the answer on the ground that the allegations in
the same were not sufficient to constitute a defense. The demurrer was sustained
and upon the defendants’ refusing to amend their answer judgment was rendered in
favor of the plaintiff, without the introduction of any evidence.

Counsel for the defendants insists that the court erred (1) in holding that
the note in question is a negotiable instrument; (2) in sustaining the
plaintiff’s demurrer; and (3) in rendering judgment against the defendants.

The note being copied into and made a part of the complaint, and the
defendants having failed to deny the execution of the note under oath, its
genuineness and due execution are admitted, without the need of proof on the
part of the plaintiff. (Sec. 103, Code Civ. Proc, and Chamber of Commerce vs.
Pua Te Ching, 14 Phil. Rep., 222, where the cases are collected.) This is not,
however, true of the indorsement: Heinszen & Co. vs. Jones (5 Phil.
Rep., 27), where this court said:

“It is claimed by the appellees that section 103 of the Code of Civil
Procedure applies not only to the note itself, but also to the indorsement
thereon, inasmuch as the indorsement was not denied by the defendant under oath,
its genuineness is admitted. We cannot agree with this contention. The
instrument upon which this action was brought is the promissory note. The action
was not brought upon the indorsement. That imposed no liability upon the
defendant, and while it was the duty of the latter to deny execution of the note
under oath, it was not his duty to do this with reference to the indorsement.
The reason for this is plain. The defendant is supposed to know whether he
signed the note or not, but in a great majority of cases there is no reason for
saying that he is supposed to know whether the payee has or has not indorsed the
note to a third person.”

And again, in Lim-Chingco vs. Terariray (5 Phil. Rep.,120), it is said:

“Reasonably construed, the purpose of the enactment (sec.103) appears to have
been to relieve a party of the trouble and expense of proving in the first
instance an alleged fact, the existence or nonexistence of which is necessarily
within the knowledge of the adverse party, and of the necessity (to his
opponent’s case) of establishing which such adverse party is notified by his
opponent’s pleading.”

It is further contended that the note is defective because it does not comply
with the sixth requisite of article 531 of the Code of Commerce by designating
the place of payment. In Compania General de Tabacos vs. Molina (5
Phil. Rep., 142), it is held that this provision is not strictly applicable to
promissory notes drawn to order, and that such omission does not in any event
destroy their commercial character.

Nor is the objection that the instrument is defective in not containing its
specific name as provided by the first paragraph of article 531 a valid one. The
words “I promise to pay” sufficiently identify its character. (Rodriguez
vs. Lasala, 5 Phil. Rep., 357.)

The note does not show that it arose from commercial transactions. Counsel
for the appellants contends that its failure to do so is fatal and quotes
extensively from Banco Espanol-Filipino vs. Tan-Tongco (13 Phil. Rep.,
628), to support this contention. It may be well to review the former decisions
of this court on the point in question. In Compania General de Tabacos
vs. Molina (5 Phil. Rep., 142), the note under consideration read as
follows:

“Three months after date I promise to pay to the order of the Compania
General de Tabacos de Filipinas three thousand three hundred and nineteen pesos
and seventy-four cents, value received in merchandise to my entire
satisfaction.”

The court said: “In order to bring the document within the Code of Commerce
it must appear that it had its origin in commercial operations. It seems to be
the contention of the appellant that this fact must appear in the note itself.
This, in our opinion, can not be sustained. If the requirements of article 531
are complied with, and, nevertheless, it does not appear from the note itself
that it had its origin in commercial operations, this fact can be proved by
other evidence. In other words, if the origin and nature of the consideration is
stated, and that statement does not show that the note proceeded from commercial
operations, the document, nevertheless, is a commercial document, if it can be
proved by other evidence that it did proceed from such
operations.”

In Noel vs. Lasala (5 Phil. Rep., 260), two promissory notes were in
question, reading as follows:

“I acknowledge to have received from Juan Noel the sum of seven thousand
pesos which I promise to pay to him or to his order within two years from this
date, together with interest at the rate of ten per cent per annum.”

“I acknowledge to have received from Juan Noel the sum of two thousand pesos
which I promise to pay to him or to his order within two years from date, with
interest at the rate of ten per cent per annum.”

The defendant claimed that those notes were negotiable under, the Code of
Commerce. As to this, the court said:

“Promissory notes payable to order and drawn as prescribed in article 531 of
the Code of Commerce shall be considered mercantile instruments when they arise
from mercantile transactions as required in article 532, and not otherwise.
There is nothing in the notes indicating that such was the case in this
particular instance, nor has any evidence been introduced on this point. For
this reason they can not be considered mercantile instruments, and the
provisions of article 950 of the Code of Commerce are not
applicable
thereto.”

(The phrase, “nor has any evidence been introduced on this point,” was
omitted from the English translation.)

The notes themselves were the sole evidence before the court, and as they
showed no indication of a commercial origin, they were properly held not to have
arisen from commercial transactions.

In Rodriguez vs. Lasala (5 Phil. Rep., 357), the note read:

“I have in my possession the sum of six thousand pesos in cash, received of
Da. Vicenta Rodriguez, which I will pay (pagare) to said lady or to her
order, within two years from date, with interest at the rate of ten per cent per
annum.”

The court said: “It does not appear upon the face of the pagare in
question that it had its origin in commercial operations, and therefore the
burden of proof as to this point is on the defendant, who alleges that it is a
commercial instrument. * * * The defendant having failed to establish this point
affirmatively, his contention that the pagare is a mercantile
instrument can not be sustained, and plaintiff is entitled to judgment.”

The result is that this court has up to this time firmly established by an
unbroken line of decisions: (1) that in order to bring promissory notes made
payable to order within the Code of Commerce it must appear that they had their
origin in commercial operations; (2) that if this fact does not appear in the
notes themselves it can be proved by other evidence; and (3) that in such cases
the burden of proof is on the person who alleges that the notes are commercial
instruments. Does the case of Banco Espanol-Filipino vs. Tan-Tongco (13
Phil. Rep., 628), change or materially modify this doctrine ?

The note in the case last mentioned reads as follows:

“Three months from this date I hereby promise to pay, in Manila, to the order
of D. Geronimo Jose, the sum of three thousand six hundred pesos, Mexican
currency, value received in cash for commercial transactions.

“Manila, 21st of July, 1902.

(Signed) “FULGENCIO
TAN-TONGCO.

“Pay to the order of the Banco Espanol-Filipino for value received from the
same in cash.

(Signed) “GERONIMO
JOSE.”

Counsels’ quotation, referred to above, is as follows:

“According to the language of article 532, which states that ‘drafts payable
to order between merchants, and bills or promissory notes, likewise payable to
order, which arise from commercial transactions, shall produce the same
obligations and effects as bills of exchange, except with regard to acceptance,
which is a quality of the latter only/ it would seem (1) that drafts payable to
order between parties who are not merchants have not a mercantile character; (2)
that a promissory note made payable to order, even though it were made by a
person who is hot a merchant, provided it arose from commercial transactions,
has the character of a mercantile document.

“On the second point, the majority holds that it is not necessary to show,
either judicially or extra judicially, that the note herein arose from
commercial transactions; it need not be shown judicially, because the defendant
has not offered any denial in his answer to the complaint. On the contrary, the
parties have submitted the document, as executed, to the courts for a decision
as to whether, in accordance with the law, it is a mercantile document or not.
It need not be shown extrajudicially, because it would be absolutely contrary to
the idea of mercantile transactions and to the nature of contracts arid
commercial legislation, that a bank, every time a promissory note was presented,
drawn in terms similar to those of the one at bar, should require the drawer and
the indorser to produce books and other evidence to establish the fact, and to
show that the note arose from commercial transactions as, for example, from the
dissolution of a commercial copartnership, from a current account, from the
balancing of accounts of a commission agent, from the liability resulting from a
commercial deposit, etc., and to make sure of all these proofs against the
contingency of a litigation.

“Beyond the fact that the question set up is purely one of law, and as both
parties agree to the facts contained in the document, the point to be decided is
whether or not a promissory note payable to order for a certain sum received in
cash for commercial transactions, as it is worded, is a mercantile document.

“As to the third point, the decisions cited of the supreme court of Spain,
its doctrine is as follows:

” ‘It is not sufficient that a vale or promissory note, in order to
be juridically valued as a commercial document, contain the conditions stated in
article 571 of the Code of Commerce; it must, in addition, arise from commercial
transactions as required by article 558 (of the code of 1829), and there is
nothing whatever about the note in question to show that said essential
requirement of the law had been fulfilled, because it is only stated therein
that the borrower received the 5,000 pesetas for a business matter, and said
isolated statement neither proves that the loan arose from a commercial
transaction, as the law requires, nor can it possess legal value so long as the
truth of the fact contained in said statement remains unproven, namely, that the
borrower used the 5,000 pesetas for commercial purposes.’ (Decision of April 10,
1894.)

“From the whole of this doctrine it would seem that the
promissory note in question did not contain the form of article 387, to wit:
‘for commercial transactions;’ that with said statement the note would have
appeared as a commercial loan; and that, being a commercial document, it would
have then contained the necessary indication that it arose from
commercial transactions. This is the important part of the decision: that a note
arises from a commercial transaction if it is the outcome of a commercial loan,
and the loan is a commercial one when the things loaned are for commercial
operations or transactions.”

The above quotation standing alone seems to support counsels’ contention, but
on examination of the entire opinion we think it will be found that the doctrine
does not go that far. Both the maker and the indorser were sued. No proof
whatever was presented except the note. The only question before the court was
the liability of the indorser, and his liability depended upon the question
whether or not the note was a mercantile instrument. It was so decided, the
court holding that the words, “for commercial transactions,” were sufficient to
bring the note within the provisions of the Code of Commerce. The question
whether the fact that a promissory note made payable to order had its origin in
commercial operations could be proved by other evidence than the note itself was
not an issue in the case. The note did not show that either the payor or payee
was a merchant. Out of this fact arose the principal issue before the court. It
was during the consideration of this point that the court used the language
above set forth. This case does not warrant the statement that it is authority
for the doctrine that all promissory notes, in order to be negotiable, must bear
the expression “for commercial transactions” or an equivalent, unless it were
also authority for the statement that promissory notes made payable to order
never arise from commercial transactions except as the result of loans of money.
It need hardly be said that this latter proposition is clearly erroneous. Such
notes often arise from the settlement of accounts between merchants,
transactions of purchase and sale, etc., wherein no money is transferred at all.
To require such a phrase (for commercial transactions) to be inserted
would be paradoxical in the extreme, for the reason that there would be no funds
to be devoted to commercial operations. Furthermore, the phrase, “for commercial
transactions,’ used in connection with a loan of money implies future operations
while a promissory note evidencing a purchase and sale, for example, obviously
cannot refer to any future transactions. It is true that a promissory note made
payable to order containing the words, “for commercial transactions,” or an
equivalent expression, sufficiently indicates its commercial character. But this
test is only positive and inclusive and not negative and exclusive. We therefore
conclude that because a promissory note made payable to order does not contain
the words, “for commercial transactions,” or some similar expression, it cannot
be immediately concluded that it did not arise from commercial operations. In
the absence of any such expression in the note itself other evidence is
admissible to prove that fact.

We have examined the decisions of this court and restate the doctrine there
announced for the purpose of disposing of the assignment of errors. But it might
be said that this was unnecessary for the reason that the recitals in the note
do not show that it is a negotiable instrument, nor are there any allegations in
the complaint to the effect that the note had its origin in commercial
operations. If it had been alleged and proved that the note arose from
commercial transactions and had been duly indorsed for a valuable consideration,
the plaintiff would have established its right to the collection of the note,
unaffected by any equities the makers may have against the payees, but as this
was not done the ruling of the court on the demurrer and the rendering of final
judgment upon untried issues of fact were erroneous.

For the foregoing
reasons the judgment appealed from is set aside and the case will be returned
for further proceedings in accordance with this decision. Without costs.

Arellano, C. J., and Araullo, J., concur.
Carson,
J. concurs in the result.

---

MORELAND, J.:

I think there can be no serious doubt that the note is not a negotiable
instrument. It was made before the enactment of the new Negotiable Instruments
Law, and therefore the nature of the contract, that is to say, whether or not it
is a negotiable instrument, is determined by the Commercial Code. It is
unquestioned both in this court and in the supreme court of Spain that, under
the Commercial Code one of the necessities of a negotiable instrument was that
it should arise from a commercial transaction. It is unnecessary to cite
authorities to support this contention; it is admitted. Every decision of the
supreme court of Spain touching the subject has said so and every decision of
this court upon the question has been to the same effect. The only question
raised, or about which there has been any dispute, or concerning which there is
any controversy in the case before us, is whether or not the fact that the note
arose from a commercial transaction must appear, in some form or manner, on the
face of the note itself. Certain decisions of this court have given the
impression that it is not necessary that it so appear, but that fact is one
which may be proved by evidence outside of the note itself. I do not believe
that these cases can be considered authority for such a position. They do not
warrant it in the present case. One of the decisions referred to is found in the
case of Rodriguez vs. Lasala (5 Phil. Rep., 357), in which the
instrument read:

“Number. $6,000. I have in my possession the sum of six thousand pesos in
cash, received of Da. Vicenta Rodriguez, which I will pay (pagare) to said lady
or to her order, within two years from date, with interest at the rate of ten
per centum per annum. Cebu, 22d of October, 1895. Mariano
Lasala.”

This instrument does not fulfill the requirements of the Code of Commerce
because it does not contain a statement that it arose from a commercial
transaction. This is admitted in the decision. It says: “In order that a
pagare may ‘have the effect’ of a commercial instrument, it must appear
that it* had its origin in ‘commercial transactions.’ (Article 632 of the
Commercial Code.)”

In considering whether this case is an authority in point it must be noted
that the action was between the original parties to the note; and the
only question involved was whether the note was outlawed. The
court said:

“The defendant admits the execution of this document and the receipt of the
sum mentioned therein, and that neither the said sum nor any part thereof has
been paid, and for his sole defense alleges that, when this action was
instituted, the cause of action on the said pagare had prescribed under
the provisions of article 950 of the Code of Commerce.

“It is admitted by both parties that, if the pagare is in fact a
commercial instrument as defined in the Code of Commerce, the right of action
had prescribed at the time when this action was instituted, whereas, if it is
not such an instrument, it is a simple promise to pay, and the plaintiff is
entitled to judgment thereon.”

Where the action is between the original parties to a note the questions
involved are quite different from those presented where the note is found in the
hands of a third person who is a holder in due course. None of the questions
arising out of such a relation were presented to or argued in the court in that
case. The only question presented or argued was the application of the statute
of limitations; and the action being between the original parties to the note,
the only question decided was that, for such purpose alone, evidence
was admissible on the trial to show that the note in fact arose out of a
commercial transaction. The court was not informed on the general question.

It is clear that in the case under discussion no question on the law merchant
was really involved and the effect of the decision on the commercial law was
never considered.

We have precisely the same situation in the case of Compania General de
Tabacos vs. Molina (5 Phil. Rep., 142). In that case the note read:

“For $3,319.74. Three months after date I promise to pay to the order of the
Compania General de Tabacos de Filipinas three thousand three hundred and
nineteen pesos and seventy-four cents, value received in merchandise to
my entire satisfaction. Manila, January 23, ’96. S. Molina. There is a rubric.
Surety, J. V. Molina. There is a rubric. There is a regulation stamp, cancelled,
of the value of two pesos.”

That case was an action between the original parties to the note, and the
main question for the court to decide was whether or not the statute of
limitations had run against the note. In that case the court said:

“Neither do we think that the contention of the plaintiff in regard to the
seventh requisite can be sustained. The origin of the debt is sufficiently
stated, for as the plaintiff itself says in its brief, the receipt of
merchandise in exchange for money necessarily supposes a contract of purchase
and sale. We think also the nature of the consideration is sufficiently stated.
It was not necessary to insert in the document an inventory of the different
articles that had been sold by the plaintiff to the said defendant, Sebastian.
As the appellees say in their brief in this court, if this was required, an
ordinary commercial note would be more extensive than a government
expediente. In order to bring the document within the Code of Commerce
it must appear that it had its origin in commercial operations. It seems to be
the contention of the appellant that this fact must appear in the note itself.
This, in our opinion, can not be sustained. If the requirements of article 531
are complied with, and, nevertheless, it does not appear from the note itself
that it had its origin in commercial operations, this fact can be proved by
other evidence. In other words, if the origin and nature of the consideration is
stated, and that statement does not show that the note proceeded from commercial
operations, the document, nevertheless, is a commercial document, if it can be
proved by other evidence that it did proceed from such operations. (Judgment of
the supreme court of Spain of the 7th of November, 1870).

“We therefore hold that the action upon the note was barred by the statute of
limitations in the Code of Commerce.”

As will be seen, this seems to be a direct holding that it is not necessary
that the requirements of article 531 shall appear upon the face of the
instrument, but in considering whether this is such a holding or not we must
take into consideration, in view of the overwhelming importance of the question
involved, the facts and circumstances already stated with respect to the other
cases cited and discussed.

But if these cases be considered authorities upon one side, the case of Noel
vs. Lasala (5 Phil. Rep., 260) may be cited on the other. This case is like the
one I have just been discussing. It was an action between the original parties
to the notes and the only defense was the statute of limitations. The notes
read:

“I acknowledge to have received from Juan Noel the sum of seven thousand
pesos which I promise to pay to him or to his order within two years from this
date, together with in terest at the rate of ten per cent per annum.”

“I acknowledge to have received from Juan Noel the sum of two thousand pesos
which I promise to pay to him or to his order within two years from date, with
interest at the rate of ten per cent per annum.”

These notes, as is seen, contain no statement that they arose from commercial
transactions, as required by the Code of Commerce. In (discussing the question
whether these notes were negotiable instruments the court said:

“Promissory notes payable to order and drawn as prescribed in article 531 of
the Code of Commerce shall be considered mercantile instruments when they arise
from mercantile transactions as required in article 532, and not otherwise.
There is nothing in the notes indicating that such was the case in this
particular instance. For this reason they cannot be considered mercantile
instruments, and the provisions of article 950 of the Code of Commerce are not
applicable thereto.”

This is very close to a direct holding in favor of my contention, provided
the action and questions raised therein were such as would reasonably permit one
to say that the case is, under all the circumstances, an authority. The notes
were held to be non-negotiable for the sole reason that they did not contain
a statement showing that they arose from commercial transactions.

Precisely the same conditions existed in the case of Miller vs.
Jones (9 Phil. Rep., 648), where both the cases just referred to were cited. The
only reference in this case to the question before us is as follows:

“Without discussing other objections which might be urged to the claim of the
defendant that this document is a mercantile obligation, it is sufficent to say
that it nowhere appears that it arose from mercantile transactions as required
in article 550 [532] of the Code of Commerce. (Noel vs. Lasala, 5 Phil. Rep.,
260.) Nor does the evidence introduced at the trial show that fact. (Rodriguez
vs. Lasala, 5 Phil. Rep., 357.) The mere purchase of personal property even by
one merchant of another does not make the transaction a mercantile one. (Arts.
825, 326, Code of Commerce.) Article 950 of the Code of Commerce not being
applicable to these obligations, the rule of prescription which governs them is
that of the Civil Code, and it is admitted that in accordance with such
provision the notes are not barred.”

In the case of Faelnar vs. Escano (11 Phil. Rep., 92), the action
was between the original parties to the note. The questions raised and discussed
were (1) whether defendant actually executed the note, and (2) whether the note
was indorsed. The only reference by the court to this question of the
negotiability of the note is the following:

“The third error assigned relates to the protest of the note. In order to
keep alive the obligation of the defendant, it was not necessary that this
instrument should be protested. (Pyle vs. Johnson, 9 Phil. Rep.,
249.)

“The claim that the instrument is a commercial document cannot be sustained.
The following statement occurs there in : ‘Value received from said gentlemen in
cash to my entire satisfaction and as a loan to meet my requirements.’

“The evidence shows that the parties thereto were not merchants and there was
no evidence that the money was actually used in commercial operations. (Arts.
311 and 532 of the Code of Commerce; Noel vs. Lasala, 5 Phil. Rep.,
260; Rodriguez vs. Lasala, 5 Phil. Rep., 357; Miller vs.
Jones, 9 Phil. Rep., 648.)”

On the other hand the conduct of the court in other cases where the question
of the negotiability of the note was directly in question leads one naturally to
the conclusion that the statement of the court in Noel vs. Lasala, above, is a
statement of the true doctrine. In several cases where the note contained a
statement, “for mercantile transactions” or an equivalent expression, the court
has seriously and solemnly discussed the question whether such an expression was
a compliance with articles 531 and 532 and other articles of the Code of
Commerce in order to determine whether they were sufficient to make the note,
under said articles, a commercial instrument. It would seem that if it was the
doctrine of the court that no such expression was required to make the
instrument negotiable, the discussion as to whether such expression was
sufficient would have been vain and idle. If a note is negotiable without any
statement at all relative to its arising from commercial transactions, what is
the purpose of discussing the sufficiency of any particular
expression? Yet this court has, time and again, considered the sufficiency of
the expression, “from commercial transactions” or an equivalent expression, to
make the note negotiable under the Code of Commerce, and, after such
consideration, has held that such expression was sufficient to make the
instrument negotiable under the Code of Commerce. This was done in the cases of
Banco Español-Filipino vs. Tan-Tongco (13 Phil. Rep., 628), and
Lichauco vs. Limjuco (19 Phil. Rep., 12). In the former case the phrase
used was “for commercial transactions” and in the latter “for commercial
operations.” Again I say, if no expression or statement relative to this matter
is required to make a note negotiable under the Code of Commerce, but that the
note is as perfectly negotiable if it contains no declaration whatever, why did
the court solemnly and seriously deliberate upon and decide the question of the
sufficiency of the statements in two later cases?

We see, then, that the cases, so far as we have gone, do not consistently
support the proposition that a note may still be negotiable under the Code of
Commerce although it contains no statement that it arose from a commercial
transaction, for the reason (1) that in those cases the action arose between the
original parties to the note, (2) that the only question raised, argued, or
decided in those cases was the application of the statute of limitations, (3)
that no question of the negotiability of the notes, that is, of the rights of
the maker, or his creditor, or of an indorser, arose in any of the cases, and
that the court did not have the question of the right of third persons, holders
in due course, presented to or argued before it. Therefore these cases have
never determined effectually and effectively that a note may be negotiable
without showing, upon its face, that it arose from a commercial transaction, and
that it was or was not negotiable may be proved as against a holder in due
course.

The case which came the nearest to presenting that question is that of Banco
Español-Filipino vs. Tan-Tongco, above cited. The note in controversy
there read as follows:

“Three months from this date I hereby promise to pay, in Manila, to the order
of D. Geronimo Jose, the sum of three thousand six hundred pesos, Mexican
currency, Value received in cash for commercial transactions.

“Manila, 21st of July, 1902.

(Signed) “FULGENCIO
TAN-TONGCO.

“Pay to the order of the Banco Espanol-Filipino for value received from the
same in cash.

(Signed) “GERONIMO
JOSE.”

Relative to the question involved and the manner of its presentation the
court said:

“As the obligation was not paid at maturity a protest was entered, and on the
3d of February, 1904, the maker and the indorser, respectively, were sued for
payment.

“Judgment was entered against Tan-Tongco, but levy of execution by the
sheriff of Manila proved ineffectual; this fact is admitted.

“On the 13th of February, 1906, the indorser Geronimo Jose, answered the
complaint admitting all the facts stated therein, and as special defense set
forth: ‘That previous to, and at the time of the issuance of the note attached
to the complaint, the party whom he represented had had no mercantile relations
with the maker of the note, nor does the note arise from a mercantile
transaction, nor is it the result and outcome of any such transactions, but of
money delivered in cash.’

“Subsequently, however, the attorneys for the plaintiff and the defendant
Geronimo Jose, agreed in behalf of their clients ‘that the special defense put
forward by defendant Geronimo Jose be withdrawn and in lieu thereof said
defendant accepts each and all of the facts stated in the complaint, as drawn;
they further agree to submit the question of law to the court after the filing
of written arguments by both parties.'”

Judgment was rendered against the indorser, Geronimo Jose, who appealed,
assigning errors as follows:

“I. In holding that the promissory note, which is the subject of this
controversy, arose from mercantile transactions.

“II. In entering judgment against the defendant Geronimo Jose, and compelling
him to pay the plaintiff, the Banco Espanol-Filipino, the sum of P3,775.50,
Philippine currency.”

Relative to these errors the court said:

“In connection with the first error assigned, the appellant’s brief
reads:

” ‘The promissory note, as it stands, is the only document by, and the only
evidence from which the conclusion that it is the result of commercial
operations must be drawn. In the whole wording of the note we do not find a
clear expression that it originated from mercantile transactions, nor do we find
an expression determining that a previous mercantile transaction existed between
the interested parties; but on the contrary, we find that it contains the words
“value received in cash for commercial transactions.” The foregoing words “value
received in cash for commercial transactions,” leave no room for any doubt
whatever, and the actual significance and literal meaning of each of them lead
us to understand that the money was to be used strictly for commercial
operations, an act which is subsequent to the execution of the promissory note,
while the Code of Commerce requires exactly the contrary in order that a note
may be considered as a commercial document; that is to say, that the commercial
act shall precede the execution of the note. Therefore, the foregoing words in
their true meaning neither establish the fact nor permit the presumption of a
commercial transaction prior to the date of the note.’

“The second assignment of error is based on the supposition that the note in
question is not a commercial document; that the original contract between
Tan-Tongco and Jose was either an ordinary loan or a mercantile promise to pay;
and that in either case, whether an ordinary loan, or a mercantile promise to
pay, it was not legally indorsable but simply a transmission of ownership
whereby the defendant, Geronimo Jose, incurred no liability for payment, he
being only responsible for the authenticity of the document and the legitimacy
of the credit, or at most, for the previous and public insolvency of the debtor.
(Art. 1529, Civil Code, and art. 548, Code of Commerce.)

“Hence, the conclusions of the appeal are:

“That the promissory note in question, in the farm in which it was drawn up,
is not a commercial note.

“That not being such, it cannot legally be indorsed.

“That, not being
legally indorsable, the indorsement thereon is simply an assignment of
credit.

“That an assignment of credit does not produce the obligation to pay, and
that in consequence thereof, the indorser, Geronimo Jose, should be absolved of
the complaint.

“The form of the note in controversy was, and still is, that habitually used
between merchants, and it may be stated, as a notoriously public fact, that
printed promissory notes with the corresponding stamp affixed thereon and in the
identical language of the one in question, were sold at the offices maintained
by the Spanish Government for the sale of stamped articles.”

And on page 637 the court said:

“Beyond the fact that the question set up is purely one of law and as both
parties agree to the facts contained in the document, the point to be decided is
whether or not a promissory note payable to order for a certain sum received in
cash for commercial transactions, as it is worded, is a mercantile
document.”

In the resolution of the question before it the court said (referring to a
doctrine established by the supreme court of Spain in a case under discussion)
:

“From the whole of this doctrine it would seem that the promissory note in
question did not contain the form of article 387, to wit: ‘for commercial
transactions;’ that with said statement the note would have appeared as a
commercial loan; and that, being a commercial document, it would have then
contained the necessary indication that it arose from commercial
transactions. This is the important part of the decision: that a note arises
from a commercial transaction if it is the outcome of a commercial loan, and the
loan is a commercial one when the things loaned are for commercial operations or
transactions. * * *

“Thus far only does the doctrine repeatedly established by the supreme court
of Spain extend, notwithstanding the fact that in its decision of January 29,
1859, it clearly indicates how the legal requirements of article 532 are
considered as fulfilled so that a promissory note payable to order may produce
the same effects and obligations as a bill of exchange, that is, when it
contains a sufficient statement or indication from which it may appear that the
same arose from a mercantile operation, such being the case when it contains the
words for commercial transactions. * * *

“And in the first, as in the second case, in order that it may be known that
it arose from a commercial loan, the form of a promissory note payable to order
or to the bearer is no other than the usual one in business: for commercial
transactions. A promissory note thus made out carries with it the
indication that it arose from a commercial transaction, wherein either the
lender carries out a commercial transaction, or the borrower intends to enter
into a business speculation, and gives in exchange a negotiable
document.

“If the defendant has admitted the fact stated in the
promissory note, that the amount confessed to have been received was delivered
in cash; if he has admitted the fact stated in the note that the maker bound
himself to pay it; if said facts constitute essentially a contract of loan, and
the fact that the amount delivered was received for commercial transactions was
stated in the note, which fact was fully admitted by the defendant and which
constitutes the specific character of a commercial loan, and in consequence, and
as the result of all of said facts, the instrument of exchange consisting of a
promissory note payable to order was executed, the inevitable conclusion is that
said note payable to order was the effect, or outcome, of a commercial
transaction known as a mercantile loan.

“Therefore, the words ‘value
received in cash for commercial transactions’ in their true sense
determine and pre-suppose a commercial transaction prior to the date of the
promissory note, namely, a mercantile loan. * ** *

“But as a promissory note payable to order was issued for value received in
cash for commercial transactions, a commercial loan exists, by reason of
these last words, and because it is payable to order, there is a contract
of exchange, which renders it subject to indorsement and negotiation. * * *

“The foregoing precepts are in accord with said article 532, which requires
nothing more than that promissory notes shall be payable to order and arise from
commercial transactions, not that they be issued between merchants as required
by said article in reference to drafts, * * *.”

Justice Willard dissented from this decision on the ground that the note was
not a negotiable instrument, because it was not proved “that either Tan-Tongco
or Geronimo Jose was a merchant.” He said: “* * * and although it appears that
the money was to be used for commercial purposes, the transaction does not come
within article 311 of the same code and cannot be called a mercantile loan. No
evidence was offered to show that in fact the note proceeded from commercial
operations.”

This dissent presented the question of the negotiability of the note sharply.
It reiterated the holdings that a note is negotiable even though no expression
whatever as to its origin appears therein and that, therefore, if the evidence
on the trial shows that it arose from a commercial transaction, it is
negotiable. It also laid down the proposition that, although a note might have
within itself evidence showing that it arose from a commercial transaction,
nevertheless that was subject to being overcome by evidence on the trial showing
the contrary. As a necessary consequence, no one could tell by looking at a note
whether it was negotiable or not. A lawsuit was necessary to determine that
question. It was decided with open eyes and after thorough consideration; and
the court held that the note was negotiable by reason of its own words,
notwithstanding the fact that it did not appear that either party thereto was a
merchant and in spite of the claim that its negotiability could be finally
determined only after a trial. Not only this but it intimated in the statements
heretofore quoted that, to be negotiable it must contain the statement “for
commercial operations” or an equivalent expression.

The court also held that, such statement being present in the note, it was
not necessary to show that it arose from a commercial transaction, “because it
would be absolutely contrary to the idea of mercantile transactions and to the
nature of contracts and commercial legislation, that a bank, every time a
promissory note was presented, drawn in terms similar to those of the one at
bar, should require the drawer and the indorser to produce books and other
evidence to establish the fact, and to show that the note arose from commercial
transactions as, for example, from the dissolution of a commercial
copartnership, from a current account, from the balancing of accounts of a
commission agent, from the liability resulting from a commercial deposit, etc.,
and to make sure of all these proofs against the contingency of a
litigation.”

This last quotation touches the vital point. It is unquestioned anywhere that
every element which is essential to make an instrument a negotiable one must
appear upon the face of the instrument itself. As written contracts, bills and
notes may not be varied by parol testimony, and in order that they may fulfill
their purpose as a medium of exchange, and may circulate with readiness and
safety, the certainty and scope of the contract in all material points, and the
whole history of the title, must appear on the face of the instrument, and there
should be no necessity for extrinsic inquiries on the part of one to whom such
an instrument is tendered. Perhaps one of the ablest statements of the essential
qualities going to make an instrument negotiable is that by Lord Chief Baron
Eyre in the House of Lords, in the great case of Gibson vs. Minet (1 H.
Bl., 605). The statement is in part as follows:

“Bills of exchange being of several kinds, the title to sue upon any one bill
of exchange in particular will depend upon what kind of bill it is, and whether
the holder claims title to it as the original payee, or as deriving from the
original payee, or from the drawer, in the case of a bill drawn payable to the
drawer’s own order, who is in the nature of an original payee. The title of an
original payee is immediate, and apparent on the face ipf the bill. The
derivative title is a title by assignment, a title which the common law does not
acknowledge, but which exists only by the custom of merchants. As it is by force
of the custom of merchants that a bill of exchange is assignable at all, of
necessity the custom must direct how it shall be assigned; and, in respect of
bills payable to order, the custom has ejected that the assignment should be
made by a writing on the bill, called an indorsement, appointing the contents of
that bill to be paid to some third person; and, in respect of bills drawn
payable to bearer, that the assignment should be constituted by delivery only.
This is simple and obvious: every man who can read can discover whether the
holder of a bill claims to be the assignee of it as indorsee or as bearer. If it
should be questioned whether a bill payable to bearer passes by assignment, or
whether every bearer is not an original payee, as being within the description
in the bill itself of the original payee, it does not appear to me to be
necessary to this argument that this question should be decided. I am content
that it should be taken either way. In either case, the title of a bearer is
self-evident, the title of an indorsee appears by the indorsement itself, the
truth of which is guaranteed by the highest penal sanctions. Everything which is
necessary to be known, in order that it may be seen whether a writing is a bill
of exchange, and as such by the custom of merchants partakes of the nature of a
specialty, and creates a debt or duty by its own proper force, whether by the
same custom it be assignable, and how it shall be assigned, and whether it has
in fact been assigned agreeable to the custom, appears at once by the bare
inspection of the writing; with the circumstance, in the case of a bill payable
to bearer, of that bill being in the possession of him who claims title to it.
The wit of man cannot devise anything better calculated for circulation. The
value of the writing, the assignable quality of it, and the particular mode of
assigning it, are created and determined in the original frame and constitution
of the instrument itself; and the party to whom such a bill of exchange is
tendered has only to read it, need look no further, and has nothing to do with
any private history that may belong to it. The policy which introduced this
simple instrument demands that the simplicity of it should be protected, and
that it never should be entangled in the infinitely complicated transactions of
particular individuals into whose hands it may happen to come.” (Am. and Eng.
Encyc. of Law, vol. 4, p. 77, footnote.)

The instrument claimed to be negotiable stands or falls upon that basis as it
is made. Except, perhaps, between the original parties to the, bill or note, no
evidence can be introduced which will make a nonnegotiable bill negotiable or
which will make a negotiable bill nonnegotiable. Such instruments partake so
much of the nature of a medium of exchange and pass from hand to hand with such
readiness in a business community that their essential form and nature cannot be
left to the contingencies of a suit at law, nor can the rights of individuals
holding them be affected by their history. They stand in the hands of a holder
upon substantially the same footing as a piece of money whose value and efficacy
can be impeached only by demonstrating that it is counterfeit. To hold that a
nonnegotiable instrument maybe shown by parol testimony to be negotiable or that
a negotiable instrument may be shown by parol testimony to be nonnegotiable is
to shake to its foundations the whole fabric of the mercantile law. If an
instrument is nonnegotiable upon its face, it cannot be made negotiable by
proof; and, vice versa, if an instrument is negotiable upon its face, it cannot
be made nonnegotiable by proof, when it has passed from the hands of the
original holder. This is the doctrine of the Spanish law as it is of the law
merchant.

In the case before us the demurrer to the answer searches the whole record
and impinges upon the first pleading found to be defective. The note set out in
the complaint in this case shows upon its face that under the Code of Commerce
it is not a negotiable instrument, for the reason that it lacks one of the
essential requirements of that code, in that it fails to show on its
face that it arose from a commercial operation. This being so, the
plaintiff bank took the instrument by assignment rather than by indorsement and
therefore occupies the position of an assignee at common law instead of an
indorser under the law merchant. As a legal consequence the bank took the note
subject to all of the equities which the makers thereof held against the payee,
and the defense set up in the answer is upon its face a complete defense to the
action.

But even if it should be held that the defect in the note could be supplied
by evidence upon the trial and that it could be shown that the note arose from a
commercial transaction, nevertheless, the complaint would still fail to show
that the note was a promissory note because it contains no allegation that the
note arose from a commercial transaction. The allegation in the complaint that
the plaintiff and the defendant are commercial companies doing business in the
city of Manila is not sufficient to cure this defect, for the reason that, under
the doctrine assumed, the Code of Commerce requires that in addition to the fact
that the parties to the note, or one of them, be merchants, or a merchant, it
must also .appear that the note in question arose from a commercial transaction.
(Banco Espanol-Filipino vs. Tan-Tongco, above.)

In either case, therefore, the complaint shows that the action is based upon
a common law instrument to which the facts set forth in the answer constitute,
if satisfactorily proved, a complete defense. The demurrer should be overruled
and the cause remanded for trial.

Judgment set aside; case remanded.