G.R. No.

L-22405 June 30, 1971

PHILIPPINE EDUCATION CO., INC., plaintiff-appellant,
vs.
MAURICIO A. SORIANO, ET AL., defendant-appellees.
Marcial Esposo for plaintiff-appellant.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Antonio G. Ibarra and Attorney Concepcion Torrijos-Agapinan for defendantsappellees.

DIZON, J.:
An appeal from a decision of the Court of First Instance of Manila dismissing the complaint filed by the Philippine Education Co., Inc. against Mauricio A.
Soriano, Enrico Palomar and Rafael Contreras.
On April 18, 1958 Enrique Montinola sought to purchase from the Manila Post Office ten (10) money orders of P200.00 each payable to E.P. Montinola
withaddress at Lucena, Quezon. After the postal teller had made out money ordersnumbered 124685, 124687-124695, Montinola offered to pay for them
with a private checks were not generally accepted in payment of money orders, the teller advised him to see the Chief of the Money Order Division, but
instead of doing so, Montinola managed to leave building with his own check and the ten(10) money orders without the knowledge of the teller.
On the same date, April 18, 1958, upon discovery of the disappearance of the unpaid money orders, an urgent message was sent to all postmasters, and
the following day notice was likewise served upon all banks, instructing them not to pay anyone of the money orders aforesaid if presented for payment.
The Bank of America received a copy of said notice three days later.
On April 23, 1958 one of the above-mentioned money orders numbered 124688 was received by appellant as part of its sales receipts. The following day it
deposited the same with the Bank of America, and one day thereafter the latter cleared it with the Bureau of Posts and received from the latter its face
value of P200.00.
On September 27, 1961, appellee Mauricio A. Soriano, Chief of the Money Order Division of the Manila Post Office, acting for and in behalf of his coappellee, Postmaster Enrico Palomar, notified the Bank of America that money order No. 124688 attached to his letter had been found to have been
irregularly issued and that, in view thereof, the amount it represented had been deducted from the bank's clearing account. For its part, on August 2 of the
same year, the Bank of America debited appellant's account with the same amount and gave it advice thereof by means of a debit memo.
On October 12, 1961 appellant requested the Postmaster General to reconsider the action taken by his office deducting the sum of P200.00 from the
clearing account of the Bank of America, but his request was denied. So was appellant's subsequent request that the matter be referred to the Secretary
of Justice for advice. Thereafter, appellant elevated the matter to the Secretary of Public Works and Communications, but the latter sustained the actions
taken by the postal officers.
In connection with the events set forth above, Montinola was charged with theft in the Court of First Instance of Manila (Criminal Case No. 43866) but after
trial he was acquitted on the ground of reasonable doubt.
On January 8, 1962 appellant filed an action against appellees in the Municipal Court of Manila praying for judgment as follows:
WHEREFORE, plaintiff prays that after hearing defendants be ordered:
(a) To countermand the notice given to the Bank of America on September 27, 1961, deducting from the said Bank's clearing
account the sum of P200.00 represented by postal money order No. 124688, or in the alternative indemnify the plaintiff in the same
amount with interest at 8-% per annum from September 27, 1961, which is the rate of interest being paid by plaintiff on its
overdraft account;
(b) To pay to the plaintiff out of their own personal funds, jointly and severally, actual and moral damages in the amount of P1,000.00
or in such amount as will be proved and/or determined by this Honorable Court: exemplary damages in the amount of P1,000.00,
attorney's fees of P1,000.00, and the costs of action.
Plaintiff also prays for such other and further relief as may be deemed just and equitable.
On November 17, 1962, after the parties had submitted the stipulation of facts reproduced at pages 12 to 15 of the Record on Appeal, the above-named
court rendered judgment as follows:
WHEREFORE, judgment is hereby rendered, ordering the defendants to countermand the notice given to the Bank of America on
September 27, 1961, deducting from said Bank's clearing account the sum of P200.00 representing the amount of postal money
order No. 124688, or in the alternative, to indemnify the plaintiff in the said sum of P200.00 with interest thereon at the rate of 8-%
per annum from September 27, 1961 until fully paid; without any pronouncement as to cost and attorney's fees.

The case was appealed to the Court of First Instance of Manila where, after the parties had resubmitted the same stipulation of facts, the appealed
decision dismissing the complaint, with costs, was rendered.
The first, second and fifth assignments of error discussed in appellant's brief are related to the other and will therefore be discussed jointly. They raise this
main issue: that the postal money order in question is a negotiable instrument; that its nature as such is not in anyway affected by the letter dated October
26, 1948 signed by the Director of Posts and addressed to all banks with a clearing account with the Post Office, and that money orders, once issued,
create a contractual relationship of debtor and creditor, respectively, between the government, on the one hand, and the remitters payees or endorses, on
the other.
It is not disputed that our postal statutes were patterned after statutes in force in the United States. For this reason, ours are generally construed in
accordance with the construction given in the United States to their own postal statutes, in the absence of any special reason justifying a departure from
this policy or practice. The weight of authority in the United States is that postal money orders are not negotiable instruments (Bolognesi vs. U.S. 189 Fed.
395; U.S. vs. Stock Drawers National Bank, 30 Fed. 912), the reason behind this rule being that, in establishing and operating a postal money order
system, the government is not engaging in commercial transactions but merely exercises a governmental power for the public benefit.
It is to be noted in this connection that some of the restrictions imposed upon money orders by postal laws and regulations are inconsistent with the
character of negotiable instruments. For instance, such laws and regulations usually provide for not more than one endorsement; payment of money
orders may be withheld under a variety of circumstances (49 C.J. 1153).
Of particular application to the postal money order in question are the conditions laid down in the letter of the Director of Posts of October 26, 1948
(Exhibit 3) to the Bank of America for the redemption of postal money orders received by it from its depositors. Among others, the condition is imposed
that "in cases of adverse claim, the money order or money orders involved will be returned to you (the bank) and the, corresponding amount will have to
be refunded to the Postmaster, Manila, who reserves the right to deduct the value thereof from any amount due you if such step is deemed necessary."
The conditions thus imposed in order to enable the bank to continue enjoying the facilities theretofore enjoyed by its depositors, were accepted by the
Bank of America. The latter is therefore bound by them. That it is so is clearly referred from the fact that, upon receiving advice that the amount
represented by the money order in question had been deducted from its clearing account with the Manila Post Office, it did not file any protest against
such action.
Moreover, not being a party to the understanding existing between the postal officers, on the one hand, and the Bank of America, on the other, appellant
has no right to assail the terms and conditions thereof on the ground that the letter setting forth the terms and conditions aforesaid is void because it was
not issued by a Department Head in accordance with Sec. 79 (B) of the Revised Administrative Code. In reality, however, said legal provision does not
apply to the letter in question because it does not provide for a department regulation but merely sets down certain conditions upon the privilege granted
to the Bank of Amrica to accept and pay postal money orders presented for payment at the Manila Post Office. Such being the case, it is clear that the
Director of Posts had ample authority to issue it pursuant to Sec. 1190 of the Revised Administrative Code.
In view of the foregoing, We do not find it necessary to resolve the issues raised in the third and fourth assignments of error.
WHEREFORE, the appealed decision being in accordance with law, the same is hereby affirmed with costs.
Concepcion, C.J., Reyes, J.B.L., Makalintal, Zaldivar, Fernando, Teehankee, Barredo and Villamor, JJ., concur.
Castro and Makasiar, JJ., took no part.

G.R. No. 97753 August 10, 1992

CALTEX (PHILIPPINES), INC., petitioner,
vs.
COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.
Bito, Lozada, Ortega & Castillo for petitioners.
Nepomuceno, Hofilea & Guingona for private.

REGALADO, J.:
This petition for review on certiorari impugns and seeks the reversal of the decision promulgated by respondent court on March 8, 1991 in CA-G.R. CV
No. 23615 1 affirming with modifications, the earlier decision of the Regional Trial Court of Manila, Branch XLII, 2 which dismissed the complaint filed
therein by herein petitioner against respondent bank.
The undisputed background of this case, as found by the court a quo and adopted by respondent court, appears of record:
1. On various dates, defendant, a commercial banking institution, through its Sucat Branch issued 280 certificates of time deposit
(CTDs) in favor of one Angel dela Cruz who deposited with herein defendant the aggregate amount of P1,120,000.00, as follows:
(Joint Partial Stipulation of Facts and Statement of Issues, Original Records, p. 207; Defendant's Exhibits 1 to 280);
CTD CTD
Dates Serial Nos. Quantity Amount
22 Feb. 82 90101 to 90120 20 P80,000
26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000

Total 280 P1,120,000
===== ========
2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff in connection with his purchased of fuel products
from the latter (Original Record, p. 208).
3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the Sucat Branch Manger, that he lost all the
certificates of time deposit in dispute. Mr. Tiangco advised said depositor to execute and submit a notarized Affidavit of Loss, as
required by defendant bank's procedure, if he desired replacement of said lost CTDs (TSN, February 9, 1987, pp. 48-50).
4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank the required Affidavit of Loss (Defendant's Exhibit
281). On the basis of said affidavit of loss, 280 replacement CTDs were issued in favor of said depositor (Defendant's Exhibits 282561).
5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from defendant bank in the amount of Eight Hundred
Seventy Five Thousand Pesos (P875,000.00). On the same date, said depositor executed a notarized Deed of Assignment of Time
Deposit (Exhibit 562) which stated, among others, that he (de la Cruz) surrenders to defendant bank "full control of the indicated

time deposits from and after date" of the assignment and further authorizes said bank to pre-terminate, set-off and "apply the said
time deposits to the payment of whatever amount or amounts may be due" on the loan upon its maturity (TSN, February 9, 1987,
pp. 60-62).
6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.) Inc., went to the defendant bank's Sucat
branch and presented for verification the CTDs declared lost by Angel dela Cruz alleging that the same were delivered to herein
plaintiff "as security for purchases made with Caltex Philippines, Inc." by said depositor (TSN, February 9, 1987, pp. 54-68).
7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563) from herein plaintiff formally informing it of its
possession of the CTDs in question and of its decision to pre-terminate the same.
8. On December 8, 1982, plaintiff was requested by herein defendant to furnish the former "a copy of the document evidencing the
guarantee agreement with Mr. Angel dela Cruz" as well as "the details of Mr. Angel dela Cruz" obligation against which plaintiff
proposed to apply the time deposits (Defendant's Exhibit 564).
9. No copy of the requested documents was furnished herein defendant.
10. Accordingly, defendant bank rejected the plaintiff's demand and claim for payment of the value of the CTDs in a letter dated
February 7, 1983 (Defendant's Exhibit 566).
11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured and fell due and on August 5, 1983, the latter set-off
and applied the time deposits in question to the payment of the matured loan (TSN, February 9, 1987, pp. 130-131).
12. In view of the foregoing, plaintiff filed the instant complaint, praying that defendant bank be ordered to pay it the aggregate value
of the certificates of time deposit of P1,120,000.00 plus accrued interest and compounded interest therein at 16% per annum, moral
and exemplary damages as well as attorney's fees.
After trial, the court a quo rendered its decision dismissing the instant complaint. 3
On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of the complaint, hence this petition wherein petitioner faults respondent
court in ruling (1) that the subject certificates of deposit are non-negotiable despite being clearly negotiable instruments; (2) that petitioner did not become
a holder in due course of the said certificates of deposit; and (3) in disregarding the pertinent provisions of the Code of Commerce relating to lost
instruments payable to bearer. 4
The instant petition is bereft of merit.
A sample text of the certificates of time deposit is reproduced below to provide a better understanding of the issues involved in this recourse.
SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____
This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS: FOUR THOUSAND ONLY,
SECURITY BANK SUCAT OFFICE P4,000 & 00 CTS Pesos, Philippine Currency, repayable to said depositor
731 days. after date, upon presentation and surrender of this certificate, with interest at the rate of 16% per
cent per annum.
(Sgd. Illegible) (Sgd. Illegible)

AUTHORIZED SIGNATURES 5
Respondent court ruled that the CTDs in question are non-negotiable instruments, nationalizing as follows:
. . . While it may be true that the word "bearer" appears rather boldly in the CTDs issued, it is important to note that after the word
"BEARER" stamped on the space provided supposedly for the name of the depositor, the words "has deposited" a certain amount
follows. The document further provides that the amount deposited shall be "repayable to said depositor" on the period indicated.
Therefore, the text of the instrument(s) themselves manifest with clarity that they are payable, not to whoever purports to be the
"bearer" but only to the specified person indicated therein, the depositor. In effect, the appellee bank acknowledges its depositor

Angel dela Cruz as the person who made the deposit and further engages itself to pay said depositor the amount indicated thereon
at the stipulated date. 6
We disagree with these findings and conclusions, and hereby hold that the CTDs in question are negotiable instruments. Section 1 Act No. 2031,
otherwise known as the Negotiable Instruments Law, enumerates the requisites for an instrument to become negotiable, viz:
(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.
The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties' bone of contention is with regard to requisite (d) set forth
above. It is noted that Mr. Timoteo P. Tiangco, Security Bank's Branch Manager way back in 1982, testified in open court that the depositor reffered to in
the CTDs is no other than Mr. Angel de la Cruz.
xxx xxx xxx
Atty. Calida:
q In other words Mr. Witness, you are saying that per books of the bank, the depositor referred (sic) in these
certificates states that it was Angel dela Cruz?
witness:
a Yes, your Honor, and we have the record to show that Angel dela Cruz was the one who cause (sic) the
amount.
Atty. Calida:
q And no other person or entity or company, Mr. Witness?
witness:
a None, your Honor. 7
xxx xxx xxx
Atty. Calida:
q Mr. Witness, who is the depositor identified in all of these certificates of time deposit insofar as the bank is
concerned?
witness:
a Angel dela Cruz is the depositor. 8
xxx xxx xxx
On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is determined from the writing, that is, from the face of the
instrument itself. 9 In the construction of a bill or note, the intention of the parties is to control, if it can be legally ascertained. 10 While the writing may be
read in the light of surrounding circumstances in order to more perfectly understand the intent and meaning of the parties, yet as they have constituted the
writing to be the only outward and visible expression of their meaning, no other words are to be added to it or substituted in its stead. The duty of the court
in such case is to ascertain, not what the parties may have secretly intended as contradistinguished from what their words express, but what is the
meaning of the words they have used. What the parties meant must be determined by what they said. 11
Contrary to what respondent court held, the CTDs are negotiable instruments. 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. 12
The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer is in the negative. The records reveal that Angel de la Cruz,
whom petitioner chose not to implead in this suit for reasons of its own, delivered the CTDs amounting to P1,120,000.00 to petitioner without informing
respondent bank thereof at any time. Unfortunately for petitioner, although the CTDs are bearer instruments, a valid negotiation thereof for the true
purpose and agreement between it and De la Cruz, as ultimately ascertained, requires both delivery and indorsement. For, although petitioner seeks to
deflect this fact, the CTDs were in reality delivered to it as a security for De la Cruz' purchases of its fuel products. Any doubt as to whether the CTDs were
delivered as payment for the fuel products or as a security has been dissipated and resolved in favor of the latter by petitioner's own authorized and
responsible representative himself.
In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . . These certificates of
deposit were negotiated to us by Mr. Angel dela Cruz to guarantee his purchases of fuel products" (Emphasis ours.) 13 This admission is conclusive upon
petitioner, its protestations notwithstanding. Under the doctrine of estoppel, an admission or representation is rendered conclusive upon the person
making it, and cannot be denied or disproved as against the person relying thereon. 14 A party may not go back on his own acts and representations to the
prejudice of the other party who relied upon them. 15 In the law of evidence, whenever a party has, by his own declaration, act, or omission, intentionally
and deliberately led another to believe a particular thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act, or
omission, be permitted to falsify it. 16
If it were true that the CTDs were delivered as payment and not as security, petitioner's credit manager could have easily said so, instead of using the
words "to guarantee" in the letter aforequoted. Besides, when respondent bank, as defendant in the court below, moved for a bill of particularity therein 17
praying, among others, that petitioner, as plaintiff, be required to aver with sufficient definiteness or particularity (a) the due date or dates of payment of the
alleged indebtedness of Angel de la Cruz to plaintiff and (b) whether or not it issued a receipt showing that the CTDs were delivered to it by De la Cruz as
payment of the latter's alleged indebtedness to it, plaintiff corporation opposed the motion. 18 Had it produced the receipt prayed for, it could have proved, if
such truly was the fact, that the CTDs were delivered as payment and not as security. Having opposed the motion, petitioner now labors under the
presumption that evidence willfully suppressed would be adverse if produced. 19
Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs. Philippine National Bank, et al. 20 is apropos:
. . . Adverting again to the Court's pronouncements in Lopez, supra, we quote therefrom:
The character of the transaction between the parties is to be determined by their intention, regardless of what
language was used or what the form of the transfer was. If it was intended to secure the payment of money, it
must be construed as a pledge; but if there was some other intention, it is not a pledge. However, even though
a transfer, if regarded by itself, appears to have been absolute, its object and character might still be qualified
and explained by contemporaneous writing declaring it to have been a deposit of the property as collateral
security. It has been said that a transfer of property by the debtor to a creditor, even if sufficient on its face to
make an absolute conveyance, should be treated as a pledge if the debt continues in inexistence and is not
discharged by the transfer, and that accordingly the use of the terms ordinarily importing conveyance of
absolute ownership will not be given that effect in such a transaction if they are also commonly used in
pledges and mortgages and therefore do not unqualifiedly indicate a transfer of absolute ownership, in the
absence of clear and unambiguous language or other circumstances excluding an intent to pledge.
Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the Negotiable Instruments Law, an instrument is negotiated when it is
transferred from one person to another in such a manner as to constitute the transferee the holder thereof, 21 and a holder may be the payee or indorsee
of a bill or note, who is in possession of it, or the bearer thereof. 22 In the present case, however, there was no negotiation in the sense of a transfer of the
legal title to the CTDs in favor of petitioner in which situation, for obvious reasons, mere delivery of the bearer CTDs would have sufficed. Here, the
delivery thereof only as security for the purchases of Angel de la Cruz (and we even disregard the fact that the amount involved was not disclosed) could
at the most constitute petitioner only as a holder for value by reason of his lien. Accordingly, a negotiation for such purpose cannot be effected by mere
delivery of the instrument since, necessarily, the terms thereof and the subsequent disposition of such security, in the event of non-payment of the
principal obligation, must be contractually provided for.
The pertinent law on this point is that where the holder has a lien on the instrument arising from contract, he is deemed a holder for value to the extent of
his lien. 23 As such holder of collateral security, he would be a pledgee but the requirements therefor and the effects thereof, not being provided for by the
Negotiable Instruments Law, shall be governed by the Civil Code provisions on pledge of incorporeal rights, 24 which inceptively provide:
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged. The instrument proving the right
pledged shall be delivered to the creditor, and if negotiable, must be indorsed.
Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged and the date of the pledge do not
appear in a public instrument.

Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of respondent court quoted at the start of this opinion show
that petitioner failed to produce any document evidencing any contract of pledge or guarantee agreement between it and Angel de la Cruz. 25
Consequently, the mere delivery of the CTDs did not legally vest in petitioner any right effective against and binding upon respondent bank. The
requirement under Article 2096 aforementioned is not a mere rule of adjective law prescribing the mode whereby proof may be made of the date of a
pledge contract, but a rule of substantive law prescribing a condition without which the execution of a pledge contract cannot affect third persons
adversely. 26
On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of respondent bank was embodied in a public instrument. 27 With regard
to this other mode of transfer, the Civil Code specifically declares:
Art. 1625. An assignment of credit, right or action shall produce no effect as against third persons, unless it appears in a public
instrument, or the instrument is recorded in the Registry of Property in case the assignment involves real property.
Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether as purchaser, assignee or lien holder of the CTDs, neither
proved the amount of its credit or the extent of its lien nor the execution of any public instrument which could affect or bind private respondent.
Necessarily, therefore, as between petitioner and respondent bank, the latter has definitely the better right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the question of whether or not private respondent observed the requirements of the law
in the case of lost negotiable instruments and the issuance of replacement certificates therefor, on the ground that petitioner failed to raised that issue in
the lower court. 28
On this matter, we uphold respondent court's finding that the aspect of alleged negligence of private respondent was not included in the stipulation of the
parties and in the statement of issues submitted by them to the trial court. 29 The issues agreed upon by them for resolution in this case are:
1. Whether or not the CTDs as worded are negotiable instruments.
2. Whether or not defendant could legally apply the amount covered by the CTDs against the depositor's loan by virtue of the
assignment (Annex "C").
3. Whether or not there was legal compensation or set off involving the amount covered by the CTDs and the depositor's
outstanding account with defendant, if any.
4. Whether or not plaintiff could compel defendant to preterminate the CTDs before the maturity date provided therein.
5. Whether or not plaintiff is entitled to the proceeds of the CTDs.
6. Whether or not the parties can recover damages, attorney's fees and litigation expenses from each other.
As respondent court correctly observed, with appropriate citation of some doctrinal authorities, the foregoing enumeration does not include the issue of
negligence on the part of respondent bank. An issue raised for the first time on appeal and not raised timely in the proceedings in the lower court is barred
by estoppel. 30 Questions raised on appeal must be within the issues framed by the parties and, consequently, issues not raised in the trial court cannot be
raised for the first time on appeal. 31
Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a case are properly raised. Thus, to obviate the element of
surprise, parties are expected to disclose at a pre-trial conference all issues of law and fact which they intend to raise at the trial, except such as may
involve privileged or impeaching matters. The determination of issues at a pre-trial conference bars the consideration of other questions on appeal. 32
To accept petitioner's suggestion that respondent bank's supposed negligence may be considered encompassed by the issues on its right to preterminate
and receive the proceeds of the CTDs would be tantamount to saying that petitioner could raise on appeal any issue. We agree with private respondent
that the broad ultimate issue of petitioner's entitlement to the proceeds of the questioned certificates can be premised on a multitude of other legal reasons
and causes of action, of which respondent bank's supposed negligence is only one. Hence, petitioner's submission, if accepted, would render a pre-trial
delimitation of issues a useless exercise. 33
Still, even assuming arguendo that said issue of negligence was raised in the court below, petitioner still cannot have the odds in its favor. A close scrutiny
of the provisions of the Code of Commerce laying down the rules to be followed in case of lost instruments payable to bearer, which it invokes, will reveal
that said provisions, even assuming their applicability to the CTDs in the case at bar, are merely permissive and not mandatory. The very first article cited
by petitioner speaks for itself.
Art 548. The dispossessed owner, no matter for what cause it may be, may apply to the judge or court of competent jurisdiction,
asking that the principal, interest or dividends due or about to become due, be not paid a third person, as well as in order to prevent
the ownership of the instrument that a duplicate be issued him. (Emphasis ours.)
xxx xxx xxx
The use of the word "may" in said provision shows that it is not mandatory but discretionary on the part of the "dispossessed owner" to apply to the judge
or court of competent jurisdiction for the issuance of a duplicate of the lost instrument. Where the provision reads "may," this word shows that it is not

mandatory but discretional. 34 The word "may" is usually permissive, not mandatory. 35 It is an auxiliary verb indicating liberty, opportunity, permission and
possibility. 36
Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of the Code of Commerce, on which petitioner seeks to anchor respondent
bank's supposed negligence, merely established, on the one hand, a right of recourse in favor of a dispossessed owner or holder of a bearer instrument
so that he may obtain a duplicate of the same, and, on the other, an option in favor of the party liable thereon who, for some valid ground, may elect to
refuse to issue a replacement of the instrument. Significantly, none of the provisions cited by petitioner categorically restricts or prohibits the issuance a
duplicate or replacement instrument sans compliance with the procedure outlined therein, and none establishes a mandatory precedent requirement
therefor.
WHEREFORE, on the modified premises above set forth, the petition is DENIED and the appealed decision is hereby AFFIRMED.
SO ORDERED.
Narvasa, C.J., Padilla and Nocon, JJ., concur.

G.R. No. 88866

February 18, 1991

METROPOLITAN BANK & TRUST COMPANY, petitioner,

vs.
COURT OF APPEALS, GOLDEN SAVINGS & LOAN ASSOCIATION, INC., LUCIA CASTILLO, MAGNO CASTILLO and GLORIA CASTILLO,
respondents.
Angara, Abello, Concepcion, Regala & Cruz for petitioner.
Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson for Magno and Lucia Castillo.
Agapito S. Fajardo and Jaime M. Cabiles for respondent Golden Savings & Loan Association, Inc.

CRUZ, J.:
This case, for all its seeming complexity, turns on a simple question of negligence. The facts, pruned of all non-essentials, are easily told.
The Metropolitan Bank and Trust Co. is a commercial bank with branches throughout the Philippines and even abroad. Golden Savings and Loan
Association was, at the time these events happened, operating in Calapan, Mindoro, with the other private respondents as its principal officers.
In January 1979, a certain Eduardo Gomez opened an account with Golden Savings and deposited over a period of two months 38 treasury warrants with
a total value of P1,755,228.37. They were all drawn by the Philippine Fish Marketing Authority and purportedly signed by its General Manager and
countersigned by its Auditor. Six of these were directly payable to Gomez while the others appeared to have been indorsed by their respective payees,
followed by Gomez as second indorser. 1

On various dates between June 25 and July 16, 1979, all these warrants were subsequently indorsed by Gloria Castillo as Cashier of Golden Savings and
deposited to its Savings Account No. 2498 in the Metrobank branch in Calapan, Mindoro. They were then sent for clearing by the branch office to the
principal office of Metrobank, which forwarded them to the Bureau of Treasury for special clearing. 2
More than two weeks after the deposits, Gloria Castillo went to the Calapan branch several times to ask whether the warrants had been cleared. She was
told to wait. Accordingly, Gomez was meanwhile not allowed to withdraw from his account. Later, however, "exasperated" over Gloria's repeated inquiries
and also as an accommodation for a "valued client," the petitioner says it finally decided to allow Golden Savings to withdraw from the proceeds of the
warrants. 3
The first withdrawal was made on July 9, 1979, in the amount of P508,000.00, the second on July 13, 1979, in the amount of P310,000.00, and the third
on July 16, 1979, in the amount of P150,000.00. The total withdrawal was P968.000.00. 4
In turn, Golden Savings subsequently allowed Gomez to make withdrawals from his own account, eventually collecting the total amount of P1,167,500.00
from the proceeds of the apparently cleared warrants. The last withdrawal was made on July 16, 1979.
On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants had been dishonored by the Bureau of Treasury on July 19, 1979, and
demanded the refund by Golden Savings of the amount it had previously withdrawn, to make up the deficit in its account.
The demand was rejected. Metrobank then sued Golden Savings in the Regional Trial Court of Mindoro. 5 After trial, judgment was rendered in favor of
Golden Savings, which, however, filed a motion for reconsideration even as Metrobank filed its notice of appeal. On November 4, 1986, the lower court
modified its decision thus:
ACCORDINGLY, judgment is hereby rendered:
1. Dismissing the complaint with costs against the plaintiff;
2. Dissolving and lifting the writ of attachment of the properties of defendant Golden Savings and Loan Association, Inc. and defendant
Spouses Magno Castillo and Lucia Castillo;
3. Directing the plaintiff to reverse its action of debiting Savings Account No. 2498 of the sum of P1,754,089.00 and to reinstate and credit to
such account such amount existing before the debit was made including the amount of P812,033.37 in favor of defendant Golden Savings and
Loan Association, Inc. and thereafter, to allow defendant Golden Savings and Loan Association, Inc. to withdraw the amount outstanding
thereon before the debit;
4. Ordering the plaintiff to pay the defendant Golden Savings and Loan Association, Inc. attorney's fees and expenses of litigation in the
amount of P200,000.00.
5. Ordering the plaintiff to pay the defendant Spouses Magno Castillo and Lucia Castillo attorney's fees and expenses of litigation in the
amount of P100,000.00.
SO ORDERED.
On appeal to the respondent court, 6 the decision was affirmed, prompting Metrobank to file this petition for review on the following grounds:
1. Respondent Court of Appeals erred in disregarding and failing to apply the clear contractual terms and conditions on the deposit slips
allowing Metrobank to charge back any amount erroneously credited.
(a) Metrobank's right to charge back is not limited to instances where the checks or treasury warrants are forged or unauthorized.
(b) Until such time as Metrobank is actually paid, its obligation is that of a mere collecting agent which cannot be held liable for its
failure to collect on the warrants.
2. Under the lower court's decision, affirmed by respondent Court of Appeals, Metrobank is made to pay for warrants already dishonored,
thereby perpetuating the fraud committed by Eduardo Gomez.
3. Respondent Court of Appeals erred in not finding that as between Metrobank and Golden Savings, the latter should bear the loss.
4. Respondent Court of Appeals erred in holding that the treasury warrants involved in this case are not negotiable instruments.
The petition has no merit.
From the above undisputed facts, it would appear to the Court that Metrobank was indeed negligent in giving Golden Savings the impression that the
treasury warrants had been cleared and that, consequently, it was safe to allow Gomez to withdraw the proceeds thereof from his account with it. Without
such assurance, Golden Savings would not have allowed the withdrawals; with such assurance, there was no reason not to allow the withdrawal. Indeed,
Golden Savings might even have incurred liability for its refusal to return the money that to all appearances belonged to the depositor, who could therefore
withdraw it any time and for any reason he saw fit.
It was, in fact, to secure the clearance of the treasury warrants that Golden Savings deposited them to its account with Metrobank. Golden Savings had no
clearing facilities of its own. It relied on Metrobank to determine the validity of the warrants through its own services. The proceeds of the warrants were
withheld from Gomez until Metrobank allowed Golden Savings itself to withdraw them from its own deposit. 7 It was only when Metrobank gave the gosignal that Gomez was finally allowed by Golden Savings to withdraw them from his own account.

The argument of Metrobank that Golden Savings should have exercised more care in checking the personal circumstances of Gomez before accepting his
deposit does not hold water. It was Gomez who was entrusting the warrants, not Golden Savings that was extending him a loan; and moreover, the
treasury warrants were subject to clearing, pending which the depositor could not withdraw its proceeds. There was no question of Gomez's identity or of
the genuineness of his signature as checked by Golden Savings. In fact, the treasury warrants were dishonored allegedly because of the forgery of the
signatures of the drawers, not of Gomez as payee or indorser. Under the circumstances, it is clear that Golden Savings acted with due care and diligence
and cannot be faulted for the withdrawals it allowed Gomez to make.
By contrast, Metrobank exhibited extraordinary carelessness. The amount involved was not trifling more than one and a half million pesos (and this was
1979). There was no reason why it should not have waited until the treasury warrants had been cleared; it would not have lost a single centavo by waiting.
Yet, despite the lack of such clearance and notwithstanding that it had not received a single centavo from the proceeds of the treasury warrants, as it
now repeatedly stresses it allowed Golden Savings to withdraw not once, not twice, but thrice from the uncleared treasury warrants in the total
amount of P968,000.00
Its reason? It was "exasperated" over the persistent inquiries of Gloria Castillo about the clearance and it also wanted to "accommodate" a valued client. It
"presumed" that the warrants had been cleared simply because of "the lapse of one week." 8 For a bank with its long experience, this explanation is
unbelievably naive.
And now, to gloss over its carelessness, Metrobank would invoke the conditions printed on the dorsal side of the deposit slips through which the treasury
warrants were deposited by Golden Savings with its Calapan branch. The conditions read as follows:
Kindly note that in receiving items on deposit, the bank obligates itself only as the depositor's collecting agent, assuming no responsibility
beyond care in selecting correspondents, and until such time as actual payment shall have come into possession of this bank, the right is
reserved to charge back to the depositor's account any amount previously credited, whether or not such item is returned. This also applies to
checks drawn on local banks and bankers and their branches as well as on this bank, which are unpaid due to insufficiency of funds, forgery,
unauthorized overdraft or any other reason. (Emphasis supplied.)
According to Metrobank, the said conditions clearly show that it was acting only as a collecting agent for Golden Savings and give it the right to "charge
back to the depositor's account any amount previously credited, whether or not such item is returned. This also applies to checks ". . . which are unpaid
due to insufficiency of funds, forgery, unauthorized overdraft of any other reason." It is claimed that the said conditions are in the nature of contractual
stipulations and became binding on Golden Savings when Gloria Castillo, as its Cashier, signed the deposit slips.
Doubt may be expressed about the binding force of the conditions, considering that they have apparently been imposed by the bank unilaterally, without
the consent of the depositor. Indeed, it could be argued that the depositor, in signing the deposit slip, does so only to identify himself and not to agree to
the conditions set forth in the given permit at the back of the deposit slip. We do not have to rule on this matter at this time. At any rate, the Court feels that
even if the deposit slip were considered a contract, the petitioner could still not validly disclaim responsibility thereunder in the light of the circumstances of
this case.
In stressing that it was acting only as a collecting agent for Golden Savings, Metrobank seems to be suggesting that as a mere agent it cannot be liable to
the principal. This is not exactly true. On the contrary, Article 1909 of the Civil Code clearly provides that
Art. 1909. The agent is responsible not only for fraud, but also for negligence, which shall be judged 'with more or less rigor by the courts,
according to whether the agency was or was not for a compensation.
The negligence of Metrobank has been sufficiently established. To repeat for emphasis, it was the clearance given by it that assured Golden Savings it
was already safe to allow Gomez to withdraw the proceeds of the treasury warrants he had deposited Metrobank misled Golden Savings. There may have
been no express clearance, as Metrobank insists (although this is refuted by Golden Savings) but in any case that clearance could be implied from its
allowing Golden Savings to withdraw from its account not only once or even twice but three times. The total withdrawal was in excess of its original
balance before the treasury warrants were deposited, which only added to its belief that the treasury warrants had indeed been cleared.
Metrobank's argument that it may recover the disputed amount if the warrants are not paid for any reason is not acceptable. Any reason does not mean no
reason at all. Otherwise, there would have been no need at all for Golden Savings to deposit the treasury warrants with it for clearance. There would have
been no need for it to wait until the warrants had been cleared before paying the proceeds thereof to Gomez. Such a condition, if interpreted in the way
the petitioner suggests, is not binding for being arbitrary and unconscionable. And it becomes more so in the case at bar when it is considered that the
supposed dishonor of the warrants was not communicated to Golden Savings before it made its own payment to Gomez.
The belated notification aggravated the petitioner's earlier negligence in giving express or at least implied clearance to the treasury warrants and allowing
payments therefrom to Golden Savings. But that is not all. On top of this, the supposed reason for the dishonor, to wit, the forgery of the signatures of the
general manager and the auditor of the drawer corporation, has not been established. 9 This was the finding of the lower courts which we see no reason
to disturb. And as we said in MWSS v. Court of Appeals: 10
Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA 238). It must be established by clear, positive and convincing evidence.
This was not done in the present case.
A no less important consideration is the circumstance that the treasury warrants in question are not negotiable instruments. Clearly stamped on their face
is the word "non-negotiable." Moreover, and this is of equal significance, it is indicated that they are payable from a particular fund, to wit, Fund 501.
The following sections of the Negotiable Instruments Law, especially the underscored parts, are pertinent:
Sec. 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.

10

Sec. 3. When promise is unconditional. An unqualified order or promise to pay is unconditional within the meaning of this Act though coupled
with
(a) An indication of a particular fund out of which reimbursement is to be made or a particular account to be debited with the amount; or
(b) A statement of the transaction which gives rise to the instrument judgment.
But an order or promise to pay out of a particular fund is not unconditional.
The indication of Fund 501 as the source of the payment to be made on the treasury warrants makes the order or promise to pay "not unconditional" and
the warrants themselves non-negotiable. There should be no question that the exception on Section 3 of the Negotiable Instruments Law is applicable in
the case at bar. This conclusion conforms to Abubakar vs. Auditor General 11 where the Court held:
The petitioner argues that he is a holder in good faith and for value of a negotiable instrument and is entitled to the rights and privileges of a
holder in due course, free from defenses. But this treasury warrant is not within the scope of the negotiable instrument law. For one thing, the
document bearing on its face the words "payable from the appropriation for food administration, is actually an Order for payment out of "a
particular fund," and is not unconditional and does not fulfill one of the essential requirements of a negotiable instrument (Sec. 3 last sentence
and section [1(b)] of the Negotiable Instruments Law).
Metrobank cannot contend that by indorsing the warrants in general, Golden Savings assumed that they were "genuine and in all respects what they
purport to be," in accordance with Section 66 of the Negotiable Instruments Law. The simple reason is that this law is not applicable to the non-negotiable
treasury warrants. The indorsement was made by Gloria Castillo not for the purpose of guaranteeing the genuineness of the warrants but merely to
deposit them with Metrobank for clearing. It was in fact Metrobank that made the guarantee when it stamped on the back of the warrants: "All prior
indorsement and/or lack of endorsements guaranteed, Metropolitan Bank & Trust Co., Calapan Branch."
The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the Philippine Islands, 12 but we feel this case is inapplicable to the present
controversy.1wphi1 That case involved checks whereas this case involves treasury warrants. Golden Savings never represented that the warrants were
negotiable but signed them only for the purpose of depositing them for clearance. Also, the fact of forgery was proved in that case but not in the case
before us. Finally, the Court found the Jai Alai Corporation negligent in accepting the checks without question from one Antonio Ramirez notwithstanding
that the payee was the Inter-Island Gas Services, Inc. and it did not appear that he was authorized to indorse it. No similar negligence can be imputed to
Golden Savings. We find the challenged decision to be basically correct. However, we will have to amend it insofar as it directs the petitioner to credit
Golden Savings with the full amount of the treasury checks deposited to its account.
The total value of the 32 treasury warrants dishonored was P1,754,089.00, from which Gomez was allowed to withdraw P1,167,500.00 before Golden
Savings was notified of the dishonor. The amount he has withdrawn must be charged not to Golden Savings but to Metrobank, which must bear the
consequences of its own negligence. But the balance of P586,589.00 should be debited to Golden Savings, as obviously Gomez can no longer be
permitted to withdraw this amount from his deposit because of the dishonor of the warrants. Gomez has in fact disappeared. To also credit the balance to
Golden Savings would unduly enrich it at the expense of Metrobank, let alone the fact that it has already been informed of the dishonor of the treasury
warrants.
WHEREFORE, the challenged decision is AFFIRMED, with the modification that Paragraph 3 of the dispositive portion of the judgment of the lower court
shall be reworded as follows:
3. Debiting Savings Account No. 2498 in the sum of P586,589.00 only and thereafter allowing defendant Golden Savings & Loan Association,
Inc. to withdraw the amount outstanding thereon, if any, after the debit.
SO ORDERED.
Narvasa, Gancayco, Grio-Aquino and Medialdea, JJ., concur.

G.R. No. 89252 May 24, 1993

RAUL SESBREO, petitioner,
vs.
HON. COURT OF APPEALS, DELTA MOTORS CORPORATION AND PILIPINAS BANK, respondents.
Salva, Villanueva & Associates for Delta Motors Corporation.
Reyes, Salazar & Associates for Pilipinas Bank.

FELICIANO, J.:
On 9 February 1981, petitioner Raul Sesbreo made a money market placement in the amount of P300,000.00 with the Philippine Underwriters Finance
Corporation ("Philfinance"), Cebu Branch; the placement, with a term of thirty-two (32) days, would mature on 13 March 1981, Philfinance, also on 9
February 1981, issued the following documents to petitioner:
(a) the Certificate of Confirmation of Sale, "without recourse," No. 20496 of one (1) Delta Motors Corporation Promissory Note
("DMC PN") No. 2731 for a term of 32 days at 17.0% per annum;

11

(b) the Certificate of securities Delivery Receipt No. 16587 indicating the sale of DMC PN No. 2731 to petitioner, with the notation
that the said security was in custodianship of Pilipinas Bank, as per Denominated Custodian Receipt ("DCR") No. 10805 dated 9
February 1981; and
(c) post-dated checks payable on 13 March 1981 (i.e., the maturity date of petitioner's investment), with petitioner as payee,
Philfinance as drawer, and Insular Bank of Asia and America as drawee, in the total amount of P304,533.33.
On 13 March 1981, petitioner sought to encash the postdated checks issued by Philfinance. However, the checks were dishonored for having been drawn
against insufficient funds.
On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued by private respondent Pilipinas Bank ("Pilipinas"). It reads as follows:
PILIPINAS BANK
Makati Stock Exchange Bldg.,
Ayala Avenue, Makati,
Metro Manila
DENOMINATED CUSTODIAN RECEIPT
This confirms that as a duly Custodian Bank, and upon instruction of PHILIPPINE UNDERWRITES FINANCE CORPORATION, we
have in our custody the following securities to you [sic] the extent herein indicated.
SERIAL MAT. FACE ISSUED REGISTERED AMOUNT
NUMBER DATE VALUE BY HOLDER PAYEE
2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33
UNDERWRITERS
FINANCE CORP.
We further certify that these securities may be inspected by you or your duly authorized representative at any time during regular
banking hours.
Upon your written instructions we shall undertake physical delivery of the above securities fully assigned to you should this
Denominated Custodianship Receipt remain outstanding in your favor thirty (30) days after its maturity.
On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private respondent Pilipinas, Makati Branch, and handed her a demand letter informing
the bank that his placement with Philfinance in the amount reflected in the DCR No. 10805 had remained unpaid and outstanding, and that he in effect
was asking for the physical delivery of the underlying promissory note. Petitioner then examined the original of the DMC PN No. 2731 and found: that the
security had been issued on 10 April 1980; that it would mature on 6 April 1981; that it had a face value of P2,300,833.33, with the Philfinance as "payee"
and private respondent Delta Motors Corporation ("Delta") as "maker;" and that on face of the promissory note was stamped "NON NEGOTIABLE."
Pilipinas did not deliver the Note, nor any certificate of participation in respect thereof, to petitioner.
Petitioner later made similar demand letters, dated 3 July 1981 and 3 August 1981, 2 again asking private respondent Pilipinas for physical delivery of the
original of DMC PN No. 2731. Pilipinas allegedly referred all of petitioner's demand letters to Philfinance for written instructions, as has been supposedly
agreed upon in "Securities Custodianship Agreement" between Pilipinas and Philfinance. Philfinance did not provide the appropriate instructions; Pilipinas
never released DMC PN No. 2731, nor any other instrument in respect thereof, to petitioner.
Petitioner also made a written demand on 14 July 1981 3 upon private respondent Delta for the partial satisfaction of DMC PN No. 2731, explaining that
Philfinance, as payee thereof, had assigned to him said Note to the extent of P307,933.33. Delta, however, denied any liability to petitioner on the
promissory note, and explained in turn that it had previously agreed with Philfinance to offset its DMC PN No. 2731 (along with DMC PN No. 2730) against
Philfinance PN No. 143-A issued in favor of Delta.
In the meantime, Philfinance, on 18 June 1981, was placed under the joint management of the Securities and exchange commission ("SEC") and the
Central Bank. Pilipinas delivered to the SEC DMC PN No. 2731, which to date apparently remains in the custody of the SEC. 4
As petitioner had failed to collect his investment and interest thereon, he filed on 28 September 1982 an action for damages with the Regional Trial Court
("RTC") of Cebu City, Branch 21, against private respondents Delta and Pilipinas. 5 The trial court, in a decision dated 5 August 1987, dismissed the
complaint and counterclaims for lack of merit and for lack of cause of action, with costs against petitioner.
Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In a Decision dated 21 March 1989, the Court of Appeals denied the
appeal and held: 6
Be that as it may, from the evidence on record, if there is anyone that appears liable for the travails of plaintiff-appellant, it is
Philfinance. As correctly observed by the trial court:

12

This act of Philfinance in accepting the investment of plaintiff and charging it against DMC PN No. 2731 when
its entire face value was already obligated or earmarked for set-off or compensation is difficult to comprehend
and may have been motivated with bad faith. Philfinance, therefore, is solely and legally obligated to return
the investment of plaintiff, together with its earnings, and to answer all the damages plaintiff has suffered
incident thereto. Unfortunately for plaintiff, Philfinance was not impleaded as one of the defendants in this
case at bar; hence, this Court is without jurisdiction to pronounce judgement against it. (p. 11, Decision)
WHEREFORE, finding no reversible error in the decision appealed from, the same is hereby affirmed in toto. Cost against plaintiffappellant.
Petitioner moved for reconsideration of the above Decision, without success.
Hence, this Petition for Review on Certiorari.
After consideration of the allegations contained and issues raised in the pleadings, the Court resolved to give due course to the petition and required the
parties to file their respective memoranda. 7
Petitioner reiterates the assignment of errors he directed at the trial court decision, and contends that respondent court of Appeals gravely erred: (i) in
concluding that he cannot recover from private respondent Delta his assigned portion of DMC PN No. 2731; (ii) in failing to hold private respondent
Pilipinas solidarily liable on the DMC PN No. 2731 in view of the provisions stipulated in DCR No. 10805 issued in favor r of petitioner, and (iii) in refusing
to pierce the veil of corporate entity between Philfinance, and private respondents Delta and Pilipinas, considering that the three (3) entities belong to the
"Silverio Group of Companies" under the leadership of Mr. Ricardo Silverio, Sr. 8
There are at least two (2) sets of relationships which we need to address: firstly, the relationship of petitioner vis-a-vis Delta; secondly, the relationship of
petitioner in respect of Pilipinas. Actually, of course, there is a third relationship that is of critical importance: the relationship of petitioner and Philfinance.
However, since Philfinance has not been impleaded in this case, neither the trial court nor the Court of Appeals acquired jurisdiction over the person of
Philfinance. It is, consequently, not necessary for present purposes to deal with this third relationship, except to the extent it necessarily impinges upon or
intersects the first and second relationships.
I.
We consider first the relationship between petitioner and Delta.
The Court of appeals in effect held that petitioner acquired no rights vis-a-vis Delta in respect of the Delta promissory note (DMC PN No. 2731) which
Philfinance sold "without recourse" to petitioner, to the extent of P304,533.33. The Court of Appeals said on this point:
Nor could plaintiff-appellant have acquired any right over DMC PN No. 2731 as the same is "non-negotiable" as stamped on its face
(Exhibit "6"), negotiation being defined as the transfer of an instrument from one person to another so as to constitute the transferee
the holder of the instrument (Sec. 30, Negotiable Instruments Law). A person not a holder cannot sue on the instrument in his own
name and cannot demand or receive payment (Section 51, id.) 9
Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that the Note had been validly transferred, in part to him by assignment and
that as a result of such transfer, Delta as debtor-maker of the Note, was obligated to pay petitioner the portion of that Note assigned to him by the payee
Philfinance.
Delta, however, disputes petitioner's contention and argues:
(1) that DMC PN No. 2731 was not intended to be negotiated or otherwise transferred by Philfinance as manifested by the word
"non-negotiable" stamp across the face of the Note 10 and because maker Delta and payee Philfinance intended that this Note would
be offset against the outstanding obligation of Philfinance represented by Philfinance PN No. 143-A issued to Delta as payee;
(2) that the assignment of DMC PN No. 2731 by Philfinance was without Delta's consent, if not against its instructions; and
(3) assuming (arguendo only) that the partial assignment in favor of petitioner was valid, petitioner took the Note subject to the
defenses available to Delta, in particular, the offsetting of DMC PN No. 2731 against Philfinance PN No. 143-A. 11
We consider Delta's arguments seriatim.
Firstly, it is important to bear in mind that the negotiation of a negotiable instrument must be distinguished from the assignment or transfer of an instrument
whether that be negotiable or non-negotiable. Only an instrument qualifying as a negotiable instrument under the relevant statute may be negotiated either
by indorsement thereof coupled with delivery, or by delivery alone where the negotiable instrument is in bearer form. A negotiable instrument may,
however, instead of being negotiated, also be assigned or transferred. The legal consequences of negotiation as distinguished from assignment of a
negotiable instrument are, of course, different. A non-negotiable instrument may, obviously, not be negotiated; but it may be assigned or transferred,
absent an express prohibition against assignment or transfer written in the face of the instrument:

13

The words "not negotiable," stamped on the face of the bill of lading, did not destroy its assignability, but the sole effect was to
exempt the bill from the statutory provisions relative thereto, and a bill, though not negotiable, may be transferred by assignment;
the assignee taking subject to the equities between the original parties. 12 (Emphasis added)
DMC PN No. 2731, while marked "non-negotiable," was not at the same time stamped "non-transferable" or "non-assignable." It contained no stipulation
which prohibited Philfinance from assigning or transferring, in whole or in part, that Note.
Delta adduced the "Letter of Agreement" which it had entered into with Philfinance and which should be quoted in full:
April 10, 1980
Philippine Underwriters Finance Corp.
Benavidez St., Makati,
Metro Manila.
Attention: Mr. Alfredo O. Banaria
SVP-Treasurer
GENTLEMEN:
This refers to our outstanding placement of P4,601,666.67 as evidenced by your Promissory Note No. 143-A, dated April 10, 1980,
to mature on April 6, 1981.
As agreed upon, we enclose our non-negotiable Promissory Note No. 2730 and 2731 for P2,000,000.00 each, dated April 10, 1980,
to be offsetted [sic] against your PN No. 143-A upon co-terminal maturity.
Please deliver the proceeds of our PNs to our representative, Mr. Eric Castillo.
We find nothing in his "Letter of Agreement" which can be reasonably construed as a prohibition upon Philfinance assigning or transferring all or part of
DMC PN No. 2731, before the maturity thereof. It is scarcely necessary to add that, even had this "Letter of Agreement" set forth an explicit prohibition of
transfer upon Philfinance, such a prohibition cannot be invoked against an assignee or transferee of the Note who parted with valuable consideration in
good faith and without notice of such prohibition. It is not disputed that petitioner was such an assignee or transferee. Our conclusion on this point is
reinforced by the fact that what Philfinance and Delta were doing by their exchange of their promissory notes was this: Delta invested, by making a money
market placement with Philfinance, approximately P4,600,000.00 on 10 April 1980; but promptly, on the same day, borrowed back the bulk of that
placement, i.e., P4,000,000.00, by issuing its two (2) promissory notes: DMC PN No. 2730 and DMC PN No. 2731, both also dated 10 April 1980. Thus,
Philfinance was left with not P4,600,000.00 but only P600,000.00 in cash and the two (2) Delta promissory notes.
Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN No. 2731 had been effected without the consent of Delta, we note that
such consent was not necessary for the validity and enforceability of the assignment in favor of petitioner. 14 Delta's argument that Philfinance's sale or
assignment of part of its rights to DMC PN No. 2731 constituted conventional subrogation, which required its (Delta's) consent, is quite mistaken.
Conventional subrogation, which in the first place is never lightly inferred, 15 must be clearly established by the unequivocal terms of the substituting
obligation or by the evident incompatibility of the new and old obligations on every point. 16 Nothing of the sort is present in the instant case.
It is in fact difficult to be impressed with Delta's complaint, since it released its DMC PN No. 2731 to Philfinance, an entity engaged in the business of
buying and selling debt instruments and other securities, and more generally, in money market transactions. In Perez v. Court of Appeals, 17 the Court,
speaking through Mme. Justice Herrera, made the following important statement:
There is another aspect to this case. What is involved here is a money market transaction. As defined by Lawrence Smith "the
money market is a market dealing in standardized short-term credit instruments (involving large amounts) where lenders and
borrowers do not deal directly with each other but through a middle manor a dealer in the open market." It involves "commercial
papers" which are instruments "evidencing indebtness of any person or entity. . ., which are issued, endorsed, sold or transferred or
in any manner conveyed to another person or entity, with or without recourse". The fundamental function of the money market
device in its operation is to match and bring together in a most impersonal manner both the "fund users" and the "fund suppliers."
The money market is an "impersonal market", free from personal considerations. "The market mechanism is intended to provide
quick mobility of money and securities."
The impersonal character of the money market device overlooks the individuals or entities concerned. The issuer of a commercial
paper in the money market necessarily knows in advance that it would be expenditiously transacted and transferred to any
investor/lender without need of notice to said issuer. In practice, no notification is given to the borrower or issuer of commercial
paper of the sale or transfer to the investor.
xxx xxx xxx
There is need to individuate a money market transaction, a relatively novel institution in the Philippine commercial scene. It has
been intended to facilitate the flow and acquisition of capital on an impersonal basis. And as specifically required by Presidential

14

Decree No. 678, the investing public must be given adequate and effective protection in availing of the credit of a borrower in the
commercial paper market. 18 (Citations omitted; emphasis supplied)
We turn to Delta's arguments concerning alleged compensation or offsetting between DMC PN No. 2731 and Philfinance PN No. 143-A. It is important to
note that at the time Philfinance sold part of its rights under DMC PN No. 2731 to petitioner on 9 February 1981, no compensation had as yet taken place
and indeed none could have taken place. The essential requirements of compensation are listed in the Civil Code as follows:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;
(2) That both debts consists in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same
quality if the latter has been stated;
(3) That the two debts are due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to
the debtor. (Emphasis supplied)
On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due. This was explicitly recognized by Delta in its 10 April 1980 "Letter
of Agreement" with Philfinance, where Delta acknowledged that the relevant promissory notes were "to be offsetted (sic) against [Philfinance] PN No. 143A upon co-terminal maturity."
As noted, the assignment to petitioner was made on 9 February 1981 or from forty-nine (49) days before the "co-terminal maturity" date, that is to say,
before any compensation had taken place. Further, the assignment to petitioner would have prevented compensation had taken place between
Philfinance and Delta, to the extent of P304,533.33, because upon execution of the assignment in favor of petitioner, Philfinance and Delta would have
ceased to be creditors and debtors of each other in their own right to the extent of the amount assigned by Philfinance to petitioner. Thus, we conclude
that the assignment effected by Philfinance in favor of petitioner was a valid one and that petitioner accordingly became owner of DMC PN No. 2731 to the
extent of the portion thereof assigned to him.
The record shows, however, that petitioner notified Delta of the fact of the assignment to him only on 14 July 1981, 19 that is, after the maturity not only of
the money market placement made by petitioner but also of both DMC PN No. 2731 and Philfinance PN No. 143-A. In other words, petitioner notified
Delta of his rights as assignee after compensation had taken place by operation of law because the offsetting instruments had both reached maturity. It is
a firmly settled doctrine that the rights of an assignee are not any greater that the rights of the assignor, since the assignee is merely substituted in the
place of the assignor 20 and that the assignee acquires his rights subject to the equities i.e., the defenses which the debtor could have set up against
the original assignor before notice of the assignment was given to the debtor. Article 1285 of the Civil Code provides that:
Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a third person, cannot set up
against the assignee the compensation which would pertain to him against the assignor, unless the assignor was notified by the
debtor at the time he gave his consent, that he reserved his right to the compensation.
If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up the compensation of
debts previous to the cession, but not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior to the same and
also later ones until he had knowledge of the assignment. (Emphasis supplied)
Article 1626 of the same code states that: "the debtor who, before having knowledge of the assignment, pays his creditor shall be released from the
obligation." In Sison v. Yap-Tico, 21 the Court explained that:
[n]o man is bound to remain a debtor; he may pay to him with whom he contacted to pay; and if he pay before notice that his debt
has been assigned, the law holds him exonerated, for the reason that it is the duty of the person who has acquired a title by transfer
to demand payment of the debt, to give his debt or notice. 22
At the time that Delta was first put to notice of the assignment in petitioner's favor on 14 July 1981, DMC PN No. 2731 had already been discharged by
compensation. Since the assignor Philfinance could not have then compelled payment anew by Delta of DMC PN No. 2731, petitioner, as assignee of
Philfinance, is similarly disabled from collecting from Delta the portion of the Note assigned to him.
It bears some emphasis that petitioner could have notified Delta of the assignment or sale was effected on 9 February 1981. He could have notified Delta
as soon as his money market placement matured on 13 March 1981 without payment thereof being made by Philfinance; at that time, compensation had
yet to set in and discharge DMC PN No. 2731. Again petitioner could have notified Delta on 26 March 1981 when petitioner received from Philfinance the
Denominated Custodianship Receipt ("DCR") No. 10805 issued by private respondent Pilipinas in favor of petitioner. Petitioner could, in fine, have notified
Delta at any time before the maturity date of DMC PN No. 2731. Because petitioner failed to do so, and because the record is bare of any indication that

15

Philfinance had itself notified Delta of the assignment to petitioner, the Court is compelled to uphold the defense of compensation raised by private
respondent Delta. Of course, Philfinance remains liable to petitioner under the terms of the assignment made by Philfinance to petitioner.
II.
We turn now to the relationship between petitioner and private respondent Pilipinas. Petitioner contends that Pilipinas became solidarily liable with
Philfinance and Delta when Pilipinas issued DCR No. 10805 with the following words:
Upon your written instruction, we [Pilipinas] shall undertake physical delivery of the above securities fully assigned to you . 23
The Court is not persuaded. We find nothing in the DCR that establishes an obligation on the part of Pilipinas to pay petitioner the amount of P307,933.33
nor any assumption of liability in solidum with Philfinance and Delta under DMC PN No. 2731. We read the DCR as a confirmation on the part of Pilipinas
that:
(1) it has in its custody, as duly constituted custodian bank, DMC PN No. 2731 of a certain face value, to mature on 6 April 1981 and
payable to the order of Philfinance;
(2) Pilipinas was, from and after said date of the assignment by Philfinance to petitioner (9 February 1981), holding that Note on
behalf and for the benefit of petitioner, at least to the extent it had been assigned to petitioner by payee Philfinance; 24
(3) petitioner may inspect the Note either "personally or by authorized representative", at any time during regular bank hours; and
(4) upon written instructions of petitioner, Pilipinas would physically deliver the DMC PN No. 2731 (or a participation therein to the
extent of P307,933.33) "should this Denominated Custodianship receipt remain outstanding in [petitioner's] favor thirty (30) days
after its maturity."
Thus, we find nothing written in printers ink on the DCR which could reasonably be read as converting Pilipinas into an obligor under the terms of DMC PN
No. 2731 assigned to petitioner, either upon maturity thereof or any other time. We note that both in his complaint and in his testimony before the trial
court, petitioner referred merely to the obligation of private respondent Pilipinas to effect the physical delivery to him of DMC PN No. 2731. 25 Accordingly,
petitioner's theory that Pilipinas had assumed a solidary obligation to pay the amount represented by a portion of the Note assigned to him by Philfinance,
appears to be a new theory constructed only after the trial court had ruled against him. The solidary liability that petitioner seeks to impute Pilipinas
cannot, however, be lightly inferred. Under article 1207 of the Civil Code, "there is a solidary liability only when the law or the nature of the obligation
requires solidarity," The record here exhibits no express assumption of solidary liability vis-a-vis petitioner, on the part of Pilipinas. Petitioner has not
pointed to us to any law which imposed such liability upon Pilipinas nor has petitioner argued that the very nature of the custodianship assumed by private
respondent Pilipinas necessarily implies solidary liability under the securities, custody of which was taken by Pilipinas. Accordingly, we are unable to hold
Pilipinas solidarily liable with Philfinance and private respondent Delta under DMC PN No. 2731.
We do not, however, mean to suggest that Pilipinas has no responsibility and liability in respect of petitioner under the terms of the DCR. To the contrary,
we find, after prolonged analysis and deliberation, that private respondent Pilipinas had breached its undertaking under the DCR to petitioner Sesbreo.
We believe and so hold that a contract of deposit was constituted by the act of Philfinance in designating Pilipinas as custodian or depositary bank. The
depositor was initially Philfinance; the obligation of the depository was owed, however, to petitioner Sesbreo as beneficiary of the custodianship or
depository agreement. We do not consider that this is a simple case of a stipulation pour autri. The custodianship or depositary agreement was
established as an integral part of the money market transaction entered into by petitioner with Philfinance. Petitioner bought a portion of DMC PN No.
2731; Philfinance as assignor-vendor deposited that Note with Pilipinas in order that the thing sold would be placed outside the control of the vendor.
Indeed, the constituting of the depositary or custodianship agreement was equivalent to constructive delivery of the Note (to the extent it had been sold or
assigned to petitioner) to petitioner. It will be seen that custodianship agreements are designed to facilitate transactions in the money market by providing
a basis for confidence on the part of the investors or placers that the instruments bought by them are effectively taken out of the pocket, as it were, of the
vendors and placed safely beyond their reach, that those instruments will be there available to the placers of funds should they have need of them. The
depositary in a contract of deposit is obliged to return the security or the thing deposited upon demand of the depositor (or, in the presented case, of the
beneficiary) of the contract, even though a term for such return may have been established in the said contract. 26 Accordingly, any stipulation in the
contract of deposit or custodianship that runs counter to the fundamental purpose of that agreement or which was not brought to the notice of and
accepted by the placer-beneficiary, cannot be enforced as against such beneficiary-placer.
We believe that the position taken above is supported by considerations of public policy. If there is any party that needs the equalizing protection of the law
in money market transactions, it is the members of the general public whom place their savings in such market for the purpose of generating interest
revenues. 27 The custodian bank, if it is not related either in terms of equity ownership or management control to the borrower of the funds, or the
commercial paper dealer, is normally a preferred or traditional banker of such borrower or dealer (here, Philfinance). The custodian bank would have every
incentive to protect the interest of its client the borrower or dealer as against the placer of funds. The providers of such funds must be safeguarded from
the impact of stipulations privately made between the borrowers or dealers and the custodian banks, and disclosed to fund-providers only after trouble has
erupted.
In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the security deposited with it when petitioner first demanded physical delivery
thereof on 2 April 1981. We must again note, in this connection, that on 2 April 1981, DMC PN No. 2731 had not yet matured and therefore, compensation
or offsetting against Philfinance PN No. 143-A had not yet taken place. Instead of complying with the demand of the petitioner, Pilipinas purported to
require and await the instructions of Philfinance, in obvious contravention of its undertaking under the DCR to effect physical delivery of the Note upon
receipt of "written instructions" from petitioner Sesbreo. The ostensible term written into the DCR (i.e., "should this [DCR] remain outstanding in your
favor thirty [30] days after its maturity") was not a defense against petitioner's demand for physical surrender of the Note on at least three grounds: firstly,

16

such term was never brought to the attention of petitioner Sesbreo at the time the money market placement with Philfinance was made; secondly, such
term runs counter to the very purpose of the custodianship or depositary agreement as an integral part of a money market transaction; and thirdly, it is
inconsistent with the provisions of Article 1988 of the Civil Code noted above. Indeed, in principle, petitioner became entitled to demand physical delivery
of the Note held by Pilipinas as soon as petitioner's money market placement matured on 13 March 1981 without payment from Philfinance.
We conclude, therefore, that private respondent Pilipinas must respond to petitioner for damages sustained by arising out of its breach of duty. By failing to
deliver the Note to the petitioner as depositor-beneficiary of the thing deposited, Pilipinas effectively and unlawfully deprived petitioner of the Note
deposited with it. Whether or not Pilipinas itself benefitted from such conversion or unlawful deprivation inflicted upon petitioner, is of no moment for
present purposes. Prima facie, the damages suffered by petitioner consisted of P304,533.33, the portion of the DMC PN No. 2731 assigned to petitioner
but lost by him by reason of discharge of the Note by compensation, plus legal interest of six percent (6%) per annum containing from 14 March 1981. The
conclusion we have reached is, of course, without prejudice to such right of reimbursement as Pilipinas may have vis-a-vis Philfinance.
III.
The third principal contention of petitioner that Philfinance and private respondents Delta and Pilipinas should be treated as one corporate entity
need not detain us for long.
In the first place, as already noted, jurisdiction over the person of Philfinance was never acquired either by the trial court nor by the respondent Court of
Appeals. Petitioner similarly did not seek to implead Philfinance in the Petition before us.
Secondly, it is not disputed that Philfinance and private respondents Delta and Pilipinas have been organized as separate corporate entities. Petitioner
asks us to pierce their separate corporate entities, but has been able only to cite the presence of a common Director Mr. Ricardo Silverio, Sr., sitting on
the Board of Directors of all three (3) companies. Petitioner has neither alleged nor proved that one or another of the three (3) concededly related
companies used the other two (2) as mere alter egos or that the corporate affairs of the other two (2) were administered and managed for the benefit of
one. There is simply not enough evidence of record to justify disregarding the separate corporate personalities of delta and Pilipinas and to hold them
liable for any assumed or undetermined liability of Philfinance to petitioner. 28
WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of Appeals in C.A.-G.R. CV No. 15195 dated 21 march 1989 and 17 July
1989, respectively, are hereby MODIFIED and SET ASIDE, to the extent that such Decision and Resolution had dismissed petitioner's complaint against
Pilipinas Bank. Private respondent Pilipinas bank is hereby ORDERED to indemnify petitioner for damages in the amount of P304,533.33, plus legal
interest thereon at the rate of six percent (6%) per annum counted from 2 April 1981. As so modified, the Decision and Resolution of the Court of Appeals
are hereby AFFIRMED. No pronouncement as to costs. SO ORDERED.
Bidin, Davide, Jr., Romero and Melo, JJ., concur.

17

G.R. No. 113236

March 5, 2001

FIRESTONE TIRE & RUBBER COMPANY OF THE PHILIPPINES, petitioner,

vs.
COURT OF APPEALS and LUZON DEVELOPMENT BANK, respondents.
QUISUMBING, J.:
This petition assails the decision 1 dated December 29, 1993 of the Court of Appeals in CA-G.R. CV No. 29546, which affirmed the judgment 2 of the
Regional Trial Court of Pasay City, Branch 113 in Civil Case No. PQ-7854-P, dismissing Firestone's complaint for damages.
The facts of this case, adopted by the CA and based on findings by the trial court, are as follows:
. . . [D]efendant is a banking corporation. It operates under a certificate of authority issued by the Central Bank of the Philippines, and among
its activities, accepts savings and time deposits. Said defendant had as one of its client-depositors the Fojas-Arca Enterprises Company
("Fojas-Arca" for brevity). Fojas-Arca maintaining a special savings account with the defendant, the latter authorized and allowed withdrawals
of funds therefrom through the medium of special withdrawal slips. These are supplied by the defendant to Fojas-Arca.
In January 1978, plaintiff and Fojas-Arca entered into a "Franchised Dealership Agreement" (Exh. B) whereby Fojas-Arca has the privilege to
purchase on credit and sell plaintiff's products.
On January 14, 1978 up to May 15, 1978. Pursuant to the aforesaid Agreement, Fojas-Arca purchased on credit Firestone products from
plaintiff with a total amount of P4,896,000.00. In payment of these purchases, Fojas-Arca delivered to plaintiff six (6) special withdrawal slips
drawn upon the defendant. In turn, these were deposited by the plaintiff with its current account with the Citibank. All of them were honored and
paid by the defendant. This singular circumstance made plaintiff believe [sic] and relied [sic] on the fact that the succeeding special withdrawal
slips drawn upon the defendant would be equally sufficiently funded. Relying on such confidence and belief and as a direct consequence
thereof, plaintiff extended to Fojas-Arca other purchases on credit of its products.
On the following dates Fojas-Arca purchased Firestone products on credit (Exh. M, I, J, K) and delivered to plaintiff the corresponding special
withdrawal slips in payment thereof drawn upon the defendant, to wit:

DATE

WITHDRAWAL SLIP NO.

AMOUNT

June 15, 1978

42127

P1,198,092.80

July 15, 1978

42128

940,190.00

Aug. 15, 1978

42129

880,000.00

18

Sep. 15, 1978

42130

981,500.00

These were likewise deposited by plaintiff in its current account with Citibank and in turn the Citibank forwarded it [sic] to the defendant for
payment and collection, as it had done in respect of the previous special withdrawal slips. Out of these four (4) withdrawal slips only withdrawal
slip No. 42130 in the amount of P981,500.00 was honored and paid by the defendant in October 1978. Because of the absence for a long
period coupled with the fact that defendant honored and paid withdrawal slips No. 42128 dated July 15, 1978, in the amount of P981,500.00
plaintiff's belief was all the more strengthened that the other withdrawal slips were likewise sufficiently funded, and that it had received full value
and payment of Fojas-Arca's credit purchased then outstanding at the time. On this basis, plaintiff was induced to continue extending to FojasArca further purchase on credit of its products as per agreement (Exh. "B").
However, on December 14, 1978, plaintiff was informed by Citibank that special withdrawal slips No. 42127 dated June 15, 1978 for
P1,198,092.80 and No. 42129 dated August 15, 1978 for P880,000.00 were dishonored and not paid for the reason 'NO ARRANGEMENT.' As
a consequence, the Citibank debited plaintiff'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
defendant's gross negligence.
On September 25, 1979, counsel of plaintiff served a written demand upon the defendant for the satisfaction of the damages suffered by it. And
due to defendant's refusal to pay plaintiff's claim, plaintiff has been constrained to file this complaint, thereby compelling plaintiff to incur
litigation expenses and attorney's fees which amount are recoverable from the defendant.
Controverting the foregoing asseverations of plaintiff, defendant asserted, inter alia that the transactions mentioned by plaintiff are that of
plaintiff and Fojas-Arca only, [in] which defendant is not involved; Vehemently, it was denied by defendant that the special withdrawal slips were
honored and treated as if it were checks, the truth being that when the special withdrawal slips were received by defendant, it only verified
whether or not the signatures therein were authentic, and whether or not the deposit level in the passbook concurred with the savings ledger,
and whether or not the deposit is sufficient to cover the withdrawal; if plaintiff treated the special withdrawal slips paid by Fojas-Arca as checks
then plaintiff has to blame itself for being grossly negligent in treating the withdrawal slips as check when it is clearly stated therein that the
withdrawal slips are non-negotiable; that defendant is not a privy to any of the transactions between Fojas-Arca and plaintiff for which reason
defendant is not duty bound to notify nor give notice of anything to plaintiff. If at first defendant had given notice to plaintiff it is merely an
extension of usual bank courtesy to a prospective client; that defendant is only dealing with its depositor Fojas-Arca and not the plaintiff. In
summation, defendant categorically stated that plaintiff has no cause of action against it (pp. 1-3, Dec.; pp. 368-370, id).3
Petitioner's complaint4 for a sum of money and damages with the Regional Trial Court of Pasay City, Branch 113, docketed as Civil Case No. 29546, was
dismissed together with the counterclaim of defendant.
Petitioner appealed the decision to the Court of Appeals. It averred that respondent Luzon Development Bank was liable for damages under Article 2176 5
in relation to Articles 196 and 207 of the Civil Code. As noted by the CA, petitioner alleged the following tortious acts on the part of private respondent: 1)
the acceptance and payment of the special withdrawal slips without the presentation of the depositor's passbook thereby giving the impression that the
withdrawal slips are instruments payable upon presentment; 2) giving the special withdrawal slips the general appearance of checks; and 3) the failure of
respondent bank to seasonably warn petitioner that it would not honor two of the four special withdrawal slips.
On December 29, 1993, the Court of Appeals promulgated its assailed decision. It denied the appeal and affirmed the judgment of the trial court.
According to the appellate court, respondent bank notified the depositor to present the passbook whenever it received a collection note from another bank,
belying petitioner's claim that respondent bank was negligent in not requiring a passbook under the subject transaction. The appellate court also found
that the special withdrawal slips in question were not purposely given the appearance of checks, contrary to petitioner's assertions, and thus should not
have been mistaken for checks. Lastly, the appellate court ruled that the respondent bank was under no obligation to inform petitioner of the dishonor of
the special withdrawal slips, for to do so would have been a violation of the law on the secrecy of bank deposits.
Hence, the instant petition, alleging the following assignment of error:
25. The CA grievously erred in holding that the [Luzon Development] Bank was free from any fault or negligence regarding the dishonor, or in
failing to give fair and timely advice of the dishonor, of the two intermediate LDB Slips and in failing to award damages to Firestone pursuant to
Article 2176 of the New Civil Code.8
The issue for our consideration is whether or not respondent bank should be held liable for damages suffered by petitioner, due to its allegedly belated
notice of non-payment of the subject withdrawal slips.
The initial transaction in this case was between petitioner and Fojas-Arca, whereby the latter purchased tires from the former with special withdrawal slips
drawn upon Fojas-Arca's special savings account with respondent bank. Petitioner in turn deposited these withdrawal slips with Citibank. The latter
credited the same to petitioner's current account, then presented the slips for payment to respondent bank. It was at this point that the bone of contention
arose.
On December 14, 1978, Citibank informed petitioner that special withdrawal slips Nos. 42127 and 42129 dated June 15, 1978 and August 15, 1978,
respectively, were refused payment by respondent bank due to insufficiency of Fojas-Arca's funds on deposit. That information came about six months
from the time Fojas-Arca purchased tires from petitioner using the subject withdrawal slips. Citibank then debited the amount of these withdrawal slips
from petitioner's account, causing the alleged pecuniary damage subject of petitioner's cause of action.
At the outset, we note that petitioner admits that the withdrawal slips in question were non-negotiable. 9 Hence, the rules governing the giving of immediate
notice of dishonor of negotiable instruments do not apply in this case.10 Petitioner itself concedes this point.11 Thus, 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.

19

In the case at bar, it appears that Citibank, with the knowledge that respondent Luzon Development Bank, had honored and paid the previous withdrawal
slips, automatically credited petitioner's current account with the amount of the subject withdrawal slips, then merely waited for the same to be honored
and paid by respondent bank. It presumed that the withdrawal slips were "good."
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. 12 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.13 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.14
In the ordinary and usual course of banking operations, current account deposits are accepted by the bank on the basis of deposit slips prepared and
signed by the depositor, or the latter's agent or representative, who indicates therein the current account number to which the deposit is to be credited, the
name of the depositor or current account holder, the date of the deposit, and the amount of the deposit either in cash or in check.15
The withdrawal slips deposited with petitioner's current account with Citibank were not checks, as petitioner admits. 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. Petitioner and Citibank could not now shift the risk and hold private respondent liable for their
admitted mistake.
WHEREFORE, the petition is DENIED and the decision of the Court of Appeals in CA-G.R. CV No. 29546 is AFFIRMED. Costs against petitioner.
SO ORDERED.
Bellosillo, Mendoza, Buena and De Leon, Jr., JJ ., concur.

G.R. No. 76788 January 22, 1990

JUANITA SALAS, petitioner,
vs.
HON. COURT OF APPEALS and FIRST FINANCE & LEASING CORPORATION, respondents.
Arsenio C. Villalon, Jr. for petitioner.
Labaguis, Loyola, Angara & Associates for private respondent.

FERNAN, C.J.:
Assailed in this petition for review on certiorari is the decision of the Court of Appeals in C.A.-G.R. CV No. 00757 entitled "Filinvest Finance & Leasing
Corporation v. Salas", which modified the decision of the Regional Trial Court of San Fernando, Pampanga in Civil Case No. 5915, a collection suit
between the same parties.
Records disclose that on February 6, 1980, Juanita Salas (hereinafter referred to as petitioner) bought a motor vehicle from the Violago Motor Sales
Corporation (VMS for brevity) for P58,138.20 as evidenced by a promissory note. This note was subsequently endorsed to Filinvest Finance & Leasing
Corporation (hereinafter referred to as private respondent) which financed the purchase.
Petitioner defaulted in her installments beginning May 21, 1980 allegedly due to a discrepancy in the engine and chassis numbers of the vehicle delivered
to her and those indicated in the sales invoice, certificate of registration and deed of chattel mortgage, which fact she discovered when the vehicle figured
in an accident on 9 May 1980.
This failure to pay prompted private respondent to initiate Civil Case No. 5915 for a sum of money against petitioner before the Regional Trial Court of San
Fernando, Pampanga.
In its decision dated September 10, 1982, the trial court held, thus:

20

WHEREFORE, and in view of all the foregoing, judgment is hereby rendered ordering the defendant to pay the plaintiff the sum of
P28,414.40 with interest thereon at the rate of 14% from October 2, 1980 until the said sum is fully paid; and the further amount of
P1,000.00 as attorney's fees.
The counterclaim of defendant is dismissed.
With costs against defendant. 1
Both petitioner and private respondent appealed the aforesaid decision to the Court of Appeals.
Imputing fraud, bad faith and misrepresentation against VMS for having delivered a different vehicle to petitioner, the latter prayed for a reversal of the trial
court's decision so that she may be absolved from the obligation under the contract.
On October 27, 1986, the Court of Appeals rendered its assailed decision, the pertinent portion of which is quoted hereunder:
The allegations, statements, or admissions contained in a pleading are conclusive as against the pleader. A party cannot
subsequently take a position contradictory of, or inconsistent with his pleadings (Cunanan vs. Amparo, 80 Phil. 227). Admissions
made by the parties in the pleadings, or in the course of the trial or other proceedings, do not require proof and cannot be
contradicted unless previously shown to have been made through palpable mistake (Sec. 2, Rule 129, Revised Rules of Court; Sta.
Ana vs. Maliwat, L-23023, Aug. 31, 1968, 24 SCRA 1018).
When an action or defense is founded upon a written instrument, copied in or attached to the corresponding pleading as provided in
the preceding section, the genuineness and due execution of the instrument shall be deemed admitted unless the adverse party,
under oath, specifically denied them, and sets forth what he claims to be the facts (Sec. 8, Rule 8, Revised Rules of Court; Hibbered
vs. Rohde and McMillian, 32 Phil. 476).
A perusal of the evidence shows that the amount of P58,138.20 stated in the promissory note is the amount assumed by the plaintiff
in financing the purchase of defendant's motor vehicle from the Violago Motor Sales Corp., the monthly amortization of winch is
Pl,614.95 for 36 months. Considering that the defendant was able to pay twice (as admitted by the plaintiff, defendant's account
became delinquent only beginning May, 1980) or in the total sum of P3,229.90, she is therefore liable to pay the remaining balance
of P54,908.30 at l4% per annum from October 2, 1980 until full payment.
WHEREFORE, considering the foregoing, the appealed decision is hereby modified ordering the defendant to pay the plaintiff the
sum of P54,908.30 at 14% per annum from October 2, 1980 until full payment. The decision is AFFIRMED in all other respects. With
costs to defendant. 2
Petitioner's motion for reconsideration was denied; hence, the present recourse.
In the petition before us, petitioner assigns twelve (12) errors which focus on the alleged fraud, bad faith and misrepresentation of Violago Motor Sales
Corporation in the conduct of its business and which fraud, bad faith and misrepresentation supposedly released petitioner from any liability to private
respondent who should instead proceed against VMS. 3
Petitioner argues that in the light of the provision of the law on sales by description 4 which she alleges is applicable here, no contract ever existed
between her and VMS and therefore none had been assigned in favor of private respondent.
She contends that it is not necessary, as opined by the appellate court, to implead VMS as a party to the case before it can be made to answer for
damages because VMS was earlier sued by her for "breach of contract with damages" before the Regional Trial Court of Olongapo City, Branch LXXII,
docketed as Civil Case No. 2916-0. She cites as authority the decision therein where the court originally ordered petitioner to pay the remaining balance of
the motor vehicle installments in the amount of P31,644.30 representing the difference between the agreed consideration of P49,000.00 as shown in the
sales invoice and petitioner's initial downpayment of P17,855.70 allegedly evidenced by a receipt. Said decision was however reversed later on, with the
same court ordering defendant VMS instead to return to petitioner the sum of P17,855.70. Parenthetically, said decision is still pending consideration by
the First Civil Case Division of the Court of Appeals, upon an appeal by VMS, docketed as AC-G.R. No. 02922. 5
Private respondent in its comment, prays for the dismissal of the petition and counters that the issues raised and the allegations adduced therein are a
mere rehash of those presented and already passed upon in the court below, and that the judgment in the "breach of contract" suit cannot be invoked as
an authority as the same is still pending determination in the appellate court.
We see no cogent reason to disturb the challenged decision.
The pivotal issue in this case is whether the promissory note in question is a negotiable instrument which will bar completely all the available defenses of
the petitioner against private respondent.
Petitioner's liability on the promissory note, the due execution and genuineness of which she never denied under oath is, under the foregoing factual
milieu, as inevitable as it is clearly established.

21

The records reveal that involved herein is not a simple case of assignment of credit as petitioner would have it appear, where the assignee merely steps
into the shoes of, is open to all defenses available against and can enforce payment only to the same extent as, the assignor-vendor.
Recently, in the case of Consolidated Plywood Industries Inc. v. IFC Leasing and Acceptance Corp., 6 this Court had the occasion to clearly distinguish
between a negotiable and a non-negotiable instrument.
Among others, 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"". Under Section 8 of the Negotiable Instruments Law, there are only two ways by which an instrument may be made payable to order. There must
always be a specified person named in the instrument and the bill or note is to be paid to the person designated in the instrument or to any person to
whom he has indorsed and delivered the same. 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. Such being
the situation in the above-cited case, it was held that therein private respondent is not a holder in due course but a mere assignee against whom all
defenses available to the assignor may be raised. 7
In the case at bar, however, the situation is different. Indubitably, the basis of private respondent's claim against petitioner is a promissory note which
bears all the earmarks of negotiability.
The pertinent portion of the note reads:
PROMISSORY NOTE
(MONTHLY)
P58,138.20
San Fernando, Pampanga, Philippines
Feb. 11, 1980
For value received, I/We jointly and severally, promise to pay Violago Motor Sales Corporation or order, at its office in San
Fernando, Pampanga, the sum of FIFTY EIGHT THOUSAND ONE HUNDRED THIRTY EIGHT & 201/100 ONLY (P58,138.20)
Philippine currency, which amount includes interest at 14% per annum based on the diminishing balance, the said principal sum, to
be payable, without need of notice or demand, in installments of the amounts following and at the dates hereinafter set forth, to wit:
P1,614.95 monthly for "36" months due and payable on the 21st day of each month starting March 21, 1980 thru and inclusive of
February 21, 1983. P_________ monthly for ______ months due and payable on the ______ day of each month starting
_____198__ thru and inclusive of _____, 198________ provided that interest at 14% per annum shall be added on each unpaid
installment from maturity hereof until fully paid.
xxx xxx xxx
Maker; Co-Maker:
(SIGNED) JUANITA SALAS _________________
Address:
____________________ ____________________
WITNESSES
SIGNED: ILLEGIBLE SIGNED: ILLEGIBLE
TAN # TAN #
PAY TO THE ORDER OF
FILINVEST FINANCE AND LEASING CORPORATION
VIOLAGO MOTOR SALES CORPORATION
BY: (SIGNED) GENEVEVA V. BALTAZAR
Cash Manager 8
A careful study of the questioned promissory note shows that it is a negotiable instrument, having complied with the requisites under the law as follows: [a]
it is in writing and signed by the maker Juanita Salas; [b] it contains an unconditional promise to pay the amount of P58,138.20; [c] it is payable at a fixed
or determinable future time which is "P1,614.95 monthly for 36 months due and payable on the 21 st day of each month starting March 21, 1980 thru and
inclusive of Feb. 21, 1983;" [d] it is payable to Violago Motor Sales Corporation, or order and as such, [e] the drawee is named or indicated with certainty. 9
It was negotiated by indorsement in writing on the instrument itself payable to the Order of Filinvest Finance and Leasing Corporation 10 and it is an
indorsement of the entire instrument. 11

22

Under the circumstances, there appears to be no question that Filinvest is a holder in due course, having taken the instrument under the following
conditions: [a] it is complete and regular upon its face; [b] it became the holder thereof before it was overdue, and without notice that it had previously
been dishonored; [c] it took the same in good faith and for value; and [d] when it was negotiated to Filinvest, the latter had no notice of any infirmity in the
instrument or defect in the title of VMS Corporation. 12
Accordingly, respondent corporation holds the instrument free from any defect of title of prior parties, and free from defenses available to prior parties
among themselves, and may enforce payment of the instrument for the full amount thereof. 13 This being so, petitioner cannot set up against respondent
the defense of nullity of the contract of sale between her and VMS.
Even assuming for the sake of argument that there is an iota of truth in petitioner's allegation that there was in fact deception made upon her in that the
vehicle she purchased was different from that actually delivered to her, this matter cannot be passed upon in the case before us, where the VMS was
never impleaded as a party.
Whatever issue is raised or claim presented against VMS must be resolved in the "breach of contract" case.
Hence, we reach a similar opinion as did respondent court when it held:
We can only extend our sympathies to the defendant (herein petitioner) in this unfortunate incident. Indeed, there is nothing We can
do as far as the Violago Motor Sales Corporation is concerned since it is not a party in this case. To even discuss the issue as to
whether or not the Violago Motor Sales Corporation is liable in the transaction in question would amount, to denial of due process,
hence, improper and unconstitutional. She should have impleaded Violago Motor Sales. 14
IN VIEW OF THE FOREGOING, the assailed decision is hereby AFFIRMED. With costs against petitioner.
SO ORDERED.
Gutierrez, Jr., Feliciano, Bidin and Corts, JJ., concur.

G.R. No. L-2516

September 25, 1950

ANG TEK LIAN, petitioner,

vs.
THE COURT OF APPEALS, respondent.
Laurel, Sabido, Almario and Laurel for petitioner.
Office of the Solicitor General Felix Bautista Angelo and Solicitor Manuel Tomacruz for respondent.

23

BENGZON, J.:
For having issued a rubber check, Ang Tek Lian was convicted of estafa in the Court of First Instance of Manila. The Court of Appeals affirmed the verdict.
It appears that, knowing he had no funds therefor, Ang Tek Lian drew on Saturday, November 16, 1946, the check Exhibits A upon the China Banking
Corporation for the sum of P4,000, payable to the order of "cash". He delivered it to Lee Hua Hong in exchange for money which the latter handed in act.
On November 18, 1946, the next business day, the check was presented by Lee Hua Hong to the drawee bank for payment, but it was dishonored for
insufficiency of funds, the balance of the deposit of Ang Tek Lian on both dates being P335 only.
The Court of Appeals believed the version of Lee Huan Hong who testified that "on November 16, 1946, appellant went to his (complainant's) office, at
1217 Herran, Paco, Manila, and asked him to exchange Exhibit A which he (appellant) then brought with him with cash alleging that he needed badly
the sum of P4,000 represented by the check, but could not withdraw it from the bank, it being then already closed; that in view of this request and relying
upon appellant's assurance that he had sufficient funds in the blank to meet Exhibit A, and because they used to borrow money from each other, even
before the war, and appellant owns a hotel and restaurant known as the North Bay Hotel, said complainant delivered to him, on the same date, the sum of
P4,000 in cash; that despite repeated efforts to notify him that the check had been dishonored by the bank, appellant could not be located any-where, until
he was summoned in the City Fiscal's Office in view of the complaint for estafa filed in connection therewith; and that appellant has not paid as yet the
amount of the check, or any part thereof."
Inasmuch as the findings of fact of the Court of Appeals are final, the only question of law for decision is whether under the facts found, estafa had been
accomplished.
Article 315, paragraph (d), subsection 2 of the Revised Penal Code, punishes swindling committed "By post dating a check, or issuing such check in
payment of an obligation the offender knowing that at the time he had no funds in the bank, or the funds deposited by him in the bank were not sufficient to
cover the amount of the check, and without informing the payee of such circumstances".
We believe that under this provision of law Ang Tek Lian was properly held liable. In this connection, it must be stated that, as explained in People vs.
Fernandez (59 Phil., 615), estafa is committed by issuing either a postdated check or an ordinary check to accomplish the deceit.
It is argued, however, that as the check had been made payable to "cash" and had not been endorsed by Ang Tek Lian, the defendant is not guilty of the
offense charged. Based on the proposition that "by uniform practice of all banks in the Philippines a check so drawn is invariably dishonored," the following
line of reasoning is advanced in support of the argument:
. . . When, therefore, he (the offended party ) accepted the check (Exhibit A) from the appellant, he did so with full knowledge that it would be
dishonored upon presentment. In that sense, the appellant could not be said to have acted fraudulently because the complainant, in so
accepting the check as it was drawn, must be considered, by every rational consideration, to have done so fully aware of the risk he was
running thereby." (Brief for the appellant, p. 11.)
We are not aware of the uniformity of such practice. Instances have undoubtedly occurred wherein the Bank required the indorsement of the drawer
before honoring a check payable to "cash." But cases there are too, where no such requirement had been made . It depends upon the circumstances of
each transaction.
Under the Negotiable Instruments Law (sec. 9 [d], a check drawn payable to the order of "cash" is a check payable to bearer, and the bank may pay it to
the person presenting it for payment without the drawer's indorsement.
A check payable to the order of cash is a bearer instrument. Bacal vs. National City Bank of New York (1933), 146 Misc., 732; 262 N. Y. S.,
839; Cleary vs. De Beck Plate Glass Co. (1907), 54 Misc., 537; 104 N. Y. S., 831; Massachusetts Bonding & Insurance Co. vs. Pittsburgh Pipe
& Supply Co. (Tex. Civ. App., 1939), 135 S. W. (2d), 818. See also H. Cook & Son vs. Moody (1916), 17 Ga. App., 465; 87 S. E., 713.
Where a check is made payable to the order of "cash", the word cash "does not purport to be the name of any person", and hence the
instrument is payable to bearer. The drawee bank need not obtain any indorsement of the check, but may pay it to the person presenting it
without any indorsement. . . . (Zollmann, Banks and Banking, Permanent Edition, Vol. 6, p. 494.)
Of course, if the bank is not sure of the bearer's identity or financial solvency, it has the right to demand identification and /or assurance against possible
complications, for instance, (a) forgery of drawer's signature, (b) loss of the check by the rightful owner, (c) raising of the amount payable, etc. The bank
may therefore require, for its protection, that the indorsement of the drawer or of some other person known to it be obtained. But where the Bank is
satisfied of the identity and /or the economic standing of the bearer who tenders the check for collection, it will pay the instrument without further question;
and it would incur no liability to the drawer in thus acting.
A check payable to bearer is authority for payment to holder. Where a check is in the ordinary form, and is payable to bearer, so that no
indorsement is required, a bank, to which it is presented for payment, need not have the holder identified, and is not negligent in falling to do
so. . . . (Michie on Banks and Banking, Permanent Edition, Vol. 5, p. 343.)
. . . Consequently, a drawee bank to which a bearer check is presented for payment need not necessarily have the holder identified and
ordinarily may not be charged with negligence in failing to do so. See Opinions 6C:2 and 6C:3 If the bank has no reasonable cause for
suspecting any irregularity, it will be protected in paying a bearer check, "no matter what facts unknown to it may have occurred prior to the
presentment." 1 Morse, Banks and Banking, sec. 393.

24

Although a bank is entitled to pay the amount of a bearer check without further inquiry, it is entirely reasonable for the bank to insist that holder
give satisfactory proof of his identity. . . . (Paton's Digest, Vol. I, p. 1089.)
Anyway, it is significant, and conclusive, that the form of the check Exhibit A was totally unconnected with its dishonor. The Court of Appeals declared that
it was returned unsatisfied because the drawer had insufficient funds not because the drawer's indorsement was lacking.
Wherefore, there being no question as to the correctness of the penalty imposed on the appellant, the writ of certiorari is denied and the decision of the
Court of Appeals is hereby affirmed, with costs.
Moran, C. J., Ozaeta, Paras, Pablo, Tuason, and Reyes, JJ., concur.

25

G.R. No. 85419 March 9, 1993

DEVELOPMENT BANK OF RIZAL, plaintiff-petitioner,
vs.
SIMA WEI and/or LEE KIAN HUAT, MARY CHENG UY, SAMSON TUNG, ASIAN INDUSTRIAL PLASTIC CORPORATION and PRODUCERS BANK
OF THE PHILIPPINES, defendants-respondents.
Yngson & Associates for petitioner.
Henry A. Reyes & Associates for Samso Tung & Asian Industrial Plastic Corporation.
Eduardo G. Castelo for Sima Wei.
Monsod, Tamargo & Associates for Producers Bank.
Rafael S. Santayana for Mary Cheng Uy.

CAMPOS, JR., J.:

On July 6, 1986, the Development Bank of Rizal (petitioner Bank for brevity) filed a complaint for a sum of money against respondents Sima Wei and/or
Lee Kian Huat, Mary Cheng Uy, Samson Tung, Asian Industrial Plastic Corporation (Plastic Corporation for short) and the Producers Bank of the
Philippines, on two causes of action:
(1) To enforce payment of the balance of P1,032,450.02 on a promissory note executed by respondent Sima Wei on June 9, 1983;
and
(2) To enforce payment of two checks executed by Sima Wei, payable to petitioner, and drawn against the China Banking
Corporation, to pay the balance due on the promissory note.
Except for Lee Kian Huat, defendants filed their separate Motions to Dismiss alleging a common ground that the complaint states no cause of action. The
trial court granted the defendants' Motions to Dismiss. The Court of Appeals affirmed this decision, * to which the petitioner Bank, represented by its Legal
Liquidator, filed this Petition for Review by Certiorari, assigning the following as the alleged errors of the Court of Appeals: 1
(1) THE COURT OF APPEALS ERRED IN HOLDING THAT THE PLAINTIFF-PETITIONER HAS NO CAUSE OF ACTION AGAINST
DEFENDANTS-RESPONDENTS HEREIN.
(2) THE COURT OF APPEALS ERRED IN HOLDING THAT SECTION 13, RULE 3 OF THE REVISED RULES OF COURT ON
ALTERNATIVE DEFENDANTS IS NOT APPLICABLE TO HEREIN DEFENDANTS-RESPONDENTS.
The antecedent facts of this case are as follows:
In consideration for a loan extended by petitioner Bank to respondent Sima Wei, the latter executed and delivered to the former a promissory note,
engaging to pay the petitioner Bank or order the amount of P1,820,000.00 on or before June 24, 1983 with interest at 32% per annum. Sima Wei made
partial payments on the note, leaving a balance of P1,032,450.02. On November 18, 1983, Sima Wei issued two crossed checks payable to petitioner
Bank drawn against China Banking Corporation, bearing respectively the serial numbers 384934, for the amount of P550,000.00 and 384935, for the
amount of P500,000.00. The said checks were allegedly issued in full settlement of the drawer's account evidenced by the promissory note. These two
checks were not delivered to the petitioner-payee or to any of its authorized representatives. For reasons not shown, these checks came into the
possession of respondent Lee Kian Huat, who deposited the checks without the petitioner-payee's indorsement (forged or otherwise) to the account of
respondent Plastic Corporation, at the Balintawak branch, Caloocan City, of the Producers Bank. Cheng Uy, Branch Manager of the Balintawak branch of
Producers Bank, relying on the assurance of respondent Samson Tung, President of Plastic Corporation, that the transaction was legal and regular,
instructed the cashier of Producers Bank to accept the checks for deposit and to credit them to the account of said Plastic Corporation, inspite of the fact
that the checks were crossed and payable to petitioner Bank and bore no indorsement of the latter. Hence, petitioner filed the complaint as aforestated.
The main issue before Us is whether petitioner Bank has a cause of action against any or all of the defendants, in the alternative or otherwise.
A cause of action is defined as an act or omission of one party in violation of the legal right or rights of another. The essential elements are: (1) legal right
of the plaintiff; (2) correlative obligation of the defendant; and (3) an act or omission of the defendant in violation of said legal right. 2
The normal parties to a check are the drawer, the payee and the drawee bank. Courts have long recognized the business custom of using printed checks
where blanks are provided for the date of issuance, the name of the payee, the amount payable and the drawer's signature. All the drawer has to do when
he wishes to issue a check is to properly fill up the blanks and sign it. However, the mere fact that he has done these does not give rise to any liability on
his part, until and unless the check is delivered to the payee or his representative. A negotiable instrument, of which a check is, is not only a written
evidence of a contract right but is also a species of property. Just as a deed to a piece of land must be delivered in order to convey title to the grantee, so

26

must a negotiable instrument be delivered to the payee in order to evidence its existence as a binding contract. Section 16 of the Negotiable Instruments
Law, which governs checks, provides in part:
Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect
thereto. . . .
Thus, the payee of a negotiable instrument acquires no interest with respect thereto until its delivery to him. 3 Delivery of an instrument means transfer of
possession, actual or constructive, from one person to another. 4 Without the initial delivery of the instrument from the drawer to the payee, there can be no
liability on the instrument. Moreover, such delivery must be intended to give effect to the instrument.
The allegations of the petitioner in the original complaint show that the two (2) China Bank checks, numbered 384934 and 384935, were not delivered to
the payee, the petitioner herein. Without the delivery of said checks to petitioner-payee, the former did not acquire any right or interest therein and cannot
therefore assert any cause of action, founded on said checks, whether against the drawer Sima Wei or against the Producers Bank or any of the other
respondents.
In the original complaint, petitioner Bank, as plaintiff, sued respondent Sima Wei on the promissory note, and the alternative defendants, including Sima
Wei, on the two checks. On appeal from the orders of dismissal of the Regional Trial Court, petitioner Bank alleged that its cause of action was not based
on collecting the sum of money evidenced by the negotiable instruments stated but on quasi-delict a claim for damages on the ground of fraudulent
acts and evident bad faith of the alternative respondents. This was clearly an attempt by the petitioner Bank to change not only the theory of its case but
the basis of his cause of action. It is well-settled that a party cannot change his theory on appeal, as this would in effect deprive the other party of his day
in court. 5
Notwithstanding the above, it does not necessarily follow that the drawer Sima Wei is freed from liability to petitioner Bank under the loan evidenced by the
promissory note agreed to by her. Her allegation that she has paid the balance of her loan with the two checks payable to petitioner Bank has no merit for,
as We have earlier explained, these checks were never delivered to petitioner Bank. And even granting, without admitting, that there was delivery to
petitioner Bank, the delivery of checks in payment of an obligation does not constitute payment unless they are cashed or their value is impaired through
the fault of the creditor. 6 None of these exceptions were alleged by respondent Sima Wei.
Therefore, unless respondent Sima Wei proves that she has been relieved from liability on the promissory note by some other cause, petitioner Bank has
a right of action against her for the balance due thereon.
However, insofar as the other respondents are concerned, petitioner Bank has no privity with them. Since petitioner Bank never received the checks on
which it based its action against said respondents, it never owned them (the checks) nor did it acquire any interest therein. Thus, anything which the
respondents may have done with respect to said checks could not have prejudiced petitioner Bank. It had no right or interest in the checks which could
have been violated by said respondents. Petitioner Bank has therefore no cause of action against said respondents, in the alternative or otherwise. If at
all, it is Sima Wei, the drawer, who would have a cause of action against her
co-respondents, if the allegations in the complaint are found to be true.
With respect to the second assignment of error raised by petitioner Bank regarding the applicability of Section 13, Rule 3 of the Rules of Court, We find it
unnecessary to discuss the same in view of Our finding that the petitioner Bank did not acquire any right or interest in the checks due to lack of delivery. It
therefore has no cause of action against the respondents, in the alternative or otherwise.
In the light of the foregoing, the judgment of the Court of Appeals dismissing the petitioner's complaint is AFFIRMED insofar as the second cause of action
is concerned. On the first cause of action, the case is REMANDED to the trial court for a trial on the merits, consistent with this decision, in order to
determine whether respondent Sima Wei is liable to the Development Bank of Rizal for any amount under the promissory note allegedly signed by her.
SO ORDERED.
Narvasa, C.J., Padilla, Regalado and Nocon, JJ., concur.

27

G.R. Nos. L-25836-37 January 31, 1981

THE PHILIPPINE BANK OF COMMERCE, plaintiff-appellee,
vs.
JOSE M. ARUEGO, defendant-appellant.

FERNANDEZ, J.:
The defendant, Jose M. Aruego, appealed to the Court of Appeals from the order of the Court of First Instance of Manila, Branch XIII, in Civil Case No.
42066 denying his motion to set aside the order declaring him in default, 1 and from the order of said court in the same case denying his motion to set
aside the judgment rendered after he was declared in default. 2 These two appeals of the defendant were docketed as CA-G.R. NO. 27734-R and CAG.R. NO. 27940-R, respectively.
Upon motion of the defendant on July 25, 1960, 3 he was allowed by the Court of Appeals to file one consolidated record on appeal of CA-G.R. NO.
27734-R and CA-G.R. NO. 27940-R. 4
In a resolution promulgated on March 1, 1966, the Court of Appeals, First Division, certified the consolidated appeal to the Supreme Court on the ground
that only questions of law are involved. 5
On December 1, 1959, the Philippine Bank of Commerce instituted against Jose M. Aruego Civil Case No. 42066 for the recovery of the total sum of about
P35,000.00 with daily interest thereon from November 17, 1959 until fully paid and commission equivalent to 3/8% for every thirty (30) days or fraction
thereof plus attorney's fees equivalent to 10% of the total amount due and costs. 6 The complaint filed by the Philippine Bank of Commerce contains
twenty-two (22) causes of action referring to twenty-two (22) transactions entered into by the said Bank and Aruego on different dates covering the period
from August 28, 1950 to March 14, 1951. 7 The sum sought to be recovered represents the cost of the printing of "World Current Events," a periodical
published by the defendant. To facilitate the payment of the printing the defendant obtained a credit accommodation from the plaintiff. Thus, for every
printing of the "World Current Events," the printer, Encal Press and Photo Engraving, collected the cost of printing by drawing a draft against the plaintiff,
said draft being sent later to the defendant for acceptance. As an added security for the payment of the amounts advanced to Encal Press and PhotoEngraving, the plaintiff bank also required defendant Aruego to execute a trust receipt in favor of said bank wherein said defendant undertook to hold in
trust for plaintiff the periodicals and to sell the same with the promise to turn over to the plaintiff the proceeds of the sale of said publication to answer for
the payment of all obligations arising from the draft. 8
Aruego received a copy of the complaint together with the summons on December 2, 1959. 9 On December 14, 1959 defendant filed an urgent motion for
extension of time to plead, and set the hearing on December 16, 1959. 10 At the hearing, the court denied defendant's motion for extension. Whereupon,
the defendant filed a motion to dismiss the complaint on December 17, 1959 on the ground that the complaint states no cause of action because:
a) When the various bills of exchange were presented to the defendant as drawee for acceptance, the amounts thereof had already been paid by the
plaintiff to the drawer (Encal Press and Photo Engraving), without knowledge or consent of the defendant drawee.
b) In the case of a bill of exchange, like those involved in the case at bar, the defendant drawee is an accommodating party only for the drawer (Encal
Press and Photo-Engraving) and win be liable in the event that the accommodating party (drawer) fails to pay its obligation to the plaintiff. 11
The complaint was dismissed in an order dated December 22, 1959, copy of which was received by the defendant on December 24, 1959. 12
On January 13, 1960, the plaintiff filed a motion for reconsideration. 13 On March 7, 1960, acting upon the motion for reconsideration filed by the plaintiff,
the trial court set aside its order dismissing the complaint and set the case for hearing on March 15, 1960 at 8:00 in the morning. 14 A copy of the order
setting aside the order of dismissal was received by the defendant on March 11, 1960 at 5:00 o'clock in the afternoon according to the affidavit of the
deputy sheriff of Manila, Mamerto de la Cruz. On the following day, March 12, 1960, the defendant filed a motion to postpone the trial of the case on the
ground that there having been no answer as yet, the issues had not yet been joined. 15 On the same date, the defendant filed his answer to the complaint
interposing the following defenses: That he signed the document upon which the plaintiff sues in his capacity as President of the Philippine Education
Foundation; that his liability is only secondary; and that he believed that he was signing only as an accommodation party. 16

28

On March 15, 1960, the plaintiff filed an ex parte motion to declare the defendant in default on the ground that the defendant should have filed his answer
on March 11, 1960. He contends that by filing his answer on March 12, 1960, defendant was one day late. 17 On March 19, 1960 the trial court declared
the defendant in default. 18 The defendant learned of the order declaring him in default on March 21, 1960. On March 22, 1960 the defendant filed a
motion to set aside the order of default alleging that although the order of the court dated March 7, 1960 was received on March 11, 1960 at 5:00 in the
afternoon, it could not have been reasonably expected of the defendant to file his answer on the last day of the reglementary period, March 11, 1960,
within office hours, especially because the order of the court dated March 7, 1960 was brought to the attention of counsel only in the early hours of March
12, 1960. The defendant also alleged that he has a good and substantial defense. Attached to the motion are the affidavits of deputy sheriff Mamerto de la
Cruz that he served the order of the court dated March 7, 1960 on March 11, 1960, at 5:00 o'clock in the afternoon and the affidavit of the defendant
Aruego that he has a good and substantial defense. 19 The trial court denied the defendant's motion on March 25, 1960. 20 On May 6, 1960, the trial court
rendered judgment sentencing the defendant to pay to the plaintiff the sum of P35,444.35 representing the total amount of his obligation to the said
plaintiff under the twenty-two (22) causes of action alleged in the complaint as of November 15, 1957 and the sum of P10,000.00 as attorney's fees. 21
On May 9, 1960 the defendant filed a notice of appeal from the order dated March 25, 1961 denying his motion to set aside the order declaring him in
default, an appeal bond in the amount of P60.00, and his record on appeal. The plaintiff filed his opposition to the approval of defendant's record on
appeal on May 13, 1960. The following day, May 14, 1960, the lower court dismissed defendant's appeal from the order dated March 25, 1960 denying his
motion to set aside the order of default. 22 On May 19, 1960, the defendant filed a motion for reconsideration of the trial court's order dismissing his appeal.
23
The plaintiff, on May 20, 1960, opposed the defendant's motion for reconsideration of the order dismissing appeal. 24 On May 21, 1960, the trial court
reconsidered its previous order dismissing the appeal and approved the defendant's record on appeal. 25 On May 30, 1960, the defendant received a copy
of a notice from the Clerk of Court dated May 26, 1960, informing the defendant that the record on appeal filed ed by the defendant was forwarded to the
Clerk of Court of Appeals. 26
On June 1, 1960 Aruego filed a motion to set aside the judgment rendered after he was declared in default reiterating the same ground previously
advanced by him in his motion for relief from the order of default. 27 Upon opposition of the plaintiff filed on June 3, 1960, 28 the trial court denied the
defendant's motion to set aside the judgment by default in an order of June 11, 1960. 29 On June 20, 1960, the defendant filed his notice of appeal from
the order of the court denying his motion to set aside the judgment by default, his appeal bond, and his record on appeal. The defendant's record on
appeal was approved by the trial court on June 25, 1960. 30 Thus, the defendant had two appeals with the Court of Appeals: (1) Appeal from the order of
the lower court denying his motion to set aside the order of default docketed as CA-G.R. NO. 27734-R; (2) Appeal from the order denying his motion to set
aside the judgment by default docketed as CA-G.R. NO. 27940-R.
In his brief, the defendant-appellant assigned the following errors:
I
THE LOWER COURT ERRED IN HOLDING THAT THE DEFENDANT WAS IN DEFAULT.
II
THE LOWER COURT ERRED IN ENTERTAINING THE MOTION TO DECLARE DEFENDANT IN DEFAULT ALTHOUGH AT THE
TIME THERE WAS ALREADY ON FILE AN ANSWER BY HIM WITHOUT FIRST DISPOSING OF SAID ANSWER IN AN
APPROPRIATE ACTION.
III
THE LOWER COURT ERRED IN DENYING DEFENDANT'S PETITION FOR RELIEF OF ORDER OF DEFAULT AND FROM
JUDGMENT BY DEFAULT AGAINST DEFENDANT. 31
It has been held that to entitle a party to relief from a judgment taken against him through his mistake, inadvertence, surprise or excusable neglect, he
must show to the court that he has a meritorious defense. 32 In other words, in order to set aside the order of default, the defendant must not only show
that his failure to answer was due to fraud, accident, mistake or excusable negligence but also that he has a meritorious defense.
The record discloses that Aruego received a copy of the complaint together with the summons on December 2, 1960; that on December 17, 1960, the last
day for filing his answer, Aruego filed a motion to dismiss; that on December 22, 1960 the lower court dismissed the complaint; that on January 23, 1960,
the plaintiff filed a motion for reconsideration and on March 7, 1960, acting upon the motion for reconsideration, the trial court issued an order setting aside
the order of dismissal; that a copy of the order was received by the defendant on March 11, 1960 at 5:00 o'clock in the afternoon as shown in the affidavit
of the deputy sheriff; and that on the following day, March 12, 1960, the defendant filed his answer to the complaint.
The failure then of the defendant to file his answer on the last day for pleading is excusable. The order setting aside the dismissal of the complaint was
received at 5:00 o'clock in the afternoon. It was therefore impossible for him to have filed his answer on that same day because the courts then held office
only up to 5:00 o'clock in the afternoon. Moreover, the defendant immediately filed his answer on the following day.
However, while the defendant successfully proved that his failure to answer was due to excusable negligence, he has failed to show that he has a
meritorious defense. The defendant does not have a good and substantial defense.
Defendant Aruego's defenses consist of the following:

29

a) The defendant signed the bills of exchange referred to in the plaintiff's complaint in a representative capacity, as the then President of the Philippine
Education Foundation Company, publisher of "World Current Events and Decision Law Journal," printed by Encal Press and Photo-Engraving, drawer of
the said bills of exchange in favor of the plaintiff bank;
b) The defendant signed these bills of exchange not as principal obligor, but as accommodation or additional party obligor, to add to the security of said
plaintiff bank. The reason for this statement is that unlike real bills of exchange, where payment of the face value is advanced to the drawer only upon
acceptance of the same by the drawee, in the case in question, payment for the supposed bills of exchange were made before acceptance; so that in
effect, although these documents are labelled bills of exchange, legally they are not bills of exchange but mere instruments evidencing indebtedness of
the drawee who received the face value thereof, with the defendant as only additional security of the same. 33
The first defense of the defendant is that he signed the supposed bills of exchange as an agent of the Philippine Education Foundation Company where
he is president. Section 20 of the Negotiable Instruments Law provides that "Where the instrument contains or a person adds to his signature words
indicating that he signs for or on behalf of a principal or in a representative capacity, he is not liable on the instrument if he was duly authorized; but the
mere addition of words describing him as an agent or as filing a representative character, without disclosing his principal, does not exempt him from
personal liability."
An inspection of the drafts accepted by the defendant shows that nowhere has he disclosed that he was signing as a representative of the Philippine
Education Foundation Company. 34 He merely signed as follows: "JOSE ARUEGO (Acceptor) (SGD) JOSE ARGUEGO For failure to disclose his principal,
Aruego is personally liable for the drafts he accepted.
The defendant also contends that he signed the drafts only as an accommodation party and as such, should be made liable only after a showing that the
drawer is incapable of paying. This contention is also without merit.
An accommodation party is one who has signed the instrument as maker, drawer, indorser, without receiving value therefor and for the purpose of lending
his name to some other person. Such person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of the taking of the
instrument knew him to be only an accommodation party. 35 In lending his name to the accommodated party, the accommodation party is in effect a surety
for the latter. He lends his name to enable the accommodated party to obtain credit or to raise money. He receives no part of the consideration for the
instrument but assumes liability to the other parties thereto because he wants to accommodate another. In the instant case, the defendant signed as a
drawee/acceptor. Under the Negotiable Instrument Law, a drawee is primarily liable. Thus, if the defendant who is a lawyer, he should not have signed as
an acceptor/drawee. In doing so, he became primarily and personally liable for the drafts.
The defendant also contends that the drafts signed by him were not really bills of exchange but mere pieces of evidence of indebtedness because
payments were made before acceptance. This is also without merit. Under the Negotiable Instruments Law, a bill of exchange is an unconditional order in
writting 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. 36 As long as a commercial paper conforms with the definition of a bill of exchange,
that paper is considered a bill of exchange. The nature of acceptance is important only in the determination of the kind of liabilities of the parties involved,
but not in the determination of whether a commercial paper is a bill of exchange or not.
It is evident then that the defendant's appeal can not prosper. To grant the defendant's prayer will result in a new trial which will serve no purpose and will
just waste the time of the courts as well as of the parties because the defense is nil or ineffective. 37
WHEREFORE, the order appealed from in Civil Case No. 42066 of the Court of First Instance of Manila denying the petition for relief from the judgment
rendered in said case is hereby affirmed, without pronouncement as to costs.
SO ORDERED.
Teehankee (Chairman), Makasiar, Guerrero and Melencio-Herrera JJ., concur.

30

G.R. No. 116320 November 29, 1999

ADALIA FRANCISCO, petitioner,
vs.
COURT OF APPEALS, HERBY COMMERCIAL & CONSTRUCTION CORPORATION AND JAIME C. ONG, respondents.

GONZAGA-REYES, J.:
Assailed in this petition for review on certiorari is the decision 1 of the Court of Appeals affirming the decision 2 rendered by Branch 168 of the Regional
Trial Court of Pasig in Civil Case No. 35231 in favor of private respondents.
The controversy before this Court finds its origins in a Land Development and Construction Contract which was entered into on June 23, 1977 by A.
Francisco Realty & Development Corporation (AFRDC), of which petitioner Adalia Francisco (Francisco) is the president, and private respondent Herby
Commercial & Construction Corporation (HCCC), represented by its President and General Manager private respondent Jaime C. Ong (Ong), pursuant to
a housing project of AFRDC at San Jose del Monte, Bulacan, financed by the Government Service Insurance System (GSIS). Under the contract, HCCC
agreed to undertake the construction of 35 housing units and the development of 35 hectares of land. The payment of HCCC for its services was on a
turn-key basis, that is, HCCC was to be paid on the basis of the completed houses and developed lands delivered to and accepted by AFRDC and the
GSIS. To facilitate payment, AFRDC executed a Deed of Assignment in favor of HCCC to enable the latter to collect payments directly from the GSIS.
Furthermore, the GSIS and AFRDC put up an Executive Committee Account with the Insular Bank of Asia & America (IBAA) in the amount of
P4,000,000.00 from which checks would be issued and co-signed by petitioner Francisco and the GSIS Vice-President Armando Diaz (Diaz).
On February 10, 1978, HCCC filed a complaint 3 with the Regional Trial Court of Quezon City against Francisco, AFRDC and the GSIS for the collection of
the unpaid balance under the Land Development and Construction Contract in the amount of P515,493.89 for completed and delivered housing units and
land development. However, the parties eventually arrived at an amicable settlement of their differences, which was embodied in a Memorandum
Agreement executed by HCCC and AFRDC on July 21, 1978. Under the agreement, the parties stipulated that HCCC had turned over 83 housing units
which have been accepted and paid for by the GSIS. The GSIS acknowledged that it still owed HCCC P520,177.50 representing incomplete construction
of housing units, incomplete land development and 5% retention, which amount will be discharged when the defects and deficiencies are finally completed
by HCCC. It was also provided that HCCC was indebted to AFRDC in the amount of P180,234.91 which the former agreed would be paid out of the
proceeds from the 40 housing units still to be turned over by HCCC or from any amount due to HCCC from the GSIS. Consequently, the trial court
dismissed the case upon the filing by the parties of a joint motion to dismiss.

31

Sometime in 1979, after an examination of the records of the GSIS, Ong discovered that Diaz and Francisco had executed and signed seven checks 4, of
various dates and amounts, drawn against the IBAA and payable to HCCC for completed and delivered work under the contract. Ong, however, claims
that these checks were never delivered to HCCC. Upon inquiry with Diaz, Ong learned that the GSIS gave Francisco custody of the checks since she
promised that she would deliver the same to HCCC. Instead, Francisco forged the signature of Ong, without his knowledge or consent, at the dorsal
portion of the said checks to make it appear that HCCC had indorsed the checks; Francisco then indorsed the checks for a second time by signing her
name at the back of the checks and deposited the checks in her IBAA savings account. IBAA credited Francisco's account with the amount of the checks
and the latter withdrew the amount so credited.
On June 7, 1979, Ong filed complaints with the office of the city fiscal of Quezon City, charging Francisco with estafa thru falsification of commercial
documents. Francisco denied having forged Ong's signature on the checks, claiming that Ong himself indorsed the seven checks in behalf of HCCC and
delivered the same to Francisco in payment of the loans extended by Francisco to HCCC. According to Francisco, she agreed to grant HCCC the loans in
the total amount of P585,000.00 and covered by eighteen promissory notes in order to obviate the risk of the non-completion of the project. As a means of
repayment, Ong allegedly issued a Certification authorizing Francisco to collect HCCC's receivables from the GSIS. Assistant City Fiscal Ramon M.
Gerona gave credence to Francisco's claims and accordingly, dismissed the complaints, which dismissal was affirmed by the Minister of Justice in a
resolution issued on June 5, 1981.
The present case was brought by private respondents on November 19, 1979 against Francisco and IBAA for the recovery of P370,475.00, representing
the total value of the seven checks, and for damages, attorney's fees, expenses of litigation and costs. After trial on the merits, the trial court rendered its
decision in favor of private respondents, the dispositive portion of which provides
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs and against the defendants INSULAR
BANK OF ASIA & AMERICA and ATTY. ADALIA FRANCISCO, to jointly and severally pay the plaintiffs the amount of P370.475.00
plus interest thereon at the rate of 12% per annum from the date of the filing of the complaint until the full amount is paid; moral
damages to plaintiff Jaime Ong in the sum of P50,000.00; exemplary damages of P50,000.00; litigation expenses of P5,000.00; and
attorney's fees of P50,000.00.
With respect to the cross-claim of the defendant IBAA against its co-defendant Atty. Adalia Francisco, the latter is ordered to
reimburse the former for the sums that the Bank shall pay to the plaintiff on the forged checks including the interests paid thereon.
Further, the defendants are ordered to pay the costs.
Based upon the findings of handwriting experts from the National Bureau of Investigation (NBI), the trial court held that Francisco had indeed forged the
signature of Ong to make it appear that he had indorsed the checks. Also, the court ruled that there were no loans extended, reasoning that it was
unbelievable that HCCC was experiencing financial difficulties so as to compel it to obtain the loans from AFRDC in view of the fact that the GSIS had
issued checks in favor of HCCC at about the same time that the alleged advances were made. The trial court stated that it was plausible that Francisco
concealed the fact of issuance of the checks from private respondents in order to make it appear as if she were accommodating private respondents,
when in truth she was lending HCCC its own money.
With regards to the Memorandum Agreement entered into between AFRDC and HCCC in Civil Case No. Q-24628, the trial court held that the same did
not make any mention of the forged checks since private respondents were as of yet unaware of their existence, that fact having been effectively
concealed by Francisco, until private respondents acquired knowledge of Francisco's misdeeds in 1979.
IBAA was held liable to private respondents for having honored the checks despite such obvious irregularities as the lack of initials to validate the
alterations made on the check, the absence of the signature of a co-signatory in the corporate checks of HCCC and the deposit of the checks on a second
indorsement in the savings account of Francisco. However, the trial court allowed IBAA recourse against Francisco, who was ordered to reimburse the
IBAA for any sums it shall have to pay to private respondents. 5
Both Francisco and IBAA appealed the trial court's decision, but the Court of Appeals dismissed IBAA's appeal for its failure to file its brief within the 45day extension granted by the appellate court. IBAA's motion for reconsideration and petition for review on certiorari filed with this Court were also similarly
denied. On November 21, 1989, IBAA and HCCC entered into a Compromise Agreement which was approved by the trial court, wherein HCCC
acknowledged receipt of the amount of P370,475.00 in full satisfaction of its claims against IBAA, without prejudice to the right of the latter to pursue its
claims against Francisco.
On June 29, 1992, the Court of Appeals affirmed the trial court's ruling, hence this petition for review on certiorari filed by petitioner, assigning the following
errors to the appealed decision
1. The respondent Court of Appeals erred in concluding that private respondents did not owe Petitioner the
sum covered by the Promissory Notes Exh. 2-2-A-2-P (FRANCISCO). Such conclusion was based mainly on
conjectures, surmises and speculation contrary to the unrebutted pleadings and evidence presented by
petitioner.
2. The respondent Court of Appeals erred in holding that Petitioner falsified the signature of private
respondent ONG on the checks in question without any authority therefor which is patently contradictory to the
unrebutted pleading and evidence that petitioner was expressly authorized by respondent HERBY thru ONG
to collect all receivables of HERBY from GSIS to pay the loans extended to them. (Exhibit 3).

32

3. That respondent Court of Appeals erred in holding that the seven checks in question were not taken up in
the liquidation and reconciliation of all outstanding account between AFRDC and HERBY as acknowledged by
the parties in Memorandum Agreement (Exh. 5) is a pure conjecture, surmise and speculation contrary to the
unrebutted evidence presented by petitioners. It is an inference made which is manifestly mistaken.
4. The respondent Court of Appeals erred in affirming the decision of the lower court and dismissing the
appeal. 6
The pivotal issue in this case is whether or not Francisco forged the signature of Ong on the seven checks. In this connection, we uphold the lower courts'
finding that the subject matter of the present case, specifically the seven checks, drawn by GSIS and AFRDC, dated between October to November 1977,
in the total amount of P370,475.00 and payable to HCCC, was not included in the Memorandum Agreement executed by HCCC and AFRDC in Civil Case
No. Q-24628. As observed by the trial court, aside from there being absolutely no mention of the checks in the said agreement, the amounts represented
by said checks could not have been included in the Memorandum Agreement executed in 1978 because private respondents only discovered Francisco's
acts of forgery in 1979. The lower courts found that Francisco was able to easily conceal from private respondents even the fact of the issuance of the
checks since she was a co-signatory thereof. 7 We also note that Francisco had custody of the checks, as proven by the check vouchers bearing her
uncontested signature, 8 by which she, in effect, acknowledged having received the checks intended for HCCC. This contradicts Francisco's claims that
the checks were issued to Ong who delivered them to Francisco already indorsed. 9
As regards the forgery, we concur with the lower courts', finding that Francisco forged the signature of Ong on the checks to make it appear as if Ong had
indorsed said checks and that, after indorsing the checks for a second time by signing her name at the back of the checks, Francisco deposited said
checks in her savings account with IBAA. The forgery was satisfactorily established in the trial court upon the strength of the findings of the NBI
handwriting expert. 10 Other than petitioner's self-serving denials, there is nothing in the records to rebut the NBI's findings. Well-entrenched is the rule that
findings of trial courts which are factual in nature, especially when affirmed by the Court of Appeals, deserve to be respected and affirmed by the Supreme
Court, provided it is supported by substantial evidence on record, 11 as it is in the case at bench.
Petitioner claims that she was, in any event, authorized to sign Ong's name on the checks by virtue of the Certification executed by Ong in her favor giving
her the authority to collect all the receivables of HCCC from the GSIS, including the questioned checks. 12 Petitioner's alternative defense must similarly
fail. The Negotiable Instruments Law provides that where any person is under obligation to indorse in a representative capacity, he may indorse in such
terms as to negative personal liability. 13 An agent, when so signing, should indicate that he is merely signing in behalf of the principal and must disclose
the name of his principal; otherwise he shall be held personally liable. 14 Even assuming that Francisco was authorized by HCCC to sign Ong's name, still,
Francisco did not indorse the instrument in accordance with law. Instead of signing Ong's name, Francisco should have signed her own name and
expressly indicated that she was signing as an agent of HCCC. Thus, the Certification cannot be used by Francisco to validate her act of forgery.
Every person who, contrary to law, wilfully or negligently causes damage to another, shall indemnify the latter for the same. 15 Due to her forgery of Ong's
signature which enabled her to deposit the checks in her own account, Francisco deprived HCCC of the money due it from the GSIS pursuant to the Land
Development and Construction Contract. Thus, we affirm respondent court's award of compensatory damages in the amount of P370,475.00, but with a
modification as to the interest rate which shall be six percent (6%) per annum, to be computed from the date of the filing of the complaint since the amount
of damages was alleged in the complaint; 16 however, the rate of interest shall be twelve percent (12%) per annum from the time the judgment in this case
becomes final and executory until its satisfaction and the basis for the computation of this twelve percent (12%) rate of interest shall be the amount of
P370,475.00. This is in accordance with the doctrine enunciated in Eastern Shipping Lines, Inc. vs. Court of Appeals, et al., 17 which was reiterated in
Philippine National Bank vs. Court of Appeals, 18 Philippine Airlines, Inc. vs. Court of Appeals 19 and in Keng Hua Paper Products Co., Inc. vs. Court of
Appeals, 20 which provides that
1. When an obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that
which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at
the discretion of the court at the rate of six percent (6%) per annum. No interest, however, shall be adjudged on unliquidated claims or damages except
when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the
interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time
the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be twelve percent (12%) per annum from such finality until its satisfaction, this interim period being deemed to
be by then an equivalent to a forbearance of credit.
We also sustain the award of exemplary damages in the amount of P50,000.00. Under Article 2229 of the Civil Code, exemplary damages are imposed by
way of example or correction for the public good, in addition to the moral, temperate, liquidated or compensatory damages. Considering petitioner's
fraudulent act, we hold that an award of P50,000.00 would be adequate, fair and reasonable. The grant of exemplary damages justifies the award of
attorney's fees in the amount of P50,000.00, and the award of P5,000.00 for litigation
expenses. 21

33

The appellate court's award of P50,000.00 in moral damages is warranted. Under Article 2217 of the Civil Code, moral damages may be granted upon
proof of physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation and similar
injury. 22 Ong testitified that he suffered sleepless nights, embarrassment, humiliation and anxiety upon discovering that the checks due his company were
forged by petitioner and that petitioner had filed baseless criminal complaints against him before the fiscal's office of Quezon City which disrupted HCCC's
business operations. 23
WHEREFORE, we AFFIRM the respondent court's decision promulgated on June 29, 1992, upholding the February 16, 1988 decision of the trial court in
favor of private respondents, with the modification that the interest upon the actual damages awarded shall be at six percent (6%) per annum, which
interest rate shall be computed from the time of the filing of the complaint on November 19, 1979. However, the interest rate shall be twelve percent (12%)
per annum from the time the judgment in this case becomes final and executory and until such amount is fully paid. The basis for computation of the six
percent and twelve percent rates of interest shall be the amount of P370,475.00. No pronouncement as to costs.
SO ORDERED.
Melo, Vitug, Panganiban and Purisima, JJ., concur.

G.R. No. L-29432.

August 6, 1975.

JAI-ALAI CORPORATION OF THE PHILIPPINES, Petitioner,

v.
BANK OF THE PHILIPPINE ISLAND, Respondent.
Bausa, Ampil & Suarez for Petitioner.
Aviado & Aranda for Respondent.

CASTRO, J.:

34

This is a petition by the Jai-Alai Corporation of the Philippines (hereinafter referred to as the petitioner) for review of the decision of the Court of Appeals in
C.A.-G.R. 34042-R dated June 25, 1968 in favor of the Bank of the Philippine Islands (hereinafter referred to as the respondent).
From April 2, 1959 to May 18, 1959, ten checks with a total face value of P8,030.58 were deposited by the petitioner in its current account with the
respondent bank. The particulars of these checks are as follows:chanrob1es virtual 1aw library
1. Drawn by the Delta Engineering Service upon the Pacific Banking Corporation and payable to the Inter-Island Gas Service Inc. or order:chanrob1es
virtual 1aw library
Date Check Exhibit
Deposited Number Amount Number
4/2/59 B-352680 P500.00 18
4/20/59 A-156907 372.32 19
4/24/59 A-156924 397.82 20
5/4/59 B-364764 250.00 23
5/6/59 B-364775 250.00 24
2. Drawn by the Enrique Cortiz & Co. upon the Pacific Banking Corporation and payable to the Inter-Island Gas Service, Inc. or bearer:chanrob1es virtual
1aw library
4/13/59 B-335063 P 2108.70 21
4/27/59 B-335072 P2210.94 22
3. Drawn by the Luzon Tinsmith & Company upon the China Banking Corporation and payable to the Inter-Island Gas Service, Inc. or bearer:chanrob1es
virtual 1aw library
5/18/59 VN430188 P940.8025cralaw:red
4. Drawn by the Roxas Manufacturing, Inc. upon the Philippine National Bank and payable to the Inter-Island Gas Service, Inc. order:chanrob1es virtual
1aw library
5/14/59 1860160 P 500.00 26
5/18/59 1860660 P 500.00 27
All the foregoing checks, which were acquired by the petitioner from one Antonio J. Ramirez, a sales agent of the Inter-Island Gas and a regular bettor at
jai-alai games, were, upon deposit, temporarily credited to the petitioners account in accordance with the clause printed on the deposit slips issued by the
respondent and which reads:jgc:chanrobles.com.ph
"Any credit allowed the depositor on the books of the Bank for checks or drafts hereby received for deposit, is provisional only, until such time as the
proceeds thereof, in current funds or solvent credits, shall have been actually received by the Bank and the latter reserves to itself the right to charge back
the item to the account of its depositor, at any time before that event, regardless of whether or not the item itself can be returned."cralaw virtua1aw library
About the latter part of July 1959, after Ramirez had resigned from the Inter-Island Gas and after the checks had been submitted to inter-bank clearing,
the Inter-Island Gas discovered that all the indorsements made on the checks purportedly by its cashiers, Santiago Amplayo and Vicenta Mucor (who
were merely authorized to deposit checks issued payable to the said company) as well as the rubber stamp impression thereon reading "Inter-Island Gas
Service, Inc.," were forgeries. In due time, the Inter-Island Gas advised the petitioner, the respondent, the drawers and the drawee-banks of the said
checks about the forgeries, and filed a criminal complaint against Ramirez with the Office of the City Fiscal of Manila. 1
The respondents cashier, Ramon Sarthou, upon receipt of the latter of Inter-Island Gas dated August 31, 1959, called up the petitioners cashier, Manuel
Garcia, and advised the latter that in view of the circumstances he would debit the value of the checks against the petitioners account as soon as they
were returned by the respective drawee-banks.
Meanwhile, the drawers of the checks, having been notified of the forgeries, demanded reimbursement to their respective accounts from the draweebanks, which in turn demanded from the respondent, as collecting bank, the return of the amounts they had paid on account thereof. When the draweebanks returned the checks to the respondent, the latter paid their value which the former in turn paid to the Inter-Island Gas. The respondent, for its part,
debited the petitioners current account and forwarded to the latter the checks containing the forged indorsements, which the petitioner, however, refused
to accept.
On October 8, 1959 the petitioner drew against its current account with the respondent a check for P135,000 payable to the order of the Mariano Olondriz
y Cia. in payment of certain shares of stock. The check was, however, dishonored by the respondent as its records showed that as of October 8, 1959 the
current account of the petitioner, after netting out the value of the checks P8,030.58) with the forged indorsements, had a balance of only P128,257.65.
The petitioner then filed a complaint against the respondent with the Court of First Instance of Manila, which was however dismissed by the trial court after
due trial, and as well by the Court of Appeals, on appeal.
Hence, the present recourse. The issues posed by the petitioner in the instant petition may be briefly stated as follows:chanrob1es virtual 1aw library
(a) Whether the respondent had the right to debit the petitioners current account in the amount corresponding to the total value of the checks in question
after more than three months had elapsed from the date their value was credited to the petitioners account:(b) Whether the respondent is estopped from
claiming that the amount of P8,030.58, representing the total value of the checks with the forged indorsements, had not been properly credited to the
petitioners account, since the same had already been paid by the drawee-banks and received in due course by the respondent; and(c) On the
assumption that the respondent had improperly debited the petitioners current account, whether the latter is entitled to damages.
These three issues interlock and will be resolved jointly. In our opinion, the respondent acted within legal bounds when it debited the petitioners account.
When the petitioner deposited the checks with the respondent, the nature of the relationship created at that stage was one of agency, that is, the bank was
to collect from the drawees of the checks the corresponding proceeds. It is true that the respondent had already collected the proceeds of the checks
when it debited the petitioners account, so that following the rule in Gullas v. Philippine National Bank 2 it might be argued that the relationship between
the parties had become that of creditor and debtor as to preclude the respondent from using the petitioners funds to make payments not authorized by the
latter. It is our view nonetheless that no creditor-debtor relationship was created between the parties.

35

Section 23 of the Negotiable Instruments Law (Act 2031) states that 3

"When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature,
unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority."cralaw virtua1aw library
Since under the foregoing provision, a forged signature in a negotiable instrument is wholly inoperative and no right to discharge it or enforce its payment
can be acquired through or under the forged signature except against a party who cannot invoke the forgery, it stands to reason, upon the facts of record,
that the respondent, as a collecting bank which indorsed the checks to the drawee-banks for clearing, should be liable to the latter for reimbursement, for,
as found by the court a quo and by the appellate court, the indorsements on the checks had been forged prior to their delivery to the petitioner. In legal
contemplation, therefore, the payments made by the drawee-banks to the respondent on account of the said checks were ineffective; and, such being the
case, the relationship of creditor and debtor between the petitioner and the respondent had not been validly effected, the checks not having been properly
and legitimately converted into cash. 4
In Great Eastern Life Ins. Co. v. Hongkong & Shanghai Bank, 5 the Court ruled that it is the obligation of the collecting bank to reimburse the drawee-bank
the value of the checks subsequently found to contain the forged indorsement of the payee. The reason is that the bank with which the check was
deposited has no right to pay the sum stated therein to the forger "or anyone else upon a forged signature." "It was its duty to know," said the Court, "that
[the payees] endorsement was genuine before cashing the check." The petitioner must in turn shoulder the loss of the amounts which the respondent; as
its collecting agent, had to reimburse to the drawee-banks.
We do not consider material for the purposes of the case at bar that more than three months had elapsed since the proceeds of the checks in question
were collected by the Respondent. The record shows that the respondent had acted promptly after being informed that the indorsements on the checks
were forged. Moreover, having received the checks merely for collection and deposit, the respondent cannot he expected to know or ascertain the
genuineness of all prior indorsements on the said checks. Indeed, having itself indorsed them to the respondent in accordance with the rules and practices
of commercial banks, of which the Court takes due cognizance, the petitioner is deemed to have given the warranty prescribed in Section 66 of the
Negotiable Instruments Law that every single one of those checks "is genuine and in all respects what it purports to be.." The petitioner was, moreover,
grossly recreant in accepting the checks in question from Ramirez. It could not have escaped the attention of the petitioner that the payee of all the checks
was a corporation the Inter-Island Gas Service, Inc. Yet, the petitioner cashed these checks to a mere individual who was admittedly a habitue at its jaialai games without making any inquiry as to his authority to exchange checks belonging to the payee-corporation. In Insular Drug Co. v. National 6 the
Court made the pronouncement that.
". . . The right of an agent to indorse commercial paper is a very responsible power and will not be lightly inferred. A salesman with authority to collect
money belonging to his principal does not have the implied authority to indorse checks received in payment. Any person taking checks made payable to a
corporation, which can act only by agents, does so at his peril, and must abide by the consequences if the agent who indorses the same is without
authority." (underscoring supplied)
It must be noted further that three of the checks in question are crossed checks, namely, exhs. 21, 25 and 27, which may only be deposited, but not
encashed; yet, the petitioner negligently accepted them for cash. That two of the crossed checks, namely, exhs. 21 and 25, are bearer instruments would
not, in our view, exculpate the petitioner from liability with respect to them. The fact that they are bearer checks and at the same time crossed checks
should have aroused the petitioners suspicion as to the title of Ramirez over them and his authority to cash them (apparently to purchase jai-alai tickets
from the petitioner), it appearing on their face that a corporate entity the Inter Island Gas Service, Inc. was the payee thereof and Ramirez delivered
the said checks to the petitioner ostensibly on the strength of the payees cashiers indorsements.
At all events, under Section 67 of the Negotiable Instruments Law, "Where a person places his indorsement on an instrument negotiable by delivery he
incurs all the liability of an indorser," and under Section 66 of the same statute a general indorser warrants that the instrument "is genuine and in all
respects what it purports to be." Considering that the petitioner indorsed the said checks when it deposited them with the respondent, the petitioner as an
indorser guaranteed the genuineness of all prior indorsements thereon. The respondent which relied upon the petitioners warranty should not be held
liable for the resulting loss. This conclusion applied similarly to exh. 22 which is an uncrossed bearer instrument, for under Section 65 of the Negotiable
Instrument Law. "Every person negotiating an instrument by delivery . . . warrants (a) That the instrument is genuine and in all respects what it purports to
be." Under that same section this warranty "extends in favor of no holder other than the immediate transferee," which, in the case at bar, would be the
Respondent.
The provision in the deposit slip issued by the respondent which stipulates that it "reserves to itself the right to charge back the item to the account of its
depositor," at any time before "current funds or solvent credits shall have been actually received by the Bank," would not materially affect the conclusion
we have reached. That stipulation prescribes that there must be an actual receipt by the bank of current funds or solvent credits; but as we have earlier
indicated the transfer by the drawee-banks of funds to the respondent on account of the checks in question was ineffectual because made under the
mistaken and valid assumption that the indorsements of the payee thereon were genuine. Under article 2154 of the New Civil Code "If something is
received when there is no right to demand it and it was unduly delivered through mistake, the obligation to return it arises." There was, therefore, in
contemplation of law, no valid payment of money made by the drawee-banks to the respondent on account of the questioned checks.
ACCORDINGLY, the judgment of the Court of Appeals is affirmed, at petitioners cost.
Makasiar, Esguerra, Muoz Palma and Martin, JJ., concur.
Teehankee, J., is on leave.
G.R. No. L-40796 July 31, 1975
REPUBLIC BANK, plaintiff-appellee,
vs.
MAURICIA T. EBRADA, defendant-appellant.
Sabino de Leon, Jr. for plaintiff-appellee.
Julio Baldonado for defendant-appellant.

36

MARTIN, J.:
Appeal on a question of law of the decision of the Court of First Instance of Manila, Branch XXIII in Civil Case No. 69288, entitled "Republic Bank vs.
Mauricia T. Ebrada."
On or about February 27, 1963 defendant Mauricia T. Ebrada, encashed Back Pay Check No. 508060 dated January 15, 1963 for P1,246.08 at the main
office of the plaintiff Republic Bank at Escolta, Manila. The check was issued by the Bureau of Treasury. 1 Plaintiff Bank was later advised by the said
bureau that the alleged indorsement on the reverse side of the aforesaid check by the payee, "Martin Lorenzo" was a forgery 2 since the latter had
allegedly died as of July 14, 1952. 3 Plaintiff Bank was then requested by the Bureau of Treasury to refund the amount of P1,246.08. 4 To recover what it
had refunded to the Bureau of Treasury, plaintiff Bank made verbal and formal demands upon defendant Ebrada to account for the sum of P1,246.08, but
said defendant refused to do so. So plaintiff Bank sued defendant Ebrada before the City Court of Manila.
On July 11, 1966, defendant Ebrada filed her answer denying the material allegations of the complaint and as affirmative defenses alleged that she was a
holder in due course of the check in question, or at the very least, has acquired her rights from a holder in due course and therefore entitled to the
proceeds thereof. She also alleged that the plaintiff Bank has no cause of action against her; that it is in estoppel, or so negligent as not to be entitled to
recover anything from her. 5
About the same day, July 11, 1966 defendant Ebrada filed a Third-Party complaint against Adelaida Dominguez who, in turn, filed on September 14, 1966
a Fourth-Party complaint against Justina Tinio.
On March 21, 1967, the City Court of Manila rendered judgment for the plaintiff Bank against defendant Ebrada; for Third-Party plaintiff against Third-Party
defendant, Adelaida Dominguez, and for Fourth-Party plaintiff against Fourth-Party defendant, Justina Tinio.
From the judgment of the City Court, defendant Ebrada took an appeal to the Court of First Instance of Manila where the parties submitted a partial
stipulation of facts as follows:
COME NOW the undersigned counsel for the plaintiff, defendant, Third-Party defendant and Fourth-Party plaintiff and unto this
Honorable Court most respectfully submit the following:
PARTIAL STIPULATION OF FACTS
1. That they admit their respective capacities to sue and be sued;
2. That on January 15, 1963 the Treasury of the Philippines issued its Check No. BP-508060, payable to the order of one MARTIN
LORENZO, in the sum of P1,246.08, and drawn on the Republic Bank, plaintiff herein, which check will be marked as Exhibit "A" for
the plaintiff;
3. That the back side of aforementioned check bears the following signatures, in this order:
1) MARTIN LORENZO;
2) RAMON R. LORENZO;
3) DELIA DOMINGUEZ; and
4) MAURICIA T. EBRADA;
4. That the aforementioned check was delivered to the defendant MAURICIA T. EBRADA by the Third-Party defendant and Fourth-Party plaintiff
ADELAIDA DOMINGUEZ, for the purpose of encashment;
5. That the signature of defendant MAURICIA T. EBRADA was affixed on said check on February 27, 1963 when she encashed it
with the plaintiff Bank;
6. That immediately after defendant MAURICIA T. EBRADA received the cash proceeds of said check in the sum of P1,246.08 from
the plaintiff Bank, she immediately turned over the said amount to the third-party defendant and fourth-party plaintiff ADELAIDA
DOMINGUEZ, who in turn handed the said amount to the fourth-party defendant JUSTINA TINIO on the same date, as evidenced
by the receipt signed by her which will be marked as Exhibit "1-Dominguez"; and
7. That the parties hereto reserve the right to present evidence on any other fact not covered by the foregoing stipulations,
Manila, Philippines, June 6, 1969.
Based on the foregoing stipulation of facts and the documentary evidence presented, the trial court rendered a decision, the dispositive portion of which
reads as follows:

37

WHEREFORE, the Court renders judgment ordering the defendant Mauricia T. Ebrada to pay the plaintiff the amount of ONE
THOUSAND TWO FORTY-SIX 08/100 (P1,246.08), with interest at the legal rate from the filing of the complaint on June 16, 1966,
until fully paid, plus the costs in both instances against Mauricia T. Ebrada.
The right of Mauricia T. Ebrada to file whatever claim she may have against Adelaida Dominguez in connection with this case is
hereby reserved. The right of the estate of Dominguez to file the fourth-party complaint against Justina Tinio is also reserved.
SO ORDERED.
In her appeal, defendant-appellant presses that the lower court erred:
IN ORDERING THE APPELLANT TO PAY THE APPELLEE THE FACE VALUE OF THE SUBJECT CHECK AFTER FINDING THAT
THE DRAWER ISSUED THE SUBJECT CHECK TO A PERSON ALREADY DECEASED FOR 11- YEARS AND THAT THE
APPELLANT DID NOT BENEFIT FROM ENCASHING SAID CHECK.
From the stipulation of facts it is admitted that the check in question was delivered to defendant-appellant by Adelaida Dominguez for the purpose of
encashment and that her signature was affixed on said check when she cashed it with the plaintiff Bank. Likewise it is admitted that defendant-appellant
was the last indorser of the said check. As such indorser, she was supposed to have warranted that she has good title to said check; for under Section 65
of the Negotiable Instruments Law: 6
Every person negotiating an instrument by delivery or by qualified indorsement, warrants:
(a) That the instrument is genuine and in all respects what it purports to be.
(b) That she has good title to it.
xxx xxx xxx
and under Section 65 of the same Act:
Every indorser who indorses without qualification warrants to all subsequent holders in due course:
(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding sections;
(b) That the instrument is at the time of his indorsement valid and subsisting.
It turned out, however, that the signature of the original payee of the check, Martin Lorenzo was a forgery because he was already dead 7 almost 11 years
before the check in question was issued by the Bureau of Treasury. Under action 23 of the Negotiable Instruments Law (Act 2031):
When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative,
and no right to retain the instruments, or to give a discharge thereof against any party thereto, can be acquired through or under
such signature unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of
authority.
It is clear from the provision that where the signature on a negotiable instrument if forged, the negotiation of the check is without force or effect. But does
this mean that the existence of one forged signature therein will render void all the other negotiations of the check with respect to the other parties whose
signature are genuine?
In the case of Beam vs. Farrel, 135 Iowa 670, 113 N.W. 590, where a check has several indorsements on it, it was held that it is only the negotiation based
on the forged or unauthorized signature which is inoperative. Applying this principle to the case before Us, it can be safely concluded that it is only the
negotiation predicated on the forged indorsement that should be declared inoperative. This means that the negotiation of the check in question from Martin
Lorenzo, the original payee, to Ramon R. Lorenzo, the second indorser, should be declared of no affect, but the negotiation of the aforesaid check from
Ramon R. Lorenzo to Adelaida Dominguez, the third indorser, and from Adelaida Dominguez to the defendant-appellant who did not know of the forgery,
should be considered valid and enforceable, barring any claim of forgery.
What happens then, if, after the drawee bank has paid the amount of the check to the holder thereof, it was discovered that the signature of the payee
was forged? Can the drawee bank recover from the one who encashed the check?
In the case of State v. Broadway Mut. Bank, 282 S.W. 196, 197, it was held that the drawee of a check can recover from the holder the money paid to him
on a forged instrument. It is not supposed to be its duty to ascertain whether the signatures of the payee or indorsers are genuine or not. This is because
the indorser is supposed to warrant to the drawee that the signatures of the payee and previous indorsers are genuine, warranty not extending only to
holders in due course. One who purchases a check or draft is bound to satisfy himself that the paper is genuine and that by indorsing it or presenting it for
payment or putting it into circulation before presentation he impliedly asserts that he has performed his duty and the drawee who has paid the forged
check, without actual negligence on his part, may recover the money paid from such negligent purchasers. In such cases the recovery is permitted
because although the drawee was in a way negligent in failing to detect the forgery, yet if the encasher of the check had performed his duty, the forgery
would in all probability, have been detected and the fraud defeated. The reason for allowing the drawee bank to recover from the encasher is:

38

Every one with even the least experience in business knows that no business man would accept a check in exchange for money or
goods unless he is satisfied that the check is genuine. He accepts it only because he has proof that it is genuine, or because he has
sufficient confidence in the honesty and financial responsibility of the person who vouches for it. If he is deceived he has suffered a
loss of his cash or goods through his own mistake. His own credulity or recklessness, or misplaced confidence was the sole cause
of the loss. Why should he be permitted to shift the loss due to his own fault in assuming the risk, upon the drawee, simply because
of the accidental circumstance that the drawee afterwards failed to detect the forgery when the check was presented? 8
Similarly, in the case before Us, the defendant-appellant, upon receiving the check in question from Adelaida Dominguez, was duty-bound to ascertain
whether the check in question was genuine before presenting it to plaintiff Bank for payment. Her failure to do so makes her liable for the loss and the
plaintiff Bank may recover from her the money she received for the check. As reasoned out above, had she performed the duty of ascertaining the
genuineness of the check, in all probability the forgery would have been detected and the fraud defeated.
In our jurisdiction We have a case of similar import. 9 The Great Eastern Life Insurance Company drew its check for P2000.00 on the Hongkong and
Shanghai Banking Corporation payable to the order of Lazaro Melicor. A certain E. M. Maasin fraudulently obtained the check and forged the signature of
Melicor, as an indorser, and then personally indorsed and presented the check to the Philippine National Bank where the amount of the check was placed
to his (Maasin's) credit. On the next day, the Philippine National Bank indorsed the cheek to the Hongkong and Shanghai Banking Corporation which paid
it and charged the amount of the check to the insurance company. The Court held that the Hongkong and Shanghai Banking Corporation was liable to the
insurance company for the amount of the check and that the Philippine National Bank was in turn liable to the Hongkong and Shanghai Banking
Corporation. Said the Court:
Where a check is drawn payable to the order of one person and is presented to a bank by another and purports upon its face to
have been duly indorsed by the payee of the check, it is the duty of the bank to know that the check was duly indorsed by the
original payee, and where the bank pays the amount of the check to a third person, who has forged the signature of the payee, the
loss falls upon the bank who cashed the check, and its only remedy is against the person to whom it paid the money.
With the foregoing doctrine We are to concede that the plaintiff Bank should suffer the loss when it paid the amount of the check in question to defendantappellant, but it has the remedy to recover from the latter the amount it paid to her. Although the defendant-appellant to whom the plaintiff Bank paid the
check was not proven to be the author of the supposed forgery, yet as last indorser of the check, she has warranted that she has good title to it 10 even if in
fact she did not have it because the payee of the check was already dead 11 years before the check was issued. The fact that immediately after receiving
title cash proceeds of the check in question in the amount of P1,246.08 from the plaintiff Bank, defendant-appellant immediately turned over said amount
to Adelaida Dominguez (Third-Party defendant and the Fourth-Party plaintiff) who in turn handed the amount to Justina Tinio on the same date would not
exempt her from liability because by doing so, she acted as an accommodation party in the check for which she is also liable under Section 29 of the
Negotiable Instruments Law (Act 2031), thus: .An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for
value, notwithstanding such holder at the time of taking the instrument knew him to be only an accommodation party.
IN VIEW OF THE FOREGOING, the judgment appealed from is hereby affirmed in toto with costs against defendant-appellant.
SO ORDERED.
Makalintal, C.J, Castro, Makasiar and Esguerra, JJ., concur.

39

G.R. No. L-62943 July 14, 1986

METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner,
vs.
COURT OF APPEALS (Now INTERMEDIATE APPELLATE COURT) and THE PHILIPPINE NATIONAL BANK, respondents.
Juan J. Diaz and Cesar T. Basa for respondent PNB.
San Juan, Africa, Gonzales & San Agustin Law Offices for respondent PCIB.

GUTIERREZ, JR., J.:

This petition for review asks us to set aside the October 29, 1982 decision of the respondent Court of Appeals, now Intermediate Appellate Court which
reversed the decision of the Court of First Instance of Manila, Branch XL, and dismissed the plaintiff's complaint, the third party complaint, as well as the
defendant's counterclaim.
The background facts which led to the filing of the instant petition are summarized in the decision of the respondent Court of Appeals:
Metropolitan Waterworks and Sewerage System (hereinafter referred to as MWSS) is a government owned and controlled
corporation created under Republic Act No. 6234 as the successor-in- interest of the defunct NWSA. The Philippine National Bank
(PNB for short), on the other hand, is the depository bank of MWSS and its predecessor-in-interest NWSA. Among the several
accounts of NWSA with PNB is NWSA Account No. 6, otherwise known as Account No. 381-777 and which is presently allocated
No. 010-500281. The authorized signature for said Account No. 6 were those of MWSS treasurer Jose Sanchez, its auditor Pedro
Aguilar, and its acting General Manager Victor L. Recio. Their respective specimen signatures were submitted by the MWSS to and
on file with the PNB. By special arrangement with the PNB, the MWSS used personalized checks in drawing from this account.
These checks were printed for MWSS by its printer, F. Mesina Enterprises, located at 1775 Rizal Extension, Caloocan City.
During the months of March, April and May 1969, twenty-three (23) checks were prepared, processed, issued and released by
NWSA, all of which were paid and cleared by PNB and debited by PNB against NWSA Account No. 6, to wit:
Check No. Date Payee Amount Date Paid
By PNB
1. 59546 8-21-69 Deogracias P 3,187.79 4-2-69
Estrella
2. 59548 3-31-69 Natividad 2,848.86 4-23 69
Rosario
3. 59547 3-31-69 Pangilinan 195.00 Unreleased
Enterprises
4. 59549 3-31-69 Natividad 3,239.88 4-23-69
Rosario
5. 59552 4-1-69 Villarama 987.59 5-6-69
& Sons
6. 59554 4-1-69 Gascom 6,057.60 4-16 69
Engineering
7. 59558 4-2-69 The Evening 112.00 Unreleased
News
8. 59544 3-27-69 Progressive 18,391.20 4-18 69
Const.
9. 59564 4-2-69 Ind. Insp. 594.06 4-18 69
Int. Inc.
10. 59568 4-7-69 Roberto 800.00 4-22-69
Marsan
11. 59570 4-7-69 Paz Andres 200.00 4-22-69
12. 59574 4-8-69 Florentino 100,000.00 4-11-69
Santos
13. 59578 4-8-69 Mla. Daily 95.00 Unreleased
Bulletin
14. 59580 4-8-69 Phil. Herald 100.00 5-9-69
15. 59582 4-8-69 Galauran 7,729.09 5-6-69
& Pilar
16. 59581 4-8-69 Manila 110.00 5-12 69
Chronicle
17. 59588 4-8-69 Treago 21,583.00 4-11 69

40

Tunnel
18. 59587 4-8-69 Delfin 120,000.00 4-11-69
Santiago
19. 59589 4-10-69 Deogracias 1,257.49 4-16 69
Estrella
20. 59594 4-14-69 Philam Ac- 33.03 4-29 69
cident Inc.
21. 59577 4-8-69 Esla 9,429.78 4-29 69
22. 59601 4-16-69 Justino 20,000.00 4-18-69
Torres
23. 59595 4-14-69 Neris Phil. 4,274.00 5-20-69
Inc. -------------------P 320,636.26
During the same months of March, April and May 1969, twenty-three (23) checks bearing the same numbers as the aforementioned
NWSA checks were likewise paid and cleared by PNB and debited against NWSA Account No. 6, to wit:
Check Date Payee Amount Date Paid
No. Issued By PNB
1. 59546 3-6-69 Raul Dizon P 84,401.00 3-16-69
2. 59548 3-11-69 Raul Dizon 104,790.00 4-1-69
3. 59547 3-14-69 Arturo Sison 56,903.00 4-11-69
4. 59549 3-20-69 Arturo Sison 48,903.00 4-15-69
5. 59552 3-24-69 Arturo Sison 63,845.00 4-16-69
6. 59544 3-26-69 Arturo Sison 98,450.00 4-17-69
7. 59558 3-28-69 Arturo Sison 114,840.00 4-21-69
8. 59544 3-16-69 Antonio 38,490.00 4-22-69 Mendoza
9. 59564 3-31-69 Arturo Sison 180,900.00 4-23-69
10.59568 4-2-69 Arturo Sison 134,940.00 4- 5-69
11.59570 4-1-69 Arturo Sison 64,550.00 4-28-69
12.59574 4-2-69 Arturo Sison 148,610.00 4-29-69
13.59578 4-10-69 Antonio 93,950.00 4-29-69
Mendoza
14.59580 4-8-69 Arturo Sison 160,000.00 5-2-69
15.59582 4-10-69 Arturo Sison 155,400.00 5-5-69
16.59581 4-8-69 Antonio 176,580.00 5-6-69
Mendoza
17.59588 4-16-69 Arturo Sison 176,000.00 5-8-69
18.59587 4-16-69 Arturo Sison 300,000.00 5-12-69
19.59589 4-18-69 Arturo Sison 122,000.00 5-14-69
20.59594 4-18-69 Arturo Sison 280,000.00 5-15-69
21.59577 4-14-69 Antonio 260,000.00 5-16-69
Mendoza
22.59601 4-18-69 Arturo Sison 400,000.00 5-19-69
23.59595 4-28-69 Arturo Sison 190,800.00 5-21-69
--------------P3,457,903.00
The foregoing checks were deposited by the payees Raul Dizon, Arturo Sison and Antonio Mendoza in their respective current
accounts with the Philippine Commercial and Industrial Bank (PCIB) and Philippine Bank of Commerce (PBC) in the months of
March, April and May 1969. Thru the Central Bank Clearing, these checks were presented for payment by PBC and PCIB to the
defendant PNB, and paid, also in the months of March, April and May 1969. At the time of their presentation to PNB these checks
bear the standard indorsement which reads 'all prior indorsement and/or lack of endorsement guaranteed.'
Subsequent investigation however, conducted by the NBI showed that Raul Dizon, Arturo Sison and Antonio Mendoza were all
fictitious persons. The respective balances in their current account with the PBC and/or PCIB stood as follows: Raul Dizon
P3,455.00 as of April 30, 1969; Antonio Mendoza P18,182.00 as of May 23, 1969; and Arturo Sison Pl,398.92 as of June 30, 1969.
On June 11, 1969, NWSA addressed a letter to PNB requesting the immediate restoration to its Account No. 6, of the total sum of
P3,457,903.00 corresponding to the total amount of these twenty-three (23) checks claimed by NWSA to be forged and/or spurious
checks. "In view of the refusal of PNB to credit back to Account No. 6 the said total sum of P3,457,903.00 MWSS filed the instant
complaint on November 10, 1972 before the Court of First Instance of Manila and docketed thereat as Civil Case No. 88950.
In its answer, PNB contended among others, that the checks in question were regular on its face in all respects, including the
genuineness of the signatures of authorized NWSA signing officers and there was nothing on its face that could have aroused any
suspicion as to its genuineness and due execution and; that NWSA was guilty of negligence which was the proximate cause of the
loss.
PNB also filed a third party complaint against the negotiating banks PBC and PCIB on the ground that they failed to ascertain the
Identity of the payees and their title to the checks which were deposited in the respective new accounts of the payees with them.
xxx xxx xxx
On February 6, 1976, the Court of First Instance of Manila rendered judgment in favor of the MWSS. The dispositive portion of the decision reads:

41

WHEREFORE, on the COMPLAINT by a clear preponderance of evidence and in accordance with Section 23 of the Negotiable
Instruments Law, the Court hereby renders judgment in favor of the plaintiff Metropolitan Waterworks and Sewerage System
(MWSS) by ordering the defendant Philippine National Bank (PNB) to restore the total sum of THREE MILLION FOUR HUNDRED
FIFTY SEVEN THOUSAND NINE HUNDRED THREE PESOS (P3,457,903.00) to plaintiff's Account No. 6, otherwise known as
Account No. 010-50030-3, with legal interest thereon computed from the date of the filing of the complaint and until as restored in
the said Account No. 6.
On the THIRD PARTY COMPLAINT, the Court, for lack of evidence, hereby renders judgment in favor of the third party defendants
Philippine Bank of Commerce (PBC) and Philippine Commercial and Industrial Bank (PCIB) by dismissing the Third Party
Complaint.
The counterclaims of the third party defendants are likewise dismissed for lack of evidence.
No pronouncement as to costs.
As earlier stated, the respondent court reversed the decision of the Court of First Instance of Manila and rendered judgment in favor of the respondent
Philippine National Bank.
A motion for reconsideration filed by the petitioner MWSS was denied by the respondent court in a resolution dated January 3, 1983.
The petitioner now raises the following assignments of errors for the grant of this petition:
I. IN NOT HOLDING THAT AS THE SIGNATURES ON THE CHECKS WERE FORGED, THE DRAWEE BANK WAS LIABLE FOR
THE LOSS UNDER SECTION 23 OF THE NEGOTIABLE INSTRUMENTS LAW.
II. IN FAILING TO CONSIDER THE PROXIMATE NEGLIGENCE OF PNB IN ACCEPTING THE SPURIOUS CHECKS DESPITE
THE OBVIOUS IRREGULARITY OF TWO SETS OF CHECKS BEARING IdENTICAL NUMBER BEING ENCASHED WITHIN DAYS
OF EACH OTHER.
III. IN NOT HOLDING THAT THE SIGNATURES OF THE DRAWEE MWSS BEING CLEARLY FORGED, AND THE CHECKS
SPURIOUS, SAME ARE INOPERATIVE AS AGAINST THE ALLEGED DRAWEE.
The appellate court applied Section 24 of the Negotiable Instruments Law which provides:
Every negotiable instrument is deemed prima facie to have been issued for valuable consideration and every person whose
signature appears thereon to have become a party thereto for value.
The petitioner submits that the above provision does not apply to the facts of the instant case because the questioned checks were not those of the
MWSS and neither were they drawn by its authorized signatories. The petitioner states that granting that Section 24 of the Negotiable Instruments Law is
applicable, the same creates only a prima facie presumption which was overcome by the following documents, to wit: (1) the NBI Report of November 2,
1970; (2) the NBI Report of November 21, 1974; (3) the NBI Chemistry Report No. C-74891; (4) the Memorandum of Mr. Juan Dino, 3rd Assistant Auditor
of the respondent drawee bank addressed to the Chief Auditor of the petitioner; (5) the admission of the respondent bank's counsel in open court that the
National Bureau of Investigation found the signature on the twenty-three (23) checks in question to be forgeries; and (6) the admission of the respondent
bank's witness, Mr. Faustino Mesina, Jr. that the checks in question were not printed by his printing press. The petitioner contends that since the
signatures of the checks were forgeries, the respondent drawee bank must bear the loss under the rulings of this Court.
A bank is bound to know the signatures of its customers; and if it pays a forged check it must be considered as making the payment
out of its obligation funds, and cannot ordinarily charge the amount so paid to the account of the depositor whose name was forged.
xxx xxx xxx
The signatures to the checks being forged, under Section 23 of the Negotiable Instruments Law they are not a charge against
plaintiff nor are the checks of any value to the defendant.
It must therefore be held that the proximate cause of loss was due to the negligence of the Bank of the Philippine Islands in
honoring and cashing the two forged checks. (San Carlos Milling Co. v. Bank of the P. I., 59 Phil. 59)
It is admitted that the Philippine National Bank cashed the check upon a forged signature, and placed the money to the credit of
Maasim, who was the forger. That the Philippine National Bank then endorsed the chock and forwarded it to the Shanghai Bank by
whom it was paid. The Philippine National Bank had no license or authority to pay the money to Maasim or anyone else upon a
forged signature. It was its legal duty to know that Malicor's endorsement was genuine before cashing the check. Its remedy is
against Maasim to whom it paid the money. (Great Eastern Life Ins. Co. v. Hongkong & Shanghai Bank, 43 Phil. 678).
We have carefully reviewed the documents cited by the petitioner. There is no express and categorical finding in these documents that the twenty-three
(23) questioned checks were indeed signed by persons other than the authorized MWSS signatories. On the contrary, the findings of the National Bureau
of Investigation in its Report dated November 2, 1970 show that the MWSS fraud was an "inside job" and that the petitioner's delay in the reconciliation of

42

bank statements and the laxity and loose records control in the printing of its personalized checks facilitated the fraud. Likewise, the questioned
Documents Report No. 159-1074 dated November 21, 1974 of the National Bureau of Investigation does not declare or prove that the signatures
appearing on the questioned checks are forgeries. The report merely mentions the alleged differences in the type face, checkwriting, and printing
characteristics appearing in the standard or submitted models and the questioned typewritings. The NBI Chemistry Report No. C-74-891 merely describes
the inks and pens used in writing the alleged forged signatures.
It is clear that these three (3) NBI Reports relied upon by the petitioner are inadequate to sustain its allegations of forgery. These reports did not touch on
the inherent qualities of the signatures which are indispensable in the determination of the existence of forgery. There must be conclusive findings that
there is a variance in the inherent characteristics of the signatures and that they were written by two or more different persons.
Forgery cannot be presumed (Siasat, et al. v. Intermediate Appellate Court, et al, 139 SCRA 238). It must be established by clear, positive, and convincing
evidence. This was not done in the present case.
The cases of San Carlos Milling Co. Ltd. v. Bank of the Philippine Islands, et al. (59 Phil. 59) and Great Eastern Life Ins., Co. v. Hongkong and Shanghai
Bank (43 Phil. 678) relied upon by the petitioner are inapplicable in this case because the forgeries in those cases were either clearly established or
admitted while in the instant case, the allegations of forgery were not clearly established during trial.
Considering the absence of sufficient security in the printing of the checks coupled with the very close similarities between the genuine signatures and the
alleged forgeries, the twenty-three (23) checks in question could have been presented to the petitioner's signatories without their knowing that they were
bogus checks. Indeed, the cashier of the petitioner whose signatures were allegedly forged was unable to ten the difference between the allegedly forged
signature and his own genuine signature. On the other hand, the MWSS officials admitted that these checks could easily be passed on as genuine.
The memorandum of Mr. A. T. Tolentino, no, Assistant Chief Accountant of the drawee Philippine National Bank to Mr. E. Villatuya, Executive VicePresident of the petitioner dated June 9, 1969 cites an instance where even the concerned NWSA officials could not ten the differences between the
genuine checks and the alleged forged checks.
At about 12:00 o'clock on June 6, 1969, VP Maramag requested me to see him in his office at the Cashier's Dept. where Messrs.
Jose M. Sanchez, treasurer of NAWASA and Romeo Oliva of the same office were present. Upon my arrival I observed the
NAWASA officials questioning the issue of the NAWASA checks appearing in their own list, xerox copy attached.
For verification purposes, therefore, the checks were taken from our file. To everybody there present namely VIP Maramag, the two
abovementioned NAWASA officials, AVP, Buhain, Asst. Cashier Castelo, Asst. Cashier Tejada and Messrs. A. Lopez and L.
Lechuga, both C/A bookkeepers, no one was able to point out any difference on the signatures of the NAWASA officials appearing
on the checks compared to their official signatures on file. In fact 3 checks, one of those under question, were presented to the
NAWASA treasurer for verification but he could not point out which was his genuine signature. After intent comparison, he pointed
on the questioned check as bearing his correct signature.
xxx xxx xxx
Moreover, the petitioner is barred from setting up the defense of forgery under Section 23 of the Negotiable Instruments Law which provides that:
SEC. 23. FORGED SIGNATURE; EFFECT OF.- When the signature is forged or made without authority of the person whose
signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce
payment thereof against any party thereto can be acquired through or under such signature unless the party against whom it is
sought to enforce such right is precluded from setting up the forgery or want of authority.
because it was guilty of negligence not only before the questioned checks were negotiated but even after the same had already been negotiated. (See
Republic v. Equitable Banking Corporation, 10 SCRA 8) The records show that at the time the twenty-three (23) checks were prepared, negotiated, and
encashed, the petitioner was using its own personalized checks, instead of the official PNB Commercial blank checks. In the exercise of this special
privilege, however, the petitioner failed to provide the needed security measures. That there was gross negligence in the printing of its personalized
checks is shown by the following uncontroverted facts, to wit:
(1) The petitioner failed to give its printer, Mesina Enterprises, specific instructions relative to the safekeeping and disposition of excess forms, check
vouchers, and safety papers;
(2) The petitioner failed to retrieve from its printer all spoiled check forms;
(3) The petitioner failed to provide any control regarding the paper used in the printing of said checks;
(4) The petitioner failed to furnish the respondent drawee bank with samples of typewriting, cheek writing, and print used by its printer in the printing of its
checks and of the inks and pens used in signing the same; and
(5) The petitioner failed to send a representative to the printing office during the printing of said checks.
This gross negligence of the petitioner is very evident from the sworn statement dated June 19, 1969 of Faustino Mesina, Jr., the owner of the printing
press which printed the petitioner's personalized checks:

43

xxx xxx xxx

7. Q: Do you have any business transaction with the National Waterworks and Sewerage Authority
(NAWASA)?
A: Yes, sir. I have a contract with the NAWASA in printing NAWASA Forms such as NAWASA Check
xxx xxx xxx
15. Q: Were you given any ingtruction by the NAWASA in connection with the printing of these check
vouchers?
A: There is none, sir. No instruction whatsoever was given to me.
16. Q: Were you not advised as to what kind of paper would be used in the check vouchers?
A: Only as per sample, sir.
xxx xxx xxx
20. Q: Where did you buy this Hammermill Safety check paper?
A: From Tan Chiong, a paper dealer with store located at Juan Luna, Binondo, Manila. (In front of the
Metropolitan Bank).
xxx xxx xxx
24. Q: Were all these check vouchers printed by you submitted to NAWASA?
A: Not all, sir. Because we have to make reservations or allowances for spoilage.
25. Q: Out of these vouchers printed by you, how many were spoiled and how many were the excess printed
check vouchers?
A: Approximately four hundred (400) sheets, sir. I cannot determine the proportion of the excess and spoiled
because the final act of perforating these check vouchers has not yet been done and spoilage can only be
determined after this final act of printing.
26. Q: What did you do with these excess check vouchers?
A: I keep it under lock and key in my firing cabinet.
xxx xxx xxx
28. Q: Were you not instructed by the NAWASA authorities to bum these excess check vouchers?
A: No, sir. I was not instructed.
29. Q: What do you intend to do with these excess printed check vouchers?
A: I intend to use them for future orders from the
xxx xxx xxx
32. Q: In the process of printing the check vouchers ordered by the NAWASA, how many sheets were actually
spoiled?
A: I cannot approximate, sir. But there are spoilage in the process of printing and perforating.
33. Q: What did you do with these spoilages?
A: Spoiled printed materials are usually thrown out, in the garbage can.

44

34. Q: Was there any representative of the NAWASA to supervise the printing or watch the printing of these
check vouchers?
A: None, sir.
xxx xxx xxx
39. Q: During the period of printing after the days work, what measures do you undertake to safeguard the
mold and other paraphernalia used in the printing of these particular orders of NAWASA?
A: Inasmuch as I have an employee who sleeps in the printing shop and at the same time do the guarding, we
just leave the mold attached to the machine and the other finished or unfinished work check vouchers are left
in the rack so that the work could be continued the following day.
The National Bureau of Investigation Report dated November 2, 1970 is even more explicit. Thus
xxx xxx xxx
60. We observed also that there is some laxity and loose control in the printing of NAWASA cheeks. We
gathered from MESINA ENTERPRISES, the printing firm that undertook the printing of the check vouchers of
NAWASA that NAWASA had no representative at the printing press during the process of the printing and no
particular security measure instructions adopted to safeguard the interest of the government in connection
with printing of this accountable form.
Another factor which facilitated the fraudulent encashment of the twenty-three (23) checks in question was the failure of the petitioner to reconcile the
bank statements with its own records.
It is accepted banking procedure for the depository bank to furnish its depositors bank statements and debt and credit memos through the mail. The
records show that the petitioner requested the respondent drawee bank to discontinue the practice of mailing the bank statements, but instead to deliver
the same to a certain Mr. Emiliano Zaporteza. For reasons known only to Mr. Zaporteza however, he was unreasonably delayed in taking prompt
deliveries of the said bank statements and credit and debit memos. As a consequence, Mr. Zaporteza failed to reconcile the bank statements with the
petitioner's records. If Mr. Zaporteza had not been remiss in his duty of taking the bank statements and reconciling them with the petitioner's records, the
fraudulent encashments of the first checks should have been discovered, and further frauds prevented. This negligence was, therefore, the proximate
cause of the failure to discover the fraud. Thus,
When a person opens a checking account with a bank, he is given blank checks which he may fill out and use whenever he wishes.
Each time he issues a check, he should also fill out the check stub to which the check is usually attached. This stub, if properly kept,
will contain the number of the check, the date of its issue, the name of the payee and the amount thereof. The drawer would
therefore have a complete record of the checks he issues. It is the custom of banks to send to its depositors a monthly statement of
the status of their accounts, together with all the cancelled checks which have been cashed by their respective holders. If the
depositor has filled out his check stubs properly, a comparison between them and the cancelled checks will reveal any forged check
not taken from his checkbook. It is the duty of a depositor to carefully examine the bank's statement, his cancelled checks, his check
stubs and other pertinent records within a reasonable time, and to report any errors without unreasonable delay. If his negligence
should cause the bank to honor a forged check or prevent it from recovering the amount it may have already paid on such check, he
cannot later complain should the bank refuse to recredit his account with the amount of such check. (First Nat. Bank of Richmond v.
Richmond Electric Co., 106 Va. 347, 56 SE 152, 7 LRA, NS 744 [1907]. See also Leather Manufacturers' Bank v. Morgan, 117 US
96, 6 S. Ct. 657 [1886]; Deer Island Fish and Oyster Co. v. First Nat. Bank of Biloxi, 166 Miss. 162, 146 So. 116 [1933]). Campos
and Campos, Notes and Selected Cases on Negotiable Instruments Law, 1971, pp. 267-268).
This failure of the petitioner to reconcile the bank statements with its cancelled checks was noted by the National Bureau of Investigation in its report
dated November 2, 1970:
58. One factor which facilitate this fraud was the delay in the reconciliation of bank (PNB) statements with the NAWASA bank
accounts. x x x. Had the NAWASA representative come to the PNB early for the statements and had the bank been advised
promptly of the reported bogus check, the negotiation of practically all of the remaining checks on May, 1969, totalling
P2,224,736.00 could have been prevented.
The records likewise show that the petitioner failed to provide appropriate security measures over its own records thereby laying confidential records open
to unauthorized persons. The petitioner's own Fact Finding Committee, in its report submitted to their General manager underscored this laxity of records
control. It observed that the "office of Mr. Ongtengco (Cashier No. VI of the Treasury Department at the NAWASA) is quite open to any person known to
him or his staff members and that the check writer is merely on top of his table."
When confronted with this report at the Anti-Fraud Action Section of the National Bureau of Investigation. Mr. Ongtengco could only state that:
A. Generally my order is not to allow anybody to enter my office. Only authorized persons are allowed to enter
my office. There are some cases, however, where some persons enter my office because they are following
up their checks. Maybe, these persons may have been authorized by Mr. Pantig. Most of the people entering

45

my office are changing checks as allowed by the Resolution of the Board of Directors of the NAWASA and the
Treasurer. The check writer was never placed on my table. There is a place for the check write which is also
under lock and key.
Q. Is Mr. Pantig authorized to allow unauthorized persons to enter your office?
A. No, sir.
Q. Why are you tolerating Mr. Pantig admitting unauthorized persons in your office?
A. I do not want to embarrass Mr. Pantig. Most of the people following up checks are employees of the
NAWASA.
Q. Was the authority given by the Board of Directors and the approval by the Treasurer for employees, and
other persons to encash their checks carry with it their authority to enter your office?
A. No, sir.
xxx xxx xxx
Q. From the answers that you have given to us we observed that actually there is laxity and poor control on
your part with regards to the preparations of check payments inasmuch as you allow unauthorized persons to
follow up their vouchers inside your office which may leakout confidential informations or your books of
account. After being apprised of all the shortcomings in your office, as head of the Cashiers' Office of the
Treasury Department what remedial measures do you intend to undertake?
A. Time and again the Treasurer has been calling our attention not to allow interested persons to hand carry
their voucher checks and we are trying our best and if I can do it to follow the instructions to the letter, I will do
it but unfortunately the persons who are allowed to enter my office are my co-employees and persons who
have connections with our higher ups and I can not possibly antagonize them. Rest assured that even though
that everybody will get hurt, I win do my best not to allow unauthorized persons to enter my office.
xxx xxx xxx
Q. Is it not possible inasmuch as your office is in charge of the posting of check payments in your books that
leakage of payments to the banks came from your office?
A. I am not aware of it but it only takes us a couple of minutes to process the checks. And there are cases
wherein every information about the checks may be obtained from the Accounting Department, Auditing
Department, or the Office of the General Manager.
Relying on the foregoing statement of Mr. Ongtengco, the National Bureau of Investigation concluded in its Report dated November 2, 1970 that the
fraudulent encashment of the twenty-three (23)cheeks in question was an "inside job". ThusWe have all the reasons to believe that this fraudulent act was an inside job or one pulled with inside connivance at NAWASA. As
pointed earlier in this report, the serial numbers of these checks in question conform with the numbers in current use of NAWASA,
aside from the fact that these fraudulent checks were found to be of the same kind and design as that of NAWASA's own checks.
While knowledge as to such facts may be obtained through the possession of a NAWASA check of current issue, an outsider without
information from the inside can not possibly pinpoint which of NAWASA's various accounts has sufficient balance to cover all these
fraudulent checks. None of these checks, it should be noted, was dishonored for insufficiency of funds. . .
Even if the twenty-three (23) checks in question are considered forgeries, considering the petitioner's gross negligence, it is barred from setting up the
defense of forgery under Section 23 of the Negotiable Instruments Law.
Nonetheless, the petitioner claims that it was the negligence of the respondent Philippine National Bank that was the proximate cause of the loss. The
petitioner relies on our ruling in Philippine National Bank v. Court of Appeals (25 SCRA 693) that.
Thus, by not returning the cheek to the PCIB, by thereby indicating that the PNB had found nothing wrong with the check and would
honor the same, and by actually paying its amount to the PCIB, the PNB induced the latter, not only to believe that the check was
genuine and good in every respect, but, also, to pay its amount to Augusto Lim. In other words, the PNB was the primary or
proximate cause of the loss, and, hence, may not recover from the PCIB.
The argument has no merit. The records show that the respondent drawee bank, had taken the necessary measures in the detection of forged checks and
the prevention of their fraudulent encashment. In fact, long before the encashment of the twenty-three (23) checks in question, the respondent Bank had
issued constant reminders to all Current Account Bookkeepers informing them of the activities of forgery syndicates. The Memorandum of the Assistant
Vice-President and Chief Accountant of the Philippine National Bank dated February 17, 1966 reads in part:
SUBJECT: ACTIVITIES OF FORGERY SYNDICATE
From reliable information we have gathered that personalized checks of current account depositors are now the target of the forgery
syndicate. To protect the interest of the bank, you are hereby enjoined to be more careful in examining said checks especially those
coming from the clearing, mails and window transactions. As a reminder please be guided with the following:
1. Signatures of drawers should be properly scrutinized and compared with those we have on file.
2. The serial numbers of the checks should be compared with the serial numbers registered with the Cashier's Dept.
3. The texture of the paper used and the printing of the checks should be compared with the sample we have on file with the
Cashier's Dept.
4. Checks bearing several indorsements should be given a special attention.
5. Alteration in amount both in figures and words should be carefully examined even if signed by the drawer.
6. Checks issued in substantial amounts particularly by depositors who do not usually issue checks in big amounts should be
brought to the attention of the drawer by telephone or any fastest means of communication for purposes of confirmation.
and your attention is also invited to keep abreast of previous circulars and memo instructions issued to bookkeepers.

46

We cannot fault the respondent drawee Bank for not having detected the fraudulent encashment of the checks because the printing of the petitioner's
personalized checks was not done under the supervision and control of the Bank. There is no evidence on record indicating that because of this private
printing the petitioner furnished the respondent Bank with samples of checks, pens, and inks or took other precautionary measures with the PNB to
safeguard its interests.
Under the circumstances, therefore, the petitioner was in a better position to detect and prevent the fraudulent encashment of its checks.
WHEREFORE, the petition for review on certiorari is hereby DISMISSED for lack of merit. The decision of the respondent Court of Appeals dated October
29, 1982 is AFFIRMED. No pronouncement as to costs.
SO ORDERED.
Feria (Chairman), Fernan, Alampay and Cruz, JJ., concur. Paras * , J., took no part.
G.R. No. 74917 January 20, 1988
BANCO DE ORO SAVINGS AND MORTGAGE BANK, petitioner,
vs.
EQUITABLE BANKING CORPORATION, PHILIPPINE CLEARING HOUSE CORPORATION, AND REGIONAL TRIAL COURT OF QUEZON CITY,
BRANCH XCII (92), respondents.

GANCAYCO, J.:
This is a petition for review on certiorari of a decision of the Regional Trial Court of Quezon City promulgated on March 24, 1986 in Civil Case No. Q46517 entitled Banco de Oro Savings and Mortgage Bank versus Equitable Banking Corporation and the Philippine Clearing House Corporation after a
review of the Decision of the Board of Directors of the Philippine Clearing House Corporation (PCHC) in the case of Equitable Banking Corporation (EBC)
vs. Banco de Oro Savings and Mortgage (BCO), ARBICOM Case No. 84033.
The undisputed facts are as follows:
It appears that some time in March, April, May and August 1983, plaintiff through its Visa Card Department, drew six crossed
Manager's check (Exhibits "A" to "F", and herein referred to as Checks) having an aggregate amount of Forty Five Thousand Nine
Hundred and Eighty Two & 23/100 (P45,982.23) Pesos and payable to certain member establishments of Visa Card. Subsequently,
the Checks were deposited with the defendant to the credit of its depositor, a certain Aida Trencio.
Following normal procedures, and after stamping at the back of the Checks the usual endorsements. All prior and/or lack of
endorsement guaranteed the defendant sent the checks for clearing through the Philippine Clearing House Corporation (PCHC).
Accordingly, plaintiff paid the Checks; its clearing account was debited for the value of the Checks and defendant's clearing account
was credited for the same amount,
Thereafter, plaintiff discovered that the endorsements appearing at the back of the Checks and purporting to be that of the payees
were forged and/or unauthorized or otherwise belong to persons other than the payees.
Pursuant to the PCHC Clearing Rules and Regulations, plaintiff presented the Checks directly to the defendant for the purpose of
claiming reimbursement from the latter. However, defendant refused to accept such direct presentation and to reimburse the plaintiff
for the value of the Checks; hence, this case.
In its Complaint, plaintiff prays for judgment to require the defendant to pay the plaintiff the sum of P45,982.23 with interest at the
rate of 12% per annum from the date of the complaint plus attorney's fees in the amount of P10,000.00 as well as the cost of the
suit.
In accordance with Section 38 of the Clearing House Rules and Regulations, the dispute was presented for Arbitration; and Atty.
Ceasar Querubin was designated as the Arbitrator.
After an exhaustive investigation and hearing the Arbiter rendered a decision in favor of the plaintiff and against the defendant
ordering the PCHC to debit the clearing account of the defendant, and to credit the clearing account of the plaintiff of the amount of
P45,982.23 with interest at the rate of 12% per annum from date of the complaint and Attorney's fee in the amount of P5,000.00. No
pronouncement as to cost was made. 1
In a motion for reconsideration filed by the petitioner, the Board of Directors of the PCHC affirmed the decision of the said Arbiter in this wise:
In view of all the foregoing, the decision of the Arbiter is confirmed; and the Philippine Clearing House Corporation is hereby ordered
to debit the clearing account of the defendant and credit the clearing account of plaintiff the amount of Forty Five Thousand Nine

47

Hundred Eighty Two & 23/100 (P45,982.23) Pesos with interest at the rate of 12% per annum from date of the complaint, and the
Attorney's fee in the amount of Five Thousand (P5,000.00) Pesos.
Thus, a petition for review was filed with the Regional Trial Court of Quezon City, Branch XCII, wherein in due course a decision was rendered affirming in
toto the decision of the PCHC.
Hence this petition.
The petition is focused on the following issues:
1. Did the PCHC have any jurisdiction to give due course to and adjudicate Arbicom Case No. 84033?
2. Were the subject checks non-negotiable and if not, does it fall under the ambit of the power of the PCHC?
3. Is the Negotiable Instrument Law, Act No. 2031 applicable in deciding controversies of this nature by the PCHC?
4. What law should govern in resolving controversies of this nature?
5. Was the petitioner bank negligent and thus responsible for any undue payment?
Petitioner maintains that the PCHC is not clothed with jurisdiction because the Clearing House Rules and Regulations of PCHC cover and apply only to
checks that are genuinely negotiable. Emphasis is laid on the primary purpose of the PCHC in the Articles of Incorporation, which states:
To provide, maintain and render an effective, convenient, efficient, economical and relevant exchange and facilitate service limited to
check processing and sorting by way of assisting member banks, entities in clearing checks and other clearing items as defined in
existing and in future Central Bank of the Philippines circulars, memoranda, circular letters, rules and regulations and policies in
pursuance to the provisions of Section 107 of R.A. 265. ...
and Section 107 of R.A. 265 which provides:
xxx xxx xxx
The deposit reserves maintained by the banks in the Central Bank, in accordance with the provisions of Section 1000 shall serve as
a basis for the clearing of checks, and the settlement of interbank balances ...
Petitioner argues that by law and common sense, the term check should be interpreted as one that fits the articles of incorporation of the PCHC, the
Central Bank and the Clearing House Rules stating that it is a negotiable instrument citing the definition of a "check" as basically a "bill of exchange" under
Section 185 of the NIL and that it should be payable to "order" or to "bearer" under Section 126 of game law. Petitioner alleges that with the cancellation of
the printed words "or bearer from the face of the check, it becomes non-negotiable so the PCHC has no jurisdiction over the case.
The Regional Trial Court took exception to this stand and conclusion put forth by the herein petitioner as it held:
Petitioner's theory cannot be maintained. As will be noted, the PCHC makes no distinction as to the character or nature of the
checks subject of its jurisdiction. The pertinent provisions quoted in petitioners memorandum simply refer to check(s). Where the law
does not distinguish, we shall not distinguish.
In the case of Reyes vs. Chuanico (CA-G.R. No. 20813 R, Feb. 5, 1962) the Appellate Court categorically stated that there are four
kinds of checks in this jurisdiction; the regular check; the cashier's check; the traveller's check; and the crossed check. The Court,
further elucidated, that while the Negotiable Instruments Law does not contain any provision on crossed checks, it is coon practice
in commercial and banking operations to issue checks of this character, obviously in accordance with Article 541 of the Code of
Commerce. Attention is likewise called to Section 185 of the Negotiable Instruments Law:
Sec. 185. Check defined. A check is a bill of exchange drawn on a bank payable on demand. Except as
herein otherwise provided, the provisions of this act applicable to a bill of exchange payable on demand apply
to a check
and the provisions of Section 61 (supra) that the drawer may insert in the instrument an express stipulation negating or limiting his
own liability to the holder. Consequently, it appears that the use of the term "check" in the Articles of Incorporation of PCHC is to be
perceived as not limited to negotiable checks only, but to checks as is generally known in use in commercial or business
transactions.
Anent Petitioner's liability on said instruments, this court is in full accord with the ruling of the PCHC Board of Directors that:
In presenting the Checks for clearing and for payment, the defendant made an express guarantee on the
validity of "all prior endorsements." Thus, stamped at the back of the checks are the defendant's clear

48

warranty; ALL PRIOR ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS GUARANTEED. With. out
such warranty, plaintiff would not have paid on the checks.
No amount of legal jargon can reverse the clear meaning of defendant's warranty. As the warranty has proven
to be false and inaccurate, the defendant is liable for any damage arising out of the falsity of its
representation.
The principle of estoppel, effectively prevents the defendant from denying liability for any damage sustained
by the plaintiff which, relying upon an action or declaration of the defendant, paid on the Checks. The same
principle of estoppel effectively prevents the defendant from denying the existence of the Checks. (Pp. 1011
Decision; pp. 4344, Rollo)
We agree.
As provided in the aforecited articles of incorporation of PCHC its operation extend to "clearing checks and other clearing items." No doubt transactions on
non-negotiable checks are within the ambit of its jurisdiction.
In a previous case, this Court had occasion to rule: "Ubi lex non distinguish nec nos distinguere debemos." 2 It was enunciated in Loc Cham v. Ocampo,
77 Phil. 636 (1946):
The rule, founded on logic is a corollary of the principle that general words and phrases in a statute should ordinarily be accorded
their natural and general significance. In other words, there should be no distinction in the application of a statute where none is
indicated.
There should be no distinction in the application of a statute where none is indicated for courts are not authorized to distinguish where the law makes no
distinction. They should instead administer the law not as they think it ought to be but as they find it and without regard to consequences. 3
The term check as used in the said Articles of Incorporation of PCHC can only connote checks in general use in commercial and business activities. It
cannot be conceived to be limited to negotiable checks only.
Checks are used between banks and bankers and their customers, and are designed to facilitate banking operations. It is of the essence to be payable on
demand, because the contract between the banker and the customer is that the money is needed on demand. 4
The participation of the two banks, petitioner and private respondent, in the clearing operations of PCHC is a manifestation of their submission to its
jurisdiction. Sec. 3 and 36.6 of the PCHC-CHRR clearing rules and regulations provide:
SEC. 3. AGREEMENT TO THESE RULES. It is the general agreement and understanding that any participant in the Philippine
Clearing House Corporation, MICR clearing operations by the mere fact of their participation, thereby manifests its agreement to
these Rules and Regulations and its subsequent amendments."
Sec 36.6. (ARBITRATION) The fact that a bank participates in the clearing operations of the PCHC shall be deemed its written
and subscribed consent to the binding effect of this arbitration agreement as if it had done so in accordance with section 4 of the
Republic Act No. 876, otherwise known as the Arbitration Law.
Further Section 2 of the Arbitration Law mandates:
Two or more persons or parties may submit to the arbitration of one or more arbitrators any controversy existing between them at
the time of the submission and which may be the subject of an action, or the parties of any contract may in such contract agree to
settle by arbitration a controversy thereafter arising between them. Such submission or contract shall be valid and irrevocable, save
upon grounds as exist at law for the revocation of any contract.
Such submission or contract may include question arising out of valuations, appraisals or other controversies which may be
collateral, incidental, precedent or subsequent to any issue between the parties. ...
Sec. 21 of the same rules, says:
Items which have been the subject of material alteration or items bearing forged endorsement when such endorsement is necessary
for negotiation shall be returned by direct presentation or demand to the Presenting Bank and not through the regular clearing house
facilities within the period prescribed by law for the filing of a legal action by the returning bank/branch, institution or entity sending
the same. (Emphasis supplied)
Viewing these provisions the conclusion is clear that the PCHC Rules and Regulations should not be interpreted to be applicable only to checks which are
negotiable instruments but also to non-negotiable instruments and that the PCHC has jurisdiction over this case even as the checks subject of this
litigation are admittedly non-negotiable.

49

Moreover, petitioner is estopped from raising the defense of non-negotiability of the checks in question. It stamped its guarantee on the back of the checks
and subsequently presented these checks for clearing and it was on the basis of these endorsements by the petitioner that the proceeds were credited in
its clearing account.
The petitioner by its own acts and representation can not now deny liability because it assumed the liabilities of an endorser by stamping its guarantee at
the back of the checks.
The petitioner having stamped its guarantee of "all prior endorsements and/or lack of endorsements" (Exh. A-2 to F-2) is now estopped from claiming that
the checks under consideration are not negotiable instruments. The checks were accepted for deposit by the petitioner stamping thereon its guarantee, in
order that it can clear the said checks with the respondent bank. By such deliberate and positive attitude of the petitioner it has for all legal intents and
purposes treated the said cheeks as negotiable instruments and accordingly assumed the warranty of the endorser when it stamped its guarantee of prior
endorsements at the back of the checks. It led the said respondent to believe that it was acting as endorser of the checks and on the strength of this
guarantee said respondent cleared the checks in question and credited the account of the petitioner. Petitioner is now barred from taking an opposite
posture by claiming that the disputed checks are not negotiable instrument.
This Court enunciated in Philippine National Bank vs. Court of Appeals 5 a point relevant to the issue when it stated the doctrine of estoppel is based upon
the grounds of public policy, fair dealing, good faith and justice and its purpose is to forbid one to speak against his own act, representations or
commitments to the injury of one to whom they were directed and who reasonably relied thereon.
A commercial bank cannot escape the liability of an endorser of a check and which may turn out to be a forged endorsement. Whenever any bank treats
the signature at the back of the checks as endorsements and thus logically guarantees the same as such there can be no doubt said bank has considered
the checks as negotiable.
Apropos the matter of forgery in endorsements, this Court has succinctly emphasized that the collecting bank or last endorser generally suffers the loss
because it has the duty to ascertain the genuineness of all prior endorsements 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 endorsements. This is laid down in the case of
PNB vs. National City Bank. 6 In another case, this court held that if the drawee-bank discovers that the signature of the payee was forged after it has paid
the amount of the check to the holder thereof, it can recover the amount paid from the collecting bank. 7
A truism stated by this Court is that "The doctrine of estoppel precludes a party from repudiating an obligation voluntarily assumed after having
accepted benefits therefrom. To countenance such repudiation would be contrary to equity and put premium on fraud or misrepresentation". 8
We made clear in Our decision in Philippine National Bank vs. The National City Bank of NY & Motor Service Co. that:
Where a check is accepted or certified by the bank on which it is drawn, the bank is estopped to deny the genuineness of the
drawers signature and his capacity to issue the instrument.
If a drawee bank pays a forged check which was previously accepted or certified by the said bank, it can not recover from a holder
who did not participate in the forgery and did not have actual notice thereof.
The payment of a check does not include or imply its acceptance in the sense that this word is used in Section 62 of the Negotiable
Instruments Act. 9
The point that comes uppermost is whether the drawee bank was negligent in failing to discover the alteration or the forgery. Very akin to the case at bar is
one which involves a suit filed by the drawer of checks against the collecting bank and this came about in Farmers State Bank 10 where it was held:
A cause of action against the (collecting bank) in favor of the appellee (the drawer) accrued as a result of the bank breaching its
implied warranty of the genuineness of the indorsements of the name of the payee by bringing about the presentation of the checks
(to the drawee bank) and collecting the amounts thereof, the right to enforce that cause of action was not destroyed by the
circumstance that another cause of action for the recovery of the amounts paid on the checks would have accrued in favor of the
appellee against another or to others than the bank if when the checks were paid they have been indorsed by the payee. (United
States vs. National Exchange Bank, 214 US, 302, 29 S CT665, 53 L. Ed 1006, 16 Am. Cas. 11 84; Onondaga County Savings Bank
vs. United States (E.C.A.) 64 F 703)
Section 66 of the Negotiable Instruments ordains that:
Every indorser who indorsee without qualification, warrants to all subsequent holders in due course' (a) that the instrument is
genuine and in all respects what it purports to be; (b) that he has good title to it; (c) that all prior parties have capacity to contract;
and (d) that the instrument is at the time of his indorsement valid and subsisting. 11
It has been enunciated in an American case particularly in American Exchange National Bank vs. Yorkville Bank 12 that: "the drawer owes no duty of
diligence to the collecting bank (one who had accepted an altered check and had paid over the proceeds to the depositor) except of seasonably
discovering the alteration by a comparison of its returned checks and check stubs or other equivalent record, and to inform the drawee thereof." In this
case it was further held that:

50

The real and underlying reasons why negligence of the drawer constitutes no defense to the collecting bank are that there is no
privity between the drawer and the collecting bank (Corn Exchange Bank vs. Nassau Bank, 204 N.Y.S. 80) and the drawer owe to
that bank no duty of vigilance (New York Produce Exchange Bank vs. Twelfth Ward Bank, 204 N.Y.S. 54) and no act of the collecting
bank is induced by any act or representation or admission of the drawer (Seaboard National Bank vs. Bank of America (supra) and it
follows that negligence on the part of the drawer cannot create any liability from it to the collecting bank, and the drawer thus is
neither a necessary nor a proper party to an action by the drawee bank against such bank. It is quite true that depositors in banks
are under the obligation of examining their passbooks and returned vouchers as a protection against the payment by the depository
bank against forged checks, and negligence in the performance of that obligation may relieve that bank of liability for the repayment
of amounts paid out on forged checks, which but for such negligence it would be bound to repay. A leading case on that subject is
Morgan vs. United States Mortgage and Trust Col. 208 N.Y. 218, 101 N.E. 871 Amn. Cas. 1914D, 462, L.R.A. 1915D, 74.
Thus We hold that while the drawer generally owes no duty of diligence to the collecting bank, the law imposes a duty of diligence on the collecting bank
to scrutinize checks deposited with it for the purpose of determining their genuineness and regularity. The collecting bank being primarily engaged in
banking holds itself out to the public as the expert and the law holds it to a high standard of conduct.
And although the subject checks are non-negotiable the responsibility of petitioner as indorser thereof remains.
To countenance a repudiation by the petitioner of its obligation would be contrary to equity and would deal a negative blow to the whole banking system of
this country.
The court reproduces with approval the following disquisition of the PCHC in its decision
II. Payments To Persons Other
Than The Payees Are Not Valid
And Give Rise To An Obligation
To Return Amounts Received
Nothing is more clear than that neither the defendant's depositor nor the defendant is entitled to receive payment payable for the
Checks. As the checks are not payable to defendant's depositor, payments to persons other than payees named therein, their
successor-in-interest or any person authorized to receive payment are not valid. Article 1240, New Civil Code of the Philippines
unequivocably provides that:
"Art. 1240. Payment shall be made to the person in whose favor the obligation has been constituted, or his
successo-in-interest, or any person authorized to receive it. "
Considering that neither the defendant's depositor nor the defendant is entitled to receive payments for the Checks, payments to
any of them give rise to an obligation to return the amounts received. Section 2154 of the New Civil Code mandates that:
Article 2154. If something is received when there is no right to demand it, and it was unduly delivered through
mistake, the obligation to return it arises.
It is contended that plaintiff should be held responsible for issuing the Checks notwithstanding that the underlying transactions were
fictitious This contention has no basis in our jurisprudence.
The nullity of the underlying transactions does not diminish, but in fact strengthens, plaintiffs right to recover from the defendant.
Such nullity clearly emphasizes the obligation of the payees to return the proceeds of the Checks. If a failure of consideration is
sufficient to warrant a finding that a payee is not entitled to payment or must return payment already made, with more reason the
defendant, who is neither the payee nor the person authorized by the payee, should be compelled to surrender the proceeds of the
Checks received by it. Defendant does not have any title to the Checks; neither can it claim any derivative title to them.
III. Having Violated Its Warranty
On Validity Of All Endorsements,
Collecting Bank Cannot Deny
liability To Those Who Relied
On Its Warranty
In presenting the Checks for clearing and for payment, the defendant made an express guarantee on the validity of "all prior
endorsements." Thus, stamped at the bank of the checks are the defendant's clear warranty: ALL PRIOR ENDORSEMENTS
AND/OR LACK OF ENDORSEMENTS GUARANTEED. Without such warranty, plaintiff would not have paid on the checks.

51

No amount of legal jargon can reverse the clear meaning of defendant's warranty. As the warranty has proven to be false and
inaccurate, the defendant is liable for any damage arising out of the falsity of its representation.
The principle of estoppel effectively prevents the defendant from denying liability for any damages sustained by the plaintiff which,
relying upon an action or declaration of the defendant, paid on the Checks. The same principle of estoppel effectively prevents the
defendant from denying the existence of the Checks.
Whether the Checks have been issued for valuable considerations or not is of no serious moment to this case. These Checks have
been made the subject of contracts of endorsement wherein the defendant made expressed warranties to induce payment by the
drawer of the Checks; and the defendant cannot now refuse liability for breach of warranty as a consequence of such forged
endorsements. The defendant has falsely warranted in favor of plaintiff the validity of all endorsements and the genuineness of the
cheeks in all respects what they purport to be.
The damage that will result if judgment is not rendered for the plaintiff is irreparable. The collecting bank has privity with the
depositor who is the principal culprit in this case. The defendant knows the depositor; her address and her history, Depositor is
defendant's client. It has taken a risk on its depositor when it allowed her to collect on the crossed-checks.
Having accepted the crossed checks from persons other than the payees, the defendant is guilty of negligence; the risk of wrongful
payment has to be assumed by the defendant.
On the matter of the award of the interest and attorney's fees, the Board of Directors finds no reason to reverse the decision of the
Arbiter. The defendant's failure to reimburse the plaintiff has constrained the plaintiff to regular the services of counsel in order to
protect its interest notwithstanding that plaintiffs claim is plainly valid just and demandable. In addition, defendant's clear obligation is
to reimburse plaintiff upon direct presentation of the checks; and it is undenied that up to this time the defendant has failed to make
such reimbursement.
WHEREFORE, the petition is DISMISSED for lack of merit without pronouncement as to costs. The decision of the respondent court of 24 March 1986
and its order of 3 June 1986 are hereby declared to be immediately executory.
SO ORDERED.
Teehankee, C.J., Narvasa, Cruz and Paras, JJ., concur.

G.R. No. 92244 February 9, 1993

NATIVIDAD GEMPESAW, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS, respondents.
L.B. Camins for petitioner.
Angara, Abello, Concepcion, Regals & Cruz for private respondent

CAMPOS, JR., J.:

From the adverse decision * of the Court of Appeals (CA-G.R. CV No. 16447), petitioner, Natividad Gempesaw, appealed to this Court in a Petition for
Review, on the issue of the right of the drawer to recover from the drawee bank who pays a check with a forged indorsement of the payee, debiting the
same against the drawer's account.
The records show that on January 23, 1985, petitioner filed a Complaint against the private respondent Philippine Bank of Communications (respondent
drawee Bank) for recovery of the money value of eighty-two (82) checks charged against the petitioner's account with the respondent drawee Bank on the

52

ground that the payees' indorsements were forgeries. The Regional Trial Court, Branch CXXVIII of Caloocan City, which tried the case, rendered a
decision on November 17, 1987 dismissing the complaint as well as the respondent drawee Bank's counterclaim. On appeal, the Court of Appeals in a
decision rendered on February 22, 1990, affirmed the decision of the RTC on two grounds, namely (1) that the plaintiff's (petitioner herein) gross
negligence in issuing the checks was the proximate cause of the loss and (2) assuming that the bank was also negligent, the loss must nevertheless be
borne by the party whose negligence was the proximate cause of the loss. On March 5, 1990, the petitioner filed this petition under Rule 45 of the Rules of
Court setting forth the following as the alleged errors of the respondent Court: 1
I
THE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE NEGLIGENCE OF THE DRAWER IS THE
PROXIMATE CAUSE OF THE RESULTING INJURY TO THE DRAWEE BANK, AND THE DRAWER IS PRECLUDED FROM
SETTING UP THE FORGERY OR WANT OF AUTHORITY.
II
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT FINDING AND RULING THAT IT IS THE GROSS AND
INEXCUSABLE NEGLIGENCE AND FRAUDULENT ACTS OF THE OFFICIALS AND EMPLOYEES OF THE RESPONDENT BANK
IN FORGING THE SIGNATURE OF THE PAYEES AND THE WRONG AND/OR ILLEGAL PAYMENTS MADE TO PERSONS,
OTHER THAN TO THE INTENDED PAYEES SPECIFIED IN THE CHECKS, IS THE DIRECT AND PROXIMATE CAUSE OF THE
DAMAGE TO PETITIONER WHOSE SAVING (SIC) ACCOUNT WAS DEBITED.
III
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT ORDERING THE RESPONDENT BANK TO RESTORE OR RECREDIT THE CHECKING ACCOUNT OF THE PETITIONER IN THE CALOOCAN CITY BRANCH BY THE VALUE OF THE
EIGHTY-TWO (82) CHECKS WHICH IS IN THE AMOUNT OF P1,208,606.89 WITH LEGAL INTEREST.
From the records, the relevant facts are as follows:
Petitioner Natividad O. Gempesaw (petitioner) owns and operates four grocery stores located at Rizal Avenue Extension and at Second Avenue, Caloocan
City. Among these groceries are D.G. Shopper's Mart and D.G. Whole Sale Mart. Petitioner maintains a checking account numbered 13-00038-1 with the
Caloocan City Branch of the respondent drawee Bank. To facilitate payment of debts to her suppliers, petitioner draws checks against her checking
account with the respondent bank as drawee. Her customary practice of issuing checks in payment of her suppliers was as follows: the checks were
prepared and filled up as to all material particulars by her trusted bookkeeper, Alicia Galang, an employee for more than eight (8) years. After the
bookkeeper prepared the checks, the completed checks were submitted to the petitioner for her signature, together with the corresponding invoice
receipts which indicate the correct obligations due and payable to her suppliers. Petitioner signed each and every check without bothering to verify the
accuracy of the checks against the corresponding invoices because she reposed full and implicit trust and confidence on her bookkeeper. The issuance
and delivery of the checks to the payees named therein were left to the bookkeeper. Petitioner admitted that she did not make any verification as to
whether or not the checks were delivered to their respective payees. Although the respondent drawee Bank notified her of all checks presented to and
paid by the bank, petitioner did not verify he correctness of the returned checks, much less check if the payees actually received the checks in payment
for the supplies she received. In the course of her business operations covering a period of two years, petitioner issued, following her usual practice stated
above, a total of eighty-two (82) checks in favor of several suppliers. These checks were all presented by the indorsees as holders thereof to, and honored
by, the respondent drawee Bank. Respondent drawee Bank correspondingly debited the amounts thereof against petitioner's checking account numbered
30-00038-1. Most of the aforementioned checks were for amounts in excess of her actual obligations to the various payees as shown in their
corresponding invoices. To mention a few:
. . . 1) in Check No. 621127, dated June 27, 1984 in the amount of P11,895.23 in favor of Kawsek Inc. (Exh. A-60), appellant's actual
obligation to said payee was only P895.33 (Exh. A-83); (2) in Check No. 652282 issued on September 18, 1984 in favor of Senson
Enterprises in the amount of P11,041.20 (Exh. A-67) appellant's actual obligation to said payee was only P1,041.20 (Exh. 7); (3) in
Check No. 589092 dated April 7, 1984 for the amount of P11,672.47 in favor of Marchem (Exh. A-61) appellant's obligation was only
P1,672.47 (Exh. B); (4) in Check No. 620450 dated May 10, 1984 in favor of Knotberry for P11,677.10 (Exh. A-31) her actual
obligation was only P677.10 (Exhs. C and C-1); (5) in Check No. 651862 dated August 9, 1984 in favor of Malinta Exchange Mart for
P11,107.16 (Exh. A-62), her obligation was only P1,107.16 (Exh. D-2); (6) in Check No. 651863 dated August 11, 1984 in favor of
Grocer's International Food Corp. in the amount of P11,335.60 (Exh. A-66), her obligation was only P1,335.60 (Exh. E and E-1); (7)
in Check No. 589019 dated March 17, 1984 in favor of Sophy Products in the amount of P11,648.00 (Exh. A-78), her obligation was
only P648.00 (Exh. G); (8) in Check No. 589028 dated March 10, 1984 for the amount of P11,520.00 in favor of the Yakult
Philippines (Exh. A-73), the latter's invoice was only P520.00 (Exh. H-2); (9) in Check No. 62033 dated May 23, 1984 in the amount
of P11,504.00 in favor of Monde Denmark Biscuit (Exh. A-34), her obligation was only P504.00 (Exhs. I-1 and I-2). 2
Practically, all the checks issued and honored by the respondent drawee bank were crossed checks. 3 Aside from the daily notice given to the petitioner by
the respondent drawee Bank, the latter also furnished her with a monthly statement of her transactions, attaching thereto all the cancelled checks she had
issued and which were debited against her current account. It was only after the lapse of more two (2) years that petitioner found out about the fraudulent
manipulations of her bookkeeper.
All the eighty-two (82) checks with forged signatures of the payees were brought to Ernest L. Boon, Chief Accountant of respondent drawee Bank at the
Buendia branch, who, without authority therefor, accepted them all for deposit at the Buendia branch to the credit and/or in the accounts of Alfredo Y.
Romero and Benito Lam. Ernest L. Boon was a very close friend of Alfredo Y. Romero. Sixty-three (63) out of the eighty-two (82) checks were deposited in

53

Savings Account No. 00844-5 of Alfredo Y. Romero at the respondent drawee Bank's Buendia branch, and four (4) checks in his Savings Account No. 3281-9 at its Ongpin branch. The rest of the checks were deposited in Account No. 0443-4, under the name of Benito Lam at the Elcao branch of the
respondent drawee Bank.
About thirty (30) of the payees whose names were specifically written on the checks testified that they did not receive nor even see the subject checks and
that the indorsements appearing at the back of the checks were not theirs.
The team of auditors from the main office of the respondent drawee Bank which conducted periodic inspection of the branches' operations failed to
discover, check or stop the unauthorized acts of Ernest L. Boon. Under the rules of the respondent drawee Bank, only a Branch Manager and no other
official of the respondent drawee bank, may accept a second indorsement on a check for deposit. In the case at bar, all the deposit slips of the eighty-two
(82) checks in question were initialed and/or approved for deposit by Ernest L. Boon. The Branch Managers of the Ongpin and Elcao branches accepted
the deposits made in the Buendia branch and credited the accounts of Alfredo Y. Romero and Benito Lam in their respective branches.
On November 7, 1984, petitioner made a written demand on respondent drawee Bank to credit her account with the money value of the eighty-two (82)
checks totalling P1,208.606.89 for having been wrongfully charged against her account. Respondent drawee Bank refused to grant petitioner's demand.
On January 23, 1985, petitioner filed the complaint with the Regional Trial Court.
This is not a suit by the party whose signature was forged on a check drawn against the drawee bank. The payees are not parties to the case. Rather, it is
the drawer, whose signature is genuine, who instituted this action to recover from the drawee bank the money value of eighty-two (82) checks paid out by
the drawee bank to holders of those checks where the indorsements of the payees were forged. How and by whom the forgeries were committed are not
established on the record, but the respective payees admitted that they did not receive those checks and therefore never indorsed the same. The
applicable law is the Negotiable Instruments Law 4 (heretofore referred to as the NIL). Section 23 of the NIL provides:
When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative,
and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be
acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting
up the forgery or want of authority.
Under the aforecited provision, forgery is a real or absolute defense by the party whose signature is forged. A party whose signature to an
instrument was forged was never a party and never gave his consent to the contract which gave rise to the instrument. Since his signature
does not appear in the instrument, he cannot be held liable thereon by anyone, not even by a holder in due course. Thus, if a person's
signature is forged as a maker of a promissory note, he cannot be made to pay because he never made the promise to pay. Or where a
person's signature as a drawer of a check is forged, the drawee bank cannot charge the amount thereof against the drawer's account because
he never gave the bank the order to pay. And said section does not refer only to the forged signature of the maker of a promissory note and of
the drawer of a check. It covers also a forged indorsement, i.e., the forged signature of the payee or indorsee of a note or check. Since under
said provision a forged signature is "wholly inoperative", no one can gain title to the instrument through such forged indorsement. Such an
indorsement prevents any subsequent party from acquiring any right as against any party whose name appears prior to the forgery. Although
rights may exist between and among parties subsequent to the forged indorsement, not one of them can acquire rights against parties prior to
the forgery. Such forged indorsement cuts off the rights of all subsequent parties as against parties prior to the forgery. However, the law makes
an exception to these rules where a party is precluded from setting up forgery as a defense.
As a matter of practical significance, problems arising from forged indorsements of checks may generally be broken into two types of cases: (1) where
forgery was accomplished by a person not associated with the drawer for example a mail robbery; and (2) where the indorsement was forged by an
agent of the drawer. This difference in situations would determine the effect of the drawer's negligence with respect to forged indorsements. While there is
no duty resting on the depositor to look for forged indorsements on his cancelled checks in contrast to a duty imposed upon him to look for forgeries of his
own name, a depositor is under a duty to set up an accounting system and a business procedure as are reasonably calculated to prevent or render difficult
the forgery of indorsements, particularly by the depositor's own employees. And if the drawer (depositor) learns that a check drawn by him has been paid
under a forged indorsement, the drawer is under duty promptly to report such fact to the drawee bank. 5 For his negligence or failure either to discover or
to report promptly the fact of such forgery to the drawee, the drawer loses his right against the drawee who has debited his account under a forged
indorsement. 6 In other words, he is precluded from using forgery as a basis for his claim for re-crediting of his account.
In the case at bar, petitioner admitted that the checks were filled up and completed by her trusted employee, Alicia Galang, and were given to her for her
signature. Her signing the checks made the negotiable instrument complete. Prior to signing the checks, there was no valid contract yet.
Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument to the payee for the purpose of giving effect thereto.
7
The first delivery of the instrument, complete in form, to the payee who takes it as a holder, is called issuance of the instrument. 8 Without the initial
delivery of the instrument from the drawer of the check to the payee, there can be no valid and binding contract and no liability on the instrument.
Petitioner completed the checks by signing them as drawer and thereafter authorized her employee Alicia Galang to deliver the eighty-two (82) checks to
their respective payees. Instead of issuing the checks to the payees as named in the checks, Alicia Galang delivered them to the Chief Accountant of the
Buendia branch of the respondent drawee Bank, a certain Ernest L. Boon. It was established that the signatures of the payees as first indorsers were
forged. The record fails to show the identity of the party who made the forged signatures. The checks were then indorsed for the second time with the
names of Alfredo Y. Romero and Benito Lam, and were deposited in the latter's accounts as earlier noted. The second indorsements were all genuine
signatures of the alleged holders. All the eighty-two (82) checks bearing the forged indorsements of the payees and the genuine second indorsements of
Alfredo Y. Romero and Benito Lam were accepted for deposit at the Buendia branch of respondent drawee Bank to the credit of their respective savings
accounts in the Buendia, Ongpin and Elcao branches of the same bank. The total amount of P1,208,606.89, represented by eighty-two (82) checks, were

54

credited and paid out by respondent drawee Bank to Alfredo Y. Romero and Benito Lam, and debited against petitioner's checking account No. 13-000381, Caloocan branch.
As a rule, a drawee bank who has paid a check on which an indorsement has been forged cannot charge the drawer's account for the amount of said
check. An exception to this rule is where the drawer is guilty of such negligence which causes the bank to honor such a check or checks. If a check is
stolen from the payee, it is quite obvious that the drawer cannot possibly discover the forged indorsement by mere examination of his cancelled check.
This accounts for the rule that although a depositor owes a duty to his drawee bank to examine his cancelled checks for forgery of his own signature, he
has no similar duty as to forged indorsements. A different situation arises where the indorsement was forged by an employee or agent of the drawer, or
done with the active participation of the latter. Most of the cases involving forgery by an agent or employee deal with the payee's indorsement. The drawer
and the payee often time shave business relations of long standing. The continued occurrence of business transactions of the same nature provides the
opportunity for the agent/employee to commit the fraud after having developed familiarity with the signatures of the parties. However, sooner or later,
some leak will show on the drawer's books. It will then be just a question of time until the fraud is discovered. This is specially true when the agent
perpetrates a series of forgeries as in the case at bar.
The negligence of a depositor which will prevent recovery of an unauthorized payment is based on failure of the depositor to act as a prudent
businessman would under the circumstances. In the case at bar, the petitioner relied implicitly upon the honesty and loyalty of her bookkeeper, and did not
even verify the accuracy of amounts of the checks she signed against the invoices attached thereto. Furthermore, although she regularly received her
bank statements, she apparently did not carefully examine the same nor the check stubs and the returned checks, and did not compare them with the
same invoices. Otherwise, she could have easily discovered the discrepancies between the checks and the documents serving as bases for the checks.
With such discovery, the subsequent forgeries would not have been accomplished. It was not until two years after the bookkeeper commenced her
fraudulent scheme that petitioner discovered that eighty-two (82) checks were wrongfully charged to her account, at which she notified the respondent
drawee bank.
It is highly improbable that in a period of two years, not one of Petitioner's suppliers complained of non-payment. Assuming that even one single complaint
had been made, petitioner would have been duty-bound, as far as the respondent drawee Bank was concerned, to make an adequate investigation on the
matter. Had this been done, the discrepancies would have been discovered, sooner or later. Petitioner's failure to make such adequate inquiry constituted
negligence which resulted in the bank's honoring of the subsequent checks with forged indorsements. On the other hand, since the record mentions
nothing about such a complaint, the possibility exists that the checks in question covered inexistent sales. But even in such a case, considering the length
of a period of two (2) years, it is hard to believe that petitioner did not know or realize that she was paying more than she should for the supplies she was
actually getting. A depositor may not sit idly by, after knowledge has come to her that her funds seem to be disappearing or that there may be a leak in her
business, and refrain from taking the steps that a careful and prudent businessman would take in such circumstances and if taken, would result in
stopping the continuance of the fraudulent scheme. If she fails to take steps, the facts may establish her negligence, and in that event, she would be
estopped from recovering from the bank. 9
One thing is clear from the records that the petitioner failed to examine her records with reasonable diligence whether before she signed the checks or
after receiving her bank statements. Had the petitioner examined her records more carefully, particularly the invoice receipts, cancelled checks, check
book stubs, and had she compared the sums written as amounts payable in the eighty-two (82) checks with the pertinent sales invoices, she would have
easily discovered that in some checks, the amounts did not tally with those appearing in the sales invoices. Had she noticed these discrepancies, she
should not have signed those checks, and should have conducted an inquiry as to the reason for the irregular entries. Likewise had petitioner been more
vigilant in going over her current account by taking careful note of the daily reports made by respondent drawee Bank in her issued checks, or at least
made random scrutiny of cancelled checks returned by respondent drawee Bank at the close of each month, she could have easily discovered the fraud
being perpetrated by Alicia Galang, and could have reported the matter to the respondent drawee Bank. The respondent drawee Bank then could have
taken immediate steps to prevent further commission of such fraud. Thus, petitioner's negligence was the proximate cause of her loss. And since it was
her negligence which caused the respondent drawee Bank to honor the forged checks or prevented it from recovering the amount it had already paid on
the checks, petitioner cannot now complain should the bank refuse to recredit her account with the amount of such checks. 10 Under Section 23 of the NIL,
she is now precluded from using the forgery to prevent the bank's debiting of her account.
The doctrine in the case of Great Eastern Life Insurance Co. vs. Hongkong & Shanghai Bank 11 is not applicable to the case at bar because in said case,
the check was fraudulently taken and the signature of the payee was forged not by an agent or employee of the drawer. The drawer was not found to be
negligent in the handling of its business affairs and the theft of the check by a total stranger was not attributable to negligence of the drawer; neither was
the forging of the payee's indorsement due to the drawer's negligence. Since the drawer was not negligent, the drawee was duty-bound to restore to the
drawer's account the amount theretofore paid under the check with a forged payee's indorsement because the drawee did not pay as ordered by the
drawer.
Petitioner argues that respondent drawee Bank should not have honored the checks because they were crossed checks. Issuing a crossed check
imposes no legal obligation on the drawee not to honor such a check. It is more of a warning to the holder that the check cannot be presented to the
drawee bank for payment in cash. Instead, the check can only be deposited with the payee's bank which in turn must present it for payment against the
drawee bank in the course of normal banking transactions between banks. The crossed check cannot be presented for payment but it can only be
deposited and the drawee bank may only pay to another bank in the payee's or indorser's account.
Petitioner likewise contends that banking rules prohibit the drawee bank from having checks with more than one indorsement. The banking rule banning
acceptance of checks for deposit or cash payment with more than one indorsement unless cleared by some bank officials does not invalidate the
instrument; neither does it invalidate the negotiation or transfer of the said check. In effect, this rule destroys the negotiability of bills/checks by limiting
their negotiation by indorsement of only the payee. Under the NIL, the only kind of indorsement which stops the further negotiation of an instrument is a
restrictive indorsement which prohibits the further negotiation thereof.
Sec. 36. When indorsement restrictive. An indorsement is restrictive which either

55

(a) Prohibits further negotiation of the instrument; or

xxx xxx xxx
In this kind of restrictive indorsement, the prohibition to transfer or negotiate must be written in express words at the back of the instrument, so that any
subsequent party may be forewarned that ceases to be negotiable. However, the restrictive indorsee acquires the right to receive payment and bring any
action thereon as any indorser, but he can no longer transfer his rights as such indorsee where the form of the indorsement does not authorize him to do
so. 12
Although the holder of a check cannot compel a drawee bank to honor it because there is no privity between them, as far as the drawer-depositor is
concerned, such bank may not legally refuse to honor a negotiable bill of exchange or a check drawn against it with more than one indorsement if there is
nothing irregular with the bill or check and the drawer has sufficient funds. The drawee cannot be compelled to accept or pay the check by the drawer or
any holder because as a drawee, he incurs no liability on the check unless he accepts it. But the drawee will make itself liable to a suit for damages at the
instance of the drawer for wrongful dishonor of the bill or check.
Thus, it is clear that under the NIL, petitioner is precluded from raising the defense of forgery by reason of her gross negligence. But under Section 196 of
the NIL, any case not provided for in the Act shall be governed by the provisions of existing legislation. Under the laws of quasi-delict, she cannot point to
the negligence of the respondent drawee Bank in the selection and supervision of its employees as being the cause of the loss because negligence is the
proximate cause thereof and under Article 2179 of the Civil Code, she may not be awarded damages. However, under Article 1170 of the same Code the
respondent drawee Bank may be held liable for damages. The article provides
Those who in the performance of their obligations are guilty of fraud, negligence or delay, and those who in any manner contravene
the tenor thereof, are liable for damages.
There is no question that there is a contractual relation between petitioner as depositor (obligee) and the respondent drawee bank as the obligor. In the
performance of its obligation, the drawee bank is bound by its internal banking rules and regulations which form part of any contract it enters into with any
of its depositors. When it violated its internal rules that second endorsements are not to be accepted without the approval of its branch managers and it
did accept the same upon the mere approval of Boon, a chief accountant, it contravened the tenor of its obligation at the very least, if it were not actually
guilty of fraud or negligence.
Furthermore, the fact that the respondent drawee Bank did not discover the irregularity with respect to the acceptance of checks with second indorsement
for deposit even without the approval of the branch manager despite periodic inspection conducted by a team of auditors from the main office constitutes
negligence on the part of the bank in carrying out its obligations to its depositors. Article 1173 provides
The fault or negligence of the obligor consists in the omission of that diligence which is required by the nature of the obligation and
corresponds with the circumstance of the persons, of the time and of the place. . . .
We hold that banking business is so impressed with public interest where the trust and confidence of the public in general is of paramount importance
such that the appropriate standard of diligence must be a high degree of diligence, if not the utmost diligence. Surely, respondent drawee Bank cannot
claim it exercised such a degree of diligence that is required of it. There is no way We can allow it now to escape liability for such negligence. Its liability as
obligor is not merely vicarious but primary wherein the defense of exercise of due diligence in the selection and supervision of its employees is of no
moment.
Premises considered, respondent drawee Bank is adjudged liable to share the loss with the petitioner on a fifty-fifty ratio in accordance with Article 172
which provides:
Responsibility arising from negligence in the performance of every kind of obligation is also demandable, but such liability may be
regulated by the courts according to the circumstances.
With the foregoing provisions of the Civil Code being relied upon, it is being made clear that the decision to hold the drawee bank liable is based on law
and substantial justice and not on mere equity. And although the case was brought before the court not on breach of contractual obligations, the courts are
not precluded from applying to the circumstances of the case the laws pertinent thereto. Thus, the fact that petitioner's negligence was found to be the
proximate cause of her loss does not preclude her from recovering damages. The reason why the decision dealt on a discussion on proximate cause is
due to the error pointed out by petitioner as allegedly committed by the respondent court. And in breaches of contract under Article 1173, due diligence on
the part of the defendant is not a defense.
PREMISES CONSIDERED, the case is hereby ordered REMANDED to the trial court for the reception of evidence to determine the exact amount of loss
suffered by the petitioner, considering that she partly benefited from the issuance of the questioned checks since the obligation for which she issued them
were apparently extinguished, such that only the excess amount over and above the total of these actual obligations must be considered as loss of which
one half must be paid by respondent drawee bank to herein petitioner.
SO ORDERED.
Narvasa, C.J., Feliciano, Regalado and Nocon, JJ., concur.

56

G.R. No. 107382/G.R. No. 107612

January 31, 1996

ASSOCIATED BANK, petitioner,

vs.
HON. COURT OF APPEALS, PROVINCE OF TARLAC and PHILIPPINE NATIONAL BANK, respondents.
xxxxxxxxxxxxxxxxxxxxx
G.R. No. 107612

January 31, 1996

PHILIPPINE NATIONAL BANK, petitioner,

vs.
HONORABLE COURT OF APPEALS, PROVINCE OF TARLAC, and ASSOCIATED BANK, respondents.
DECISION
ROMERO, J.:
Where thirty checks bearing forged endorsements are paid, who bears the loss, the drawer, the drawee bank or the collecting bank?
This is the main issue in these consolidated petitions for review assailing the decision of the Court of Appeals in "Province of Tarlac v. Philippine National
Bank v. Associated Bank v. Fausto Pangilinan, et. al." (CA-G.R. No. CV No. 17962). 1
The facts of the case are as follows:
The Province of Tarlac maintains a current account with the Philippine National Bank (PNB) Tarlac Branch where the provincial funds are deposited.
Checks issued by the Province are signed by the Provincial Treasurer and countersigned by the Provincial Auditor or the Secretary of the Sangguniang
Bayan.
A portion of the funds of the province is allocated to the Concepcion Emergency Hospital. 2 The allotment checks for said government hospital are drawn
to the order of "Concepcion Emergency Hospital, Concepcion, Tarlac" or "The Chief, Concepcion Emergency Hospital, Concepcion, Tarlac." The checks
are released by the Office of the Provincial Treasurer and received for the hospital by its administrative officer and cashier.
In January 1981, the books of account of the Provincial Treasurer were post-audited by the Provincial Auditor. It was then discovered that the hospital did
not receive several allotment checks drawn by the Province.
On February 19, 1981, the Provincial Treasurer requested the manager of the PNB to return all of its cleared checks which were issued from 1977 to 1980
in order to verify the regularity of their encashment. After the checks were examined, the Provincial Treasurer learned that 30 checks amounting to
P203,300.00 were encashed by one Fausto Pangilinan, with the Associated Bank acting as collecting bank.
It turned out that Fausto Pangilinan, who was the administrative officer and cashier of payee hospital until his retirement on February 28, 1978, collected
the questioned checks from the office of the Provincial Treasurer. He claimed to be assisting or helping the hospital follow up the release of the checks
and had official receipts. 3 Pangilinan sought to encash the first check 4 with Associated Bank. However, the manager of Associated Bank refused and
suggested that Pangilinan deposit the check in his personal savings account with the same bank. Pangilinan was able to withdraw the money when the
check was cleared and paid by the drawee bank, PNB.
After forging the signature of Dr. Adena Canlas who was chief of the payee hospital, Pangilinan followed the same procedure for the second check, in the
amount of P5,000.00 and dated April 20, 1978, 5 as well as for twenty-eight other checks of various amounts and on various dates. The last check
negotiated by Pangilinan was for f8,000.00 and dated February 10, 1981. 6 All the checks bore the stamp of Associated Bank which reads "All prior
endorsements guaranteed ASSOCIATED BANK."
Jesus David, the manager of Associated Bank testified that Pangilinan made it appear that the checks were paid to him for certain projects with the
hospital. 7 He did not find as irregular the fact that the checks were not payable to Pangilinan but to the Concepcion Emergency Hospital. While he
admitted that his wife and Pangilinan's wife are first cousins, the manager denied having given Pangilinan preferential treatment on this account. 8

57

On February 26, 1981, the Provincial Treasurer wrote the manager of the PNB seeking the restoration of the various amounts debited from the current
account of the Province. 9
In turn, the PNB manager demanded reimbursement from the Associated Bank on May 15, 1981. 10
As both banks resisted payment, the Province of Tarlac brought suit against PNB which, in turn, impleaded Associated Bank as third-party defendant. The
latter then filed a fourth-party complaint against Adena Canlas and Fausto Pangilinan. 11
After trial on the merits, the lower court rendered its decision on March 21, 1988, disposing as follows:
WHEREFORE, in view of the foregoing, judgment is hereby rendered:
1. On the basic complaint, in favor of plaintiff Province of Tarlac and against defendant Philippine National Bank (PNB), ordering the latter to
pay to the former, the sum of Two Hundred Three Thousand Three Hundred (P203,300.00) Pesos with legal interest thereon from March 20,
1981 until fully paid;
2. On the third-party complaint, in favor of defendant/third-party plaintiff Philippine National Bank (PNB) and against third-party
defendant/fourth-party plaintiff Associated Bank ordering the latter to reimburse to the former the amount of Two Hundred Three Thousand
Three Hundred (P203,300.00) Pesos with legal interests thereon from March 20, 1981 until fully paid;.
3. On the fourth-party complaint, the same is hereby ordered dismissed for lack of cause of action as against fourth-party defendant Adena
Canlas and lack of jurisdiction over the person of fourth-party defendant Fausto Pangilinan as against the latter.
4. On the counterclaims on the complaint, third-party complaint and fourth-party complaint, the same are hereby ordered dismissed for lack of
merit.
SO ORDERED. 12
PNB and Associated Bank appealed to the Court of Appeals. 13 Respondent court affirmed the trial court's decision in toto on September 30, 1992.
Hence these consolidated petitions which seek a reversal of respondent appellate court's decision.
PNB assigned two errors. First, the bank contends that respondent court erred in exempting the Province of Tarlac from liability when, in fact, the latter
was negligent because it delivered and released the questioned checks to Fausto Pangilinan who was then already retired as the hospital's cashier and
administrative officer. PNB also maintains its innocence and alleges that as between two innocent persons, the one whose act was the cause of the loss,
in this case the Province of Tarlac, bears the loss.
Next, PNB asserts that it was error for the court to order it to pay the province and then seek reimbursement from Associated Bank. According to petitioner
bank, respondent appellate Court should have directed Associated Bank to pay the adjudged liability directly to the Province of Tarlac to avoid circuity. 14
Associated Bank, on the other hand, argues that the order of liability should be totally reversed, with the drawee bank (PNB) solely and ultimately bearing
the loss.
Respondent court allegedly erred in applying Section 23 of the Philippine Clearing House Rules instead of Central Bank Circular No. 580, which, being an
administrative regulation issued pursuant to law, has the force and effect of law. 15 The PCHC Rules are merely contractual stipulations among and
between member-banks. As such, they cannot prevail over the aforesaid CB Circular.
It likewise contends that PNB, the drawee bank, is estopped from asserting the defense of guarantee of prior indorsements against Associated Bank, the
collecting bank. In stamping the guarantee (for all prior indorsements), it merely followed a mandatory requirement for clearing and had no choice but to
place the stamp of guarantee; otherwise, there would be no clearing. The bank will be in a "no-win" situation and will always bear the loss as against the
drawee bank. 16
Associated Bank also claims that since PNB already cleared and paid the value of the forged checks in question, it is now estopped from asserting the
defense that Associated Bank guaranteed prior indorsements. The drawee bank allegedly has the primary duty to verify the genuineness of payee's
indorsement before paying the check. 17
While both banks are innocent of the forgery, Associated Bank claims that PNB was at fault and should solely bear the loss because it cleared and paid
the forged checks.
xxx

xxx

xxx

The case at bench concerns checks payable to the order of Concepcion Emergency Hospital or its Chief. They were properly issued and bear the genuine
signatures of the drawer, the Province of Tarlac. The infirmity in the questioned checks lies in the payee's (Concepcion Emergency Hospital) indorsements
which are forgeries. At the time of their indorsement, the checks were order instruments.
Checks having forged indorsements should be differentiated from forged checks or checks bearing the forged signature of the drawer.

58

Section 23 of the Negotiable Instruments Law (NIL) provides:

Sec. 23. FORGED SIGNATURE, EFFECT OF. When a signature is forged or made without authority of the person whose signature it
purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof
against any party thereto, can be acquired through or under such signature unless the party against whom it is sought to enforce such right is
precluded from setting up the forgery or want of authority.
A forged signature, whether it be that of the drawer or the payee, is wholly inoperative and no one can gain title to the instrument through it. A person
whose signature to an instrument was forged was never a party and never consented to the contract which allegedly gave rise to such instrument. 18
Section 23 does not avoid the instrument but only the forged signature. 19 Thus, a forged indorsement does not operate as the payee's indorsement.
The exception to the general rule in Section 23 is where "a party against whom it is sought to enforce a right is precluded from setting up the forgery or
want of authority." Parties who warrant or admit the genuineness of the signature in question and those who, by their acts, silence or negligence are
estopped from setting up the defense of forgery, are precluded from using this defense. Indorsers, persons negotiating by delivery and acceptors are
warrantors of the genuineness of the signatures on the instrument. 20
In bearer instruments, the signature of the payee or holder is unnecessary to pass title to the instrument. Hence, when the indorsement is a forgery, only
the person whose signature is forged can raise the defense of forgery against a holder in due course. 21
The checks involved in this case are order instruments, hence, the following discussion is made with reference to the effects of a forged indorsement on
an instrument payable to order.
Where the instrument is payable to order at the time of the forgery, such as the checks in this case, the signature of its rightful holder (here, the payee
hospital) is essential to transfer title to the same instrument. When the holder's indorsement is forged, all parties prior to the forgery may raise the real
defense of forgery against all parties subsequent thereto. 22
An indorser of an order instrument warrants "that the instrument is genuine and in all respects what it purports to be; that he has a good title to it; that all
prior parties had capacity to contract; and that the instrument is at the time of his indorsement valid and subsisting." 23 He cannot interpose the defense
that signatures prior to him are forged.
A collecting bank where a check is deposited and which indorses the check upon presentment with the drawee bank, is such an indorser. So even if the
indorsement on the check deposited by the banks's client is forged, the collecting bank is bound by his warranties as an indorser and cannot set up the
defense of forgery as against the drawee bank.
The bank on which a check is drawn, known as the drawee bank, is under strict liability to pay the check to the order of the payee. The drawer's
instructions are reflected on the face and by the terms of the check. Payment under a forged indorsement is not to the drawer's order. When the drawee
bank pays a person other than the payee, it does not comply with the terms of the check and violates its duty to charge its customer's (the drawer)
account only for properly payable items. Since the drawee bank did not pay a holder or other person entitled to receive payment, it has no right to
reimbursement from the drawer. 24 The general rule then is that the drawee bank may not debit the drawer's account and is not entitled to indemnification
from the drawer. 25 The risk of loss must perforce fall on the drawee bank.
However, if the drawee bank can prove a failure by the customer/drawer to exercise ordinary care that substantially contributed to the making of the forged
signature, the drawer is precluded from asserting the forgery.
If at the same time the drawee bank was also negligent to the point of substantially contributing to the loss, then such loss from the forgery can be
apportioned between the negligent drawer and the negligent bank. 26
In cases involving a forged check, where the drawer's signature is forged, the 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 the check to the account of the drawer. The liability chain ends with the drawee bank
whose responsibility it is to know the drawer's signature since the latter is its customer. 27
In cases involving checks with forged indorsements, such as the present petition, the chain of liability does not end with the drawee bank. The drawee
bank may not debit the account of the drawer but may generally pass liability back through the collection chain to the party who took from the forger and,
of course, to the forger himself, if available. 28 In other words, the drawee bank canseek reimbursement or a return of the amount it paid from the presentor
bank or person. 29 Theoretically, the latter can demand reimbursement from the person who indorsed the check to it and so on. The loss falls on the party
who took the check from the forger, or on the forger himself.
In this case, the checks were indorsed by the collecting bank (Associated Bank) to the drawee bank (PNB). The former will necessarily be liable to the
latter for the checks bearing forged indorsements. If the forgery is that of the payee's or holder's indorsement, the collecting bank is held liable, without
prejudice to the latter proceeding against the forger.
Since a forged indorsement is inoperative, the collecting bank had no right to be paid by the drawee bank. The former must necessarily return the money
paid by the latter because it was paid wrongfully. 30
More importantly, by reason of the statutory warranty of a general indorser in section 66 of the Negotiable Instruments Law, a collecting bank which
indorses a check bearing a forged indorsement and presents it to the drawee bank guarantees all prior indorsements, including the forged indorsement. It

59

warrants that the instrument is genuine, and that it is valid and subsisting at the time of his indorsement. Because the indorsement is a forgery, the
collecting bank commits a breach of this warranty and will be accountable to the drawee bank. This liability scheme operates without regard to fault on the
part of the collecting/presenting bank. Even if the latter bank was not negligent, it would still be liable to the drawee bank because of its indorsement.
The Court has consistently ruled that "the collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the genuineness
of all prior endorsements 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 endorsements." 31
The drawee bank is not similarly situated as the collecting bank because the former makes no warranty as to the genuineness. of any indorsement. 32 The
drawee bank's duty is but to verify the genuineness of the drawer's signature and not of the indorsement because the drawer is its client.
Moreover, the collecting bank is made liable because it is privy to the depositor who negotiated the check. The bank knows him, his address and history
because he is a client. It has taken a risk on his deposit. The bank is also in a better position to detect forgery, fraud or irregularity in the indorsement.
Hence, the drawee bank can recover the amount paid on the check bearing a forged indorsement from the collecting bank. However, a drawee bank has
the duty to promptly inform the presentor of the forgery upon discovery. If the drawee bank delays in informing the presentor of the forgery, thereby
depriving said presentor of the right to recover from the forger, the former is deemed negligent and can no longer recover from the presentor. 33
Applying these rules to the case at bench, PNB, the drawee bank, cannot debit the current account of the Province of Tarlac because it paid checks which
bore forged indorsements. However, if the Province of Tarlac as drawer was negligent to the point of substantially contributing to the loss, then the drawee
bank PNB can charge its account. If both drawee bank-PNB and drawer-Province of Tarlac were negligent, the loss should be properly apportioned
between them.
The loss incurred by drawee bank-PNB can be passed on to the collecting bank-Associated Bank which presented and indorsed the checks to it.
Associated Bank can, in turn, hold the forger, Fausto Pangilinan, liable.
If PNB negligently delayed in informing Associated Bank of the forgery, thus depriving the latter of the opportunity to recover from the forger, it forfeits its
right to reimbursement and will be made to bear the loss.
After careful examination of the records, the Court finds that the Province of Tarlac was equally negligent and should, therefore, share the burden of loss
from the checks bearing a forged indorsement.
The Province of Tarlac permitted Fausto Pangilinan to collect the checks when the latter, having already retired from government service, was no longer
connected with the hospital. With the exception of the first check (dated January 17, 1978), all the checks were issued and released after Pangilinan's
retirement on February 28, 1978. After nearly three years, the Treasurer's office was still releasing the checks to the retired cashier. In addition, some of
the aid allotment checks were released to Pangilinan and the others to Elizabeth Juco, the new cashier. The fact that there were now two persons
collecting the checks for the hospital is an unmistakable sign of an irregularity which should have alerted employees in the Treasurer's office of the fraud
being committed. There is also evidence indicating that the provincial employees were aware of Pangilinan's retirement and consequent dissociation from
the hospital. Jose Meru, the Provincial Treasurer, testified:.
ATTY. MORGA:
Q Now, is it true that for a given month there were two releases of checks, one went to Mr. Pangilinan and one went to Miss Juco?
JOSE MERU:
A Yes, sir.
Q Will you please tell us how at the time (sic) when the authorized representative of Concepcion Emergency Hospital is and was supposed to
be Miss Juco?
A Well, as far as my investigation show (sic) the assistant cashier told me that Pangilinan represented himself as also authorized to help in the
release of these checks and we were apparently misled because they accepted the representation of Pangilinan that he was helping them in
the release of the checks and besides according to them they were, Pangilinan, like the rest, was able to present an official receipt to
acknowledge these receipts and according to them since this is a government check and believed that it will eventually go to the hospital
following the standard procedure of negotiating government checks, they released the checks to Pangilinan aside from Miss Juco. 34
The failure of the Province of Tarlac to exercise due care contributed to a significant degree to the loss tantamount to negligence. Hence, the Province of
Tarlac should be liable for part of the total amount paid on the questioned checks.
The drawee bank PNB also breached its duty to pay only according to the terms of the check. Hence, it cannot escape liability and should also bear part
of the loss.
As earlier stated, PNB can recover from the collecting bank.

60

In the case of Associated Bank v. CA, 35 six crossed checks with forged indorsements were deposited in the forger's account with the collecting bank and
were later paid by four different drawee banks. The Court found the collecting bank (Associated) to be negligent and held:
The Bank should have first verified his right to endorse the crossed checks, of which he was not the payee, and to deposit the proceeds of the
checks to his own account. The Bank was by reason of the nature of the checks put upon notice that they were issued for deposit only to the
private respondent's account. . . .
The situation in the case at bench is analogous to the above case, for it was not the payee who deposited the checks with the collecting bank. Here, the
checks were all payable to Concepcion Emergency Hospital but it was Fausto Pangilinan who deposited the checks in his personal savings account.
Although Associated Bank claims that the guarantee stamped on the checks (All prior and/or lack of endorsements guaranteed) is merely a requirement
forced upon it by clearing house rules, it cannot but remain liable. The stamp guaranteeing prior indorsements is not an empty rubric which a bank must
fulfill for the sake of convenience. A bank is not required to accept all the checks negotiated to it. It is within the bank's discretion to receive a check for no
banking institution would consciously or deliberately accept a check bearing a forged indorsement. When a check is deposited with the collecting bank, it
takes a risk on its depositor. It is only logical that this bank be held accountable for checks deposited by its customers.
A delay in informing the collecting bank (Associated Bank) of the forgery, which deprives it of the opportunity to go after the forger, signifies negligence on
the part of the drawee bank (PNB) and will preclude it from claiming reimbursement.
It is here that Associated Bank's assignment of error concerning C.B. Circular No. 580 and Section 23 of the Philippine Clearing House Corporation Rules
comes to fore. Under Section 4(c) of CB Circular No. 580, items bearing a forged endorsement shall be returned within twenty-Sour (24) hours after
discovery of the forgery but in no event beyond the period fixed or provided by law for filing of a legal action by the returning bank. Section 23 of the PCHC
Rules deleted the requirement that items bearing a forged endorsement should be returned within twenty-four hours. Associated Bank now argues that the
aforementioned Central Bank Circular is applicable. Since PNB did not return the questioned checks within twenty-four hours, but several days later,
Associated Bank alleges that PNB should be considered negligent and not entitled to reimbursement of the amount it paid on the checks.
The Court deems it unnecessary to discuss Associated Bank's assertions that CB Circular No. 580 is an administrative regulation issued pursuant to law
and as such, must prevail over the PCHC rule. The Central Bank circular was in force for all banks until June 1980 when the Philippine Clearing House
Corporation (PCHC) was set up and commenced operations. Banks in Metro Manila were covered by the PCHC while banks located elsewhere still had to
go through Central Bank Clearing. In any event, the twenty-four-hour return rule was adopted by the PCHC until it was changed in 1982. The contending
banks herein, which are both branches in Tarlac province, are therefore not covered by PCHC Rules but by CB Circular No. 580. Clearly then, the CB
circular was applicable when the forgery of the checks was discovered in 1981.
The rule mandates that the checks be returned within twenty-four hours after discovery of the forgery but in no event beyond the period fixed by law for
filing a legal action. The rationale of the rule is to give the collecting bank (which indorsed the check) adequate opportunity to proceed against the forger. If
prompt notice is not given, the collecting bank maybe prejudiced and lose the opportunity to go after its depositor.
The Court finds that even if PNB did not return the questioned checks to Associated Bank within twenty-four hours, as mandated by the rule, PNB did not
commit negligent delay. Under the circumstances, PNB gave prompt notice to Associated Bank and the latter bank was not prejudiced in going after
Fausto Pangilinan. After the Province of Tarlac informed PNB of the forgeries, PNB necessarily had to inspect the checks and conduct its own
investigation. Thereafter, it requested the Provincial Treasurer's office on March 31, 1981 to return the checks for verification. The Province of Tarlac
returned the checks only on April 22, 1981. Two days later, Associated Bank received the checks from PNB. 36
Associated Bank was also furnished a copy of the Province's letter of demand to PNB dated March 20, 1981, thus giving it notice of the forgeries. At this
time, however, Pangilinan's account with Associated had only P24.63 in it. 37 Had Associated Bank decided to debit Pangilinan's account, it could not have
recovered the amounts paid on the questioned checks. In addition, while Associated Bank filed a fourth-party complaint against Fausto Pangilinan, it did
not present evidence against Pangilinan and even presented him as its rebuttal witness. 38 Hence, Associated Bank was not prejudiced by PNB's failure to
comply with the twenty-four-hour return rule.
Next, Associated Bank contends that PNB is estopped from requiring reimbursement because the latter paid and cleared the checks. The Court finds this
contention unmeritorious. Even if PNB cleared and paid the checks, it can still recover from Associated Bank. This is true even if the payee's Chief Officer
who was supposed to have indorsed the checks is also a customer of the drawee bank. 39 PNB's duty was to verify the genuineness of the drawer's
signature and not the genuineness of payee's indorsement. Associated Bank, as the collecting bank, is the entity with the duty to verify the genuineness of
the payee's indorsement.
PNB also avers that respondent court erred in adjudging circuitous liability by directing PNB to return to the Province of Tarlac the amount of the checks
and then directing Associated Bank to reimburse PNB. The Court finds nothing wrong with the mode of the award. The drawer, Province of Tarlac, is a
clientor customer of the PNB, not of Associated Bank. There is no privity of contract between the drawer and the collecting bank.
The trial court made PNB and Associated Bank liable with legal interest from March 20, 1981, the date of extrajudicial demand made by the Province of
Tarlac on PNB. The payments to be made in this case stem from the deposits of the Province of Tarlac in its current account with the PNB. Bank deposits
are considered under the law as loans. 40 Central Bank Circular No. 416 prescribes a twelve percent (12%) interest per annum for loans, forebearance of
money, goods or credits in the absence of express stipulation. Normally, current accounts are likewise interest-bearing, by express contract, thus
excluding them from the coverage of CB Circular No. 416. In this case, however, the actual interest rate, if any, for the current account opened by the
Province of Tarlac with PNB was not given in evidence. Hence, the Court deems it wise to affirm the trial court's use of the legal interest rate, or six
percent (6%) per annum. The interest rate shall be computed from the date of default, or the date of judicial or extrajudicial demand. 41 The trial court did
not err in granting legal interest from March 20, 1981, the date of extrajudicial demand.

61

The Court finds as reasonable, the proportionate sharing of fifty percent - fifty percent (50%-50%). Due to the negligence of the Province of Tarlac in
releasing the checks to an unauthorized person (Fausto Pangilinan), in allowing the retired hospital cashier to receive the checks for the payee hospital for
a period close to three years and in not properly ascertaining why the retired hospital cashier was collecting checks for the payee hospital in addition to
the hospital's real cashier, respondent Province contributed to the loss amounting to P203,300.00 and shall be liable to the PNB for fifty (50%) percent
thereof. In effect, the Province of Tarlac can only recover fifty percent (50%) of P203,300.00 from PNB.
The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%) percent of P203,300.00. It is liable on its warranties as indorser of the checks
which were deposited by Fausto Pangilinan, having guaranteed the genuineness of all prior indorsements, including that of the chief of the payee hospital,
Dr. Adena Canlas. Associated Bank was also remiss in its duty to ascertain the genuineness of the payee's indorsement.
IN VIEW OF THE FOREGOING, the petition for review filed by the Philippine National Bank (G.R. No. 107612) is hereby PARTIALLY GRANTED. The
petition for review filed by the Associated Bank (G.R. No. 107382) is hereby DENIED. The decision of the trial court is MODIFIED. The Philippine National
Bank shall pay fifty percent (50%) of P203,300.00 to the Province of Tarlac, with legal interest from March 20, 1981 until the payment thereof. Associated
Bank shall pay fifty percent (50%) of P203,300.00 to the Philippine National Bank, likewise, with legal interest from March 20, 1981 until payment is made.
SO ORDERED.
Regalado, Puno and Mendoza, JJ., concur.

G.R. No. L-55079 November 19, 1982

METROPOLITAN BANK and TRUST COMPANY, petitioner,
vs.
THE FIRST NATIONAL CITY BANK and THE COURT OF APPEALS, respondents.
Resales, Perez & Assoc. for petitioner.
Siguion, Reyna, Montecillo and Ongsiako for respondent PNCB.

MELENCIO-HERRERA, J.:
This is a Petition for Review on certiorari of the Decision of the Court of Appeals in CA-G.R. No. 57129-R entitled, First National City Bank vs. Metropolitan
Bank and Trust Company, which affirmed in toto the Decision of the Court of First Instance of Manila, Branch VIII, in Civil Case No. 61488, ordering
petitioner herein, Metropolitan Bank, to reimburse respondent First National City Bank the amount of P50,000.00, with legal rate of interest from June 25,
1965, and to pay attorney's fees of P5,000.00 and costs.
The controversy arose from the following facts:
On August 25, 1964, Check No. 7166 dated July 8, 1964 for P50,000.00, payable to CASH, drawn by Joaquin Cunanan & Company on First National City
Bank (FNCB for brevity) was deposited with Metropolitan Bank and Trust Company (Metro Bank for short) by a certain Salvador Sales. Earlier that day,

62

Sales had opened a current account with Metro Bank depositing P500.00 in cash. 1 Metro Bank immediately sent the cash check to the Clearing House of
the Central Bank with the following words stamped at the back of the check:
Metropolitan Bank and Trust Company Cleared (illegible) office All prior endorsements and/or Lack of endorsements Guaranteed. 2
The check was cleared the same day. Private respondent paid petitioner through clearing the amount of P50,000.00, and Sales was credited with the said
amount in his deposit with Metro Bank.
On August 26, 1964, Sales made his first withdrawal of P480.00 from his current account. On August 28, 1964, he withdrew P32,100.00. Then on August
31, 1964, he withdrew the balance of P17,920.00 and closed his account with Metro Bank.
On September 3, 1964, or nine (9) days later, FNCB returned cancelled Check No. 7166 to drawer Joaquin Cunanan & Company, together with the
monthly statement of the company's account with FNCB. That same day, the company notified FNCB that the check had been altered. The actual amount
of P50.00 was raised to P50,000.00, and over the name of the payee, Manila Polo Club, was superimposed the word CASH.
FNCB notified Metro Bank of the alteration by telephone, confirming it the same day with a letter, which was received by Metro Bank on the following day,
September 4, 1964.
On September 10, 1964, FNCB wrote Metro Bank asking for reimbursement of the amount of P50,000.00. The latter did not oblige, so that FNCB
reiterated its request on September 29, 1964. Metro Bank was adamant in its refusal.
On June 29, 1965, FNCB filed in the Court of First Instance of Manila, Branch VIII, Civil Case No. 61488 against Metro Bank for recovery of the amount of
P50,000.00.
On January 27, 1975, the Trial Court rendered its Decision ordering Metro Bank to reimburse FNCB the amount of P50,000.00 with legal rate of interest
from June 25, 1965 until fully paid, to pay attorney's fees of P5,000.00, and costs.
Petitioner appealed said Decision to the Court of Appeals (CA-G.R. No. 57129-R). On August 29, 1980, respondent Appellate Court 3 affirmed in toto the
judgment of the Trial Court.
Petitioner came to this instance on appeal by Certiorari, alleging:
I
The Respondent Court of Appeals erred in completely ignoring and disregarding the 24-hour clearing house rule provided for under
Central Bank Circular No. 9, as amended, although:
1. The 24-hour regulation of the Central Bank in clearing house operations is valid and banks are subject to and are bound by the
same; and
2. The 24-hour clearing house rule applies to the present case of the petitioner and the private respondent.
II
The Respondent Court of Appeals erred in relying heavily on its decision in Gallaites, et al. vs. RCA, etc., promulgated on October
23, 1950 for the same is not controlling and is not applicable to the present case.
III
The Respondent Court of Appeals erred in disregarding and in not applying the doctrines in the cases of Republic of the Philippines
vs. Equitable Banking Corporation (10 SCRA 8) and Hongkong & Shanghai Banking Corporation vs. People's Bank and Trust
Company (35 SCRA 140) for the same are controlling and apply four square to the present case.
IV
The Respondent Court of Appeals erred in not finding the private respondent guilty of operative negligence which is the proximate
cause of the loss.
The material facts of the case are not disputed. The issue for resolution is, which bank is liable for the payment of the altered check, the drawee bank
(FNCB) or the collecting bank (Metro Bank)?
The transaction occurred during the effectivity of Central Bank Circular No. 9 (February 17, 1949) as amended by Circular No. 138 (January 30, 1962),
and Circular No. 169 (March 30, 1964). Section 4 of said Circular, as amended, states:
Section 4. Clearing Procedures.

63

(c) Procedures for Returned Items

Items which should be returned for any reason whatsoever shall be delivered to and received through the clearing Office in the
special red envelopes and shall be considered and accounted as debits to the banks to which the items are returned. Nothing in this
section shall prevent the returned items from being settled by reinbursement to the bank, institution or entity returning the items. All
items cleared on a particular clearing shall be returned not later than 3:30 P.M. on the following business day.
xxx xxx xxx
The facts of this case fall within said Circular. Under the procedure prescribed, the drawee bank receiving the check for clearing from the Central Bank
Clearing House must return the check to the collecting bank within the 24-hour period if the check is defective for any reason.
Metro Bank invokes this 24-hour regulation of the Central Bank as its defense. FNCB on the other hand, relies on the guarantee of all previous
indorsements made by Metro Bank which guarantee had allegedly misled FNCB into believing that the check in question was regular and the payee's
indorsements genuine; as well as on "the general rule of law founded on equity and justice that a drawee or payor bank which in good faith pays the
amount of materially altered check to the holder thereof is entitled to recover its payment from the said holder, even if he be an innocent holder. 4
The validity of the 24-hour clearing house regulation has been upheld by this Court in Republic vs. Equitable Banking Corporation, 10 SCRA 8 (1964). As
held therein, since both parties are part of our banking system, and both are subject to the regulations of the Central Bank, they are bound by the 24-hour
clearing house rule of the Central Bank.
In this case, the check was not returned to Metro Bank in accordance with the 24-hour clearing house period, but was cleared by FNCB. Failure of FNCB,
therefore, to call the attention of Metro Bank to the alteration of the check in question until after the lapse of nine days, negates whatever right it might
have had against Metro Bank in the light of the said Central Bank Circular. Its remedy lies not against Metro Bank, but against the party responsible for the
changing the name of the payee 5 and the amount on the face of the check.
FNCB contends that the stamp reading,
Metropolitan Bank and Trust Company Cleared (illegible) office All prior endorsements and/or Lack of endorsements Guaranteed. 6
made by Metro Bank is an unqualified representation that the endorsement on the check was that of the true payee, and that the amount thereon was the
correct amount. In that connection, this Court in the Hongkong & Shanghai Bank case, supra, ruled:
.. But Plaintiff Bank insists that Defendant Bank is liable on its indorsement during clearing house operations. The indorsement,
itself, is very clear when it begins with words 'For clearance, clearing office **** In other words, such an indorsement must be read
together with the 24-hour regulation on clearing House Operations of the Central Bank. Once that 24- hour period is over, the liability
on such an indorsement has ceased. This being so, Plaintiff Bank has not made out a case for relief. 7
Consistent with this ruling, Metro Bank can not be held liable for the payment of the altered check.
Moreover, FNCB did not deny the allegation of Metro Bank that before it allowed the withdrawal of the balance of P17,920.00 by Salvador Sales, Metro
Bank withheld payment and first verified, through its Assistant Cashier Federico Uy, the regularity and genuineness of the check deposit from Marcelo
Mirasol, Department Officer of FNCB, because its (Metro Bank) attention was called by the fast movement of the account. Only upon being assured that
the same is not unusual' did Metro Bank allow the withdrawal of the balance.
Reliance by respondent Court of Appeals, on its own ruling in Gallaites vs. RCA, CA-G.R. No. 3805, October 23, 1950, by stating:
... The laxity of appellant in its dealing with customers, particularly in cases where the Identity of the person is new to them (as in the
case at bar) and in the obvious carelessness of the appellant in handling checks which can easily be forged or altered boil down to
one conclusion-negligence in the first order. This negligence enabled a swindler to succeed in fraudulently encashing the chock in
question thereby defrauding drawee bank (appellee) in the amount thereof.
is misplaced not only because the factual milieu is not four square with this case but more so because it cannot prevail over the doctrine laid down by this
Court in the Hongkong & Shanghai Bank case which is more in point and, hence, controlling:
WHEREFORE, the challenged Decision of respondent Court of Appeals of August 29, 1980 is hereby set aside, and Civil Case No. 61488 is hereby
dismissed.
Costs against private respondent The First National City Bank.
SO ORDERED.
Plana, Vasquez, Relova and Gutierrez, Jr., JJ., concur.
Teehankee ** (Chairman), J., took no part.

64

G.R. No. 42725.

April 22, 1991

REPUBLIC BANK, Petitioner,

v.
COURT OF APPEALS and FIRST NATIONAL CITY BANK, Respondents.
Lourdes C. Dorado for Petitioner.
Siguion Reyna, Montecillo & Ongsiako for private respondent Citibank.

GRIO-AQUINO, J.:

65

On January 25, 1966, San Miguel Corporation (SMC for short), drew a dividend Check No. 108854 for P240, Philippine currency, on its account in the
respondent First National City Bank ("FNCB" for brevity) in favor of J. Roberto C. Delgado, a stockholder. After the check had been delivered to Delgado,
the amount on its face was fraudulently and without authority of the drawer, SMC, altered by increasing it from P240 to P9,240. The check was indorsed
and deposited on March 14, 1966 by Delgado in his account with the petitioner Republic Bank (hereafter "Republic").
Republic accepted the check for deposit without ascertaining its genuineness and regularity. Later, Republic endorsed the check to FNCB by stamping on
the back of the check "all prior and/or lack of indorsement guaranteed" and presented it to FNCB for payment through the Central Bank Clearing House.
Believing the check was genuine, and relying on the guaranty and endorsement of Republic appearing on the back of the check, FNCB paid P9,240 to
Republic through the Central Bank Clearing House on March 15, 1966.
On April 19, 1966, SMC notified FNCB of the material alteration in the amount of the check in question. FNCB lost no time in recrediting P9,240 to SMC.
On May 19, 1966, FNCB informed Republic in writing of the alteration and the forgery of the endorsement of J. Roberto C. Delgado. By then, Delgado had
already withdrawn his account from Republic.
On August 15, 1966, FNCB demanded that Republic refund the P9,240 on the basis of the latters endorsement and guaranty. Republic refused, claiming
there was delay in giving it notice of the alteration; that it was not guilty of negligence; that it was the drawers (SMCs) fault in drawing the check in such a
way as to permit the insertion of numerals increasing the amount; that FNCB, as drawee, was absolved of any liability to the drawer (SMC), thus, FNCB
had no right of recourse against Republic.
On April 8, 1968, the trial court rendered judgment ordering Republic to pay P9,240 to FNCB with 6% interest per annum from February 27, 1967 until fully
paid, plus P2,000 for attorneys fees and costs of the suit. The Court of Appeals affirmed that decision, but modified the award of attorneys fees by
reducing it to P1,000 without pronouncement as to costs (CA-G.R. No. 41691-R, December 22, 1975).chanrobles virtual lawlibrary
In this petition for review, the lone issue is whether Republic, as the collecting bank, is protected, by the 24-hour clearing house rule, found in CB Circular
No. 9, as amended, from liability to refund the amount paid by FNCB, as drawee of the SMC dividend check.
The petition for review is meritorious and must be granted.
The 24-hour clearing house rule embodied in Section 4(c) of Central Bank Circular No. 9, as amended, provides:jgc:chanrobles.com.ph
"Items which should be returned for any reason whatsoever shall be returned directly to the bank, institution or entity from which the item was received.
For this purpose, the Receipt for Returned Checks (Cash Form No. 9) should be used. The original and duplicate copies of said Receipt shall be given to
the Bank, institution or entity which returned the items and the triplicate copy should be retained by the bank, institution or entity whose demand is being
returned. At the following clearing, the original of the Receipt for Returned Checks shall be presented through the Clearing Office as a demand against the
bank, institution or entity whose item has been returned. Nothing in this section shall prevent the returned items from being settled by direct
reimbursement to the bank, institution or entity returning the items. All items cleared at 11:00 oclock A.M. shall be returned not later than 2:00 oclock P.M.
on the same day and all items cleared at 3:00 oclock P.M. shall be returned not later than 8:30 A.M. of the following business day except for items cleared
on Saturday which may be returned not later than 8:30 A.M. of the following day."cralaw virtua1aw library
The 24-hour clearing house rule is a valid rule applicable to commercial banks (Republic v. Equitable Banking Corporation, 10 SCRA 8 [1964];
Metropolitan Bank & Trust Co. v. First National City Bank, 118 SCRA 537).
It is true that when an endorsement is forged, the collecting bank or last endorser, as a general rule, bears the loss (Banco de Oro Savings & Mortgage
Bank v. Equitable Banking Corp., 167 SCRA 188). But the unqualified endorsement of the collecting bank on the check should be read together with the
24-hour regulation on clearing house operation (Metropolitan Bank & Trust Co. v. First National City Bank, supra). Thus, when the drawee bank fails to
return a forged or altered check to the collecting bank within the 24-hour clearing period, the collecting bank is absolved from liability. The following
decisions of this Court are also relevant and persuasive:chanrob1es virtual 1aw library
In Hongkong & Shanghai Banking Corp. v. Peoples Bank & Trust Co. (35 SCRA 140), a check for P14,608.05 was drawn by the Philippine Long Distance
Telephone Company on the Hongkong & Shanghai Banking Corporation payable to the same bank. It was mailed to the payee but fell into the hands of a
certain Florentino Changco who erased the name of the payee, typed his own name, and thereafter deposited the altered check in his account in the
Peoples Bank & Trust Co. which presented it to the drawee bank with the following indorsement:chanrobles law library
"For clearance, clearing office. All prior endorsements and or lack of endorsements guaranteed. Peoples Bank and Trust Company."cralaw virtua1aw
library
The check was cleared by the drawee bank (Hongkong & Shanghai Bank), whereupon the Peoples Bank credited Changco with the amount of the check.
Changco thereafter withdrew the contents of his bank account. A month later, when the check was returned to PLDT, the alteration was discovered. The
Hongkong & Shanghai Bank sued to recover from the Peoples Bank the sum of P14,608.05. The complaint was dismissed. Affirming the decision of the
trial court, this Court held:jgc:chanrobles.com.ph
"The entire case of plaintiff is based on the indorsement that has been heretofore copied namely, a guarantee of all prior indorsement, made by
Peoples Bank and since such an indorsement carries with it a concomitant guarantee of genuineness, the Peoples Bank is liable to the Hongkong
Shanghai Bank for alteration made in the name of payee. On the other hand, the Peoples Bank relies on the 24-hour regulation of the Central Bank that
requires after a clearing, that all cleared items must be returned not later than 3:00 P.M. of the following business day. And since the Hongkong Shanghai
Bank only advised the Peoples Bank as to the alteration on April 12, 1965 or 27 days after clearing, the Peoples Bank claims that it is now too late to do
so. This regulation of the Central Bank as to 24 hours is challenged by Plaintiff Bank as being merely part of an ingenious device to facilitate banking
transactions. Be that what it may as both Plaintiff as well as Defendant Banks are part of our banking system and both are subject to regulations of the
Central Bank they are both bound by such regulations. . . . But Plaintiff Bank insists that Defendant Bank is liable on its indorsement during clearing
house operations. The indorsement, itself, is very clear when it begins with the words `For clearance, clearing office . . . In other words, such an
indorsement must be read together with the 24-hour regulation on clearing House Operations of the Central Bank. Once that 24-hour period is over, the
liability on such an indorsement has ceased. This being so, Plaintiff Bank has not made out a case for relief."cralaw virtua1aw library
"x

"Moreover, in one of the very cases relied upon by plaintiff, as appellant, mention is made of a principle on which defendant Bank could have acted without
incurring the liability now sought to be imposed by plaintiff. Thus: It is a settled rule that a person who presents for payment checks such as are here

66

involved guarantees the genuineness of the check, and the drawee bank need concern itself with nothing but the genuineness of the signature, and the
state of the account with it of the drawee. (Interstate Trust Co. v. United States National Bank, 185 Pac. 260 [1919]). If at all, then, whatever remedy the
plaintiff has would lie not against defendant Bank but as against the party responsible for changing the name of the payee. Its failure to call the attention of
defendant Bank as to such alteration until after the lapse of 27 days would, in the light of the above Central Bank circular, negate whatever right it might
have had against defendant Bank. . . ." (35 SCRA 140, 142-143; 145-146.)
In Metropolitan Bank & Trust Co. v. First National City Bank, Et. Al. (118 SCRA 537, 542) a check for P50, drawn by Joaquin Cunanan and Company on its
account at FNCB and payable to Manila Polo Club, was altered by changing the amount to P50,000 and the payee was changed to "Cash." It was
deposited by a certain Salvador Sales in his current account in the Metropolitan Bank which sent it to the clearing house. The check was cleared the same
day by FNCB which paid the amount of P50,000 to Metro Bank. Sales immediately withdrew the whole amount and closed his account. Nine (9) days
later, the alteration was discovered and FNCB sought to recover from Metro Bank what it had paid. The trial court and the Court of Appeals rendered
judgment for FNCB but this Court reversed it. We ruled:jgc:chanrobles.com.ph
"The validity of the 24-hour clearing house regulation has been upheld by this Court in Republic v. Equitable Banking Corporation, 10 SCRA 8 (1964). As
held therein, since both parties are part of our banking system, and both are subject to the regulations of the Central Bank, they are bound by the 24-hour
clearing house rule of the Central Bank.chanrobles.com.ph : virtual law library
"In this case, the check was not returned to Metro Bank in accordance with the 24-hour clearing house period, but was cleared by FNCB. Failure of FNCB,
therefore, to call the attention of Metro Bank to the alteration of the check in question until after the lapse of nine days, negates whatever right it might
have had against Metro Bank in the light of the said Central Bank Circular. Its remedy lies not against Metro Bank, but against the party responsible for
changing the name of the payee (Hongkong & Shanghai Banking Corp. v. Peoples Bank & Trust Co., 35 SCRA 140) and the amount on the face of the
check." (p. 542.)
Every bank that issues checks for the use of its customers should know whether or not the drawers signature thereon is genuine, whether there are
sufficient funds in the drawers account to cover checks issued, and it should be able to detect alterations, erasures, superimpositions or intercalations
thereon, for these instruments are prepared, printed and issued by itself, it has control of the drawers account, and it is supposed to be familiar with the
drawers signature. It should possess appropriate detecting devices for uncovering forgeries and/or alterations on these instruments. Unless an alteration
is attributable to the fault or negligence of the drawer himself, such as when he leaves spaces on the check which would allow the fraudulent insertion of
additional numerals in the amount appearing thereon, the remedy of the drawee bank that negligently clears a forged and/or altered check for payment is
against the party responsible for the forgery or alteration (Hongkong & Shanghai Banking Corp. v. Peoples Bank & Trust Co., 35 SCRA 140), otherwise, it
bears the loss. It may not charge the amount so paid to the account of the drawer, if the latter was free from blame, nor recover it from the collecting bank
if the latter made payment after proper clearance from the drawee. As this Court pointed out in Philippine National Bank v. Quimpo, Et Al., 158 SCRA 582,
584:jgc:chanrobles.com.ph
"There is nothing inequitable in such a rule for if in the regular course of business the check comes to the drawee bank which, having the opportunity to
ascertain its character, pronounces it to be valid and pays it, it is not only a question of payment under mistake, but payment in neglect of duty which the
commercial law places upon it, and the result of its negligence must rest upon it."cralaw virtua1aw library
The Court of Appeals erred in laying upon Republic, instead of on FNCB the drawee bank, the burden of loss for the payment of the altered SMC check,
the fraudulent character of which FNCB failed to detect and warn Republic about, within the 24-hour clearing house rule. The Court of Appeals departed
from the ruling of this Court in an earlier PNB case, that:jgc:chanrobles.com.ph
"Where a loss, which must be borne by one of two parties alike innocent of forgery, can be traced to the neglect or fault of either, it is reasonable that it
would be borne by him, even if innocent of any intentional fraud, through whose means it has succeeded. (Phil. National Bank v. National City Bank of
New York, 63 Phil. 711, 733.)"
WHEREFORE, the petition for review is granted. The decision of the Court of Appeals is hereby reversed and set aside, and another is entered absolving
the petitioner Republic Bank from liability to refund to the First National City Bank the sum of P9,240, which the latter paid on the check in question. No
costs.
SO ORDERED.
Narvasa, Gancayco and Medialdea, JJ., concur.
Cruz, J., took no part.

G.R. No. 121413

January 29, 2001

PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly INSULAR BANK OF ASIA AND AMERICA), petitioner,
vs.
COURT OF APPEALS and FORD PHILIPPINES, INC. and CITIBANK, N.A., respondents.

G.R. No. 121479

January 29, 2001

67

FORD PHILIPPINES, INC., petitioner-plaintiff,

vs.
COURT OF APPEALS and CITIBANK, N.A. and PHILIPPINE COMMERCIAL INTERNATIONAL BANK, respondents.

G.R. No. 128604

January 29, 2001

FORD PHILIPPINES, INC., petitioner,

vs.
CITIBANK, N.A., PHILIPPINE COMMERCIAL INTERNATIONAL BANK and COURT OF APPEALS, respondents.
QUISUMBING, J.:
These consolidated petitions involve several fraudulently negotiated checks.
The original actions a quo were instituted by Ford Philippines to recover from the drawee bank, CITIBANK, N.A. (Citibank) and collecting bank, Philippine
Commercial International Bank (PCIBank) [formerly Insular Bank of Asia and America], the value of several checks payable to the Commissioner of
Internal Revenue, which were embezzled allegedly by an organized syndicate.1wphi1.nt
G.R. Nos. 121413 and 121479 are twin petitions for review of the March 27, 1995 Decision1 of the Court of Appeals in CA-G.R. CV No. 25017, entitled
"Ford Philippines, Inc. vs. Citibank, N.A. and Insular Bank of Asia and America (now Philipppine Commercial International Bank), and the August 8, 1995
Resolution,2 ordering the collecting bank, Philippine Commercial International Bank, to pay the amount of Citibank Check No. SN-04867.
In G.R. No. 128604, petitioner Ford Philippines assails the October 15, 1996 Decision 3 of the Court of Appeals and its March 5, 1997 Resolution4 in CAG.R. No. 28430 entitled "Ford Philippines, Inc. vs. Citibank, N.A. and Philippine Commercial International Bank," affirming in toto the judgment of the trial
court holding the defendant drawee bank, Citibank, N.A., solely liable to pay the amount of P12,163,298.10 as damages for the misapplied proceeds of
the plaintiff's Citibanl Check Numbers SN-10597 and 16508.
I. G.R. Nos. 121413 and 121479
The stipulated facts submitted by the parties as accepted by the Court of Appeals are as follows:
"On October 19, 1977, the plaintiff Ford drew and issued its Citibank Check No. SN-04867 in the amount of P4,746,114.41, in favor of the
Commissioner of Internal Revenue as payment of plaintiff;s percentage or manufacturer's sales taxes for the third quarter of 1977.
The aforesaid check was deposited with the degendant IBAA (now PCIBank) and was subsequently cleared at the Central Bank. Upon
presentment with the defendant Citibank, the proceeds of the check was paid to IBAA as collecting or depository bank.
The proceeds of the same Citibank check of the plaintiff was never paid to or received by the payee thereof, the Commissioner of Internal
Revenue.
As a consequence, upon demand of the Bureau and/or Commissioner of Internal Revenue, the plaintiff was compelled to make a second
payment to the Bureau of Internal Revenue of its percentage/manufacturers' sales taxes for the third quarter of 1977 and that said second
payment of plaintiff in the amount of P4,746,114.41 was duly received by the Bureau of Internal Revenue.
It is further admitted by defendant Citibank that during the time of the transactions in question, plaintiff had been maintaining a checking
account with defendant Citibank; that Citibank Check No. SN-04867 which was drawn and issued by the plaintiff in favor of the Commissioner
of Internal Revenue was a crossed check in that, on its face were two parallel lines and written in between said lines was the phrase "Payee's
Account Only"; and that defendant Citibank paid the full face value of the check in the amount of P4,746,114.41 to the defendant IBAA.
It has been duly established that for the payment of plaintiff's percentage tax for the last quarter of 1977, the Bureau of Internal Revenue issued
Revenue Tax Receipt No. 18747002, dated October 20, 1977, designating therein in Muntinlupa, Metro Manila, as the authorized agent bank of
Metrobanl, Alabang branch to receive the tax payment of the plaintiff.
On December 19, 1977, plaintiff's Citibank Check No. SN-04867, together with the Revenue Tax Receipt No. 18747002, was deposited with
defendant IBAA, through its Ermita Branch. The latter accepted the check and sent it to the Central Clearing House for clearing on the samd
day, with the indorsement at the back "all prior indorsements and/or lack of indorsements guaranteed." Thereafter, defendant IBAA presented
the check for payment to defendant Citibank on same date, December 19, 1977, and the latter paid the face value of the check in the amount
of P4,746,114.41. Consequently, the amount of P4,746,114.41 was debited in plaintiff's account with the defendant Citibank and the check was
returned to the plaintiff.
Upon verification, plaintiff discovered that its Citibank Check No. SN-04867 in the amount of P4,746,114.41 was not paid to the Commissioner
of Internal Revenue. Hence, in separate letters dated October 26, 1979, addressed to the defendants, the plaintiff notified the latter that in case
it will be re-assessed by the BIR for the payment of the taxes covered by the said checks, then plaintiff shall hold the defendants liable for
reimbursement of the face value of the same. Both defendants denied liability and refused to pay.
In a letter dated February 28, 1980 by the Acting Commissioner of Internal Revenue addressed to the plaintiff - supposed to be Exhibit "D", the
latter was officially informed, among others, that its check in the amount of P4, 746,114.41 was not paid to the government or its authorized
agent and instead encashed by unauthorized persons, hence, plaintiff has to pay the said amount within fifteen days from receipt of the letter.
Upon advice of the plaintiff's lawyers, plaintiff on March 11, 1982, paid to the Bureau of Internal Revenue, the amount of P4,746,114.41,
representing payment of plaintiff's percentage tax for the third quarter of 1977.

68

As a consequence of defendant's refusal to reimburse plaintiff of the payment it had made for the second time to the BIR of its percentage
taxes, plaintiff filed on January 20, 1983 its original complaint before this Court.
On December 24, 1985, defendant IBAA was merged with the Philippine Commercial International Bank (PCI Bank) with the latter as the
surviving entity.
Defendant Citibank maintains that; the payment it made of plaintiff's Citibank Check No. SN-04867 in the amount of P4,746,114.41 "was in due
course"; it merely relied on the clearing stamp of the depository/collecting bank, the defendant IBAA that "all prior indorsements and/or lack of
indorsements guaranteed"; and the proximate cause of plaintiff's injury is the gross negligence of defendant IBAA in indorsing the plaintiff's
Citibank check in question.
It is admitted that on December 19, 1977 when the proceeds of plaintiff's Citibank Check No. SN-048867 was paid to defendant IBAA as
collecting bank, plaintiff was maintaining a checking account with defendant Citibank."5
Although it was not among the stipulated facts, an investigation by the National Bureau of Investigation (NBI) revealed that Citibank Check No. SN-04867
was recalled by Godofredo Rivera, the General Ledger Accountant of Ford. He purportedly needed to hold back the check because there was an error in
the computation of the tax due to the Bureau of Internal Revenue (BIR). With Rivera's instruction, PCIBank replaced the check with two of its own
Manager's Checks (MCs). Alleged members of a syndicate later deposited the two MCs with the Pacific Banking Corporation.
Ford, with leave of court, filed a third-party complaint before the trial court impleading Pacific Banking Corporation (PBC) and Godofredo Rivera, as third
party defendants. But the court dismissed the complaint against PBC for lack of cause of action. The course likewise dismissed the third-party complaint
against Godofredo Rivera because he could not be served with summons as the NBI declared him as a "fugitive from justice".
On June 15, 1989, the trial court rendered its decision, as follows:
"Premises considered, judgment is hereby rendered as follows:
"1. Ordering the defendants Citibank and IBAA (now PCI Bank), jointly and severally, to pay the plaintiff the amount of
P4,746,114.41 representing the face value of plaintiff's Citibank Check No. SN-04867, with interest thereon at the legal rate starting
January 20, 1983, the date when the original complaint was filed until the amount is fully paid, plus costs;
"2. On defendant Citibank's cross-claim: ordering the cross-defendant IBAA (now PCI Bank) to reimburse defendant Citibank for
whatever amount the latter has paid or may pay to the plaintiff in accordance with next preceding paragraph;
"3. The counterclaims asserted by the defendants against the plaintiff, as well as that asserted by the cross-defendant against the
cross-claimant are dismissed, for lack of merits; and
"4. With costs against the defendants.
SO ORDERED."6
Not satisfied with the said decision, both defendants, Citibank and PCIBank, elevated their respective petitions for review on certiorari to the Courts of
Appeals. On March 27, 1995, the appellate court issued its judgment as follows:
"WHEREFORE, in view of the foregoing, the court AFFIRMS the appealed decision with modifications.
The court hereby renderes judgment:
1. Dismissing the complaint in Civil Case No. 49287 insofar as defendant Citibank N.A. is concerned;
2. Ordering the defendant IBAA now PCI Bank to pay the plaintiff the amount of P4,746,114.41 representing the face value of
plaintiff's Citibank Check No. SN-04867, with interest thereon at the legal rate starting January 20, 1983, the date when the original
complaint was filed until the amount is fully paid;
3. Dismissing the counterclaims asserted by the defendants against the plaintiff as well as that asserted by the cross-defendant
against the cross-claimant, for lack of merits.
Costs against the defendant IBAA (now PCI Bank).
IT IS SO ORDERED."7
PCI Bank moved to reconsider the above-quoted decision of the Court of Appeals, while Ford filed a "Motion for Partial Reconsideration." Both motions
were denied for lack of merit.
Separately, PCIBank and Ford filed before this Court, petitions for review by certiorari under Rule 45.
In G.R. No. 121413, PCIBank seeks the reversal of the decision and resolution of the Twelfth Division of the Court of Appeals contending that it merely
acted on the instruction of Ford and such casue of action had already prescribed.
PCIBank sets forth the following issues for consideration:

69

I. Did the respondent court err when, after finding that the petitioner acted on the check drawn by respondent Ford on the said respondent's
instructions, it nevertheless found the petitioner liable to the said respondent for the full amount of the said check.
II. Did the respondent court err when it did not find prescription in favor of the petitioner. 8
In a counter move, Ford filed its petition docketed as G.R. No. 121479, questioning the same decision and resolution of the Court of Appeals, and praying
for the reinstatement in toto of the decision of the trial court which found both PCIBank and Citibank jointly and severally liable for the loss.
In G.R. No. 121479, appellant Ford presents the following propositions for consideration:
I. Respondent Citibank is liable to petitioner Ford considering that:
1. As drawee bank, respondent Citibank owes to petitioner Ford, as the drawer of the subject check and a depositor of respondent
Citibank, an absolute and contractual duty to pay the proceeds of the subject check only to the payee thereof, the Commissioner of
Internal Revenue.
2. Respondent Citibank failed to observe its duty as banker with respect to the subject check, which was crossed and payable to
"Payee's Account Only."
3. Respondent Citibank raises an issue for the first time on appeal; thus the same should not be considered by the Honorable Court.
4. As correctly held by the trial court, there is no evidence of gross negligence on the part of petitioner Ford. 9
II. PCI Bank is liable to petitioner Ford considering that:
1. There were no instructions from petitioner Ford to deliver the proceeds of the subject check to a person other than the payee
named therein, the Commissioner of the Bureau of Internal Revenue; thus, PCIBank's only obligation is to deliver the proceeds to
the Commissioner of the Bureau of Internal Revenue.10
2. PCIBank which affixed its indorsement on the subject check ("All prior indorsement and/or lack of indorsement guaranteed"), is
liable as collecting bank.11
3. PCIBank is barred from raising issues of fact in the instant proceedings.12
4. Petitioner Ford's cause of action had not prescribed.13
II. G.R. No. 128604
The same sysndicate apparently embezzled the proceeds of checks intended, this time, to settle Ford's percentage taxes appertaining to the second
quarter of 1978 and the first quarter of 1979.
The facts as narrated by the Court of Appeals are as follows:
Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount of P5,851,706.37 representing the percentage tax due for the second quarter of
1978 payable to the Commissioner of Internal Revenue. A BIR Revenue Tax Receipt No. 28645385 was issued for the said purpose.
On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in the amount of P6,311,591.73, representing the payment of percentage tax for the
first quarter of 1979 and payable to the Commissioner of Internal Revenue. Again a BIR Revenue Tax Receipt No. A-1697160 was issued for the said
purpose.
Both checks were "crossed checks" and contain two diagonal lines on its upper corner between, which were written the words "payable to the payee's
account only."
The checks never reached the payee, CIR. Thus, in a letter dated February 28, 1980, the BIR, Region 4-B, demanded for the said tax payments the
corresponding periods above-mentioned.
As far as the BIR is concernced, the said two BIR Revenue Tax Receipts were considered "fake and spurious". This anomaly was confirmed by the NBI
upon the initiative of the BIR. The findings forced Ford to pay the BIR a new, while an action was filed against Citibank and PCIBank for the recovery of
the amount of Citibank Check Numbers SN-10597 and 16508.
The Regional Trial Court of Makati, Branch 57, which tried the case, made its findings on the modus operandi of the syndicate, as follows:
"A certain Mr. Godofredo Rivera was employed by the plaintiff FORD as its General Ledger Accountant. As such, he prepared the plaintiff's
check marked Ex. 'A' [Citibank Check No. Sn-10597] for payment to the BIR. Instead, however, fo delivering the same of the payee, he passed
on the check to a co-conspirator named Remberto Castro who was a pro-manager of the San Andres Branch of PCIB.* In connivance with one
Winston Dulay, Castro himself subsequently opened a Checking Account in the name of a fictitious person denominated as 'Reynaldo reyes' in
the Meralco Branch of PCIBank where Dulay works as Assistant Manager.
After an initial deposit of P100.00 to validate the account, Castro deposited a worthless Bank of America Check in exactly the same amount as
the first FORD check (Exh. "A", P5,851,706.37) while this worthless check was coursed through PCIB's main office enroute to the Central Bank
for clearing, replaced this worthless check with FORD's Exhibit 'A' and accordingly tampered the accompanying documents to cover the

70

replacement. As a result, Exhibit 'A' was cleared by defendant CITIBANK, and the fictitious deposit account of 'Reynaldo Reyes' was credited at
the PCIB Meralco Branch with the total amount of the FORD check Exhibit 'A'. The same method was again utilized by the syndicate in profiting
from Exh. 'B' [Citibank Check No. SN-16508] which was subsequently pilfered by Alexis Marindo, Rivera's Assistant at FORD.
From this 'Reynaldo Reyes' account, Castro drew various checks distributing the sahres of the other participating conspirators namely (1)
CRISANTO BERNABE, the mastermind who formulated the method for the embezzlement; (2) RODOLFO R. DE LEON a customs broker who
negotiated the initial contact between Bernabe, FORD's Godofredo Rivera and PCIB's Remberto Castro; (3) JUAN VASTILLO who assisted de
Leon in the initial arrangements; (4) GODOFREDO RIVERA, FORD's accountant who passed on the first check (Exhibit "A") to Castro; (5)
REMERTO CASTRO, PCIB's pro-manager at San Andres who performed the switching of checks in the clearing process and opened the
fictitious Reynaldo Reyes account at the PCIB Meralco Branch; (6) WINSTON DULAY, PCIB's Assistant Manager at its Meralco Branch, who
assisted Castro in switching the checks in the clearing process and facilitated the opening of the fictitious Reynaldo Reyes' bank account; (7)
ALEXIS MARINDO, Rivera's Assistant at FORD, who gave the second check (Exh. "B") to Castro; (8) ELEUTERIO JIMENEZ, BIR Collection
Agent who provided the fake and spurious revenue tax receipts to make it appear that the BIR had received FORD's tax payments.
Several other persons and entities were utilized by the syndicate as conduits in the disbursements of the proceeds of the two checks, but like
the aforementioned participants in the conspiracy, have not been impleaded in the present case. The manner by which the said funds were
distributed among them are traceable from the record of checks drawn against the original "Reynaldo Reyes" account and indubitably identify
the parties who illegally benefited therefrom and readily indicate in what amounts they did so."14
On December 9, 1988, Regional Trial Court of Makati, Branch 57, held drawee-bank, Citibank, liable for the value of the two checks while adsolving
PCIBank from any liability, disposing as follows:
"WHEREFORE, judgment is hereby rendered sentencing defendant CITIBANK to reimburse plaintiff FORD the total amount of P12,163,298.10
prayed for in its complaint, with 6% interest thereon from date of first written demand until full payment, plus P300,000.00 attorney's fees and
expenses litigation, and to pay the defendant, PCIB (on its counterclaim to crossclaim) the sum of P300,000.00 as attorney's fees and costs of
litigation, and pay the costs.
SO ORDERED."15
Both Ford and Citibank appealed to the Court of Appeals which affirmed, in toto, the decision of the trial court. Hence, this petition.
Petitioner Ford prays that judgment be rendered setting aside the portion of the Court of Appeals decision and its resolution dated March 5, 1997, with
respect to the dismissal of the complaint against PCIBank and holding Citibank solely responsible for the proceeds of Citibank Check Numbers SN-10597
and 16508 for P5,851,706.73 and P6,311,591.73 respectively.
Ford avers that the Court of Appeals erred in dismissing the complaint against defendant PCIBank considering that:
I. Defendant PCIBank was clearly negligent when it failed to exercise the diligence required to be exercised by it as a banking insitution.
II. Defendant PCIBank clearly failed to observe the diligence required in the selection and supervision of its officers and employees.
III. Defendant PCIBank was, due to its negligence, clearly liable for the loss or damage resulting to the plaintiff Ford as a consequence of the
substitution of the check consistent with Section 5 of Central Bank Circular No. 580 series of 1977.
IV. Assuming arguedo that defedant PCIBank did not accept, endorse or negotiate in due course the subject checks, it is liable, under Article
2154 of the Civil Code, to return the money which it admits having received, and which was credited to it its Central bank account. 16
The main issue presented for our consideration by these petitions could be simplified as follows: Has petitioner Ford the right to recover from the collecting
bank (PCIBank) and the drawee bank (Citibank) the value of the checks intended as payment to the Commissioner of Internal Revenue? Or has Ford's
cause of action already prescribed?
Note that in these cases, the checks were drawn against the drawee bank, but the title of the person negotiating the same was allegedly defective
because the instrument was obtained by fraud and unlawful means, and the proceeds of the checks were not remitted to the payee. It was established
that instead of paying the checks to the CIR, for the settlement of the approprite quarterly percentage taxes of Ford, the checks were diverted and
encashed for the eventual distribution among the mmbers of the syndicate. As to the unlawful negotiation of the check the applicable law is Section 55 of
the Negotiable Instruments Law (NIL), which provides:
"When title defective -- The title of a person who negotiates an instrument is defective within the meaning of this Act when he obtained the
instrument, or any signature thereto, by fraud, duress, or fore and fear, or other unlawful means, or for an illegal consideration, or when he
negotiates it in breach of faith or under such circumstances as amount to a fraud."
Pursuant to this provision, it is vital to show that the negotiation is made by the perpetator in breach of faith amounting to fraud. The person negotiating the
checks must have gone beyond the authority given by his principal. If the principal could prove that there was no negligence in the performance of his
duties, he may set up the personal defense to escape liability and recover from other parties who. Though their own negligence, alowed the commission of
the crime.
In this case, we note that the direct perpetrators of the offense, namely the embezzlers belonging to a syndicate, are now fugitives from justice. They
have, even if temporarily, escaped liability for the embezzlement of millions of pesos. We are thus left only with the task of determining who of the present
parties before us must bear the burden of loss of these millions. It all boils down to thequestion of liability based on the degree of negligence among the
parties concerned.
Foremost, we must resolve whether the injured party, Ford, is guilty of the "imputed contributory negligence" that would defeat its claim for reimbursement,
bearing ing mind that its employees, Godofredo Rivera and Alexis Marindo, were among the members of the syndicate.

71

Citibank points out that Ford allowed its very own employee, Godofredo Rivera, to negotiate the checks to his co-conspirators, instead of delivering them
to the designated authorized collecting bank (Metrobank-Alabang) of the payee, CIR. Citibank bewails the fact that Ford was remiss in the supervision and
control of its own employees, inasmuch as it only discovered the syndicate's activities through the information given by the payee of the checks after an
unreasonable period of time.
PCIBank also blames Ford of negligence when it allegedly authorized Godofredo Rivera to divert the proceeds of Citibank Check No. SN-04867, instead
of using it to pay the BIR. As to the subsequent run-around of unds of Citibank Check Nos. SN-10597 and 16508, PCIBank claims that the proximate
cause of the damge to Ford lies in its own officers and employees who carried out the fradulent schemes and the transactions. These circumstances were
not checked by other officers of the company including its comptroller or internal auditor. PCIBank contends that the inaction of Ford despite the enormity
of the amount involved was a sheer negligence and stated that, as between two innocent persons, one of whom must suffer the consequences of a
breach of trust, the one who made it possible, by his act of negligence, must bear the loss.
For its part, Ford denies any negligence in the performance of its duties. It avers that there was no evidence presented before the trial court showing lack
of diligence on the part of Ford. And, citing the case of Gempesaw vs. Court of Appeals,17 Ford argues that even if there was a finding therein that the
drawer was negligent, the drawee bank was still ordered to pay damages.
Furthermore, Ford contends the Godofredo rivera was not authorized to make any representation in its behalf, specifically, to divert the proceeds of the
checks. It adds that Citibank raised the issue of imputed negligence against Ford for the first time on appeal. Thus, it should not be considered by this
Court.
On this point, jurisprudence regarding the imputed negligence of employer in a master-servant relationship is instructive. Since a master may be held for
his servant's wrongful act, the law imputes to the master the act of the servant, and if that act is negligent or wrongful and proximately results in injury to a
third person, the negligence or wrongful conduct is the negligence or wrongful conduct of the master, for which he is liable.18 The general rule is that if the
master is injured by the negligence of a third person and by the concuring contributory negligence of his own servant or agent, the latter's negligence is
imputed to his superior and will defeat the superior's action against the third person, asuming, of course that the contributory negligence was the
proximate cause of the injury of which complaint is made.19
Accordingly, we need to determine whether or not the action of Godofredo Rivera, Ford's General Ledger Accountant, and/or Alexis Marindo, his assistant,
was the proximate cause of the loss or damage. AS defined, proximate cause is that which, in the natural and continuous sequence, unbroken by any
efficient, intervening cause produces the injury and without the result would not have occurred.20
It appears that although the employees of Ford initiated the transactions attributable to an organized syndicate, in our view, their actions were not the
proximate cause of encashing the checks payable to the CIR. The degree of Ford's negligence, if any, could not be characterized as the proximate cause
of the injury to the parties.
The Board of Directors of Ford, we note, did not confirm the request of Godofredo Rivera to recall Citibank Check No. SN-04867. Rivera's instruction to
replace the said check with PCIBank's Manager's Check was not in theordinary course of business which could have prompted PCIBank to validate the
same.
As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it was established that these checks were made payable to the CIR. Both were
crossed checks. These checks were apparently turned around by Ford's emploees, who were acting on their own personal capacity.
Given these circumstances, the mere fact that the forgery was committed by a drawer-payor's confidential employee or agent, who by virtue of his position
had unusual facilities for perpertrating the fraud and imposing the forged paper upon the bank, does notentitle the bank toshift the loss to the drawerpayor, in the absence of some circumstance raising estoppel against the drawer.21 This rule likewise applies to the checks fraudulently negotiated or
diverted by the confidential employees who hold them in their possession.
With respect to the negligence of PCIBank in the payment of the three checks involved, separately, the trial courts found variations between the
negotiation of Citibank Check No. SN-04867 and the misapplication of total proceeds of Checks SN-10597 and 16508. Therefore, we have to scrutinize,
separately, PCIBank's share of negligence when the syndicate achieved its ultimate agenda of stealing the proceeds of these checks.
G.R. Nos. 121413 and 121479
Citibank Check No. SN-04867 was deposited at PCIBank through its Ermita Branch. It was coursed through the ordinary banking transaction, sent to
Central Clearing with the indorsement at the back "all prior indorsements and/or lack of indorsements guaranteed," and was presented to Citibank for
payment. Thereafter PCIBank, instead of remitting the proceeds to the CIR, prepared two of its Manager's checks and enabled the syndicate to encash
the same.
On record, PCIBank failed to verify the authority of Mr. Rivera to negotiate the checks. The neglect of PCIBank employees to verify whether his letter
requesting for the replacement of the Citibank Check No. SN-04867 was duly authorized, showed lack of care and prudence required in the
circumstances.
Furthermore, it was admitted that PCIBank is authorized to collect the payment of taxpayers in behalf of the BIR. As an agent of BIR, PCIBank is duty
bound to consult its principal regarding the unwarranted instructions given by the payor or its agent. As aptly stated by the trial court, to wit:
"xxx. Since the questioned crossed check was deposited with IBAA [now PCIBank], which claimed to be a depository/collecting bank of BIR, it
has the responsibility to make sure that the check in question is deposited in Payee's account only.
xxx

xxx

xxx

As agent of the BIR (the payee of the check), defendant IBAA should receive instructions only from its principal BIR and not from any other
person especially so when that person is not known to the defendant. It is very imprudent on the part of the defendant IBAA to just rely on the
alleged telephone call of the one Godofredo Rivera and in his signature considering that the plaintiff is not a client of the defendant IBAA."

72

It is a well-settled rule that the relationship between the payee or holder of commercial paper and the bank to which it is sent for collection is, in the
absence of an argreement to the contrary, that of principal and agent.22 A bank which receives such paper for collection is the agent of the payee or
holder.23
Even considering arguendo, that the diversion of the amount of a check payable to the collecting bank in behalf of the designated payee may be allowed,
still such diversion must be properly authorized by the payor. Otherwise stated, the diversion can be justified only by proof of authority from the drawer, or
that the drawer has clothed his agent with apparent authority to receive the proceeds of such check.
Citibank further argues that PCI Bank's clearing stamp appearing at the back of the questioned checks stating that ALL PRIOR INDORSEMENTS
AND/OR LACK OF INDORSEMENTS GURANTEED should render PCIBank liable because it made it pass through the clearing house and therefore
Citibank had no other option but to pay it. Thus, Citibank had no other option but to pay it. Thus, Citibank assets that the proximate cause of Ford's injury
is the gross negligence of PCIBank. Since the questione dcrossed check was deposited with PCIBank, which claimed to be a depository/collecting bank of
the BIR, it had the responsibility to make sure that the check in questions is deposited in Payee's account only.
Indeed, the crossing of the check with the phrase "Payee's Account Only," is a warning that the check should be deposited only in the account of the CIR.
Thus, it is the duty of the collecting bank PCIBank to ascertain that the check be deposited in payee's account only. Therefore, it is the collecting bank
(PCIBank) which is bound to scruninize the check and to know its depositors before it could make the clearing indorsement "all prior indorsements and/or
lack of indorsement guaranteed".
In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corporation,24 we ruled:
"Anent petitioner's liability on said instruments, this court is in full accord with the ruling of the PCHC's Board of Directors that:
'In presenting the checks for clearing and for payment, the defendant made an express guarantee on the validity of "all prior endorsements."
Thus, stamped at the back of the checks are the defedant's clear warranty: ALL PRIOR ENDORSEMENTS AND/OR LACK OF
ENDORSEMENTS GUARANTEED. Without such warranty, plaintiff would not have paid on the checks.'
No amount of legal jargon can reverse the clear meaning of defendant's warranty. As the warranty has proven to be false and inaccurate, the
defendant is liable for any damage arising out of the falsity of its representation."25
Lastly, banking business requires that the one who first cashes and negotiates the check must take some percautions to learn whether or not it is genuine.
And if the one cashing the check through indifference or othe circumstance assists the forger in committing the fraud, he should not be permitted to retain
the proceeds of the check from the drawee whose sole fault was that it did not discover the forgery or the defect in the title of the person negotiating the
instrument before paying the check. For this reason, a bank which cashes a check drawn upon another bank, without requiring proof as to the identity of
persons presenting it, or making inquiries with regard to them, cannot hold the proceeds against the drawee when the proceeds of the checks were
afterwards diverted to the hands of a third party. In such cases the drawee bank has a right to believe that the cashing bank (or the collecting bank) had,
by the usual proper investigation, satisfied itself of the authenticity of the negotiation of the checks. Thus, one who encashed a check which had been
forged or diverted and in turn received payment thereon from the drawee, is guilty of negligence which proximately contributed to the success of the fraud
practiced on the drawee bank. The latter may recover from the holder the money paid on the check.26
Having established that the collecting bank's negligence is the proximate cause of the loss, we conclude that PCIBank is liable in the amount
corresponding to the proceeds of Citibank Check No. SN-04867.
G.R. No. 128604
The trial court and the Court of Appeals found that PCIBank had no official act in the ordinary course of business that would attribute to it the case of the
embezzlement of Citibank Check Numbers SN-10597 and 16508, because PCIBank did not actually receive nor hold the two Ford checks at all. The trial
court held, thus:
"Neither is there any proof that defendant PCIBank contributed any official or conscious participation in the process of the embezzlement. This
Court is convinced that the switching operation (involving the checks while in transit for "clearing") were the clandestine or hidden actuations
performed by the members of the syndicate in their own personl, covert and private capacity and done without the knowledge of the defendant
PCIBank"27
In this case, there was no evidence presented confirming the conscious particiapation of PCIBank in the embezzlement. As a general rule, however, a
banking corporation is liable for the wrongful or tortuous acts and declarations of its officers or agents within the course and scope of their employment. 28 A
bank will be held liable for the negligence of its officers or agents when acting within the course and scope of their employment. It may be liable for the
tortuous acts of its officers even as regards that species of tort of which malice is an essential element. In this case, we find a situation where the PCIBank
appears also to be the victim of the scheme hatched by a syndicate in which its own management employees had particiapted.
The pro-manager of San Andres Branch of PCIBank, Remberto Castro, received Citibank Check Numbers SN-10597 and 16508. He passed the checks to
a co-conspirator, an Assistant Manager of PCIBank's Meralco Branch, who helped Castro open a Checking account of a fictitious person named
"Reynaldo Reyes." Castro deposited a worthless Bank of America Check in exactly the same amount of Ford checks. The syndicate tampered with the
checks and succeeded in replacing the worthless checks and the eventual encashment of Citibank Check Nos. SN 10597 and 16508. The PCIBank Ptromanager, Castro, and his co-conspirator Assistant Manager apparently performed their activities using facilities in their official capacity or authority but for
their personal and private gain or benefit.
A bank holding out its officers and agents as worthy of confidence will not be permitted to profit by the frauds these officers or agents were enabled to
perpetrate in the apparent course of their employment; nor will t be permitted to shirk its responsibility for such frauds, even though no benefit may accrue
to the bank therefrom. For the general rule is that a bank is liable for the fraudulent acts or representations of an officer or agent acting within the course
and apparent scope of his employment or authority.29 And if an officer or employee of a bank, in his official capacity, receives money to satisfy an evidence
of indebetedness lodged with his bank for collection, the bank is liable for his misappropriation of such sum.30

73

Moreover, as correctly pointed out by Ford, Section 531 of Central Bank Circular No. 580, Series of 1977 provides that any theft affecting items in transit for
clearing, shall be for the account of sending bank, which in this case is PCIBank.
But in this case, responsibility for negligence does not lie on PCIBank's shoulders alone.
The evidence on record shows that Citibank as drawee bank was likewise negligent in the performance of its duties. Citibank failed to establish that its
payment of Ford's checjs were made in due course and legally in order. In its defense, Citibank claims the genuineness and due execution of said checks,
considering that Citibank (1) has no knowledge of any informity in the issuance of the checks in question (2) coupled by the fact that said checks were
sufficiently funded and (3) the endorsement of the Payee or lack thereof was guaranteed by PCI Bank (formerly IBAA), thus, it has the obligation to honor
and pay the same.
For its part, Ford contends that Citibank as the drawee bank owes to Ford an absolute and contractual duty to pay the proceeds of the subject check only
to the payee thereof, the CIR. Citing Section 6232 of the Negotiable Instruments Law, Ford argues that by accepting the instrument, the acceptro which is
Citibank engages that it will pay according to the tenor of its acceptance, and that it will pay only to the payee, (the CIR), considering the fact that here the
check was crossed with annotation "Payees Account Only."
As ruled by the Court of Appeals, Citibank must likewise answer for the damages incurred by Ford on Citibank Checks Numbers SN 10597 and 16508,
because of the contractual relationship existing between the two. Citibank, as the drawee bank breached its contractual obligation with Ford and such
degree of culpability contributed to the damage caused to the latter. On this score, we agree with the respondent court's ruling.
Citibank should have scrutinized Citibank Check Numbers SN 10597 and 16508 before paying the amount of the proceeds thereof to the collecting bank
of the BIR. One thing is clear from the record: the clearing stamps at the back of Citibank Check Nos. SN 10597 and 16508 do not bear any initials.
Citibank failed to notice and verify the absence of the clearing stamps. Had this been duly examined, the switching of the worthless checks to Citibank
Check Nos. 10597 and 16508 would have been discovered in time. For this reason, Citibank had indeed failed to perform what was incumbent upon it,
which is to ensure that the amount of the checks should be paid only to its designated payee. The fact that the drawee bank did not discover the
irregularity seasonably, in our view, consitutes negligence in carrying out the bank's duty to its depositors. The point is that as a business affected with
public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always
having in mind the fiduciary nature of their relationship.33
Thus, invoking the doctrine of comparative negligence, we are of the view that both PCIBank and Citibank failed in their respective obligations and both
were negligent in the selection and supervision of their employees resulting in the encashment of Citibank Check Nos. SN 10597 AND 16508. Thus, we
are constrained to hold them equally liable for the loss of the proceeds of said checks issued by Ford in favor of the CIR.
Time and again, we have stressed that banking business is so impressed with public interest where the trust and confidence of the public in general is of
paramount umportance such that the appropriate standard of diligence must be very high, if not the highest, degree of diligence.34 A bank's liability as
obligor is not merely vicarious but primary, wherein the defense of exercise of due diligence in the selection and supervision of its employees is of no
moment.35
Banks handle daily transactions involving millions of pesos.36 By the very nature of their work the degree of responsibility, care and trustworthiness
expected of their employees and officials is far greater than those of ordinary clerks and employees. 37 Banks are expected to exercise the highest degree
of diligence in the selection and supervision of their employees.38
On the issue of prescription, PCIBank claims that the action of Ford had prescribed because of its inability to seek judicial relief seasonably, considering
that the alleged negligent act took place prior to December 19, 1977 but the relief was sought only in 1983, or seven years thereafter.
The statute of limitations begins to run when the bank gives the depositor notice of the payment, which is ordinarily when the check is returned to the
alleged drawer as a voucher with a statement of his account,39 and an action upon a check is ordinarily governed by the statutory period applicable to
instruments in writing.40
Our laws on the matter provide that the action upon a written contract must be brought within ten year from the time the right of action accrues. 41 hence,
the reckoning time for the prescriptive period begins when the instrument was issued and the corresponding check was returned by the bank to its
depositor (normally a month thereafter). Applying the same rule, the cause of action for the recovery of the proceeds of Citibank Check No. SN 04867
would normally be a month after December 19, 1977, when Citibank paid the face value of the check in the amount of P4,746,114.41. Since the original
complaint for the cause of action was filed on January 20, 1984, barely six years had lapsed. Thus, we conclude that Ford's cause of action to recover the
amount of Citibank Check No. SN 04867 was seasonably filed within the period provided by law.
Finally, we also find thet Ford is not completely blameless in its failure to detect the fraud. Failure on the part of the depositor to examine its passbook,
statements of account, and cancelled checks and to give notice within a reasonable time (or as required by statute) of any discrepancy which it may in the
exercise of due care and diligence find therein, serves to mitigate the banks' liability by reducing the award of interest from twelve percent (12%) to six
percent (6%) per annum. As provided in Article 1172 of the Civil Code of the Philippines, respondibility arising from negligence in the performance of every
kind of obligation is also demandable, but such liability may be regulated by the courts, according to the circumstances. In quasi-delicts, the contributory
negligence of the plaintiff shall reduce the damages that he may recover.42
WHEREFORE, the assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 25017 are AFFIRMED. PCIBank, know formerly as
Insular Bank of Asia and America, id declared solely responsible for the loss of the proceeds of Citibank Check No SN 04867 in the amount
P4,746,114.41, which shall be paid together with six percent (6%) interest thereon to Ford Philippines Inc. from the date when the original complaint was
filed until said amount is fully paid.
However, the Decision and Resolution of the Court of Appeals in CA-G.R. No. 28430 are MODIFIED as follows: PCIBank and Citibank are adjudged liable
for and must share the loss, (concerning the proceeds of Citibank Check Numbers SN 10597 and 16508 totalling P12,163,298.10) on a fifty-fifty ratio, and
each bank is ORDERED to pay Ford Philippines Inc. P6,081,649.05, with six percent (6%) interest thereon, from the date the complaint was filed until full
payment of said amount.1wphi1.nt
Costs against Philippine Commercial International Bank and Citibank N.A.

74

SO ORDERED.
Bellosillo, Mendoza, Buena, De Leon, Jr., JJ, concur.

G.R. No. 139130

November 27, 2002

RAMON K. ILUSORIO, petitioner,

vs.
HON. COURT OF APPEALS, and THE MANILA BANKING CORPORATION, respondents.

75

DECISION
QUISUMBING, J.:
This petition for review seeks to reverse the decision1 promulgated on January 28, 1999 by the Court of Appeals in CA-G.R. CV No. 47942, affirming the
decision of the then Court of First Instance of Rizal, Branch XV (now the Regional Trial Court of Makati, Branch 138) dismissing Civil Case No. 43907, for
damages.
The facts as summarized by the Court of Appeals are as follows:
Petitioner is a prominent businessman who, at the time material to this case, was the Managing Director of Multinational Investment Bancorporation and
the Chairman and/or President of several other corporations. He was a depositor in good standing of respondent bank, the Manila Banking Corporation,
under current Checking Account No. 06-09037-0. As he was then running about 20 corporations, and was going out of the country a number of times,
petitioner entrusted to his secretary, Katherine2 E. Eugenio, his credit cards and his checkbook with blank checks. It was also Eugenio who verified and
reconciled the statements of said checking account.3
Between the dates September 5, 1980 and January 23, 1981, Eugenio was able to encash and deposit to her personal account about seventeen (17)
checks drawn against the account of the petitioner at the respondent bank, with an aggregate amount of P119,634.34. Petitioner did not bother to check
his statement of account until a business partner apprised him that he saw Eugenio use his credit cards. Petitioner fired Eugenio immediately, and
instituted a criminal action against her for estafa thru falsification before the Office of the Provincial Fiscal of Rizal. Private respondent, through an affidavit
executed by its employee, Mr. Dante Razon, also lodged a complaint for estafa thru falsification of commercial documents against Eugenio on the basis of
petitioners statement that his signatures in the checks were forged.4 Mr. Razons affidavit states:
That I have examined and scrutinized the following checks in accordance with prescribed verification procedures with utmost care and diligence by
comparing the signatures affixed thereat against the specimen signatures of Mr. Ramon K. Ilusorio which we have on file at our said office on such dates,
xxx
That the aforementioned checks were among those issued by Manilabank in favor of its client MR. RAMON K. ILUSORIO,
That the same were personally encashed by KATHERINE E. ESTEBAN, an executive secretary of MR. RAMON K. ILUSORIO in said Investment
Corporation;
That I have met and known her as KATHERINE E. ESTEBAN the attending verifier when she personally encashed the above-mentioned checks at our
said office;
That MR. RAMON K. ILUSORIO executed an affidavit expressly disowning his signature appearing on the checks further alleged to have not authorized
the issuance and encashment of the same.5
Petitioner then requested the respondent bank to credit back and restore to its account the value of the checks which were wrongfully encashed but
respondent bank refused. Hence, petitioner filed the instant case.6
At the trial, petitioner testified on his own behalf, attesting to the truth of the circumstances as narrated above, and how he discovered the alleged
forgeries. Several employees of Manila Bank were also called to the witness stand as hostile witnesses. They testified that it is the banks standard
operating procedure that whenever a check is presented for encashment or clearing, the signature on the check is first verified against the specimen
signature cards on file with the bank.
Manila Bank also sought the expertise of the National Bureau of Investigation (NBI) in determining the genuineness of the signatures appearing on the
checks. However, in a letter dated March 25, 1987, the NBI informed the trial court that they could not conduct the desired examination for the reason that
the standard specimens submitted were not sufficient for purposes of rendering a definitive opinion. The NBI then suggested that petitioner be asked to
submit seven (7) or more additional standard signatures executed before or about, and immediately after the dates of the questioned checks. Petitioner,
however, failed to comply with this request.
After evaluating the evidence on both sides, the court a quo rendered judgment on May 12, 1994 with the following dispositive portion:
WHEREFORE, finding no sufficient basis for plaintiff's cause herein against defendant bank, in the light of the foregoing considerations and established
facts, this case would have to be, as it is hereby DISMISSED.
Defendants counterclaim is likewise DISMISSED for lack of sufficient basis.
SO ORDERED.7
Aggrieved, petitioner elevated the case to the Court of Appeals by way of a petition for review but without success. The appellate court held that
petitioners own negligence was the proximate cause of his loss. The appellate court disposed as follows:
WHEREFORE, the judgment appealed from is AFFIRMED. Costs against the appellant.

76

SO ORDERED.8
Before us, petitioner ascribes the following errors to the Court of Appeals:
A. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE RESPONDENT BANK IS ESTOPPED FROM RAISING THE DEFENSE THAT
THERE WAS NO FORGERY OF THE SIGNATURES OF THE PETITIONER IN THE CHECK BECAUSE THE RESPONDENT FILED A CRIMINAL
COMPLAINT FOR ESTAFA THRU FALSIFICATION OF COMMERCIAL DOCUMENTS AGAINST KATHERINE EUGENIO USING THE AFFIDAVIT OF
PETITIONER STATING THAT HIS SIGNATURES WERE FORGED AS PART OF THE AFFIDAVIT-COMPLAINT. 9
B. THE COURT OF APPEALS ERRED IN NOT APPLYING SEC. 23, NEGOTIABLE INSTRUMENTS LAW. 10
C. THE COURT OF APPEALS ERRED IN NOT HOLDING THE BURDEN OF PROOF IS WITH THE RESPONDENT BANK TO PROVE THE DUE
DILIGENCE TO PREVENT DAMAGE, TO THE PETITIONER, AND THAT IT WAS NOT NEGLIGENT IN THE SELECTION AND SUPERVISION OF ITS
EMPLOYEES.11
D. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT BANK SHOULD BEAR THE LOSS, AND SHOULD BE MADE TO PAY
PETITIONER, WITH RECOURSE AGAINST KATHERINE EUGENIO ESTEBAN. 12
Essentially the issues in this case are: (1) whether or not petitioner has a cause of action against private respondent; and (2) whether or not private
respondent, in filing an estafa case against petitioners secretary, is barred from raising the defense that the fact of forgery was not established.
Petitioner contends that Manila Bank is liable for damages for its negligence in failing to detect the discrepant checks. He adds that as a general rule a
bank which has obtained possession of a check upon an unauthorized or forged endorsement of the payees signature and which collects the amount of
the check from the drawee is liable for the proceeds thereof to the payee. Petitioner invokes the doctrine of estoppel, saying that having itself instituted a
forgery case against Eugenio, Manila Bank is now estopped from asserting that the fact of forgery was never proven.
For its part, Manila Bank contends that respondent appellate court did not depart from the accepted and usual course of judicial proceedings, hence there
is no reason for the reversal of its ruling. Manila Bank additionally points out that Section 23 13 of the Negotiable Instruments Law is inapplicable,
considering that the fact of forgery was never proven. Lastly, the bank negates petitioners claim of estoppel. 14
On the first issue, we find that petitioner has no cause of action against Manila Bank. To be entitled to damages, petitioner has the burden of proving
negligence on the part of the bank for failure to detect the discrepancy in the signatures on the checks. It is incumbent upon petitioner to establish the fact
of forgery, i.e., by submitting his specimen signatures and comparing them with those on the questioned checks. Curiously though, petitioner failed to
submit additional specimen signatures as requested by the National Bureau of Investigation from which to draw a conclusive finding regarding forgery. The
Court of Appeals found that petitioner, by his own inaction, was precluded from setting up forgery. Said the appellate court:
We cannot fault the court a quo for such declaration, considering that the plaintiffs evidence on the alleged forgery is not convincing enough. The burden
to prove forgery was upon the plaintiff, which burden he failed to discharge. Aside from his own testimony, the appellant presented no other evidence to
prove the fact of forgery. He did not even submit his own specimen signatures, taken on or about the date of the questioned checks, for examination and
comparison with those of the subject checks. On the other hand, the appellee presented specimen signature cards of the appellant, taken at various
years, namely, in 1976, 1979 and 1981 (Exhibits "1", "2", "3" and "7"), showing variances in the appellants unquestioned signatures. The evidence further
shows that the appellee, as soon as it was informed by the appellant about his questioned signatures, sought to borrow the questioned checks from the
appellant for purposes of analysis and examination (Exhibit "9"), but the same was denied by the appellant. It was also the former which sought the
assistance of the NBI for an expert analysis of the signatures on the questioned checks, but the same was unsuccessful for lack of sufficient specimen
signatures.15
Moreover, petitioners contention that Manila Bank was remiss in the exercise of its duty as drawee lacks factual basis. Consistently, the CA and the RTC
found that Manila Bank employees exercised due diligence in cashing the checks. The banks employees in the present case did not have a hint as to
Eugenios modus operandi because she was a regular customer of the bank, having been designated by petitioner himself to transact in his behalf.
According to the appellate court, the employees of the bank exercised due diligence in the performance of their duties. Thus, it found that:
The evidence on both sides indicates that TMBCs employees exercised due diligence before encashing the checks. Its verifiers first verified the drawers
signatures thereon as against his specimen signature cards, and when in doubt, the verifier went further, such as by referring to a more experienced
verifier for further verification. In some instances the verifier made a confirmation by calling the depositor by phone. It is only after taking such
precautionary measures that the subject checks were given to the teller for payment.
Of course it is possible that the verifiers of TMBC might have made a mistake in failing to detect any forgery -- if indeed there was. However, a mistake is
not equivalent to negligence if they were honest mistakes. In the instant case, we believe and so hold that if there were mistakes, the same were not
deliberate, since the bank took all the precautions.16
As borne by the records, it was petitioner, not the bank, who was negligent. Negligence is the omission to do something which a reasonable man, guided
by those considerations which ordinarily regulate the conduct of human affairs, would do, or the doing of something which a prudent and reasonable man
would do.17 In the present case, it appears that petitioner accorded his secretary unusual degree of trust and unrestricted access to his credit cards,
passbooks, check books, bank statements, including custody and possession of cancelled checks and reconciliation of accounts. Said the Court of
Appeals on this matter:

77

Moreover, the appellant had introduced his secretary to the bank for purposes of reconciliation of his account, through a letter dated July 14, 1980 (Exhibit
"8"). Thus, the said secretary became a familiar figure in the bank. What is worse, whenever the bank verifiers call the office of the appellant, it is the same
secretary who answers and confirms the checks.
The trouble is, the appellant had put so much trust and confidence in the said secretary, by entrusting not only his credit cards with her but also his
checkbook with blank checks. He also entrusted to her the verification and reconciliation of his account. Further adding to his injury was the fact that while
the bank was sending him the monthly Statements of Accounts, he was not personally checking the same. His testimony did not indicate that he was out
of the country during the period covered by the checks. Thus, he had all the opportunities to verify his account as well as the cancelled checks issued
thereunder -- month after month. But he did not, until his partner asked him whether he had entrusted his credit card to his secretary because the said
partner had seen her use the same. It was only then that he was minded to verify the records of his account. 18
The abovecited findings are binding upon the reviewing court. We stress the rule that the factual findings of a trial court, especially when affirmed by the
appellate court, are binding upon us19 and entitled to utmost respect20 and even finality. We find no palpable error that would warrant a reversal of the
appellate courts assessment of facts anchored upon the evidence on record.
Petitioners failure to examine his bank statements appears as the proximate cause of his own damage. Proximate cause is that cause, which, in natural
and continuous sequence, unbroken by any efficient intervening cause, produces the injury, and without which the result would not have occurred. 21 In the
instant case, the bank was not shown to be remiss in its duty of sending monthly bank statements to petitioner so that any error or discrepancy in the
entries therein could be brought to the banks attention at the earliest opportunity. But, petitioner failed to examine these bank statements not because he
was prevented by some cause in not doing so, but because he did not pay sufficient attention to the matter. Had he done so, he could have been alerted
to any anomaly committed against him. In other words, petitioner had sufficient opportunity to prevent or detect any misappropriation by his secretary had
he only reviewed the status of his accounts based on the bank statements sent to him regularly. In view of Article 2179 of the New Civil Code, 22 when the
plaintiffs own negligence was the immediate and proximate cause of his injury, no recovery could be had for damages.
Petitioner further contends that under Section 23 of the Negotiable Instruments Law a forged check is inoperative, and that Manila Bank had no authority
to pay the forged checks. True, it is a rule that when a signature is forged or made without the authority of the person whose signature it purports to be,
the check is wholly inoperative. No right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party, can be
acquired through or under such signature. However, the rule does provide for an exception, namely: "unless the party against whom it is sought to enforce
such right is precluded from setting up the forgery or want of authority." In the instant case, it is the exception that applies. In our view, petitioner is
precluded from setting up the forgery, assuming there is forgery, due to his own negligence in entrusting to his secretary his credit cards and checkbook
including the verification of his statements of account.
Petitioners reliance on Associated Bank vs. Court of Appeals23 and Philippine Bank of Commerce vs. CA24 to buttress his contention that respondent
Manila Bank as the collecting or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior endorsements is
misplaced. In the cited cases, the fact of forgery was not in issue. In the present case, the fact of forgery was not established with certainty. In those cited
cases, the collecting banks were held to be negligent for failing to observe precautionary measures to detect the forgery. In the case before us, both courts
below uniformly found that Manila Banks personnel diligently performed their duties, having compared the signature in the checks from the specimen
signatures on record and satisfied themselves that it was petitioners.
On the second issue, the fact that Manila Bank had filed a case for estafa against Eugenio would not estop it from asserting the fact that forgery has not
been clearly established. Petitioner cannot hold private respondent in estoppel for the latter is not the actual party to the criminal action. In a criminal
action, the State is the plaintiff, for the commission of a felony is an offense against the State. 25 Thus, under Section 2, Rule 110 of the Rules of Court the
complaint or information filed in court is required to be brought in the name of the "People of the Philippines." 26
Further, as petitioner himself stated in his petition, respondent bank filed the estafa case against Eugenio on the basis of petitioners own affidavit, 27 but
without admitting that he had any personal knowledge of the alleged forgery. It is, therefore, easy to understand that the filing of the estafa case by
respondent bank was a last ditch effort to salvage its ties with the petitioner as a valuable client, by bolstering the estafa case which he filed against his
secretary.All told, we find no reversible error that can be ascribed to the Court of Appeals.
WHEREFORE, the instant petition is DENIED for lack of merit. The assailed decision of the Court of Appeals dated January 28, 1999 in CA-G.R. CV No.
47942, is AFFIRMED. Costs against petitioner.
SO ORDERED.
Bellosillo, Acting C.J., (Chairman), Mendoza, Austria-Martinez, and Callejo, Sr., JJ., concur.

78

G.R. No. 129015

August 13, 2004

SAMSUNG CONSTRUCTION COMPANY PHILIPPINES, INC., petitioner,

vs.
FAR EAST BANK AND TRUST COMPANY AND COURT OF APPEALS, respondents.

DECISION

TINGA, J.:
Called to fore in the present petition is a classic textbook question if a bank pays out on a forged check, is it liable to reimburse the drawer from whose
account the funds were paid out? The Court of Appeals, in reversing a trial court decision adverse to the bank, invoked tenuous reasoning to acquit the
bank of liability. We reverse, applying time-honored principles of law.
The salient facts follow.
Plaintiff Samsung Construction Company Philippines, Inc. ("Samsung Construction"), while based in Bian, Laguna, maintained a current account with
defendant Far East Bank and Trust Company1 ("FEBTC") at the latters Bel-Air, Makati branch.2 The sole signatory to Samsung Constructions account
was Jong Kyu Lee ("Jong"), its Project Manager,3 while the checks remained in the custody of the companys accountant, Kyu Yong Lee ("Kyu"). 4
On 19 March 1992, a certain Roberto Gonzaga presented for payment FEBTC Check No. 432100 to the banks branch in Bel-Air, Makati. The check,
payable to cash and drawn against Samsung Constructions current account, was in the amount of Nine Hundred Ninety Nine Thousand Five Hundred
Pesos (P999,500.00). The bank teller, Cleofe Justiani, first checked the balance of Samsung Constructions account. After ascertaining there were enough
funds to cover the check,5 she compared the signature appearing on the check with the specimen signature of Jong as contained in the specimen
signature card with the bank. After comparing the two signatures, Justiani was satisfied as to the authenticity of the signature appearing on the check. She
then asked Gonzaga to submit proof of his identity, and the latter presented three (3) identification cards.6
At the same time, Justiani forwarded the check to the branch Senior Assistant Cashier Gemma Velez, as it was bank policy that two bank branch officers
approve checks exceeding One Hundred Thousand Pesos, for payment or encashment. Velez likewise counterchecked the signature on the check as
against that on the signature card. He too concluded that the check was indeed signed by Jong. Velez then forwarded the check and signature card to
Shirley Syfu, another bank officer, for approval. Syfu then noticed that Jose Sempio III ("Sempio"), the assistant accountant of Samsung Construction, was
also in the bank. Sempio was well-known to Syfu and the other bank officers, he being the assistant accountant of Samsung Construction. Syfu showed
the check to Sempio, who vouched for the genuineness of Jongs signature. Confirming the identity of Gonzaga, Sempio said that the check was for the
purchase of equipment for Samsung Construction. Satisfied with the genuineness of the signature of Jong, Syfu authorized the banks encashment of the
check to Gonzaga.
The following day, the accountant of Samsung Construction, Kyu, examined the balance of the bank account and discovered that a check in the amount of
Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00) had been encashed. Aware that he had not prepared such a check for Jongs
signature, Kyu perused the checkbook and found that the last blank check was missing.7 He reported the matter to Jong, who then proceeded to the bank.
Jong learned of the encashment of the check, and realized that his signature had been forged. The Bank Manager reputedly told Jong that he would be
reimbursed for the amount of the check.8 Jong proceeded to the police station and consulted with his lawyers.9 Subsequently, a criminal case for qualified
theft was filed against Sempio before the Laguna court.10
In a letter dated 6 May 1992, Samsung Construction, through counsel, demanded that FEBTC credit to it the amount of Nine Hundred Ninety Nine
Thousand Five Hundred Pesos (P999,500.00), with interest.11 In response, FEBTC said that it was still conducting an investigation on the matter.
Unsatisfied, Samsung Construction filed a Complaint on 10 June 1992 for violation of Section 23 of the Negotiable Instruments Law, and prayed for the
payment of the amount debited as a result of the questioned check plus interest, and attorneys fees. 12 The case was docketed as Civil Case No. 9261506 before the Regional Trial Court ("RTC") of Manila, Branch 9.13
During the trial, both sides presented their respective expert witnesses to testify on the claim that Jongs signature was forged. Samsung Corporation,
which had referred the check for investigation to the NBI, presented Senior NBI Document Examiner Roda B. Flores. She testified that based on her
examination, she concluded that Jongs signature had been forged on the check. On the other hand, FEBTC, which had sought the assistance of the
Philippine National Police (PNP),14 presented Rosario C. Perez, a document examiner from the PNP Crime Laboratory. She testified that her findings
showed that Jongs signature on the check was genuine.15

79

Confronted with conflicting expert testimony, the RTC chose to believe the findings of the NBI expert. In a Decision dated 25 April 1994, the RTC held that
Jongs signature on the check was forged and accordingly directed the bank to pay or credit back to Samsung Constructions account the amount of Nine
Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00), together with interest tolled from the time the complaint was filed, and attorneys fees
in the amount of Fifteen Thousand Pesos (P15,000.00).
FEBTC timely appealed to the Court of Appeals. On 28 November 1996, the Special Fourteenth Division of the Court of Appeals rendered a Decision,16
reversing the RTC Decision and absolving FEBTC from any liability. The Court of Appeals held that the contradictory findings of the NBI and the PNP
created doubt as to whether there was forgery.17 Moreover, the appellate court also held that assuming there was forgery, it occurred due to the
negligence of Samsung Construction, imputing blame on the accountant Kyu for lack of care and prudence in keeping the checks, which if observed would
have prevented Sempio from gaining access thereto.18 The Court of Appeals invoked the ruling in PNB v. National City Bank of New York19 that, if a loss,
which must be borne by one or two innocent persons, can be traced to the neglect or fault of either, such loss would be borne by the negligent party, even
if innocent of intentional fraud.20
Samsung Construction now argues that the Court of Appeals had seriously misapprehended the facts when it overturned the RTCs finding of forgery. It
also contends that the appellate court erred in finding that it had been negligent in safekeeping the check, and in applying the equity principle enunciated
in PNB v. National City Bank of New York.
Since the trial court and the Court of Appeals arrived at contrary findings on questions of fact, the Court is obliged to examine the record to draw out the
correct conclusions. Upon examination of the record, and based on the applicable laws and jurisprudence, we reverse the Court of Appeals.
Section 23 of the Negotiable Instruments Law states:
When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no
right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired
through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or
want of authority. (Emphasis supplied)
The general rule is to the effect that a forged signature is "wholly inoperative," and payment made "through or under such signature" is ineffectual or does
not discharge the instrument.21 If payment is made, the drawee cannot charge it to the drawers account. The traditional justification for the result is that
the drawee is in a superior position to detect a forgery because he has the makers signature and is expected to know and compare it. 22 The rule has a
healthy cautionary effect on banks by encouraging care in the comparison of the signatures against those on the signature cards they have on file.
Moreover, the very opportunity of the drawee to insure and to distribute the cost among its customers who use checks makes the drawee an ideal party to
spread the risk to insurance.23
Brady, in his treatise The Law of Forged and Altered Checks, elucidates:
When a person deposits money in a general account in a bank, against which he has the privilege of drawing checks in the ordinary course of
business, the relationship between the bank and the depositor is that of debtor and creditor. So far as the legal relationship between the two is
concerned, the situation is the same as though the bank had borrowed money from the depositor, agreeing to repay it on demand, or had
bought goods from the depositor, agreeing to pay for them on demand. The bank owes the depositor money in the same sense that any debtor
owes money to his creditor. Added to this, in the case of bank and depositor, there is, of course, the banks obligation to pay checks drawn by
the depositor in proper form and presented in due course. When the bank receives the deposit, it impliedly agrees to pay only upon the
depositors order. When the bank pays a check, on which the depositors signature is a forgery, it has failed to comply with its contract in this
respect. Therefore, the bank is held liable.
The fact that the forgery is a clever one is immaterial. The forged signature may so closely resemble the genuine as to defy detection by the
depositor himself. And yet, if a bank pays the check, it is paying out its own money and not the depositors.
The forgery may be committed by a trusted employee or confidential agent. The bank still must bear the loss. Even in a case where the forged
check was drawn by the depositors partner, the loss was placed upon the bank. The case referred to is Robinson v. Security Bank, Ark., 216 S.
W. Rep. 717. In this case, the plaintiff brought suit against the defendant bank for money which had been deposited to the plaintiffs credit and
which the bank had paid out on checks bearing forgeries of the plaintiffs signature.
xxx
It was held that the bank was liable. It was further held that the fact that the plaintiff waited eight or nine months after discovering the forgery,
before notifying the bank, did not, as a matter of law, constitute a ratification of the payment, so as to preclude the plaintiff from holding the
bank liable. xxx
This rule of liability can be stated briefly in these words: "A bank is bound to know its depositors signature." The rule is variously expressed in
the many decisions in which the question has been considered. But they all sum up to the proposition that a bank must know the signatures of
those whose general deposits it carries.24
By no means is the principle rendered obsolete with the advent of modern commercial transactions. Contemporary texts still affirm this well-entrenched
standard. Nickles, in his book Negotiable Instruments and Other Related Commercial Paper wrote, thus:
The deposit contract between a payor bank and its customer determines who can draw against the customers account by specifying whose
signature is necessary on checks that are chargeable against the customers account. Therefore, a check drawn against the account of an
individual customer that is signed by someone other than the customer, and without authority from her, is not properly payable and is not
chargeable to the customers account, inasmuch as any "unauthorized signature on an instrument is ineffective" as the signature of the person
whose name is signed.25
Under Section 23 of the Negotiable Instruments Law, forgery is a real or absolute defense by the party whose signature is forged. 26 On the premise that
Jongs signature was indeed forged, FEBTC is liable for the loss since it authorized the discharge of the forged check. Such liability attaches even if the

80

bank exerts due diligence and care in preventing such faulty discharge. Forgeries often deceive the eye of the most cautious experts; and when a bank
has been so deceived, it is a harsh rule which compels it to suffer although no one has suffered by its being deceived. 27 The forgery may be so near like
the genuine as to defy detection by the depositor himself, and yet the bank is liable to the depositor if it pays the check. 28
Thus, the first matter of inquiry is into whether the check was indeed forged. A document formally presented is presumed to be genuine until it is proved to
be fraudulent. In a forgery trial, this presumption must be overcome but this can only be done by convincing testimony and effective illustrations. 29
In ruling that forgery was not duly proven, the Court of Appeals held:
[There] is ground to doubt the findings of the trial court sustaining the alleged forgery in view of the conflicting conclusions made by handwriting
experts from the NBI and the PNP, both agencies of the government.
xxx
These contradictory findings create doubt on whether there was indeed a forgery. In the case of Tenio-Obsequio v. Court of Appeals, 230 SCRA
550, the Supreme Court held that forgery cannot be presumed; it must be proved by clear, positive and convincing evidence.
This reasoning is pure sophistry. Any litigator worth his or her salt would never allow an opponents expert witness to stand uncontradicted, thus the
spectacle of competing expert witnesses is not unusual. The trier of fact will have to decide which version to believe, and explain why or why not such
version is more credible than the other. Reliance therefore cannot be placed merely on the fact that there are colliding opinions of two experts, both
clothed with the presumption of official duty, in order to draw a conclusion, especially one which is extremely crucial. Doing so is tantamount to a
jurisprudential cop-out.
Much is expected from the Court of Appeals as it occupies the penultimate tier in the judicial hierarchy. This Court has long deferred to the appellate court
as to its findings of fact in the understanding that it has the appropriate skill and competence to plough through the minutiae that scatters the factual field.
In failing to thoroughly evaluate the evidence before it, and relying instead on presumptions haphazardly drawn, the Court of Appeals was sadly remiss. Of
course, courts, like humans, are fallible, and not every error deserves a stern rebuke. Yet, the appellate courts error in this case warrants special
attention, as it is absurd and even dangerous as a precedent. If this rationale were adopted as a governing standard by every court in the land, barely any
actionable claim would prosper, defeated as it would be by the mere invocation of the existence of a contrary "expert" opinion.
On the other hand, the RTC did adjudge the testimony of the NBI expert as more credible than that of the PNP, and explained its reason behind the
conclusion:
After subjecting the evidence of both parties to a crucible of analysis, the court arrived at the conclusion that the testimony of the NBI document
examiner is more credible because the testimony of the PNP Crime Laboratory Services document examiner reveals that there are a lot of
differences in the questioned signature as compared to the standard specimen signature. Furthermore, as testified to by Ms. Rhoda Flores, NBI
expert, the manner of execution of the standard signatures used reveals that it is a free rapid continuous execution or stroke as shown by the
tampering terminal stroke of the signatures whereas the questioned signature is a hesitating slow drawn execution stroke. Clearly, the person
who executed the questioned signature was hesitant when the signature was made.30
During the testimony of PNP expert Rosario Perez, the RTC bluntly noted that "apparently, there [are] differences on that questioned signature and the
standard signatures."31 This Court, in examining the signatures, makes a similar finding. The PNP expert excused the noted "differences" by asserting that
they were mere "variations," which are normal deviations found in writing.32 Yet the RTC, which had the opportunity to examine the relevant documents
and to personally observe the expert witness, clearly disbelieved the PNP expert. The Court similarly finds the testimony of the PNP expert as
unconvincing. During the trial, she was confronted several times with apparent differences between strokes in the questioned signature and the genuine
samples. Each time, she would just blandly assert that these differences were just "variations,"33 as if the mere conjuration of the word would sufficiently
disquiet whatever doubts about the deviations. Such conclusion, standing alone, would be of little or no value unless supported by sufficiently cogent
reasons which might amount almost to a demonstration.34
The most telling difference between the questioned and genuine signatures examined by the PNP is in the final upward stroke in the signature, or "the
point to the short stroke of the terminal in the capital letter L," as referred to by the PNP examiner who had marked it in her comparison chart as "point
no. 6." To the plain eye, such upward final stroke consists of a vertical line which forms a ninety degree (90) angle with the previous stroke. Of the twenty
one (21) other genuine samples examined by the PNP, at least nine (9) ended with an upward stroke.35 However, unlike the questioned signature, the
upward strokes of eight (8) of these signatures are looped, while the upward stroke of the seventh36 forms a severe forty-five degree (45) with the
previous stroke. The difference is glaring, and indeed, the PNP examiner was confronted with the inconsistency in point no. 6.
Q: Now, in this questioned document point no. 6, the "s" stroke is directly upwards.
A: Yes, sir.
Q: Now, can you look at all these standard signature (sic) were (sic) point 6 is repeated or the last stroke "s" is pointing directly upwards?
A: There is none in the standard signature, sir.37
Again, the PNP examiner downplayed the uniqueness of the final stroke in the questioned signature as a mere variation, 38 the same excuse she proffered
for the other marked differences noted by the Court and the counsel for petitioner.39
There is no reason to doubt why the RTC gave credence to the testimony of the NBI examiner, and not the PNP experts. The NBI expert, Rhoda Flores,
clearly qualifies as an expert witness. A document examiner for fifteen years, she had been promoted to the rank of Senior Document Examiner with the
NBI, and had held that rank for twelve years prior to her testimony. She had placed among the top five examinees in the Competitive Seminar in Question
Document Examination, conducted by the NBI Academy, which qualified her as a document examiner.40 She had trained with the Royal Hongkong Police
Laboratory and is a member of the International Association for Identification.41 As of the time she testified, she had examined more than fifty to fifty-five
thousand questioned documents, on an average of fifteen to twenty documents a day.42 In comparison, PNP document examiner Perez admitted to having
examined only around five hundred documents as of her testimony.43

81

In analyzing the signatures, NBI Examiner Flores utilized the scientific comparative examination method consisting of analysis, recognition, comparison
and evaluation of the writing habits with the use of instruments such as a magnifying lense, a stereoscopic microscope, and varied lighting substances.
She also prepared enlarged photographs of the signatures in order to facilitate the necessary comparisons.44 She compared the questioned signature as
against ten (10) other sample signatures of Jong. Five of these signatures were executed on checks previously issued by Jong, while the other five
contained in business letters Jong had signed.45 The NBI found that there were significant differences in the handwriting characteristics existing between
the questioned and the sample signatures, as to manner of execution, link/connecting strokes, proportion characteristics, and other identifying details. 46
The RTC was sufficiently convinced by the NBI examiners testimony, and explained her reasons in its Decisions. While the Court of Appeals disagreed
and upheld the findings of the PNP, it failed to convincingly demonstrate why such findings were more credible than those of the NBI expert. As a
throwaway, the assailed Decision noted that the PNP, not the NBI, had the opportunity to examine the specimen signature card signed by Jong, which was
relied upon by the employees of FEBTC in authenticating Jongs signature. The distinction is irrelevant in establishing forgery. Forgery can be established
comparing the contested signatures as against those of any sample signature duly established as that of the persons whose signature was forged.
FEBTC lays undue emphasis on the fact that the PNP examiner did compare the questioned signature against the bank signature cards. The crucial fact
in question is whether or not the check was forged, not whether the bank could have detected the forgery. The latter issue becomes relevant
only if there is need to weigh the comparative negligence between the bank and the party whose signature was forged.
At the same time, the Court of Appeals failed to assess the effect of Jongs testimony that the signature on the check was not his. 47 The assertion may
seem self-serving at first blush, yet it cannot be ignored that Jong was in the best position to know whether or not the signature on the check was his.
While his claim should not be taken at face value, any averments he would have on the matter, if adjudged as truthful, deserve primacy in consideration.
Jongs testimony is supported by the findings of the NBI examiner. They are also backed by factual circumstances that support the conclusion that the
assailed check was indeed forged. Judicial notice can be taken that is highly unusual in practice for a business establishment to draw a check for close to
a million pesos and make it payable to cash or bearer, and not to order. Jong immediately reported the forgery upon its discovery. He filed the appropriate
criminal charges against Sempio, the putative forger.48
Now for determination is whether Samsung Construction was precluded from setting up the defense of forgery under Section 23 of the Negotiable
Instruments Law. The Court of Appeals concluded that Samsung Construction was negligent, and invoked the doctrines that "where a loss must be borne
by one of two innocent person, can be traced to the neglect or fault of either, it is reasonable that it would be borne by him, even if innocent of any
intentional fraud, through whose means it has succeeded49 or who put into the power of the third person to perpetuate the wrong."50 Applying these rules,
the Court of Appeals determined that it was the negligence of Samsung Construction that allowed the encashment of the forged check.
In the case at bar, the forgery appears to have been made possible through the acts of one Jose Sempio III, an assistant accountant employed
by the plaintiff Samsung [Construction] Co. Philippines, Inc. who supposedly stole the blank check and who presumably is responsible for its
encashment through a forged signature of Jong Kyu Lee. Sempio was assistant to the Korean accountant who was in possession of the blank
checks and who through negligence, enabled Sempio to have access to the same. Had the Korean accountant been more careful and prudent
in keeping the blank checks Sempio would not have had the chance to steal a page thereof and to effect the forgery. Besides, Sempio was an
employee who appears to have had dealings with the defendant Bank in behalf of the plaintiff corporation and on the date the check was
encashed, he was there to certify that it was a genuine check issued to purchase equipment for the company. 51
We recognize that Section 23 of the Negotiable Instruments Law bars a party from setting up the defense of forgery if it is guilty of negligence. 52 Yet, we
are unable to conclude that Samsung Construction was guilty of negligence in this case. The appellate court failed to explain precisely how the Korean
accountant was negligent or how more care and prudence on his part would have prevented the forgery. We cannot sustain this "tar and feathering"
resorted to without any basis.
The bare fact that the forgery was committed by an employee of the party whose signature was forged cannot necessarily imply that such partys
negligence was the cause for the forgery. Employers do not possess the preternatural gift of cognition as to the evil that may lurk within the hearts and
minds of their employees. The Courts pronouncement in PCI Bank v. Court of Appeals53 applies in this case, to wit:
[T]he mere fact that the forgery was committed by a drawer-payors confidential employee or agent, who by virtue of his position had unusual
facilities for perpetrating the fraud and imposing the forged paper upon the bank, does not entitle the bank to shift the loss to the drawer-payor,
in the absence of some circumstance raising estoppel against the drawer.54
Admittedly, the record does not clearly establish what measures Samsung Construction employed to safeguard its blank checks. Jong did testify that his
accountant, Kyu, kept the checks inside a "safety box,"55 and no contrary version was presented by FEBTC. However, such testimony cannot prove that
the checks were indeed kept in a safety box, as Jongs testimony on that point is hearsay, since Kyu, and not Jong, would have the personal knowledge
as to how the checks were kept.
Still, in the absence of evidence to the contrary, we can conclude that there was no negligence on Samsung Constructions part. The presumption remains
that every person takes ordinary care of his concerns,56 and that the ordinary course of business has been followed.57 Negligence is not presumed, but
must be proven by him who alleges it.58 While the complaint was lodged at the instance of Samsung Construction, the matter it had to prove was the claim
it had alleged - whether the check was forged. It cannot be required as well to prove that it was not negligent, because the legal presumption remains that
ordinary care was employed.
Thus, it was incumbent upon FEBTC, in defense, to prove the negative fact that Samsung Construction was negligent. While the payee, as in this case,
may not have the personal knowledge as to the standard procedures observed by the drawer, it well has the means of disputing the presumption of
regularity. Proving a negative fact may be "a difficult office,"59 but necessarily so, as it seeks to overcome a presumption in law. FEBTC was unable to
dispute the presumption of ordinary care exercised by Samsung Construction, hence we cannot agree with the Court of Appeals finding of negligence.
The assailed Decision replicated the extensive efforts which FEBTC devoted to establish that there was no negligence on the part of the bank in its
acceptance and payment of the forged check. However, the degree of diligence exercised by the bank would be irrelevant if the drawer is not precluded
from setting up the defense of forgery under Section 23 by his own negligence. The rule of equity enunciated in PNB v. National City Bank of New York, 60
as relied upon by the Court of Appeals, deserves careful examination.
The point in issue has sometimes been said to be that of negligence. The drawee who has paid upon the forged signature is held to bear
the loss, because he has been negligent in failing to recognize that the handwriting is not that of his customer. But it follows obviously

82

that if the payee, holder, or presenter of the forged paper has himself been in default, if he has himself been guilty of a negligence prior to that
of the banker, or if by any act of his own he has at all contributed to induce the banker's negligence, then he may lose his right to cast the loss
upon the banker.61 (Emphasis supplied)
Quite palpably, the general rule remains that the drawee who has paid upon the forged signature bears the loss. The exception to this rule arises only
when negligence can be traced on the part of the drawer whose signature was forged, and the need arises to weigh the comparative negligence between
the drawer and the drawee to determine who should bear the burden of loss. The Court finds no basis to conclude that Samsung Construction was
negligent in the safekeeping of its checks. For one, the settled rule is that the mere fact that the depositor leaves his check book lying around does not
constitute such negligence as will free the bank from liability to him, where a clerk of the depositor or other persons, taking advantage of the opportunity,
abstract some of the check blanks, forges the depositors signature and collect on the checks from the bank. 62 And for another, in point of fact Samsung
Construction was not negligent at all since it reported the forgery almost immediately upon discovery. 63
It is also worth noting that the forged signatures in PNB v. National City Bank of New York were not of the drawer, but of indorsers. The same circumstance
attends PNB v. Court of Appeals,64 which was also cited by the Court of Appeals. It is accepted that a forged signature of the drawer differs in treatment
than a forged signature of the indorser.
The justification for the distinction between forgery of the signature of the drawer and forgery of an indorsement is that the drawee is in a
position to verify the drawers signature by comparison with one in his hands, but has ordinarily no opportunity to verify an indorsement. 65
Thus, a drawee bank is generally liable to its depositor in paying a check which bears either a forgery of the drawers signature or a forged
indorsement. But the bank may, as a general rule, recover back the money which it has paid on a check bearing a forged indorsement,
whereas it has not this right to the same extent with reference to a check bearing a forgery of the drawers signature. 66
The general rule imputing liability on the drawee who paid out on the forgery holds in this case.
Since FEBTC puts into issue the degree of care it exercised before paying out on the forged check, we might as well comment on the banks performance
of its duty. It might be so that the bank complied with its own internal rules prior to paying out on the questionable check. Yet, there are several troubling
circumstances that lead us to believe that the bank itself was remiss in its duty.
The fact that the check was made out in the amount of nearly one million pesos is unusual enough to require a higher degree of caution on the part of the
bank. Indeed, FEBTC confirms this through its own internal procedures. Checks below twenty-five thousand pesos require only the approval of the teller;
those between twenty-five thousand to one hundred thousand pesos necessitate the approval of one bank officer; and should the amount exceed one
hundred thousand pesos, the concurrence of two bank officers is required.67
In this case, not only did the amount in the check nearly total one million pesos, it was also payable to cash. That latter circumstance should have aroused
the suspicion of the bank, as it is not ordinary business practice for a check for such large amount to be made payable to cash or to bearer, instead of to
the order of a specified person.68 Moreover, the check was presented for payment by one Roberto Gonzaga, who was not designated as the payee of the
check, and who did not carry with him any written proof that he was authorized by Samsung Construction to encash the check. Gonzaga, a stranger to
FEBTC, was not even an employee of Samsung Construction.69 These circumstances are already suspicious if taken independently, much more so if they
are evaluated in concurrence. Given the shadiness attending Gonzagas presentment of the check, it was not sufficient for FEBTC to have merely
complied with its internal procedures, but mandatory that all earnest efforts be undertaken to ensure the validity of the check, and of the authority of
Gonzaga to collect payment therefor.
According to FEBTC Senior Assistant Cashier Gemma Velez, the bank tried, but failed, to contact Jong over the phone to verify the check. 70 She added
that calling the issuer or drawer of the check to verify the same was not part of the standard procedure of the bank, but an "extra effort." 71 Even assuming
that such personal verification is tantamount to extraordinary diligence, it cannot be denied that FEBTC still paid out the check despite the absence of any
proof of verification from the drawer. Instead, the bank seems to have relied heavily on the say-so of Sempio, who was present at the bank at the time the
check was presented.
FEBTC alleges that Sempio was well-known to the bank officers, as he had regularly transacted with the bank in behalf of Samsung Construction. It was
even claimed that everytime FEBTC would contact Jong about problems with his account, Jong would hand the phone over to Sempio. 72 However, the
only proof of such allegations is the testimony of Gemma Velez, who also testified that she did not know Sempio personally, 73 and had met Sempio for the
first time only on the day the check was encashed.74 In fact, Velez had to inquire with the other officers of the bank as to whether Sempio was actually
known to the employees of the bank.75 Obviously, Velez had no personal knowledge as to the past relationship between FEBTC and Sempio, and any
averments of her to that effect should be deemed hearsay evidence. Interestingly, FEBTC did not present as a witness any other employee of their Bel-Air
branch, including those who supposedly had transacted with Sempio before.
Even assuming that FEBTC had a standing habit of dealing with Sempio, acting in behalf of Samsung Construction, the irregular circumstances attending
the presentment of the forged check should have put the bank on the highest degree of alert. The Court recently emphasized that the highest degree of
care and diligence is required of banks.
Banks are engaged in a business impressed with public interest, and it is their duty to protect in return their many clients and depositors who
transact business with them. They have the obligation to treat their clients account meticulously and with the highest degree of care,
considering the fiduciary nature of their relationship. The diligence required of banks, therefore, is more than that of a good father of a family. 76
Given the circumstances, extraordinary diligence dictates that FEBTC should have ascertained from Jong personally that the signature in the questionable
check was his.
Still, even if the bank performed with utmost diligence, the drawer whose signature was forged may still recover from the bank as long as he or she is not
precluded from setting up the defense of forgery. After all, Section 23 of the Negotiable Instruments Law plainly states that no right to enforce the payment
of a check can arise out of a forged signature. Since the drawer, Samsung Construction, is not precluded by negligence from setting up the forgery, the
general rule should apply. Consequently, if a bank pays a forged check, it must be considered as paying out of its funds and cannot charge the amount so
paid to the account of the depositor.77 A bank is liable, irrespective of its good faith, in paying a forged check.78

83

WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals dated 28 November 1996 is REVERSED, and the Decision of the
Regional Trial Court of Manila, Branch 9, dated 25 April 1994 is REINSTATED. Costs against respondent.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.

G.R. No. 107508 April 25, 1996

PHILIPPINE NATIONAL BANK, petitioner,
vs.
COURT OF APPEALS, CAPITOL CITY DEVELOPMENT BANK, PHILIPPINE BANK OF COMMUNICATIONS, and F. ABANTE MARKETING,
respondents.

KAPUNAN, J.:p
This is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the decision dated April 29, 1992 of respondent Court of Appeals in
CA-G.R. CV No. 24776 and its resolution dated September 16, 1992, denying petitioner Philippine National Bank's motion for reconsideration of said
decision.
The facts of the case are as follows.
A check with serial number 7-3666-223-3, dated August 7, 1981 in the amount of P97,650.00 was issued by the Ministry of Education and Culture (now
Department of Education, Culture and Sports [DECS]) payable to F. Abante Marketing. This check was drawn against Philippine National Bank (herein
petitioner).
On August 11, 1981, F. Abante Marketing, a client of Capitol City Development Bank (Capitol), deposited the questioned check in its savings account with
said bank. In turn, Capitol deposited the same in its account with the Philippine Bank of Communications (PBCom) which, in turn, sent the check to
petitioner for clearing.
Petitioner cleared the check as good and, thereafter, PBCom credited Capitol's account for the amount stated in the check. However, on October 19,
1981, petitioner returned the check to PBCom and debited PBCom's account for the amount covered by the check, the reason being that there was a
"material alteration" of the check number.
PBCom, as collecting agent of Capitol, then proceeded to debit the latter's account for the same amount, and subsequently, sent the check back to
petitioner. Petitioner, however, returned the check to PBCom.
On the other hand, Capitol could not, in turn, debit F. Abante Marketing's account since the latter had already withdrawn the amount of the check as of
October 15, 1981. Capitol sought clarification from PBCom and demanded the re-crediting of the amount. PBCom followed suit by requesting an
explanation and re-crediting from petitioner.
Since the demands of Capitol were not heeded, it filed a civil suit with the Regional Trial Court of Manila against PBCom which, in turn, filed a third-party
complaint against petitioner for reimbursement/indemnity with respect to the claims of Capitol. Petitioner, on its part, filed a fourth-party complaint against
F. Abante Marketing.
On October 3, 1989; the Regional Trial Court rendered its decision the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered as follows:
1.) On plaintiffs complaint, defendant Philippine Bank of Communications is ordered to re-credit or reimburse plaintiff Capitol City
Development Bank the amount of P97,650.00, plus interest of 12 percent thereto from October 19, 1981 until the amount is fully
paid;
2.) On Philippine Bank of Communications third-party complaint third-party defendant PNB is ordered to reimburse and indemnify
Philippine Bank of Communications for whatever amount PBCom pays to plaintiff;
3.) On Philippine National Bank's fourth-party complaint, F. Abante Marketing is ordered to reimburse and indemnify PNB for
whatever amount PNB pays to PBCom;
4.) On attorney's fees, Philippine Bank of Communications is ordered to pay Capitol City Development Bank attorney's fees in the
amount of Ten Thousand (P10,000.00) Pesos; but PBCom is entitled to reimbursement/indemnity from PNB; and Philippine National
Bank to be, in turn reimbursed or indemnified by F. Abante Marketing for the same amount;

84

5.) The Counterclaims of PBCom and PNB are hereby dismissed;

6.) No pronouncement as to costs.
SO ORDERED. 1
An appeal was interposed before the respondent Court of Appeals which rendered its decision on April 29, 1992, the decretal portion of which reads:
WHEREFORE, the judgment appealed from is modified by exempting PBCom from liability to plaintiff-appellee for attorney's fees
and ordering PNB to honor the check for P97,650.00, with interest as declared by the trial court, and pay plaintiff-appellee attorney's
fees of P10,000.00. After the check shall have been honored by PNB, PBCom shall re-credit plaintiff-appellee's account with it with
the amount. No pronouncement as to costs.
SO ORDERED. 2
A motion for reconsideration of the decision was denied by the respondent Court in its resolution dated September 16, 1992 for lack of merit. 3
Hence, petitioner filed the instant petition which raises the following issues:
I
WHETHER OR NOT AN ALTERATION OF THE SERIAL NUMBER OF A CHECK IS A MATERIAL ALTERATION UNDER THE
NEGOTIABLE INSTRUMENTS LAW.
II
WHETHER OR NOT A CERTIFICATION HEREIN ISSUED BY THE MINISTRY OF EDUCATION CAN BE GIVEN WEIGHT IN
EVIDENCE.
III
WHETHER OR NOT A DRAWEE BANK WHO FAILED TO RETURN A. CHECK WITHIN THE TWENTY FOUR (24) HOUR
CLEARING PERIOD MAY RECOVER THE VALUE OF THE CHECK FROM THE COLLECTING BANK.
IV
WHETHER OR NOT IN THE ABSENCE OF MALICE OR ILL WILL PETITIONER PNB MAY BE HELD LIABLE FOR ATTORNEY'S
FEES. 4
We find no merit in the petition.
We shall first deal with the effect of the alteration of the serial number on the negotiability of the check in question.
Petitioner anchors its position on Section 125 of the Negotiable Instruments Law (ACT No. 2031) 5 which provides:
Sec. 225. What constitutes a material alteration. Any alteration which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment;
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be made;
(f) Or which adds a place of payment where no place of payment is specified, or any other change or addition which alters the effect
of the instrument in any respect, is a material alteration.
Petitioner alleges that there is no hard and fast rule in the interpretation of the aforequoted provision of the Negotiable Instruments Law. It maintains that
under Section 125(f), any change that alters the effect of the instrument is a material alteration. 6
We do not agree.

85

An alteration is said to be material if it alters the effect of the

instrument. 7 It means an unauthorized change in an instrument that purports to modify in any respect the obligation of a party or an unauthorized addition
of words or numbers or other change to an incomplete instrument relating to the obligation of a party. 8 In other words, a material alteration is one which
changes the items which are required to be stated under Section 1 of the Negotiable Instruments Law.
Section 1 of the Negotiable Instruments Law provides:
Sec. 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.
In his book entitled "Pandect of Commercial Law and Jurisprudence," Justice Jose C. Vitug opines that "an innocent alteration (generally, changes on
items other than those required to be stated under Sec. 1, N.I.L.) and spoliation (alterations done by a stranger) will not avoid the instrument, but the
holder may enforce it only according to its original tenor." 9
Reproduced hereunder are some examples of material and immaterial alterations:
A. Material Alterations:
(1) Substituting the words "or bearer" for "order."
(2) Writing "protest waived" above blank indorsements.
(3) A change in the date from which interest is to run.
(4) A check was originally drawn as follows: "Iron County Bank, Crystal Falls, Mich. Aug. 5, 1901. Pay to G.L. or order $9 fifty cents
CTR" The insertion of the figure 5 before the figure 9, the instrument being otherwise unchanged.
(5) Adding the words "with interest" with or without a fixed rate.
(6) An alteration in the maturity of a note, whether the time for payment is thereby curtailed or extended.
(7) An instrument was payable "First Nat'l Bank" the plaintiff added the word "Marion."
(8) Plaintiff, without consent of the defendant, struck out the name of the defendant as payee and inserted the name of the maker of
the original note.
(9) Striking out the name of the payee and substituting that of the person who actually discounted the note.
(10) Substituting the address of the maker for the name of a co-maker. 10
B. Immaterial Alterations:
(1) Changing "I promise to pay" to "We promise to pay", where there are two makers.
(2) Adding the word "annual" after the interest clause.
(3) Adding the date of maturity as a marginal notation.
(4) Filling in the date of actual delivery where the makers of a note gave it with the date in blank, "July ____."
(5) An alteration of the marginal figures of a note where the sum stated in words in the body remained unchanged.
(6) The insertion of the legal rate of interest where the note had a provision for "interest at _______ per cent."

86

(7) A printed form of promissory note had on the margin the printed words, "Extended to ________." The holder on or after maturity
wrote in the blank space the words "May 1, 1913," as a reference memorandum of a promise made by him to the principal maker at
the time the words were written to extend the time of payment.
(8) Where there was a blank for the place of payment, filling in the blank with the place desired.
(9) Adding to an indorsee's name the abbreviation "Cash" when it had been agreed that the draft should be discounted by the trust
company of which the indorsee was cashier.
(10) The indorsement of a note by a stranger after its delivery to the payee at the time the note was negotiated to the plaintiff.
(11) An extension of time given by the holder of a note to the principal maker, without the consent of a surety co-maker. 11
The case at bench is unique in the sense that what was altered is the serial number of the check in question, an item which, it can readily be observed, is
not an essential requisite for negotiability under Section 1 of the Negotiable Instruments Law. The aforementioned alteration did not change the relations
between the parties. The name of the drawer and the drawee were not altered. The intended payee was the same. The sum of money due to the payee
remained the same. Despite these findings, however, petitioner insists, that:
xxx xxx xxx
It is an accepted concept, besides being a negotiable instrument itself, that a TCAA check by its very nature is the medium of
exchange of governments (sic) instrumentalities of agencies. And as (a) safety measure, every government office o(r) agency (is)
assigned TCAA checks bearing different number series.
A concrete example is that of the disbursements of the Ministry of Education and Culture. It is issued by the Bureau of Treasury
sizeable bundles of checks in booklet form with serial numbers different from other government office or agency. Now, for fictitious
payee to succeed in its malicious intentions to defraud the government, all it need do is to get hold of a TCAA Check and have the
serial numbers of portion (sic) thereof changed or altered to make it appear that the same was issued by the MEG.
Otherwise, stated, it is through the serial numbers that (a) TCAA Check is determined to have been issued by a particular office or
agency of the government. 12
xxx xxx xxx
Petitioner's arguments fail to convince. The check's serial number is not the sole indication of its origin.. As succinctly found by the Court of Appeals, the
name of the government agency which issued the subject check was prominently printed therein. The check's issuer was therefore sufficiently identified,
rendering the referral to the serial number redundant and inconsequential. Thus, we quote with favor the findings of the respondent court:
xxx xxx xxx
If the purpose of the serial number is merely to identify the issuing government office or agency, its alteration in this case had no
material effect whatsoever on the integrity of the check. The identity of the issuing government office or agency was not changed
thereby and the amount of the check was not charged against the account of another government office or agency which had no
liability under the check. The owner and issuer of the check is boldly and clearly printed on its face, second line from the top:
"MINISTRY OF EDUCATION AND CULTURE," and below the name of the payee are the rubber-stamped words: "Ministry of Educ.
& Culture." These words are not alleged to have been falsely or fraudulently intercalated into the check. The ownership of the check
is established without the necessity of recourse to the serial number. Neither there any proof that the amount of the check was
erroneously charged against the account of a government office or agency other than the Ministry of Education and Culture. Hence,
the alteration in the number of the check did not affect or change the liability of the Ministry of Education and Culture under the
check and, therefore, is immaterial. The genuineness of the amount and the signatures therein of then Deputy Minister of Education
Hermenegildo C. Dumlao and of the resident Auditor, Penomio C. Alvarez are not challenged. Neither is the authenticity of the
different codes appearing therein questioned . . . 13 (Emphasis ours.)
Petitioner, thus cannot refuse to accept the check in question on the ground that the serial number was altered, the same being an immaterial or innocent
one.
We now go to the second issue. It is petitioner's submission that the certification issued by Minrado C. Batonghinog, Cashier III of the MEC clearly shows
that the check was altered. Said certification reads:
J5
TO WHOM IT MAY CONCERN:
This is to certify that according to the records of this Office, TCAA PNB Check Mo. SN7-3666223-3 dated August 7, 1981 drawn in
favor of F. Abante Marketing in the amount of NINETY (S)EVEN THOUSAND SIX HUNDRED FIFTY PESOS ONLY (P97,650.00)

87

was not issued by this Office nor released to the payee concerned. The series number of said check was not included among those
requisition by this Office from the Bureau of Treasury.
Petitioner claims that even if the author of the certification issued by the Ministry of Education and Culture (MEG) was not presented, still the best
evidence of the material alteration would be the disputed check itself and the serial number thereon. Petitioner thus assails the refusal of respondent court
to give weight to the certification because the author thereof was not presented to identify it and to be cross-examined thereon. 15
We agree with the respondent court.
The one who signed the certification was not presented before the trial court to prove that the said document was really the document he prepared and
that the signature below the said document is his own signature. Neither did petitioner present an eyewitness to the execution of the questioned document
who could possibly identify it. 16 Absent this proof, we cannot rule on the authenticity of the contents of the certification. Moreover, as we previously
emphasized, there was no material alteration on the check, the change of its serial number not being substantial to its negotiability.
Anent the third issue whether or not the drawee bank may still recover the value of the check from the collecting bank even if it failed to return the
check within the twenty-four (24) hour clearing period because the check was tampered suffice it to state that since there is no material alteration in the
check, petitioner has no right to dishonor it and return it to PBCom, the same being in all respects negotiable.
However, the amount of P10,000.00 as attorney's fees is hereby deleted. In their respective decisions, the trial court and the Court of Appeals failed to
explicitly state the rationale for the said award. The trial court merely ruled as follows:
With respect to Capitol's claim for damages consisting of alleged loss of opportunity, this Court finds that Capitol failed to adequately
substantiate its claim. What Capitol had presented was a self-serving, unsubstantiated and speculative computation of what it
allegedly could have earned or realized were it not for the debit made by PBCom which was triggered by the return and debit made
by PNB. However, this Court finds that it would be fair and reasonable to impose interest at 12% per annum on the principal amount
of the check computed from October 19, 1981 (the date PBCom debited Capitol's account) until the amount is fully paid and
reasonable attorney's fees. 17 (Emphasis ours.)
And contrary to the Court of Appeal's resolution, petitioner unambiguously questioned before it the award of attorney's fees, assigning the latter as one of
the errors committed by the trial court. 18
The foregoing is in conformity with the guiding principles laid down in a long line of cases and reiterated recently in Consolidated Bank & Trust
Corporation (Solidbank) v. Court of Appeals: 19
The award of attorney's fees lies within the discretion of the court and depends upon the circumstances of each case. However, the
discretion of the court to award attorney's fees under Article 2208 of the Civil Code of the Philippines demands factual, legal and
equitable justification, without which the award is a conclusion without a premise and improperly left to speculation and conjecture. It
becomes a violation of the proscription against the imposition of a penalty on the right to litigate (Universal Shipping Lines, Inc. v.
Intermediate Appellate Court, 188 SCRA 170 [1990]). The reason for the award must be stated in the text of the court's decision. If it
is stated only in the dispositive portion of the decision, the same shall be disallowed. As to the award of attorney's fees being an
exception rather than the rule, it is necessary for the court to make findings of fact and law that would bring the case within the
exception and justify the grant of the award (Refractories Corporation of the Philippines v. Intermediate Appellate Court, 176 SCRA
539 [176 SCRA 539]).
WHEREFORE, premises considered, except for the deletion of the award of attorney's fees, the decision of the Court of Appeals is hereby AFFIRMED.
SO ORDERED.
Padilla, Bellosillo, Vitug and Hermosisima, Jr., JJ., concur.

88

G.R. No. L-2861

February 26, 1951

ENRIQUE P. MONTINOLA, plaintiff-appellant,

vs.
THE PHILIPPINE NATIONAL BANK, ET AL., defendants-appellees.
Quijano, Rosete and Lucena for appellant.
Second Assistant Corporate Counsel Hilarion U. Jarencio for appellee Philippine National Bank.
Office of the Solicitor General Felix Bautista Angelo and Solicitor Augusto M. Luciano for appellee Provincial Treasurer of Misamis Oriental.
MONTEMAYOR, J.:
In August, 1947, Enrique P. Montinola filed a complaint in the Court of First Instance of Manila against the Philippine National Bank and the Provincial
Treasurer of Misamis Oriental to collect the sum of P100,000, the amount of Check No. 1382 issued on May 2, 1942 by the Provincial Treasurer of
Misamis Oriental to Mariano V. Ramos and supposedly indorsed to Montinola. After hearing, the court rendered a decision dismissing the complaint with
costs against plaintiff-appellant. Montinola has appealed from that decision directly to this Court inasmuch as the amount in controversy exceeds P50,000.
There is no dispute as to the following facts. In April and May, 1942, Ubaldo D. Laya was the Provincial Treasurer of Misamis Oriental. As such Provincial
Treasurer he was ex officio agent of the Philippine National Bank branch in the province. Mariano V. Ramos worked under him as assistant agent in the
bank branch aforementioned. In April of that year 1942, the currency being used in Mindanao, particularly Misamis Oriental and Lanao which had not yet
been occupied by the Japanese invading forces, was the emergency currency which had been issued since January, 1942 by the Mindanao Emergency
Currency Board by authority of the late President Quezon.
About April 26, 1942, thru the recommendation of Provincial Treasurer Laya, his assistant agent M. V. Ramos was inducted into the United States Armed
Forces in the Far East (USAFFE) as disbursing officer of an army division. As such disbursing officer, M. V. Ramos on April 30, 1942, went to the
neighboring Province Lanao to procure a cash advance in the amount of P800,000 for the use of the USAFFE in Cagayan de Misamis. Pedro
Encarnacion, Provincial Treasurer of Lanao did not have that amount in cash. So, he gave Ramos P300,000 in emergency notes and a check for
P500,000. On May 2, 1942 Ramos went to the office of Provincial Treasurer Laya at Misamis Oriental to encash the check for P500,000 which he had
received from the Provincial Treasurer of Lanao. Laya did not have enough cash to cover the check so he gave Ramos P400,000 in emergency notes and
a check No. 1382 for P100,000 drawn on the Philippine National Bank. According to Laya he had previously deposited P500,000 emergency notes in the
Philippine National Bank branch in Cebu and he expected to have the check issued by him cashed in Cebu against said deposit.

89

Ramos had no opportunity to cash the check because in the evening of the same day the check was issued to him, the Japanese forces entered the
capital of Misamis Oriental, and on June 10, 1942, the USAFFE forces to which he was attached surrendered. Ramos was made a prisoner of war until
February 12, 1943, after which, he was released and he resumed his status as a civilian.
About the last days of December, 1944 or the first days of January, 1945, M. V. Ramos allegedly indorsed this check No. 1382 to Enrique P. Montinola.
The circumstances and conditions under which the negotiation or transfer was made are in controversy.
According to Montinola's version, sometime in June, 1944, Ramos, needing money with which to buy foodstuffs and medicine, offered to sell him the
check; to be sure that it was genuine and negotiable, Montinola, accompanied by his agents and by Ramos himself, went to see President Carmona of the
Philippine National Bank in Manila about said check; that after examining it President Carmona told him that it was negotiable but that he should not let
the Japanese catch him with it because possession of the same would indicate that he was still waiting for the return of the Americans to the Philippines;
that he and Ramos finally agreed to the sale of the check for P850,000 Japanese military notes, payable in installments; that of this amount, P450,000
was paid to Ramos in Japanese military notes in five installments, and the balance of P400,000 was paid in kind, namely, four bottles of sulphatia sole,
each bottle containing 1,000 tablets, and each tablet valued at P100; that upon payment of the full price, M. V. Ramos duly indorsed the check to him. This
indorsement which now appears on the back of the document is described in detail by trial court as follows:
The endorsement now appearing at the back of the check (see Exhibit A-1) may be described as follows: The woods, "pay to the order of" in
rubber stamp and in violet color are placed about one inch from the top. This is followed by the words "Enrique P. Montinola" in typewriting
which is approximately 5/8 an inch below the stamped words "pay to the order of". Below "Enrique P. Montinola", in typewriting are words and
figures also in typewriting, "517 Isabel Street" and about /8 of an inch therefrom, the edges of the check appear to have been burned, but there
are words stamped apparently in rubber stamp which, according to Montinola, are a facsimile of the signature of Ramos. There is a signature
which apparently reads "M. V. Ramos" also in green ink but made in handwriting."
To the above description we may add that the name of M. V. Ramos is hand printed in green ink, under the signature. According to Montinola, he asked
Ramos to hand print it because Ramos' signature was not clear.
Ramos in his turn told the court that the agreement between himself and Montinola regarding the transfer of the check was that he was selling only
P30,000 of the check and for this reason, at the back of the document he wrote in longhand the following:
Pay to the order of Enrique P. Montinola P30,000 only. The balance to be deposited in the Philippine National Bank to the credit of M. V.
Ramos.
Ramos further said that in exchange for this assignment of P30,000 Montinola would pay him P90,000 in Japanese military notes but that Montinola gave
him only two checks of P20,000 and P25,000, leaving a balance unpaid of P45,000. In this he was corroborated by Atty. Simeon Ramos Jr. who told the
court that the agreement between Ramos and Montinola was that the latter, for the sale to him of P30,000 of the check, was to pay Ramos P90,000 in
Japanese military notes; that when the first check for P20,000 was issued by Montinola, he (Simeon) prepared a document evidencing said payment of
P20,000; that when the second check for P25,000 was issued by Montinola, he (Simeon) prepared another document with two copies, one for Montinola
and the other for Ramos, both signed by Montinola and M. V. Ramos, evidencing said payment, with the understanding that the balance of P45,000 would
be paid in a few days.
The indorsement or writing described by M. V. Ramos which had been written by him at the back of the check, Exhibit A, does not now appear at the back
of said check. What appears thereon is the indosement testified to by Montinola and described by the trial court as reproduced above. Before going into a
discussion of the merits of the version given by Ramos and Montinola as to the indorsement or writing at the back of the check, it is well to give a further
description of it as we shall later.
When Montinola filed his complaint in 1947 he stated therein that the check had been lost, and so in lieu thereof he filed a supposed photostic copy.
However, at the trial, he presented the check itself and had its face marked Exhibit A and the back thereof Exhibit A-1. But the check is badly mutilated,
bottled, torn and partly burned, and its condition can best be appreciated by seeing it. Roughly, it may be stated that looking at the face of the check
(Exhibit A) we see that the left third portion of the paper has been cut off perpendicularly and severed from the remaining 2/3 portion; a triangular portion of
the upper right hand corner of said remaining 2/3 portion has been similarly cut off and severed, and to keep and attach this triangular portion and the
rectangular /3 portion to the rest of the document, the entire check is pasted on both sides with cellophane; the edges of the severed portions as well as
of the remaining major portion, where cut bear traces of burning and searing; there is a big blot with indelible ink about the right middle portion, which
seems to have penetrated to the back of the check (Exhibit A-1), which back bears a larger smear right under the blot, but not black and sharp as the blot
itself; finally, all this tearing, burning, blotting and smearing and pasting of the check renders it difficult if not impossible to read some of the words and
figures on the check.
In explanation of the mutilation of the check Montinola told the court that several months after indorsing and delivering the check to him, Ramos
demanded the return of the check to him, threatening Montinola with bodily harm, even death by himself or his guerrilla forces if he did not return said
check, and that in order to justify the non-delivery of the document and to discourage Ramos from getting it back, he (Montinola) had to resort to the
mutilation of the document.
As to what was really written at the back of the check which Montinola claims to be a full indorsement of the check, we agree with trial court that the
original writing of Ramos on the back of the check was to the effect that he was assigning only P30,000 of the value of the document and that he was
instructing the bank to deposit to his credit the balance. This writing was in some mysterious way obliterated, and in its place was placed the present
indorsement appearing thereon. Said present indorsement occupies a good portion of the back of the check. It has already been described in detail. As to
how said present indorsement came to be written, the circumstances surrounding its preparation, the supposed participation of M. V. Ramos in it and the

90

writing originally appearing on the reverse side of the check, Exhibit A-1, we quote with approval what the trial court presided over by Judge Conrado V.
Sanchez, in its well-prepared decision, says on these points:
The allegedly indorsement: "Pay to the order of Enrique P. Montinola the amount of P30,000 only. The balance to be deposited to the credit of
M. V. Ramos", signed by M. V. Ramos-according to the latter-does not now appear at the back of the check. A different indorsement, as
aforesaid, now appears.
Had Montinola really paid in full the sum of P850,000 in Japanese Military Notes as consideration for the check? The following observations are
in point:
(a) According to plaintiff's witness Gregorio A. Cortado, the oval line in violet, enclosing "P." of the words "Enrique P. Montinola" and the line in
the form of cane handle crossing the word "street" in the words and figures "517 Isabel Street" in the endorsement Exhibit A-1 "unusual" to him,
and that as far as he could remember this writing did not appear on the instrument and he had no knowledge as to how it happened to be
there. Obviously Cortado had no recollection as to how such marks ever were stamped at the back of the check.
(b) Again Cortado, speaking of the endorsement as it now appears at the back of the check (Exh. A-1) stated that Ramos typewrote these
words outside of the premises of Montinola, that is, a nearby house. Montinola, on the other hand, testified that Ramos typewrote the words
"Enrique P. Montinola 517 Isabel Street", in his own house. Speaking of the rubber stamp used at the back of the check and which produced
the words "pay to the order of", Cortado stated that when he (Cortado), Atadero, Montinola and Ramos returned in group to the house of
Montinola, the rubber stamp was already in the house of Montinola, and it was on the table of the upper floor of the house, together with the
stamp pad used to stamp the same. Montinola, on the other hand, testified that Ramos carried in his pocket the said rubber stamp as well as
the ink pad, and stamped it in his house.
The unusually big space occupied by the indorsement on the back of the check and the discrepancies in the versions of Montinola and his
witness Cortado just noted, create doubts as to whether or not really Ramos made the indorsement as it now appears at the back of Exhibit A.
One thing difficult to understand is why Ramos should go into the laborious task of placing the rubber stamp "Pay to the order of" and
afterwards move to the typewriter and write the words "Enrique P. Montinola" "and "517 Isabel Street", and finally sign his name too far below
the main indorsement.
(c) Another circumstances which bears heavily upon the claim of plaintiff Montinola that he acquired the full value of the check and paid the full
consideration therefor is the present condition of said check. It is now so unclean and discolored; it is pasted in cellophane, bottled with ink on
both sides torn three parts, and with portions thereof burned-all done by plaintiff, the alleged owner thereof.
The acts done by the very plaintiff on a document so important and valuable to him, and which according to him involves his life savings,
approximate intentional cancellation. The only reason advanced by plaintiff as to why tore check, burned the torn edges and bottled out the
registration at the back, is found in the following: That Ramos came to his house, armed with a revolver, threatened his life and demanded from
him the return of the check; that when he informed Ramos that he did not have it in the house, but in some deposit outside thereof and that
Ramos promised to return the next day; that the same night he tore the check into three parts, burned the sides with a parrafin candle to show
traces of burning; and that upon the return of Ramos the next day he showed the two parts of the check, the triangle on the right upper part and
the torn piece on the left part, and upon seeing the condition thereof Ramos did not bother to get the check back. He also said that he placed
the blots in indelible ink to prevent Ramos if he would be forced to surrender the middle part of the check from seeing that it was
registered in the General Auditing Office.
Conceding at the moment these facts to be true, the question is: Why should Montinola be afraid of Ramos? Montinola claims that Ramos went
there about April, 1945, that is, during liberation. If he believed he was standing by his rights, he could have very well sought police protection
or transferred to some place where Ramos could not bother him. And then, really Ramos did not have anything more to do with this check for
the reason that Montinola had obtained in full the amount thereof, there could not be any reason why Ramos should have threatened Montinola
as stated by the latter. Under the circumstances, the most logical conclusion is that Ramos wanted the check at all costs because Montinola did
not acquire the check to such an extent that it borders on intentional cancellation thereof (see Sections 119-123 Negotiable Instruments Law)
there is room to believe that Montinola did not have so much investments in that check as to adopted an "what do I care?" attitude.
And there is the circumstance of the alleged loss of the check. At the time of the filing of the complaint the check was allegedly lost, so much so
that a photostatic copy thereof was merely attached to the complaint (see paragraph 7 of the complaint). Yet, during the trial the original check
Exhibit A was produced in court.
But a comparison between the photostatic copy and the original check reveals discrepancies between the two. The condition of the check as it
was produced is such that it was partially burned, partially blotted, badly mutilated, discolored and pasted with cellophane. What is worse is that
Montinola's excuse as to how it was lost, that it was mixed up with household effects is not plausible, considering the fact that it involves his life
savings, and that before the alleged loss, he took extreme pains and precautions to save the check from the possible ravages of the war, had it
photographed, registered said check with the General Auditing Office and he knew that Ramos, since liberation, was hot after the possession of
that check.
(d) It seems that Montinola was not so sure as to what he had testified to in reference to the consideration he paid for the check. In court he
testified that he paid P450,000 in cash from June to December 1944, and P400,000 worth of sulphatiazole in January 1945 to complete the
alleged consideration of P850,000. When Montinola testified this way in court, obviously he overlooked a letter he wrote to the provincial
treasurer of Cagayan, Oriental Misamis, dated May 1, 1947, Exhibit 3 the record. In that letter Exhibit 3, Montinola told Provincial Treasurer

91

Elizalde of Misamis Oriental that "Ramos endorsed it (referring to check) to me for goods in kind, medicine, etc., received by him for the use of
the guerrillas." In said letter Exhibit 3, Montinola did not mention the cash that he paid for the check.
From the foregoing the court concludes that plaintiff Montinola came into the possession of the check in question about the end of December
1944 by reason of the fact that M. V. Ramos sold to him P30,000 of the face value thereof in consideration of the sum of P90,000 Japanese
money, of which only one-half or P45,000 (in Japanese money) was actually paid by said plaintiff to Ramos. (R. on A., pp. 31-33; Brief of
Appellee, pp. 14-20.)
At the beginning of this decision, we stated that as Provincial Treasurer of Misamis Oriental, Ubaldo D. Laya was ex officio agent of the Philippine National
Bank branch in that province. On the face of the check (Exh. A) we now find the words in parenthesis "Agent, Phil. National Bank" under the signature of
Laya, purportedly showing that he issued the check as agent of the Philippine National Bank. It this is true, then the bank is not only drawee but also a
drawer of the check, and Montinola evidently is trying to hold the Philippine National Bank liable in that capacity of drawer, because as drawee alone,
inasmuch as the bank has not yet accepted or certified the check, it may yet avoid payment.
Laya, testifying in court, stated that he issued the check only as Provincial Treasurer, and that the words in parenthesis "Agent, Phil. National Bank" now
appearing under his signature did not appear on the check when he issued the same. In this he was corroborated by the payee M. V. Ramos who equally
assured the court that when he received the check and then delivered it to Montinola, those words did not appear under the signature of Ubaldo D. Laya.
We again quote with approval the pertinent portion of the trial court's decision:
The question is reduced to whether or not the words, "Agent, Phil. National Bank" were added after Laya had issued the check. In a
straightforward manner and without vacillation Laya positively testified that the check Exhibit A was issued by him in his capacity as Provincial
Treasurer of Misamis Oriental and that the words "Agent, Phil. National Bank" which now appear on the check Exhibit A were not typewritten
below his signature when he signed the said check and delivered the same to Ramos. Laya assured the court that there could not be any
mistake as to this. For, according to Laya, when he issued check in his capacity as agent of the Misamis Oriental agency of the Philippine
National Bank the said check must be countersigned by the cashier of the said agency not by the provincial auditor. He also testified that the
said check was issued by him in his capacity as provincial treasurer of Misamis Oriental and that is why the same was countersigned by
Provincial Auditor Flores. The Provincial Auditor at that time had no connection in any capacity with the Misamis Oriental agency of the
Philippine National Bank. Plaintiff Montinola on the other hand testified that when he received the check Exhibit A it already bore the words
"Agent, Phil. National Bank" below the signature of Laya and the printed words "Provincial Treasurer".
After considering the testimony of the one and the other, the court finds that the preponderance of the evidence supports Laya's testimony. In
the first place, his testimony was corroborated by the payee M. V. Ramos. But what renders more probable the testimony of Laya and Ramos is
the fact that the money for which the check was issued was expressly for the use of the USAFFE of which Ramos was then disbursing officer,
so much so that upon the delivery of the P400,000 in emergency notes and the P100,000 check to Ramos, Laya credited his depository
accounts as provincial treasurer with the corresponding credit entry. In the normal course of events the check could not have been issued by
the bank, and this is borne by the fact that the signature of Laya was countersigned by the provincial auditor, not the bank cashier. And then,
too there is the circumstance that this check was issued by the provincial treasurer of Lanao to Ramos who requisitioned the said funds in his
capacity as disbursing officer of the USAFFE. The check, Exhibit A is not what we may term in business parlance, "certified check" or "cashier's
check."
Besides, at the time the check was issued, Laya already knew that Cebu and Manila were already occupied. He could not have therefore
issued the check-as a bank employee-payable at the central office of the Philippine National Bank.
Upon the foregoing circumstances the court concludes that the words "Agent, Phil. National Bank' below the signature of Ubaldo D. Laya and
the printed words "Provincial Treasurer" were added in the check after the same was issued by the Provincial Treasurer of Misamis Oriental.
From all the foregoing, we may safely conclude as we do that the words "Agent, Phil. National Bank" now appearing on the face of the check (Exh. A)
were added or placed in the instrument after it was issued by Provincial Treasurer Laya to M. V. Ramos. There is no reason known to us why Provincial
Treasurer Laya should issue the check (Exh. A) as agent of the Philippine National Bank. Said check for P100,000 was issued to complete the payment of
the other check for P500,000 issued by the Provincial Treasurer of Lanao to Ramos, as part of the advance funds for the USAFFE in Cagayan de
Misamis. The balance of P400,000 in cash was paid to Ramos by Laya from the funds, not of the bank but of the Provincial Treasury. Said USAFFE were
being financed not by the Bank but by the Government and, presumably, one of the reasons for the issuance of the emergency notes in Mindanao was for
this purpose. As already stated, according to Provincial Treasurer Laya, upon receiving a relatively considerable amount of these emergency notes for his
office, he deposited P500,000 of said currency in the Philippine National Bank branch in Cebu, and that in issuing the check (Exh. A), he expected to have
it cashed at said Cebu bank branch against his deposit of P500,000.
The logical conclusion, therefore, is that the check was issued by Laya only as Provincial Treasurer and as an official of the Government which was under
obligation to provide the USAFFE with advance funds, and not by the Philippine National Bank which has no such obligation. The very Annex C, made
part of plaintiff's complaint, and later introduced in evidence for him as Exhibit E states that Laya issued the check "in his capacity as Provincial Treasurer
of Misamis Oriental", obviously, not as agent of the Bank.
Now, did M. V. Ramos add or place those words below the signature of Laya before transferring the check to Montinola? Let us bear in mind that Ramos
before his induction into the USAFFE had been working as assistant of Treasurer Laya as ex-officio agent of the Misamis Oriental branch of the Philippine
National Bank. Naturally, Ramos must have known the procedure followed there as to the issuance of checks, namely, that when a check is issued by the
Provincial Treasurer as such, it is countersigned by the Provincial Auditor as was done on the check (Exhibit A), but that if the Provincial Treasurer issues
a check as agent of the Philippine National Bank, the check is countersigned not by the Provincial Auditor who has nothing to do with the bank, but by the
bank cashier, which was not done in this case. It is not likely, therefore, that Ramos had made the insertion of the words "Agent, Phil. National Bank" after

92

he received the check, because he should have realized that following the practice already described, the check having been issued by Laya as Provincial
Treasurer, and not as agent of the bank, and since the check bears the countersignature not of the Bank cashier of the Provincial Auditor, the addition of
the words "Agent, Phil. National Bank" could not change the status and responsibility of the bank. It is therefore more logical to believe and to find that the
addition of those words was made after the check had been transferred by Ramos to Montinola. Moreover, there are other facts and circumstances
involved in the case which support this view. Referring to the mimeographed record on appeal filed by the plaintiff-appellant, we find that in transcribing
and copying the check, particularly the face of it (Exhibit A) in the complaint, the words "Agent, Phil. National Bank" now appearing on the face of the
check under the signature of the Provincial Treasurer, is missing. Unless the plaintiff in making this copy or transcription in the complaint committed a
serious omission which is decisive as far as the bank is concerned, the inference is, that at the time the complaint was filed, said phrase did not appear on
the face of the check. That probably was the reason why the bank in its motion to dismiss dated September 2, 1947, contended that if the check in
question had been issued by the provincial treasurer in his capacity as agent of the Philippine National Bank, said treasurer would have placed below his
signature the words "Agent of the Philippine National Bank". The plaintiff because of the alleged loss of the check, allegedly attached to the complaint a
photostatic copy of said check and marked it as Annex A. But in transcribing and copying said Annex A in his complaint, the phrase "Agent, Phil. National
Bank" does not appear under the signature of the provincial treasurer. We tried to verify this discrepancy by going over the original records of the Court of
First Instance so as to compare the copy of Annex A in the complaint, with the original Annex A, the photostatic copy, but said original Annex A appears to
be missing from the record. How it disappeared is not explained. Of course, now we have in the list of exhibit a photostatic copy marked Annex A and
Exhibit B, but according to the manifestation of counsel for the plaintiff dated October 15, 1948, said photostatic copy now marked Annex A and Exhibit B
was submitted on October 15, 1948, in compliance with the verbal order of the trial court. It is therefore evident that the Annex A now available is not the
same original Annex A attached to the complaint in 1947.
There is one other circumstance, important and worth nothing. If Annex A also marked Exhibit B is the photostatic copy of the original check No. 1382
particularly the face thereof (Exhibit A), then said photostatic copy should be a faithful and accurate reproduction of the check, particularly of the phrase
"Agent, Phil. National Bank" now appearing under the signature of the Provincial Treasurer on the face of the original check (Exhibit A). But a minute
examination of and comparison between Annex A, the photostatic copy also marked Exhibit B and the face of the check, Exhibit A, especially with the aid
of a handlens, show notable differences and discrepancies. For instance, on Exhibit A, the letter A of the word "Agent" is toward the right of the tail of the
beginning letter of the signature of Ubaldo D. Laya; this same letter "A" however in Exhibit B is directly under said tail.
The letter "N" of the word "National" on Exhibit A is underneath the space between "Provincial" and "Treasurer"; but the same letter "N" is directly under
the letter "I" of the word "Provincial" in Exhibit B.
The first letter "a" of the word "National" is under "T" of the word "Treasurer" in Exhibit A; but the same letter "a" in Exhibit "B" is just below the space
between the words "Provincial" and "Treasurer".
The letter "k" of the word "Bank" in Exhibit A is after the green perpendicular border line near the lower right hand corner of the edge of the check (Exh. A);
this same letter "k" however, on Exhibit B is on the very border line itself or even before said border line.
The closing parenthesis ")" on Exhibit A is a little far from the perpendicular green border line and appears to be double instead of one single line; this
same ")" on Exhibit B appears in a single line and is relatively nearer to the border line.
There are other notable discrepancies between the check Annex A and the photostatic copy, Exhibit B, as regards the relative position of the phrase
"Agent, Phil. National Bank", with the title Provincial Treasurer, giving ground to the doubt that Exhibit B is a photostatic copy of the check (Exhibit A).
We then have the following facts. Exhibit A was issued by Laya in his capacity as Provincial Treasurer of Misamis Oriental as drawer on the Philippine
National Bank as drawee. Ramos sold P30,000 of the check to Enrique P. Montinola for P90,000 Japanese military notes, of which only P45,000 was paid
by Montinola. The writing made by Ramos at the back of the check was an instruction to the bank to pay P30,000 to Montinola and to deposit the balance
to his (Ramos) credit. This writing was obliterated and in its place we now have the supposed indorsement appearing on the back of the check (Exh. A-1).
At the time of the transfer of this check (Exh. A) to Montinola about the last days of December, 1944, or the first days of January, 1945, the check which,
being a negotiable instrument, was payable on demand, was long overdue by about 2 years. It may therefore be considered, even then, a stable check.
Of course, Montinola claims that about June, 1944 when Ramos supposedly approached him for the purpose of negotiating the check, he (Montinola)
consulted President Carmona of the Philippine National Bank who assured him that the check was good and negotiable. However, President Carmona on
the witness stand flatly denied Montinola's claim and assured the court that the first time that he saw Montinola was after the Philippine National Bank, of
which he was President, reopened, after liberation, around August or September, 1945, and that when shown the check he told Montinola that it was stale.
M. V. Ramos also told the court that it is not true that he ever went with Montinola to see President Carmona about the check in 1944.
On the basis of the facts above related there are several reasons why the complaint of Montinola cannot prosper. The insertion of the words "Agent, Phil.
National Bank" which converts the bank from a mere drawee to a drawer and therefore changes its liability, constitutes a material alteration of the
instrument without the consent of the parties liable thereon, and so discharges the instrument. (Section 124 of the Negotiable Instruments Law). The
check was not legally negotiated within the meaning of the Negotiable Instruments Law. Section 32 of the same law provides that "the indorsement must
be an indorsement of the entire instrument. An indorsement which purports to transfer to the indorsee a part only of the amount payable, . . . (as in this
case) does not operate as a negotiation of the instrument." Montinola may therefore not be regarded as an indorsee. At most he may be regarded as a
mere assignee of the P30,000 sold to him by Ramos, in which case, as such assignee, he is subject to all defenses available to the drawer Provincial
Treasurer of Misamis Oriental and against Ramos. Neither can Montinola be considered as a holder in due course because section 52 of said law defines
a holder in due course as a holder who has taken the instrument under certain conditions, one of which is that he became the holder before it was
overdue. When Montinola received the check, it was long overdue. And, Montinola is not even a holder because section 191 of the same law defines
holder as the payee or indorsee of a bill or note and Montinola is not a payee. Neither is he an indorsee for as already stated, at most he can be
considered only as assignee. Neither could it be said that he took it in good faith. As already stated, he has not paid the full amount of P90,000 for which
Ramos sold him P30,000 of the value of the check. In the second place, as was stated by the trial court in its decision, Montinola speculated on the check
and took a chance on its being paid after the war. Montinola must have known that at the time the check was issued in May, 1942, the money circulating in

93

Mindanao and the Visayas was only the emergency notes and that the check was intended to be payable in that currency. Also, he should have known
that a check for such a large amount of P100,000 could not have been issued to Ramos in his private capacity but rather in his capacity as disbursing
officer of the USAFFE, and that at the time that Ramos sold a part of the check to him, Ramos was no longer connected with the USAFFE but already a
civilian who needed the money only for himself and his family.
As already stated, as a mere assignee Montinola is subject to all the defenses available against assignor Ramos. And, Ramos had he retained the check
may not now collect its value because it had been issued to him as disbursing officer. As observed by the trial court, the check was issued to M. V. Ramos
not as a person but M. V. Ramos as the disbursing officer of the USAFFE. Therefore, he had no right to indorse it personally to plaintiff. It was negotiated
in breach of trust, hence he transferred nothing to the plaintiff.
In view of all the foregoing, finding no reversible error in the decision appealed from, the same is hereby affirmed with costs.
In the prayer for relief contained at the end of the brief for the Philippine National Bank dated September 27, 1949, we find this prayer:
It is also respectfully prayed that this Honorable Court refer the check, Exhibit A, to the City Fiscal's Office for appropriate criminal action
against the plaintiff-appellant if the facts so warrant.
Subsequently, in a petition signed by plaintiff-appellant Enrique P. Montinola dated February 27, 1950, he asked this Court to allow him to withdraw the
original check (Exh. A) for him to keep, expressing his willingness to submit it to the court whenever needed for examination and verification. The bank on
March 2, 1950 opposed the said petition on the ground that inasmuch as the appellant's cause of action in this case is based on the said check, it is
absolutely necessary for the court to examine the original in order to see the actual alterations supposedly made thereon, and that should this Court grant
the prayer contained in the bank's brief that the check be later referred to the city fiscal for appropriate action, said check may no longer be available if the
appellant is allowed to withdraw said document. In view of said opposition this Court resolution of March 6, 1950, denied said petition for withdrawal.
Acting upon the petition contained in the bank's brief already mentioned, once the decision becomes final, let the Clerk of Court transmit to the city fiscal
the check (Exh. A) together with all pertinent papers and documents in this case, for any action he may deem proper in the premises.
Moran, C.J., Paras, Feria, Pablo, Bengzon, Padilla, Tuazon, Reyes and Bautista Angelo, JJ., concur.

94

G.R. No. L-17845

April 27, 1967

INTESTATE ESTATE OF VICTOR SEVILLA. SIMEON SADAYA, petitioner,

vs.
FRANCISCO SEVILLA, respondent.
Belen Law Offices for petitioner.
Poblador, Cruz & Nazareno for respondent.
SANCHEZ, J.:
On March 28, 1949, Victor Sevilla, Oscar Varona and Simeon Sadaya executed, jointly and severally, in favor of the Bank of the Philippine Islands, or its
order, a promissory note for P15,000.00 with interest at 8% per annum, payable on demand. The entire, amount of P15,000.00, proceeds of the
promissory note, was received from the bank by Oscar Varona alone. Victor Sevilla and Simeon Sadaya signed the promissory note as co-makers only as
a favor to Oscar Varona. Payments were made on account. As of June 15, 1950, the outstanding balance stood P4,850.00. No payment thereafter made.
On October 6, 1952, the bank collected from Sadaya the foregoing balance which, together with interest, totalled P5,416.12. Varona failed to reimburse
Sadaya despite repeated demands.
Victor Sevilla died. Intestate estate proceedings were started in the Court of First Instance of Rizal, Special Proceeding No. 1518. Francisco Sevilla was
named administrator.
In Special Proceeding No. 1518, Sadaya filed a creditor's claim for the above sum of P5,746.12, plus attorneys fees in the sum of P1,500.00. The
administrator resisted the claim upon the averment that the deceased Victor Sevilla "did not receive any amount as consideration for the promissory note,"
but signed it only "as surety for Oscar Varona".
On June 5, 1957, the trial court issued an order admitting the claim of Simeon Sadaya in the amount of P5,746.12, and directing the administrator to pay
the same from any available funds belonging to the estate of the deceased Victor Sevilla.
The motion to reconsider having been overruled, the administrator appealed.1 The Court of Appeals, in a decision promulgated on July, 15, 1960, voted to
set aside the order appealed from and to disapprove and disallow "appellee's claim of P5,746.12 against the intestate estate."
The case is now before this Court on certiorari to review the judgment of the Court of Appeals.
Sadaya's brief here seeks reversal of the appellate court's decision and prays that his claim "in the amount of 50% of P5,746.12, or P2,873.06, against the
intestate estate of the deceased Victor Sevilla," be approved.
1. That Victor Sevilla and Simeon Sadaya were joint and several accommodation makers of the 15,000.00-peso promissory note in favor of the Bank of
the Philippine Islands, need not be essayed. As such accommodation the makers, the individual obligation of each of them to the bank is no different from,
and no greater and no less than, that contract by Oscar Varona. For, while these two did not receive value on the promissory note, they executed the
same with, and for the purpose of lending their names to, Oscar Varona. Their liability to the bank upon the explicit terms of the promissory note is joint
and several.2 Better yet, the bank could have pursued its right to collect the unpaid balance against either Sevilla or Sadaya. And the fact is that one of the
last two, Simeon Sadaya, paid that balance.
2. It is beyond debate that Simeon Sadaya could have sought reimbursement of the total amount paid from Oscar Varona. This is but right and just.
Varona received full value of the promissory note.3 Sadaya received nothing therefrom. He paid the bank because he was a joint and several obligor. The
least that can be said is that, as between Varona and Sadaya, there is an implied contract of indemnity. And Varona is bound by the obligation to
reimburse Sadaya.4
3. The common creditor, the Bank of the Philippine Islands, now out of the way, we first look into the relations inter se amongst the three consigners of the
promissory note. Their relations vis-a-vis the Bank, we repeat, is that of joint and several obligors. But can the same thing be said about the relations of
the three consigners, in respect to each other?
Surely enough, as amongst the three, the obligation of Varona and Sevilla to Sadaya who paid can not be joint and several. For, indeed, had payment
been made by Oscar Varona, instead of Simeon Sadaya, Varona could not have had reason to seek reimbursement from either Sevilla or Sadaya, or both.
After all, the proceeds of the loan went to Varona and the other two received nothing therefrom.
4. On principle, a solidary accommodation maker who made payment has the right to contribution, from his co-accommodation maker, in the
absence of agreement to the contrary between them, and subject to conditions imposed by law. This right springs from an implied promise between the
accommodation makers to share equally the burdens that may ensue from their having consented to stamp their signatures on the promissory note. 5 For

95

having lent their signatures to the principal debtor, they clearly placed themselves in so far as payment made by one may create liability on the other
in the category of mere joint grantors of the former.6 This is as it should be. Not one of them benefited by the promissory note. They stand on the same
footing. In misfortune, their burdens should be equally spread.
Manresa, commenting on Article 1844 of the Civil Code of Spain,7 which is substantially reproduced in Article 20738 of our Civil Code, on this point stated:
Otros, como Pothier, entienden que, si bien el principio es evidente enestricto concepto juridico, se han extremado sus consecuencias hasta el
punto de que estas son contrarias, no solo a la logica, sino tambien a la equidad, que debe ser el alma del Derecho, como ha dicho Laurent.
Esa accion sostienen no nace de la fianza, pues, en efecto, el hecho de afianzar una misma deuda no crea ningun vinculo juridico, ni
ninguna razon de obligar entre los fiadores, sino que trae, por el contrario, su origen de una acto posterior, cual es el pago de toda la deuda
realizado por uno de ellos, y la equdad, no permite que los denias fiadores, que igualmente estaban estaban obligos a dicho pago, se
aprovenchen de ese acto en perjuico del que lo realozo.
Lo cierto es que esa accion concedida al fiador nace, si, del hecho del pago, pero es consecuencia del beneficio o del derecho de division,
como tenemos ya dicho. En efecto, por virtud de esta todos los cofiadores vienen obligados a contribuir al pago de parte que a cada uno
corresponde. De ese obligacion, contraida por todos ellos, se libran los que no han pagado por consecuencia del acto realizado por el que
pago, y si bien este no hizo mas que cumplir el deber que el contracto de fianza le imponia de responder de todo el debito cuando no limito su
obligacion a parte alguna del mismo, dicho acto redunda en beneficio de los otros cofiadores los cuales se aprovechan de el para quedar
desligados de todo compromiso con el acreedor.9
5. And now, to the requisites before one accommodation maker can seek reimbursement from a co-accommodation maker.
By Article 18 of the Civil Code in matters not covered by the special laws, "their deficiency shall be supplied by the provisions of this Code". Nothing extant
in the Negotiable Instruments Law would define the right of one accommodation maker to seek reimbursement from another. Perforce, we must go to the
Civil Code.1wph1.t
Because Sevilla and Sadaya, in themselves, are but co-guarantors of Varona, their case comes within the ambit of Article 2073 of the Civil Code which
reads:
ART. 2073. When there are two or more guarantors of the same debtor and for the same debt, the one among them who has paid may demand
of each of the others the share which is proportionally owing from him.
If any of the guarantors should be insolvent, his share shall be borne by the others, including the payer, in the same proportion.
The provisions of this article shall not be applicable, unless the payment has been made in virtue of a judicial demand or unless the principal
debtor is insolvent.10
As Mr. Justice Street puts it: "[T]hat article deals with the situation which arises when one surety has paid the debt to the creditor and is seeking
contribution from his cosureties."11
Not that the requirements in paragraph 3, Article 2073, just quoted, are devoid of cogent reason. Says Manresa: 12
c) Requisitos para el ejercicio del derecho de reintegro o de reembolso derivado de la corresponsabilidad de los cofiadores.
La tercera de las prescripciones que comprende el articulo se refiere a los requisitos que deben concurrir para que pueda tener lugar lo
dispuesto en el mismo. Ese derecho que concede al fiador para reintegrarse directamente de los fiadores de lo que pago por ellos en vez de
dirigir su reclamacion contra el deudor, es un beneficio otorgado por la ley solo ell dos casos determinados, cuya justificacion resulta
evidenciada desde luego; y esa limitacion este debidamente aconsejada por una razon de prudencia que no puede desconocerse, cual es la
de evitar que por la mera voluntad de uno de los cofiadores pueda hacerse surgir la accion de reintegro contra los demas en prejuicio de los
mismos.
El perjuicio que con tal motivo puede inferirse a los cofiadores es bien notorio, pues teniendo en primer termino el fiador que paga por el
deudor el derecho de indemnizacion contra este, sancionado por el art. 1,838, es de todo punto indudable que ejercitando esta accion pueden
quedar libres de toda responsabilidad los demas cofiadores si, a consecuencia de ella, indemniza el fiado a aquel en los terminos establecidos
en el expresado articulo. Por el contrario de prescindir de dicho derecho el fiador, reclamando de los confiadores en primer lugar el oportuno
reintegro, estos en tendrian mas remedio que satisfacer sus ductares respectivas, repitiendo despues por ellas contra el deudor con la
imposicion de las molestias y gastos consiguientes.
No es aventurado asegurar que si el fiador que paga pudiera libremente utilizar uno u otro de dichos derechos, el de indemnizacion por el
deudor y el del reintegro por los cofiadores, indudablemente optaria siempre y en todo caso por el segundo, puesto que mucha mas garantias
de solvencia y mucha mas seguridad del cobro ha de encontrar en los fiadores que en el deudor; y en la practica quedaria reducido el primero
a la indemnizacion por el deudor a los confiadores que hubieran hecho el reintegro, obligando a estos, sin excepcion alguna, a soportar
siempre los gastos y las molestias que anteriormente homos indicado. Y para evitar estos perjuicios, la ley no ha podido menos de reducir el
ejercicio de ese derecho a los casos en que absolutamente sea indispensable.13

96

6. All of the foregoing postulate the following rules: (1) A joint and several accommodation maker of a negotiable promissory note may demand from the
principal debtor reimbursement for the amount that he paid to the payee; and (2) a joint and several accommodation maker who pays on the said
promissory note may directly demand reimbursement from his co-accommodation maker without first directing his action against the principal debtor
provided that (a) he made the payment by virtue of a judicial demand, or (b) a principal debtor is insolvent.
The Court of Appeals found that Sadaya's payment to the bank "was made voluntarily and without any judicial demand," and that "there is an absolute
absence of evidence showing that Varona is insolvent". This combination of fact and lack of fact epitomizes the fatal distance between payment by Sadaya
and Sadaya's right to demand of Sevilla "the share which is proportionately owing from him."
For the reasons given, the judgment of the Court of Appeals under review is hereby affirmed. No costs. So ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar and Castro, JJ., concur.

G.R. No. 80599 September 15, 1989

ERNESTINA CRISOLOGO-JOSE, petitioner,
vs.
COURT OF APPEALS and RICARDO S. SANTOS, JR. in his own behalf and as Vice-President for Sales of Mover Enterprises, Inc., respondents.
Melquiades P. de Leon for petitioner.
Rogelio A. Ajes for private respondent.

REGALADO, J.:
Petitioner seeks the annulment of the decision 1 of respondent Court of Appeals, promulgated on September 8, 1987, which reversed the decision of the
trial Court 2 dismissing the complaint for consignation filed by therein plaintiff Ricardo S. Santos, Jr.
The parties are substantially agreed on the following facts as found by both lower courts:
In 1980, plaintiff Ricardo S. Santos, Jr. was the vice-president of Mover Enterprises, Inc. in-charge of marketing and sales; and the
president of the said corporation was Atty. Oscar Z. Benares. On April 30, 1980, Atty. Benares, in accommodation of his clients, the
spouses Jaime and Clarita Ong, issued Check No. 093553 drawn against Traders Royal Bank, dated June 14, 1980, in the amount
of P45,000.00 (Exh- 'I') payable to defendant Ernestina Crisologo-Jose. Since the check was under the account of Mover
Enterprises, Inc., the same was to be signed by its president, Atty. Oscar Z. Benares, and the treasurer of the said corporation.
However, since at that time, the treasurer of Mover Enterprises was not available, Atty. Benares prevailed upon the plaintiff, Ricardo
S. Santos, Jr., to sign the aforesaid chEck as an alternate story. Plaintiff Ricardo S. Santos, Jr. did sign the check.
It appears that the check (Exh. '1') was issued to defendant Ernestina Crisologo-Jose in consideration of the waiver or quitclaim by
said defendant over a certain property which the Government Service Insurance System (GSIS) agreed to sell to the clients of Atty.
Oscar Benares, the spouses Jaime and Clarita Ong, with the understanding that upon approval by the GSIS of the compromise
agreement with the spouses Ong, the check will be encashed accordingly. However, since the compromise agreement was not
approved within the expected period of time, the aforesaid check for P45,000.00 (Exh. '1') was replaced by Atty. Benares with
another Traders Royal Bank cheek bearing No. 379299 dated August 10, 1980, in the same amount of P45,000.00 (Exhs. 'A' and
'2'), also payable to the defendant Jose. This replacement check was also signed by Atty. Oscar Z. Benares and by the plaintiff
Ricardo S. Santos, Jr. When defendant deposited this replacement check (Exhs. 'A' and '2') with her account at Family Savings
Bank, Mayon Branch, it was dishonored for insufficiency of funds. A subsequent redepositing of the said check was likewise
dishonored by the bank for the same reason. Hence, defendant through counsel was constrained to file a criminal complaint for
violation of Batas Pambansa Blg. 22 with the Quezon City Fiscal's Office against Atty. Oscar Z. Benares and plaintiff Ricardo S.
Santos, Jr. The investigating Assistant City Fiscal, Alfonso Llamas, accordingly filed an amended information with the court charging
both Oscar Benares and Ricardo S. Santos, Jr., for violation of Batas Pambansa Blg. 22 docketed as Criminal Case No. Q-14867 of
then Court of First Instance of Rizal, Quezon City.
Meanwhile, during the preliminary investigation of the criminal charge against Benares and the plaintiff herein, before Assistant City
Fiscal Alfonso T. Llamas, plaintiff Ricardo S. Santos, Jr. tendered cashier's check No. CC 160152 for P45,000.00 dated April 10,
1981 to the defendant Ernestina Crisologo-Jose, the complainant in that criminal case. The defendant refused to receive the
cashier's check in payment of the dishonored check in the amount of P45,000.00. Hence, plaintiff encashed the aforesaid cashier's

97

check and subsequently deposited said amount of P45,000.00 with the Clerk of Court on August 14, 1981 (Exhs. 'D' and 'E').
Incidentally, the cashier's check adverted to above was purchased by Atty. Oscar Z. Benares and given to the plaintiff herein to be
applied in payment of the dishonored check. 3
After trial, the court a quo, holding that it was "not persuaded to believe that consignation referred to in Article 1256 of the Civil Code is applicable to this
case," rendered judgment dismissing plaintiff s complaint and defendant's counterclaim. 4
As earlier stated, respondent court reversed and set aside said judgment of dismissal and revived the complaint for consignation, directing the trial court to
give due course thereto.
Hence, the instant petition, the assignment of errors wherein are prefatorily stated and discussed seriatim.
1. Petitioner contends that respondent Court of Appeals erred in holding that private respondent, one of the signatories of the check
issued under the account of Mover Enterprises, Inc., is an accommodation party under the Negotiable Instruments Law and a debtor
of petitioner to the extent of the amount of said check.
Petitioner avers that the accommodation party in this case is Mover Enterprises, Inc. and not private respondent who merely signed the check in question
in a representative capacity, that is, as vice-president of said corporation, hence he is not liable thereon under the Negotiable Instruments Law.
The pertinent provision of said law referred to provides:
Sec. 29. Liability of accommodation party an accommodation party is one who has signed the instrument as maker, drawer,
acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person
is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be
only an accommodation party.
Consequently, to be considered an accommodation party, a person must (1) be a party to the instrument, signing as maker, drawer, acceptor, or indorser,
(2) not receive value therefor, and (3) sign for the purpose of lending his name for the credit of some other person.
Based on the foregoing requisites, it is not a valid defense that the accommodation party did not receive any valuable consideration when he executed the
instrument. From the standpoint of contract law, he differs from the ordinary concept of a debtor therein in the sense that he has not received any valuable
consideration for the instrument he signs. Nevertheless, he is liable to a holder for value as if the contract was not for accommodation 5 in whatever
capacity such accommodation party signed the instrument, whether primarily or secondarily. Thus, it has been held that in lending his name to the
accommodated party, the accommodation party is in effect a surety for the latter. 6
Assuming arguendo that Mover Enterprises, Inc. is the accommodation party in this case, as petitioner suggests, the inevitable question is whether or not
it may be held liable on the accommodation instrument, that is, the check issued in favor of herein petitioner.
We hold in the negative.
The aforequoted provision of the Negotiable Instruments Law which holds an accommodation party liable on the instrument to a holder for value, although
such holder at the time of taking the instrument knew him to be only an accommodation party, does not include nor apply to corporations which are
accommodation parties. 7 This is because the issue or indorsement of negotiable paper by a corporation without consideration and for the accommodation
of another is ultra vires. 8 Hence, one who has taken the instrument with knowledge of the accommodation nature thereof cannot recover against a
corporation where it is only an accommodation party. If the form of the instrument, or the nature of the transaction, is such as to charge the indorsee with
knowledge that the issue or indorsement of the instrument by the corporation is for the accommodation of another, he cannot recover against the
corporation thereon. 9
By way of exception, an officer or agent of a corporation shall have the power to execute or indorse a negotiable paper in the name of the corporation for
the accommodation of a third person only if specifically authorized to do so. 10 Corollarily, corporate officers, such as the president and vice-president,
have no power to execute for mere accommodation a negotiable instrument of the corporation for their individual debts or transactions arising from or in
relation to matters in which the corporation has no legitimate concern. Since such accommodation paper cannot thus be enforced against the corporation,
especially since it is not involved in any aspect of the corporate business or operations, the inescapable conclusion in law and in logic is that the
signatories thereof shall be personally liable therefor, as well as the consequences arising from their acts in connection therewith.
The instant case falls squarely within the purview of the aforesaid decisional rules. If we indulge petitioner in her aforesaid postulation, then she is
effectively barred from recovering from Mover Enterprises, Inc. the value of the check. Be that as it may, petitioner is not without recourse.
The fact that for lack of capacity the corporation is not bound by an accommodation paper does not thereby absolve, but should render personally liable,
the signatories of said instrument where the facts show that the accommodation involved was for their personal account, undertaking or purpose and the
creditor was aware thereof.
Petitioner, as hereinbefore explained, was evidently charged with the knowledge that the cheek was issued at the instance and for the personal account of
Atty. Benares who merely prevailed upon respondent Santos to act as co-signatory in accordance with the arrangement of the corporation with its
depository bank. That it was a personal undertaking of said corporate officers was apparent to petitioner by reason of her personal involvement in the

98

financial arrangement and the fact that, while it was the corporation's check which was issued to her for the amount involved, she actually had no
transaction directly with said corporation.
There should be no legal obstacle, therefore, to petitioner's claims being directed personally against Atty. Oscar Z. Benares and respondent Ricardo S.
Santos, Jr., president and vice-president, respectively, of Mover Enterprises, Inc.
2. On her second assignment of error, petitioner argues that the Court of Appeals erred in holding that the consignation of the sum
of P45,000.00, made by private respondent after his tender of payment was refused by petitioner, was proper under Article 1256 of
the Civil Code.
Petitioner's submission is that no creditor-debtor relationship exists between the parties, hence consignation is not proper. Concomitantly, this argument
was premised on the assumption that private respondent Santos is not an accommodation party.
As previously discussed, however, respondent Santos is an accommodation party and is, therefore, liable for the value of the check. The fact that he was
only a co-signatory does not detract from his personal liability. A co-maker or co-drawer under the circumstances in this case is as much an
accommodation party as the other co-signatory or, for that matter, as a lone signatory in an accommodation instrument. Under the doctrine in Philippine
Bank of Commerce vs. Aruego, supra, he is in effect a co-surety for the accommodated party with whom he and his co-signatory, as the other co-surety,
assume solidary liability ex lege for the debt involved. With the dishonor of the check, there was created a debtor-creditor relationship, as between Atty.
Benares and respondent Santos, on the one hand, and petitioner, on the other. This circumstance enables respondent Santos to resort to an action of
consignation where his tender of payment had been refused by petitioner.
We interpose the caveat, however, that by holding that the remedy of consignation is proper under the given circumstances, we do not thereby rule that all
the operative facts for consignation which would produce the effect of payment are present in this case. Those are factual issues that are not clear in the
records before us and which are for the Regional Trial Court of Quezon City to ascertain in Civil Case No. Q-33160, for which reason it has advisedly been
directed by respondent court to give due course to the complaint for consignation, and which would be subject to such issues or claims as may be raised
by defendant and the counterclaim filed therein which is hereby ordered similarly revived.
3. That respondent court virtually prejudged Criminal Case No. Q-14687 of the Regional Trial Court of Quezon City filed against
private respondent for violation of Batas Pambansa Blg. 22, by holding that no criminal liability had yet attached to private
respondent when he deposited with the court the amount of P45,000.00 is the final plaint of petitioner.
We sustain petitioner on this score.
Indeed, respondent court went beyond the ratiocination called for in the appeal to it in CA-G.R. CV. No. 05464. In its own decision therein, it declared that
"(t)he lone issue dwells in the question of whether an accommodation party can validly consign the amount of the debt due with the court after his tender
of payment was refused by the creditor." Yet, from the commercial and civil law aspects determinative of said issue, it digressed into the merits of the
aforesaid Criminal Case No. Q-14867, thus:
Section 2 of B.P. 22 establishes the prima facie evidence of knowledge of such insufficiency of funds or credit. Thus, the making,
drawing and issuance of a check, payment of which is refused by the drawee because of insufficient funds in or credit with such
bank is prima facie evidence of knowledge of insufficiency of funds or credit, when the check is presented within 90 days from the
date of the check.
It will be noted that the last part of Section 2 of B.P. 22 provides that the element of knowledge of insufficiency of funds or credit is
not present and, therefore, the crime does not exist, when the drawer pays the holder the amount due or makes arrangements for
payment in full by the drawee of such check within five (5) banking days after receiving notice that such check has not been paid by
the drawee.
Based on the foregoing consideration, this Court finds that the plaintiff-appellant acted within Ms legal rights when he consigned the
amount of P45,000.00 on August 14, 1981, between August 7, 1981, the date when plaintiff-appellant receive (sic) the notice of nonpayment, and August 14, 1981, the date when the debt due was deposited with the Clerk of Court (a Saturday and a Sunday which
are not banking days) intervened. The fifth banking day fell on August 14, 1981. Hence, no criminal liability has yet attached to
plaintiff-appellant when he deposited the amount of P45,000.00 with the Court a quo on August 14, 1981. 11
That said observations made in the civil case at bar and the intrusion into the merits of the criminal case pending in another court are improper do not
have to be belabored. In the latter case, the criminal trial court has to grapple with such factual issues as, for instance, whether or not the period of five
banking days had expired, in the process determining whether notice of dishonor should be reckoned from any prior notice if any has been given or from
receipt by private respondents of the subpoena therein with supporting affidavits, if any, or from the first day of actual preliminary investigation; and
whether there was a justification for not making the requisite arrangements for payment in full of such check by the drawee bank within the said period.
These are matters alien to the present controversy on tender and consignation of payment, where no such period and its legal effects are involved.
These are aside from the considerations that the disputed period involved in the criminal case is only a presumptive rule, juris tantum at that, to determine
whether or not there was knowledge of insufficiency of funds in or credit with the drawee bank; that payment of civil liability is not a mode for
extinguishment of criminal liability; and that the requisite quantum of evidence in the two types of cases are not the same.
To repeat, the foregoing matters are properly addressed to the trial court in Criminal Case No. Q-14867, the resolution of which should not be interfered
with by respondent Court of Appeals at the present posture of said case, much less preempted by the inappropriate and unnecessary holdings in the

99

aforequoted portion of the decision of said respondent court. Consequently, we modify the decision of respondent court in CA-G.R. CV No. 05464 by
setting aside and declaring without force and effect its pronouncements and findings insofar as the merits of Criminal Case No. Q-14867 and the liability of
the accused therein are concerned.
WHEREFORE, subject to the aforesaid modifications, the judgment of respondent Court of Appeals is AFFIRMED.
SO ORDERED.
Paras, Padilla and Sarmiento, JJ., concur.
Melencio-Herrera J., took no part.

G.R. No. 96160 June 17, 1992

STELCO MARKETING CORPORATION, petitioner,
vs.
HON. COURT OF APPEALS and STEELWELD CORPORATION OF THE PHILIPPINES, INC., respondent.

NARVASA, c.J.:
Stelco Marketing Corporation is engaged in the distribution and sale to the public of structural steel bars. 1 On seven (7) different occasions in September
and October, 1980, it sold to RYL Construction, Inc. quantities of steels bars of various sizes and rolls of G.I. wire. These bars and wire were delivered at
different places at the indication of RYL Construction, Inc. The aggregate price for the purchases was P126,859.61.
Although the corresponding invoices issued by STELCO stipulated that RYL pay "COD" (cash on delivery), the latter made no payments for the
construction materials thus ordered and delivered despite insistent demands for payment by the former.
On April 4, 1981, RYL gave to Armstrong, Industries described by STELCO as its "sister corporation" and "manufacturing arm" 2 a check drawn
against Metrobank in the amount of P126,129.86, numbered 765380 and dated April 4, 1981. That check was a company check of another corporation,
Steelweld Corporation of the Philippines, signed by its President, Peter Rafael Limson, and its Vice-President, Artemio Torres.
The check was issued by Limson at the behest of his friend, Romeo Y. Lim, President of RYL. Romeo Lim had asked Limson, for financial assistance, and
the latter had agreed to give Lim a check only by way of accommodation, "only as guaranty but not to pay for anything." 3 Why the check was made out in
the amount of P126,129.86 is not explained. Anyway, the check was actually issued in said amount of P126, 129.86, and as already stated, was given by

100

R.Y. Lim to Armstrong Industries, 4 in payment of an obligation. When the latter deposited the check at its bank, it was dishonored because "drawn against
insufficient funds." 5 When so deposited, the check bore two(2) endorsements, that of "RYL Construction," followed by that of "Armstrong Industries." 6
On account of the dishonor of Metrobank Check No. 765380, and on complaint of Armstrong Industries (through a Mr. Young), Rafael Limson and Artemio
Torres were charged in the Regional Trial Court of Manila with a violation of Batas Pambansa Bilang 22. 7 They were acquitted in a decision rendered on
June 28, 1984 "on the ground that the check in question was not issued by the drawer "to apply on account for value," it being merely for accommodation
purposes. 8 The judgment however conditioned the acquittal with the following pronouncement:
This is not however to release Steelweld Corporation from its liability under Sec. 29 of the Negotiable Instruments Law for having
issued it for the accommodation of Romeo Lim.
Eleven months or so later and some four (4) years after issuance of the check in question in May, 1985, STELCO filed with the Regional Trial Court
at Caloocan City a civil complaint 9 against both RYL and STEELWELD for the recovery of the valued of the steel bars and wire sold to and delivered to
RYL (as already narrated) in the amount of P126,129.86, "plus 18% interest from August 20, 1980 . . . (and) 25% of the total amount sought to be
recovered as and by way of attorney's fees . . . ." 10 Among the allegations of its complaint was that Metrobank Check No. 765380 above mentioned had
been given to it in payment of RYL's indebtedness, duly indorsed by R.Y. Lim. 11 A preliminary attachment was issued by the trial court on the basis of the
averments of the complaint but was shortly dissolved upon the filing of a counter-bond by STEELWELD.
RYL could no longer be located and could not be served with
summons. 12 It never appeared. Only STEELWELD filed an answer, under date of July 16, 1985. 13 In said pleading, it specifically denied the facts alleged
in the complaint, the truth, according to Steelweld, being basically that
1) STELCO "is a complete stranger to it;" it had "not entered into any transaction or business dealing of any kind" with STELCO, the transactions
described in the complaint having been solely and exclusively between the plaintiff and RYL Construction;
2) the check in question was "only given to a certain R. Lim to be used as collateral for another obligation . . . (but) in breach of his agreement (Lim)
utilized and negotiated the check for another purpose. . . .;
3) nevertheless, the check "is wholly inoperative since . . . Steelweld
. . . did not issue it for any valuable consideration either to R. Lim or to the plaintiff not to mention also the fact that the said plaintiff failed to comply with
the requirements of the law to hold the said defendant (STEELWELD) liable
. . ."
Trial ensued upon these issues, after which judgment was rendered on June 26, 1986. 14 The judgment sentenced "the defendant Steelweld Corporation
to pay to . . . (Stelco Marketing Corporation) the amount of P126,129.86 with legal rate of interest from May 9, 1985, when this case was instituted until
fully paid, plus another sum equivalent to 25% of the total amount due as and for attorney's fees . . . 15 That disposition was justified in the judgment as
follows: 16
There is no question, then, that as far as any commercial transaction is concerned between plaintiff and defendant Steelweld no
such transaction ever occurred. Ordinarily, under civil law rules, there having been no transaction between them involving the
purchase of certain merchandise there would be no privity of contract between them, and plaintiff will have no right to sue the
defendant for payment of said merchandise for the simple reason that the defendant did not order them, such less receive them.
But we have here a case where the defendant Steelweld thru its President Peter Rafael Limson admitted to have issued a check
payable to cash in favor of his friend Romeo Lim who was the President of RYL Construction by way of accommodation. Under the
Negotiable Instruments Law an accommodation party is liable.
Sec. 29. Liability of an accommodation party. An accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of
lending his name to some other person. Such a person is liable on the instrument to a holder for value
notwithstanding such holder at the time of taking the instrument knew him to be only an accommodation party.
From this adverse judgment STEELWELD appealed to the Court of Appeals 17 and there succeeded in reversing the judgment. By Decision promulgated
on May 29, 1990, 18 the Court of Appeals 19 ordered "the complaint against appellant (STEELWELD) DISMISSED; (and the appellee, STELCO) to pay
appellant the sum of P15,000.00 as attorney's fees and cost of litigation, the suit . . . (being) a baseless one that dragged appellant in court and caused it
to incur attorney's fees and expense of litigation.
STELCO's motion for reconsideration was denied by the Appellate Tribunal's resolution dated November 13, 1990. 20 The Court stressed that
. . . as far as Steelweld is concerned, there was no commercial transaction between said appellant and appellee. Moreover, there is
no evidence that appellee Stelco Marketing became a holder for value. Nowhere in the check itself does the name of Stelco
Marketing appear as payee, indorsee or depositor thereof. Finally, appellee's complaint is for the collection of the unpaid accounts
for delivery of steels bars and construction materials. It having been established that appellee had no commercial transaction with
appellant Stelco, appellee had no cause of action against said appellant.
STELCO appealed to this Court in accordance with Rule 45 of the Rules of Court. In this Court it seeks to make the following points in connection with its
plea for the overthrow of the Appellate Tribunal's aforesaid decision, viz.:

101

1) said decision is "not in accord with law and jurisprudence;"

2) "STELCO is a "holder" within the meaning of the Negotiable Instruments Law;"
3) "STELCO is a holder in due course of Metrobank Check No. 765380 . . . (and hence) holds the same free from personal or equitable defense;" and
4) "Negotiation in breach of faith is a personal defense . . . (and hence) not effective as against a holder in due course."
The points are not well taken.
The crucial question is whether or not STELCO ever became a holder in due course of Check No. 765380, a bearer instrument, within the contemplation
of the Negotiable Instruments Law. It never did.
STELCO evidently places much reliance on the pronouncement of the Regional Trial Court in Criminal Case No. 66571, 21 that the acquittal of the two (2)
accused (Limson and Torres) did not operate "to release Steelweld Corporation from its liability under Sec. 29 of the Negotiable Instruments Law for
having issued . . . (the check) for the accommodation of Romeo Lim." The cited provision reads as follows:
Sec. 29. Liability of accommodation party. An accommodation party is one who has singed the instrument as maker, drawer,
acceptor, or indorser, without receiving valued therefor, and for the purpose of lending his name to some other person. Such a
person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to
be only an accommodation party.
It is noteworthy that the Trial Court's pronouncement containing reference to said Section 29 did not specify to whom STEELWELD, as accommodation
party, is supposed to be liable; and certain it is that neither said pronouncement nor any other part of the judgment of acquittal declared it liable to
STELCO.
"A holder in due course," says the law, 22 "is a holder who has taken the instrument under the following conditions:
(a) That 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 persons
negotiating it.
To be sure, as regards an accommodation party (such as STEELWELD), the fourth condition, i.e., lack of notice of any infirmity in the instruments or defect
in title of the persons negotiating it, has no application. This is because Section 29 of the law above quoted preserves the right of recourse of a "holder for
value" against the accommodation party notwithstanding that "such holder, at the time of taking the instrument, knew him to be only an accommodation
party." 23
Now, STELCO theorizes that it should be deemed a "holder for value" of STEELWELD's Check No. 765380 because the record shows it to have been in
"actual possession" thereof; otherwise, it "could not have presented, marked and introduced (said check) in evidence . . . before the court a quo."
"Besides," it adds, the check in question was presented by STELCO to the drawee bank for payment through Armstrong Industries, the manufacturing arm
of STELCO and its sister company." 24
The trouble is, there is no evidence whatever that STELCO's possession of Check No. 765380 ever dated back to nay time before the instrument's
presentment and dishonor. There is no evidence whatsoever that the check was ever given to it, or indorsed to it in any manner or form in payment of an
obligation or as security for an obligation, or for any other purpose before it was presented for payment. On the contrary, the factual finding of the Court of
Appeals, which by traditional precept is normally conclusive on this Court, is that STELCO never became a holder for value and that "(n)owhere in the
check itself does the name of Stelco Marketing appear as payee, indorsee or depositor thereof." 25
What the record shows is that: (1) the STEELWELD company check in question was given by its president to R.Y. Lim; (2) it was given only by way of
accommodation, to be "used as collateral for another obligation;" (3) in breach of the agreement, however, R.Y. Lim indorsed the check to Armstrong in
payment of obligation; (4) Armstrong deposited the check to its account, after indorsing it; (5) the check was dishonored. The record does not show any
intervention or participation by STELCO in any manner of form whatsoever in these transactions, or any communication of any sort between STEELWELD
and STELCO, or between either of them and Armstrong Industries, at any time before the dishonor of the check.
The record does show that after the check had been deposited and dishonored, STELCO came into possession of it in some way, and was able, several
years after the dishonor of the check, to give it in evidence at the trial of the civil case it had instituted against the drawers of the check (Limson and
Torres) and RYL. But, as already pointed out, possession of a negotiable instrument after presentment and dishonor, or payment, is utterly
inconsequential; it does not make the possessor a holder for value within the meaning of the law; it gives rise to no liability on the part of the maker or
drawer and indorsers.

102

It is clear from the relevant circumstances that STELCO cannot be deemed a holder of the check for value. It does not meet two of the essential requisites
prescribed by the statute. It did not become "the holder of it before it was overdue, and without notice that it had been previously dishonored," and it did
not take the check "in good faith and for value." 26
Neither is there any evidence whatever that Armstrong Industries, to whom R.Y. Lim negotiated the check accepted the instrument and attempted to
encash it in behalf, and as agent of STELCO. On the contrary, the indications are that Armstrong was really the intended payee of the check and was the
party actually injured by its dishonor; it was after all its representative (a Mr. Young) who instituted the criminal prosecution of the drawers, Limson and
Torres, albeit unsuccessfully.
The petitioner has failed to show any sufficient cause for modification or reversal of the challenged judgment of the Court of Appeals which, on the
contrary, appears to be entirely in accord with the facts and the applicable law.
WHEREFORE, the petition is DENIED and the Decision of the Court of Appeals in CA-G.R. CV No. 13418 is AFFIRMED in toto. Costs against petitioner.
SO ORDERED
Paras, Padilla and Regalado, JJ., concur.
Nocon., J., is on leave.

G.R. No. L-56169 June 26, 1992

TRAVEL-ON, INC., petitioner,
vs.
COURT OF APPEALS and ARTURO S. MIRANDA, respondents.
RESOLUTION

103

FELICIANO, J.:
Petitioner Travel-On. Inc. ("Travel-On") is a travel agency selling airline tickets on commission basis for and in behalf of different airline companies. Private
respondent Arturo S. Miranda had a revolving credit line with petitioner. He procured tickets from petitioner on behalf of airline passengers and derived
commissions therefrom.
On 14 June 1972, Travel-On filed suit before the Court of First Instance ("CFI") of Manila to collect on six (6) checks issued by private respondent with a
total face amount of P115,000.00. The complaint, with a prayer for the issuance of a writ of preliminary attachment and attorney's fees, averred that from 5
August 1969 to 16 January 1970, petitioner sold and delivered various airline tickets to respondent at a total price of P278,201.57; that to settle said
account, private respondent paid various amounts in cash and in kind, and thereafter issued six (6) postdated checks amounting to P115,000.00 which
were all dishonored by the drawee banks. Travel-On further alleged that in March 1972, private respondent made another payment of P10,000.00
reducing his indebtedness to P105,000.00. The writ of attachment was granted by the court a quo.
In his answer, private respondent admitted having had transactions with Travel-On during the period stipulated in the complaint. Private respondent,
however, claimed that he had already fully paid and even overpaid his obligations and that refunds were in fact due to him. He argued that he had issued
the postdated checks for purposes of accommodation, as he had in the past accorded similar favors to petitioner. During the proceedings, private
respondent contested several tickets alleged to have been erroneously debited to his account. He claimed reimbursement of his alleged over payments,
plus litigation expenses, and exemplary and moral damages by reason of the allegedly improper attachment of his properties.
In support of his theory that the checks were issued for accommodation, private respondent testified that he bad issued the checks in the name of TravelOn in order that its General Manager, Elita Montilla, could show to Travel-On's Board of Directors that the accounts receivable of the company were still
good. He further stated that Elita Montilla tried to encash the same, but that these were dishonored and were subsequently returned to him after the
accommodation purpose had been attained.
Travel-On's witness, Elita Montilla, on the other hand explained that the "accommodation" extended to Travel-On by private respondent related to
situations where one or more of its passengers needed money in Hongkong, and upon request of Travel-On respondent would contact his friends in
Hongkong to advance Hongkong money to the passenger. The passenger then paid Travel-On upon his return to Manila and which payment would be
credited by Travel-On to respondent's running account with it.
In its decision dated 31 January 1975, the court a quo ordered Travel-On to pay private respondent the amount of P8,894.91 representing net
overpayments by private respondent, moral damages of P10,000.00 for the wrongful issuance of the writ of attachment and for the filing of this case,
P5,000.00 for attorney's fees and the costs of the suit.
The trial court ruled that private respondent's indebtedness to petitioner was not satisfactorily established and that the postdated checks were issued not
for the purpose of encashment to pay his indebtedness but to accommodate the General Manager of Travel-On to enable her to show to the Board of
Directors that Travel-On was financially stable.
Petitioner filed a motion for reconsideration that was, however, denied by the trial court, which in fact then increased the award of moral damages to
P50,000.00.
On appeal, the Court of Appeals affirmed the decision of the trial court, but reduced the award of moral damages to P20,000.00, with interest at the legal
rate from the date of the filing of the Answer on 28 August 1972.
Petitioner moved for reconsideration of the Court of Appeal's' decision, without success.
In the instant Petition for Review, it is urged that the postdated checks are per se evidence of liability on the part of private respondent. Petitioner further
argues that even assuming that the checks were for accommodation, private respondent is still liable thereunder considering that petitioner is a holder for
value.
Both the trial and appellate courts had rejected the checks as evidence of indebtedness on the ground that the various statements of account prepared by
petitioner did not show that Private respondent had an outstanding balance of P115,000.00 which is the total amount of the checks he issued. It was
pointed out that while the various exhibits of petitioner showed various accountabilities of private respondent, they did not satisfactorily establish the
amount of the outstanding indebtedness of private respondent. The appellate court made much of the fact that the figures representing private
respondent's unpaid accounts found in the "Schedule of Outstanding Account" dated 31 January 1970 did not tally with the figures found in the statement
which showed private respondent's transactions with petitioner for the years 1969 and 1970; that there was no satisfactory explanation as to why the total
outstanding amount of P278,432.74 was still used as basis in the accounting of 7 April 1972 considering that according to the table of transactions for the
year 1969 and 1970, the total unpaid account of private respondent amounted to P239,794.57.
We have, however, examined the record and it shows that the 7 April 1972 Statement of Account had simply not been updated; that if we use as basis the
figure as of 31 January 1970 which is P278,432.74 and from it deduct P38,638.17 which represents some of the payments subsequently made by private
respondent, the figure P239,794.57 will be obtained.
Also, the fact alone that the various statements of account had variances in figures, simply did not mean that private respondent had no more financial
obligations to petitioner. It must be stressed that private respondent's account with petitioner was a running or open one, which explains the varying
figures in each of the statements rendered as of a given date.

104

The appellate court erred in considering only the statements of account in determining whether private respondent was indebted to petitioner under the
checks. By doing so, it failed to give due importance to the most telling piece of evidence of private respondent's indebtedness the checks themselves
which he had issued.
Contrary to the view held by the Court of Appeals, this Court finds that the checks are the all important evidence of petitioner's case; that these checks
clearly established private respondent's indebtedness to petitioner; that private respondent was liable thereunder.
It is important to stress that a check which is regular on its face is deemed prima facie to have been issued for a valuable consideration and every person
whose signature appears thereon is deemed to have become a party thereto for value. 1 Thus, the mere introduction of the instrument sued on in evidence
prima facie entitles the plaintiff to recovery. Further, the rule is quite settled that a negotiable instrument is presumed to have been given or indorsed for a
sufficient consideration unless otherwise contradicted and overcome by other competent evidence. 2
In the case at bar, the Court of Appeals, contrary to these established rules, placed the burden of proving the existence of valuable consideration upon
petitioner. This cannot be countenanced; it was up to private respondent to show that he had indeed issued the checks without sufficient consideration.
The Court considers that Private respondent was unable to rebut satisfactorily this legal presumption. It must also be noted that those checks were issued
immediately after a letter demanding payment had been sent to private respondent by petitioner Travel-On.
The fact that all the checks issued by private respondent to petitioner were presented for payment by the latter would lead to no other conclusion than that
these checks were intended for encashment. There is nothing in the checks themselves (or in any other document for that matter) that states otherwise.
We are unable to accept the Court of Appeals' conclusion that the checks here involved were issued for "accommodation" and that accordingly private
respondent maker of those checks was not liable thereon to petitioner payee of those checks.
In the first place, while the Negotiable Instruments Law does refer to accommodation transactions, no such transaction was here shown. Section 29 of the
Negotiable Instruments Law provides as follows:
Sec. 29. Liability of accommodation party. An accommodation party is one who has signed the instrument as maker, drawer,
acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person
is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be
only an accommodation party.
In accommodation transactions recognized by the Negotiable Instruments Law, an accommodating party lends his credit to the accommodated
party, by issuing or indorsing a check which is held by a payee or indorsee as a holder in due course, who gave full value therefor to the
accommodated party. The latter, in other words, receives or realizes full value which the accommodated party then must repay to the
accommodating party, unless of course the accommodating party intended to make a donation to the accommodated party. But the
accommodating party is bound on the check to the holder in due course who is necessarily a third party and is not the accommodated party.
Having issued or indorsed the check, the accommodating party has warranted to the holder in due course that he will pay the same according
to its tenor. 3
In the case at bar, Travel-On was payee of all six (6) checks, it presented these checks for payment at the drawee bank but the checks bounced. TravelOn obviously was not an accommodated party; it realized no value on the checks which bounced.
Travel-On was entitled to the benefit of the statutory presumption that it was a holder in due course, 4 that the checks were supported by valuable
consideration. 5 Private respondent maker of the checks did not successfully rebut these presumptions. The only evidence aliunde that private respondent
offered was his own self-serving uncorroborated testimony. He claimed that he had issued the checks to Travel-On as payee to "accommodate" its
General Manager who allegedly wished to show those checks to the Board of Directors of Travel-On to "prove" that Travel-On's account receivables were
somehow "still good." It will be seen that this claim was in fact a claim that the checks were merely simulated, that private respondent did not intend to
bind himself thereon. Only evidence of the clearest and most convincing kind will suffice for that purpose; 6 no such evidence was submitted by private
respondent. The latter's explanation was denied by Travel-On's General Manager; that explanation, in any case, appears merely contrived and quite
hollow to us. Upon the other hand, the "accommodation" or assistance extended to Travel-On's passengers abroad as testified by petitioner's General
Manager involved, not the accommodation transactions recognized by the NIL, but rather the circumvention of then existing foreign exchange regulations
by passengers booked by Travel-On, which incidentally involved receipt of full consideration by private respondent.
Thus, we believe and so hold that private respondent must be held liable on the six (6) checks here involved. Those checks in themselves constituted
evidence of indebtedness of private respondent, evidence not successfully overturned or rebutted by private respondent.
Since the checks constitute the best evidence of private respondent's liability to petitioner Travel-On, the amount of such liability is the face amount of the
checks, reduced only by the P10,000.00 which Travel-On admitted in its complaint to have been paid by private respondent sometime in March 1992.
The award of moral damages to Private respondent must be set aside, for the reason that Petitioner's application for the writ of attachment rested on
sufficient basis and no bad faith was shown on the part of Travel-On. If anyone was in bad faith, it was private respondent who issued bad checks and
then pretended to have "accommodated" petitioner's General Manager by assisting her in a supposed scheme to deceive petitioner's Board of Directors
and to misrepresent Travel-On's financial condition.
ACCORDINGLY, the Court Resolved to GRANT due course to the Petition for Review on Certiorari and to REVERSE and SET ASIDE the Decision dated
22 October 1980 and the Resolution of 23 January 1981 of the Court of Appeals, as well as the Decision dated 31 January 1975 of the trial court, and to

105

enter a new decision requiring private respondent Arturo S. Miranda to pay to petitioner Travel-On the amount of P105,000.00 with legal interest thereon
from 14 June 1972, plus ten percent (10%) of the total amount due as attorney's fees. Costs against Private respondent.
Gutierrez, Jr., Bidin, Davide, Jr. and Romero, JJ., concur.
G.R. No. 112392

February 29, 2000

BANK OF THE PHILIPPINE ISLANDS, petitioner,

vs.
COURT OF APPEALS and BENJAMIN C. NAPIZA, respondents.
YNARES-SANTIAGO, J.:
This is a petition for review on certiorari of the Decision1 of the Court of Appeals in CA-G.R. CV No. 37392 affirming in toto that of the Regional Trial Court
of Makati, Branch 139,2 which dismissed the complaint filed by petitioner Bank of the Philippine Islands against private respondent Benjamin C. Napiza for
sum of money.
On September 3, 1987, private respondent deposited in Foreign Currency Deposit Unit (FCDU) Savings Account No. 028-1873 which he maintained in
petitioner bank's Buendia Avenue Extension Branch, Continental Bank Manager's Check No. 000147574 dated August 17, 1984, payable to "cash" in the
amount of Two Thousand Five Hundred Dollars ($2,500.00) and duly endorsed by private respondent on its dorsal side.5 It appears that the check
belonged to a certain Henry who went to the office of private respondent and requested him to deposit the check in his dollar account by way of
accommodation and for the purpose of clearing the same. Private respondent acceded, and agreed to deliver to Chan a signed blank withdrawal slip, with
the understanding that as soon as the check is cleared, both of them would go to the bank to withdraw the amount of the check upon private respondent's
presentation to the bank of his passbook.
Using the blank withdrawal slip given by private respondent to Chan, on October 23, 1984, one Ruben Gayon, Jr. was able to withdraw the amount of
$2,541.67 from FCDU Savings Account No. 028-187. Notably, the withdrawal slip shows that the amount was payable to Ramon A. de Guzman and Agnes
C. de Guzman and was duly initialed by the branch assistant manager, Teresita Lindo.6
On November 20, 1984, petitioner received communication from the Wells Fargo Bank International of New York that the said check deposited by private
respondent was a counterfeit check7 because it was "not of the type or style of checks issued by Continental Bank International."8 Consequently, Mr. Ariel
Reyes, the manager of petitioner's Buendia Avenue Extension Branch, instructed one of its employees, Benjamin D. Napiza IV, who is private
respondent's son, to inform his father that the check bounced.9 Reyes himself sent a telegram to private respondent regarding the dishonor of the check.
In turn, private respondent's son wrote to Reyes stating that the check been assigned "for encashment" to Ramon A. de Guzman and/or Agnes C. de
Guzman after it shall have been cleared upon instruction of Chan. He also said that upon learning of the dishonor of the check, his father immediately tried
to contact Chan but the latter was out of town.10
Private respondent's son undertook to return the amount of $2,500.00 to petitioner bank. On December 18, 1984, Reyes reminded private respondent of
his son's promise and warned that should he fail to return that amount within seven (7) days, the matter would be referred to the bank's lawyers for
appropriate action to protect the bank's interest.11 This was followed by a letter of the bank's lawyer dated April 8, 1985 demanding the return of the
$2,500.00.12
In reply, private respondent wrote petitioner's counsel on April 20, 198513 stating that he deposited the check "for clearing purposes" only to accommodate
Chan. He added:
Further, please take notice that said check was deposited on September 3, 1984 and withdrawn on October 23, 1984, or a total period of fifty
(50) days had elapsed at the time of withdrawal. Also, it may not be amiss to mention here that I merely signed an authority to withdraw said
deposit subject to its clearing, the reason why the transaction is not reflected in the passbook of the account. Besides, I did not receive its
proceeds as may be gleaned from the withdrawal slip under the captioned signature of recipient.1wphi1.nt
If at all, my obligation on the transaction is moral in nature, which (sic) I have been and is (sic) still exerting utmost and maximum efforts to
collect from Mr. Henry Chan who is directly liable under the circumstances.
xxx

xxx

xxx

On August 12, 1986, petitioner filed a complaint against private respondent, praying for the return of the amount of $2,500.00 or the prevailing peso
equivalent plus legal interest from date of demand to date of full payment, a sum equivalent to 20% of the total amount due as attorney's fees, and
litigation and/or costs of suit.
Private respondent filed his answer, admitting that he indeed signed a "blank" withdrawal slip with the understanding that the amount deposited would be
withdrawn only after the check in question has been cleared. He likewise alleged that he instructed the party to whom he issued the signed blank
withdrawal slip to return it to him after the bank draft's clearance so that he could lend that party his passbook for the purpose of withdrawing the amount
of $2,500.00. However, without his knowledge, said party was able to withdraw the amount of $2,541.67 from his dollar savings account through collusion
with one of petitioner's employees. Private respondent added that he had "given the Plaintiff fifty one (51) days with which to clear the bank draft in
question." Petitioner should have disallowed the withdrawal because his passbook was not presented. He claimed that petitioner had no one to blame
except itself "for being grossly negligent;" in fact, it had allegedly admitted having paid the amount in the check "by mistake" . . . "if not altogether due to
collusion and/or bad faith on the part of (its) employees." Charging petitioner with "apparent ignorance of routine bank procedures," by way of

106

counterclaim, private respondent prayed for moral damages of P100,000.00, exemplary damages of P50,000.00 and attorney's fees of 30% of whatever
amount that would be awarded to him plus an honorarium of P500.00 per appearance in court.
Private respondent also filed a motion for admission of a third party complaint against Chan. He alleged that "thru strategem and/or manipulation," Chan
was able to withdraw the amount of $2,500.00 even without private respondent's passbook. Thus, private respondent prayed that third party defendant
Chan be made to refund to him the amount withdrawn and to pay attorney's fees of P5,000.00 plus P300.00 honorarium per appearance. Petitioner filed a
comment on the motion for leave of court to admit the third party complaint, whenever it asserted that per paragraph 2 of the Rules and Regulations
governing BPI savings accounts, private respondent alone was liable "for the value of the credit given on account of the draft or check deposited." It
contended that private respondent was estopped from disclaiming liability because he himself authorized the withdrawal of the amount by signing the
withdrawal slip. Petitioner prayed for the denial of the said motion so as not to unduly delay the disposition of the main case asserting that private
respondent's claim could be ventilated in another case. Private respondent replied that for the parties to obtain complete relief and to avoid multiplicity of
suits, the motion to admit third party complaint should be granted. Meanwhile, the trial court issued orders on August 25, 1987 and October 28, 1987
directing private respondent to actively participate in locating Chan. After private respondent failed to comply, the trial court, on May 18, 1988, dismissed
the third party complaint without prejudice.
On November 4, 1991, a decision was rendered dismissing the complaint. The lower court held that petitioner could not hold private respondent liable
based on the check's face value alone. To so hold him liable "would render inutile the requirement of "clearance" from the drawee bank before the value of
a particular foreign check or draft can be credited to the account of a depositor making such deposit." The lower court further held that "it was incumbent
upon the petitioner to credit the value of the check in question to the account of the private respondent only upon receipt of the notice of final payment and
should not have authorized the withdrawal from the latter's account of the value or proceeds of the check." Having admitted that it committed a "mistake"
in not waiting for the clearance of the check before authorizing the withdrawal of its value or proceeds, petitioner should suffer the resultant loss.
On appeal, the Court of Appeals affirmed the lower court's decision. The appellate court held that petitioner committed "clears gross negligence" in
allowing Ruben Gayon, Jr. to withdraw the money without presenting private respondent's passbook and, before the check was cleared and in crediting
the amount indicated therein in private respondent's account. It stressed that the mere deposit of a check in private respondent's account did not mean
that the check was already private respondent's property. The check still had to be cleared and its proceeds can only be withdrawn upon presentation of a
passbook in accordance with the bank's rules and regulations. Furthermore, petitioner's contention that private respondent warranted the check's
genuineness by endorsing it is untenable for it would render useless the clearance requirement. Likewise, the requirement of presentation of a passbook
to ascertain the propriety of the accounting reflected would be a meaningless exercise. After all, these requirements are designed to protect the bank from
deception or fraud.
The Court of Appeals cited the case of Roman Catholic Bishop of Malolos, Inc. v. IAC,14 where this Court stated that a personal check is not legal tender or
money, and held that the check deposited in this case must be cleared before its value could be properly transferred to private respondent's account.
Without filing a motion for the reconsideration of the Court of Appeals' Decision, petitioner filed this petition for review on certiorari, raising the following
issues:
1. WHETHER OR NOT RESPONDENT NAPIZA IS LIABLE UNDER HIS WARRANTIES AS A GENERAL INDORSER.
2. WHETHER OR NOT A CONTRACT OF AGENCY WAS CREATED BETWEEN RESPONDENT NAPIZA AND RUBEN GAYON.
3. WHETHER OR NOT PETITIONER WAS GROSSLY NEGLIGENT IN ALLOWING THE WITHDRAWAL.
Petitioner claims that private respondent, having affixed his signature at the dorsal side of the check, should be liable for the amount stated therein in
accordance with the following provision of the Negotiable Instruments Law (Act No. 2031):
Sec. 66. Liability of general indorser. Every indorser who indorses without qualification, warrants to all subsequent holders in due course
(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding section; and
(b) That the instrument is at the time of his indorsement, valid and subsisting.
And, in addition, he engages that on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that
if it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any
subsequent indorser who may be compelled to pay it.
Sec. 65, on the other hand, provides for the following warranties of a person negotiating an instrument by delivery or by qualified indorsement: (a) that the
instrument is genuine and in all respects what it purports to be; (b) that he has a good title to it, and (c) that all prior parties had capacity to contract. 15 In
People v. Maniego,16 this Court described the liabilities of an indorser as follows:
Appellant's contention that as mere indorser, she may not be liable on account of the dishonor of the checks indorsed by her, is likewise
untenable. Under the law, the holder or last indorsee of a negotiable instrument has the right "to enforce payment of the instrument for the full
amount thereof against all parties liable thereon. Among the "parties liable thereon." Is an indorser of the instrument, i.e., "a person placing his
signature upon an instrument otherwise than as a maker, drawer or acceptor * * unless he clearly indicated by appropriate words his intention
to be bound in some other capacity." Such an indorser "who indorses without qualification," inter alia "engages that on due presentment, * *
(the instrument) shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored, and the necessary
proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or any subsequent indorser who may be compelled to pay
it." Maniego may also be deemed an "accommodation party" in the light of the facts, i.e., a person "who has signed the instrument as maker,

107

drawer, acceptor, or indorser, without receiving value thereof, and for the purpose of lending his name to some other person." As such, she is
under the law "liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew * * (her) to
be only an accommodation party," although she has the right, after paying the holder, to obtain reimbursement from the party accommodated,
"since the relation between them is in effect that of principal and surety, the accommodation party being the surety.
It is thus clear that ordinarily private respondent may be held liable as an indorser of the check or even as an accommodation party. 17 However, to hold
private respondent liable for the amount of the check he deposited by the strict application of the law and without considering the attending circumstances
in the case would result in an injustice and in the erosion of the public trust in the banking system. The interest of justice thus demands looking into the
events that led to the encashment of the check.
Petitioner asserts that by signing the withdrawal slip, private respondent "presented the opportunity for the withdrawal of the amount in question."
Petitioner relied "on the genuine signature on the withdrawal slip, the personality of private respondent's son and the lapse of more than fifty (50) days
from date of deposit of the Continental Bank draft, without the same being returned yet."18 We hold, however, that the propriety of the withdrawal should be
gauged by compliance with the rules thereon that both petitioner bank and its depositors are duty-bound to observe.
In the passbook that petitioner issued to private respondent, the following rules on withdrawal of deposits appear:
4. Withdrawals must be made by the depositor personally but in some exceptional circumstances, the Bank may allow withdrawal by another
upon the depositor's written authority duly authenticated; and neither a deposit nor a withdrawal will be permitted except upon the presentation
of the depositor's savings passbook, in which the amount deposited withdrawn shall be entered only by the Bank.
5. Withdrawals may be made by draft, mail or telegraphic transfer in currency of the account at the request of the depositor in writing on the
withdrawal slip or by authenticated cable. Such request must indicate the name of the payee/s, amount and the place where the funds are to be
paid. Any stamp, transmission and other charges related to such withdrawals shall be for the account of the depositor and shall be paid by
him/her upon demand. Withdrawals may also be made in the form of travellers checks and in pesos. Withdrawals in the form of notes/bills are
allowed subject however, to their (availability).
6. Deposits shall not be subject to withdrawal by check, and may be withdrawal only in the manner above provided, upon presentation of the
depositor's savings passbook and with the withdrawal form supplied by the Bank at the counter. 19
Under these rules, to be able to withdraw from the savings account deposit under the Philippine foreign currency deposit system, two requisites must be
presented to petitioner bank by the person withdrawing an amount: (a) a duly filled-up withdrawal slip, and (b) the depositor's passbook. Private
respondent admits he signed a blank withdrawal slip ostensibly in violation of Rule No. 6 requiring that the request for withdrawal must name the payee,
the amount to be withdrawn and the place where such withdrawal should be made. That the withdrawal slip was in fact a blank one with only private
respondent's two signatures affixed on the proper spaces is buttressed by petitioner's allegation in the instant petition that had private respondent
indicated therein the person authorized to receive the money, then Ruben Gayon, Jr. could not have withdrawn any amount. Petitioner contends that "(I)n
failing to do so (i.e., naming his authorized agent), he practically authorized any possessor thereof to write any amount and to collect the same." 20
Such contention would have been valid if not for the fact that the withdrawal slip itself indicates a special instruction that the amount is payable to "Ramon
A. de Guzman &/or Agnes C. de Guzman." Such being the case, petitioner's personnel should have been duly warned that Gayon, who was also
employed in petitioner's Buendia Ave. Extension branch,21 was not the proper payee of the proceeds of the check. Otherwise, either Ramon or Agnes de
Guzman should have issued another authority to Gayon for such withdrawal. Of course, at the dorsal side of the withdrawal slip is an "authority to
withdraw" naming Gayon the person who can withdraw the amount indicated in the check. Private respondent does not deny having signed such authority.
However, considering petitioner's clear admission that the withdrawal slip was a blank one except for private respondent's signature, the unavoidable
conclusion is that the typewritten name of "Ruben C. Gayon, Jr." was intercalated and thereafter it was signed by Gayon or whoever was allowed by
petitioner to withdraw the amount. Under these facts, there could not have been a principal-agent relationship between private respondent and Gayon so
as to render the former liable for the amount withdrawn.
Moreover, the withdrawal slip contains a boxed warning that states: "This receipt must be signed and presented with the corresponding foreign currency
savings passbook by the depositor in person. For withdrawals thru a representative, depositor should accomplish the authority at the back." The
requirement of presentation of the passbook when withdrawing an amount cannot be given mere lip service even though the person making the
withdrawal is authorized by the depositor to do so. This is clear from Rule No. 6 set out by petitioner so that, for the protection of the bank's interest and as
a reminder to the depositor, the withdrawal shall be entered in the depositor's passbook. The fact that private respondent's passbook was not presented
during the withdrawal is evidenced by the entries therein showing that the last transaction that he made with the bank was on September 3, 1984, the date
he deposited the controversial check in the amount of $2,500.00.22
In allowing the withdrawal, petitioner likewise overlooked another rule that is printed in the passbook. Thus:
2. All deposits will be received as current funds and will be repaid in the same manner; provided, however, that deposits of drafts, checks,
money orders, etc. will be accented as subject to collection only and credited to the account only upon receipt of the notice of final payment.
Collection charges by the Bank's foreign correspondent in effecting such collection shall be for the account of the depositor. If the account has
sufficient balance, the collection shall be debited by the Bank against the account. If, for any reason, the proceeds of the deposited checks,
drafts, money orders, etc., cannot be collected or if the Bank is required to return such proceeds, the provisional entry therefor made by the
Bank in the savings passbook and its records shall be deemed automatically cancelled regardless of the time that has elapsed, and whether or
not the defective items can be returned to the depositor; and the Bank is hereby authorized to execute immediately the necessary corrections,
amendments or changes in its record, as well as on the savings passbook at the first opportunity to reflect such cancellation. (Emphasis and
underlining supplied.)

108

As correctly held by the Court of Appeals, in depositing the check in his name, private respondent did not become the outright owner of the amount stated
therein. Under the above rule, by depositing the check with petitioner, private respondent was, in a way, merely designating petitioner as the collecting
bank. This is in consonance with the rule that a negotiable instrument, such as a check, whether a manager's check or ordinary check, is not legal
tender.23 As such, after receiving the deposit, under its own rules, petitioner shall credit the amount in private respondent's account or infuse value thereon
only after the drawee bank shall have paid the amount of the check or the check has been cleared for deposit. Again, this is in accordance with ordinary
banking practices and with this Court's pronouncement that "the collecting bank or last endorser generally suffers the loss because has the duty to
ascertain the genuineness of all prior endorsements 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 endorsements."24 The rule finds more meaning in this case where the
check involved is drawn on a foreign bank and therefore collection is more difficult than when the drawee bank is a local one even though the check in
question is a manager's check.25
In Banco Atlantico v. Auditor General,26 Banco Atlantico, a commercial bank in Madrid, Spain, paid the amounts represented in three (3) checks to Virginia
Boncan, the finance officer of the Philippine Embassy in Madrid. The bank did so without previously clearing the checks with the drawee bank, the
Philippine National Bank in New York, on account of the "special treatment" that Boncan received from the personnel of Banco Atlantico's foreign
department. The Court held that the encashment of the checks without prior clearance is "contrary to normal or ordinary banking practice specially so
where the drawee bank is a foreign bank and the amounts involved were large." Accordingly, the Court approved the Auditor General's denial of Banco
Atlantico's claim for payment of the value of the checks that was withdrawn by Boncan.
Said ruling brings to light the fact that the banking business is affected with public interest. By the nature of its functions, a bank is under obligation to treat
the accounts of its depositors "with meticulous care, always having in mind the fiduciary nature of their relationship." 27 As such, in dealing with its
depositors, a bank should exercise its functions not only with the diligence of a good father of a family but it should do so with the highest degree of care. 28
In the case at bar, petitioner, in allowing the withdrawal of private respondent's deposit, failed to exercise the diligence of a good father of a family. In total
disregard of its own rules, petitioner's personnel negligently handled private respondent's account to petitioner's detriment. As this Court once said on this
matter:
Negligence is the omission to do something which a reasonable man, guided by those considerations which ordinarily regulate the conduct of human
affairs, would do, or the doing of something which a prudent and reasonable man would do. The seventy-eight (78)-year-old, yet still relevant, case of
Picart v. Smith, provides that test by which to determine the existence of negligence in a particular case which may be stated as follows: Did the defendant
in doing the alleged negligent act use that reasonable care and caution which an ordinarily prudent person would have used in the same situation? If not,
then he is guilty of negligence. The law here in effect adopts the standard supposed to be supplied by the imaginary conduct of the discreet pater-familias
of the Roman law. The existence of negligence in a given case is not determined by reference to the personal judgment of the actor in the situation before
him. The law considers what would be reckless, blameworthy, or negligent in the man of ordinary intelligence and prudence and determines liability by
that.29
Petitioner violated its own rules by allowing the withdrawal of an amount that is definitely over and above the aggregate amount of private respondent's
dollar deposits that had yet to be cleared. The bank's ledger on private respondent's account shows that before he deposited $2,500.00, private
respondent had a balance of only $750.00.30 Upon private respondent's deposit of $2,500.00 on September 3, 1984, that amount was credited in his
ledger as a deposit resulting in the corresponding total balance of $3,250.00.31 On September 10, 1984, the amount of $600.00 and the additional charges
of $10.00 were indicated therein as withdrawn thereby leaving a balance $2,640.00. On September 30, 1984, an interest of $11.59 was reflected in the
ledger and on October 23, 1984, the amount of $2,541.67 was entered as withdrawn with a balance of $109.92.32 On November 19, 1984 the word "hold"
was written beside the balance of $109.92.33 That must have been the time when Reyes, petitioner's branch manager, was informed unofficially of the fact
that the check deposited was a counterfeit, but petitioner's Buendia Ave. Extension Branch received a copy of the communication thereon from Wells
Fargo Bank International in New York the following day, November 20, 1984.34 According to Reyes, Wells Fargo Bank International handled the clearing of
checks drawn against U.S. banks that were deposited with petitioner.35
From these facts on record, it is at once apparent that petitioner's personnel allowed the withdrawal of an amount bigger than the original deposit of
$750.00 and the value of the check deposited in the amount of $2,500.00 although they had not yet received notice from the clearing bank in the United
States on whether or not the check was funded. Reyes' contention that after the lapse of the 35-day period the amount of a deposited check could be
withdrawn even in the absence of a clearance thereon, otherwise it could take a long time before a depositor could make a withdrawal, 36 is untenable.
Said practice amounts to a disregard of the clearance requirement of the banking system.
While it is true that private respondent's having signed a blank withdrawal slip set in motion the events that resulted in the withdrawal and encashment of
the counterfeit check, the negligence of petitioner's personnel was the proximate cause of the loss that petitioner sustained. Proximate cause, which is
determined by a mixed consideration of logic, common sense, policy and precedent, is "that cause, which, in natural and continuous sequence, unbroken
by any efficient intervening cause, produces the injury, and without which the result would not have occurred."37 The proximate cause of the withdrawal
and eventual loss of the amount of $2,500.00 on petitioner's part was its personnel's negligence in allowing such withdrawal in disregard of its own rules
and the clearing requirement in the banking system. In so doing, petitioner assumed the risk of incurring a loss on account of a forged or counterfeit
foreign check and hence, it should suffer the resulting damage.1wphi1.nt
WHEREFORE, the petition for review on certiorari is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No. 37392 is AFFIRMED. SO
ORDERED.
Davide, Jr., C.J., Puno, Kapunan and Pardo, JJ., concur

109

G.R. No. 117660.

December 18, 2000

AGRO CONGLOMERATES, INC. and MARIO SORIANO, petitioners,

vs.
THE HON. COURT OF APPEALS and REGENT SAVINGS and LOAN BANK, INC., respondents.

QUISUMBING, J.:
This is a petition for review challenging the decisioni[1] dated October 17, 1994 of the Court of Appeals in CA-G.R. No. 32933, which affirmed in toto the
judgment of the Manila Regional Trial Court, Branch 27, in consolidated Cases Nos. 86-37374, 86-37388, 86-37543.
This petition springs from three complaints for sums of money filed by respondent bank against herein petitioners. In the decision of the Court of Appeals,
petitioners were ordered to pay respondent bank, as follows:
Wherefore, judgment is hereby rendered in favor of plaintiff and against defendants, as follows:
1) In Civil Case No. 86-37374, defendants [petitioners, herein] are ordered jointly and severally, to pay to plaintiff the amount of P78,212.29, together with
interest and service charge thereon, at the rates of 14% and 3% per annum, respectively, computed from November 10, 1982, until fully paid, plus
stipulated penalty on unpaid principal at the rate of 6% per annum, computed from November 10, 1982, plus 15% as liquidated damage plus 10% of the
total amount due, as attorneys fees, plus costs;
2) In Civil Case No. 86-37388, defendant is ordered to pay plaintiff the amount of P632,911.39, together with interest and service charge thereon at the
rate of 14% and 3% per annum, respectively, computed from January 15, 1983, until fully paid, plus stipulated penalty on unpaid principal at the rate of 6%
per annum, computed from January 15, 1983, plus liquidated damages equivalent to 15% of the total amount due, plus attorneys fees equivalent to 10%
of the total amount due, plus costs; and
3) In Civil Case No. 86-37543, defendant is ordered to pay plaintiff, on the first cause of action, the amount of P510,000.00, together with interest and
service charge thereon, at the rates of 14% and 2% per annum, respectively, computed from March 13, 1983, until fully paid, plus a penalty of 6% per
annum, based on the outstanding principal of the loan, computed from March 13, 1983, until fully paid; and on the second cause of action, the amount of
P494,936.71, together with interest and service charge thereon at the rates of 14% and 2%, per annum, respectively, computed from March 30, 1983, until
fully paid, plus a penalty charge of 6% per annum, based on the unpaid principal, computed from March 30, 1983, until fully paid, plus (on both causes of
action) an amount equal to 15% of the total amounts due, as liquidated damages, plus attorneys fees equal to 10% of the total amounts due, plus costs. 1
[2]

110

Based on the records, the following are the factual antecedents.

On July 17, 1982, petitioner Agro Conglomerates, Inc. as vendor, sold two parcels of land to Wonderland Food Industries, Inc. In their Memorandum of
Agreement,ii[3] the parties covenanted that the purchase price of Five Million (P5,000,000.00) Pesos would be settled by the vendee, under the following
terms and conditions: (1) One Million (P1,000,000.00) Pesos shall be paid in cash upon the signing of the agreement; (2) Two Million (P2,000,000.00)
Pesos worth of common shares of stock of the Wonderland Food Industries, Inc.; and (3) The balance of P2,000,000.00 shall be paid in four equal
installments, the first installment falling due, 180 days after the signing of the agreement and every six months thereafter, with an interest rate of 18% per
annum, to be advanced by the vendee upon the signing of the agreement.
On July 19, 1982, the vendor, the vendee, and the respondent bank Regent Savings & Loan Bank (formerly Summa Savings & Loan Association),
executed an Addendumiii[4]to the previous Memorandum of Agreement. The new arrangement pertained to the revision of settlement of the initial
payments of P1,000,000.00 and prepaid interest of P360,000.00 (18% of P2,000,000.00) as follows:
Whereas, the parties have agreed to qualify the stipulated terms for the payment of the said ONE MILLION THREE HUNDRED SIXTY THOUSAND
(P1,360,000.00) PESOS.
WHEREFORE, in consideration of the mutual covenant and agreement of the parties, they do further covenant and agree as follows:
1. That the VENDEE instead of paying the amount of ONE MILLION THREE HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS in cash, hereby
authorizes the VENDOR to obtain a loan from Summa Savings and Loan Association with office address at Valenzuela, Metro Manila, being represented
herein by its President, Mr. Jaime Cario and referred to hereafter as Financier; in the amount of ONE MILLION THREE HUNDRED SIXTY THOUSAND
(P1,360,000.00)PESOS, plus interest thereon at such rate as the VENDEE and the Financier may agree, which amount shall cover the ONE MILLION
(P1,000,000.00) PESOS cash which was agreed to be paid upon signing of the Memorandum of Agreement, plus 18% interest on the balance of two
million pesos stipulated upon in Item No. 1(c) of the said agreement; provided however, that said loan shall be made for and in the name of the VENDOR.
2. The VENDEE also agrees that the full amount of ONE MILLION THREE HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS be paid directly to the
VENDOR; however, the VENDEE hereby undertakes to pay the full amount of the said loan to the Financier on such terms and conditions agreed upon by
the Financier and the VENDOR, it being understood that while the loan will be secured from and in the name of the VENDOR, the VENDEE will be the
one liable to pay the entire proceeds thereof including interest and other charges.iv[5]
This addendum was not notarized.
Consequently, petitioner Mario Soriano signed as maker several promissory notes,v[6] payable to the respondent bank. Thereafter, the bank released the
proceeds of the loan to petitioners. However, petitioners failed to meet their obligations as they fell due. During that time, the bank was experiencing
financial turmoil and was under the supervision of the Central Bank. Central Bank examiner and liquidator Cordula de Jesus, endorsed the subject
promissory notes to the banks counsel for collection. The bank gave petitioners opportunity to settle their account by extending payment due dates. Mario
Soriano manifested his intention to re-structure the loan, yet did not show up nor submit his formal written request.
Respondent bank filed three separate complaints before the Regional Trial Court of Manila for Collection of Sums of money. The corresponding case
histories are illustrated in the table below:

DatAm Pa Pa
e ou y ym
of nt m ent
Lo
en Ext
an
t en
Du sio
e n
Da Da
te tes
Civ
il P No Fe
Ca 78, v. b.
se 21 10 8,
86- 2.2 , 19
37 9 19 83
37
82 Ma
4
y
Au
9,
gus
19
t
83
12,
Au
19
g.
82
7,
19
83
Civ
il P Ja Ma
Ca 63 n. y
se 2,9 15 16,
86- 11. , 19
37 39 19 83

111

38
83 Au
8
g.
Jul
14,
y
19
19,
83
19
82
Civ
il P M Ju
Ca 51 ar ne
se 0,0 ch 11,
86- 00. 13 19
37 00 , 83
54
19 Se
3
83 pt.
Se P
9,
pte 49
19
mb 4,9 M 83
er 36. ar
14, 71 ch Ju
19
30 ne
82
, 28,
19 19
83 83
Oct
Se
ob
pt.
er
26,
1,
19
19
83
82
In their answer, petitioners interposed the defense of novation and insisted there was a valid substitution of debtor. They alleged that the addendum
specifically states that although the promissory notes were in their names, Wonderland shall be responsible for the payment thereof.
The trial court held that petitioners are liable, to wit:
The evidences, however, disclose that Wonderland did not comply with its obligation under said Addendum (Exh. S) as the agreement to turn over the
farmland to it, did not materialize (57 tsn, May 29, 1990), and there was, actually no sale of the land (58 tsn, ibid). Hence, Wonderland is not answerable.
And since the loans obtained under the four promissory notes (Exhs. A, C, G, and E) have not been paid, despite opportunities given by plaintiff to
defendants to make payments, it stands to reason that defendants are liable to pay their obligations thereunder to plaintiff. In fact, defendants failed to file
a third-party complaint against Wonderland, which shows the weakness of its stand that Wonderland is answerable to make said payments. vi[7]
Petitioners appealed to the Court of Appeals. The trial courts decision was affirmed by the appellate court.
Hence, this recourse, wherein petitioners raise the sole issue of:
WHETHER THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE ADDENDUM, SIGNED BY THE PETITIONERS, RESPONDENT BANK
AND WONDERLAND INC., CONSTITUTES A NOVATION OF THE CONTRACT BY SUBSTITUTION OF DEBTOR, WHICH EXEMPTS THE
PETITIONERS FROM ANY LIABILITY OVER THE PROMISSORY NOTES.
Revealed by the facts on record, the conflict among the parties started from a contract of sale of a farmland between petitioners and Wonderland Food
Industries, Inc. As found by the trial court, no such sale materialized.
A contract of sale is a reciprocal transaction. The obligation or promise of each party is the cause or consideration for the obligation or promise by the
other. The vendee is obliged to pay the price, while the vendor must deliver actual possession of the land. In the instant case the original plan was that the
initial payments would be paid in cash. Subsequently, the parties (with the participation of respondent bank) executed an addendum providing instead, that
the petitioners would secure a loan in the name of Agro Conglomerates Inc. for the total amount of the initial payments, while the settlement of said loan
would be assumed by Wonderland. Thereafter, petitioner Soriano signed several promissory notes and received the proceeds in behalf of petitionercompany.
By this time, we note a subsidiary contract of suretyship had taken effect since petitioners signed the promissory notes as maker and accommodation
party for the benefit of Wonderland. Petitioners became liable as accommodation party. An accommodation party is a person who has signed the
instrument as maker, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person and is liable on
the instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew (the signatory) to be an accommodation party. vii
[8] He has the right, after paying the holder, to obtain reimbursement from the party accommodated, since the relation between them has in effect become
one of principal and surety, the accommodation party being the surety.viii[9] Suretyship is defined as the relation which exists where one person has
undertaken an obligation and another person is also under the obligation or other duty to the obligee, who is entitled to but one performance, and as
between the two who are bound, one rather than the other should perform.ix[10] The suretys liability to the creditor or promisee of the principal is said to be
direct, primary and absolute; in other words, he is directly and equally bound with the principal.x[11] And the creditor may proceed against any one of the
solidary debtors.xi[12]
We do not give credence to petitioners assertion that, as provided by the addendum, their obligation to pay the promissory notes was novated by
substitution of a new debtor, Wonderland. Contrary to petitioners contention, the attendant facts herein do not make a case of novation.
Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which extinguishes or modifies the
first, either by changing the object or principal conditions, or by substituting another in place of the debtor, or by subrogating a third person in the rights of
the creditor.xii[13] In order that a novation can take place, the concurrence of the following requisitesxiii[14] are indispensable:

112

1) There must be a previous valid obligation;

2) There must be an agreement of the parties concerned to a new contract;
3) There must be the extinguishment of the old contract; and
4) There must be the validity of the new contract.
In the instant case, the first requisite for a valid novation is lacking. There was no novation by substitution of debtor because there was no prior obligation
which was substituted by a new contract. It will be noted that the promissory notes, which bound the petitioners to pay, were executed after the addendum.
The addendum modified the contract of sale, not the stipulations in the promissory notes which pertain to the surety contract. At this instance, Wonderland
apparently assured the payment of future debts to be incurred by the petitioners. Consequently, only a contract of surety arose. It was wrong for
petitioners to presume a novation had taken place. The well-settled rule is that novation is never presumed, xiv[15] it must be clearly and unequivocally
shown.xv[16]
As it turned out, the contract of surety between Wonderland and the petitioners was extinguished by the rescission of the contract of sale of the farmland.
With the rescission, there was confusion or merger in the persons of the principal obligor and the surety, namely the petitioners herein. The addendum
which was dependent thereon likewise lost its efficacy. It is true that the basic and fundamental rule in the interpretation of contract is that, if the terms
thereof are clear and leave no doubt as to the intention of the contracting parties, the literal meaning shall control. However, in order to judge the intention
of the parties, their contemporaneous and subsequent acts should be considered.xvi[17]The contract of sale between Wonderland and petitioners did not
materialize. But it was admitted that petitioners received the proceeds of the promissory notes obtained from respondent bank.
Sec. 22 of the Civil Code provides:
Every person who through an act of performance by another, or any other means, acquires or comes into possession of something at the expense of the
latter without just or legal ground, shall return the same to him.
Petitioners had no legal or just ground to retain the proceeds of the loan at the expense of private respondent. Neither could petitioners excuse
themselves and hold Wonderland still liable to pay the loan upon the rescission of their sales contract. If petitioners sustained damages as a result of the
rescission, they should have impleaded Wonderland and asked damages. The non-inclusion of a necessary party does not prevent the court from
proceeding in the action, and the judgment rendered therein shall be without prejudice to the rights of such necessary party. xvii[18] But respondent
appellate court did not err in holding that petitioners are duty-bound under the law to pay the claims of respondent bank from whom they had obtained the
loan proceeds.
WHEREFORE, the petition is DENIED for lack of merit. The assailed decision of the Court of Appeals dated October 17, 1994 is AFFIRMED. Costs
against petitioners.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur

G.R. No. L-15126

November 30, 1961

113

VICENTE R. DE OCAMPO & CO., plaintiff-appellee,

vs.
ANITA GATCHALIAN, ET AL., defendants-appellants.
Vicente Formoso, Jr. for plaintiff-appellee.
Reyes and Pangalagan for defendants-appellants.
LABRADOR, J.:
Appeal from a judgment of the Court of First Instance of Manila, Hon. Conrado M. Velasquez, presiding, sentencing the defendants to pay the plaintiff the
sum of P600, with legal interest from September 10, 1953 until paid, and to pay the costs.
The action is for the recovery of the value of a check for P600 payable to the plaintiff and drawn by defendant Anita C. Gatchalian. The complaint sets
forth the check and alleges that plaintiff received it in payment of the indebtedness of one Matilde Gonzales; that upon receipt of said check, plaintiff gave
Matilde Gonzales P158.25, the difference between the face value of the check and Matilde Gonzales' indebtedness. The defendants admit the execution
of the check but they allege in their answer, as affirmative defense, that it was issued subject to a condition, which was not fulfilled, and that plaintiff was
guilty of gross negligence in not taking steps to protect itself.
At the time of the trial, the parties submitted a stipulation of facts, which reads as follows:
Plaintiff and defendants through their respective undersigned attorney's respectfully submit the following Agreed Stipulation of Facts;
First. That on or about 8 September 1953, in the evening, defendant Anita C. Gatchalian who was then interested in looking for a car for the
use of her husband and the family, was shown and offered a car by Manuel Gonzales who was accompanied by Emil Fajardo, the latter being
personally known to defendant Anita C. Gatchalian;
Second. That Manuel Gonzales represented to defend Anita C. Gatchalian that he was duly authorized by the owner of the car, Ocampo
Clinic, to look for a buyer of said car and to negotiate for and accomplish said sale, but which facts were not known to plaintiff;
Third. That defendant Anita C. Gatchalian, finding the price of the car quoted by Manuel Gonzales to her satisfaction, requested Manuel
Gonzales to bring the car the day following together with the certificate of registration of the car, so that her husband would be able to see
same; that on this request of defendant Anita C. Gatchalian, Manuel Gonzales advised her that the owner of the car will not be willing to give
the certificate of registration unless there is a showing that the party interested in the purchase of said car is ready and willing to make such
purchase and that for this purpose Manuel Gonzales requested defendant Anita C. Gatchalian to give him (Manuel Gonzales) a check which
will be shown to the owner as evidence of buyer's good faith in the intention to purchase the said car, the said check to be for safekeeping only
of Manuel Gonzales and to be returned to defendant Anita C. Gatchalian the following day when Manuel Gonzales brings the car and the
certificate of registration, but which facts were not known to plaintiff;
Fourth. That relying on these representations of Manuel Gonzales and with his assurance that said check will be only for safekeeping and
which will be returned to said defendant the following day when the car and its certificate of registration will be brought by Manuel Gonzales to
defendants, but which facts were not known to plaintiff, defendant Anita C. Gatchalian drew and issued a check, Exh. "B"; that Manuel
Gonzales executed and issued a receipt for said check, Exh. "1";
Fifth. That on the failure of Manuel Gonzales to appear the day following and on his failure to bring the car and its certificate of registration
and to return the check, Exh. "B", on the following day as previously agreed upon, defendant Anita C. Gatchalian issued a "Stop Payment
Order" on the check, Exh. "3", with the drawee bank. Said "Stop Payment Order" was issued without previous notice on plaintiff not being know
to defendant, Anita C. Gatchalian and who furthermore had no reason to know check was given to plaintiff;
Sixth. That defendants, both or either of them, did not know personally Manuel Gonzales or any member of his family at any time prior to
September 1953, but that defendant Hipolito Gatchalian is personally acquainted with V. R. de Ocampo;
Seventh. That defendants, both or either of them, had no arrangements or agreement with the Ocampo Clinic at any time prior to, on or after
9 September 1953 for the hospitalization of the wife of Manuel Gonzales and neither or both of said defendants had assumed, expressly or
impliedly, with the Ocampo Clinic, the obligation of Manuel Gonzales or his wife for the hospitalization of the latter;
Eight. That defendants, both or either of them, had no obligation or liability, directly or indirectly with the Ocampo Clinic before, or on 9
September 1953;
Ninth. That Manuel Gonzales having received the check Exh. "B" from defendant Anita C. Gatchalian under the representations and
conditions herein above specified, delivered the same to the Ocampo Clinic, in payment of the fees and expenses arising from the
hospitalization of his wife;
Tenth. That plaintiff for and in consideration of fees and expenses of hospitalization and the release of the wife of Manuel Gonzales from its
hospital, accepted said check, applying P441.75 (Exhibit "A") thereof to payment of said fees and expenses and delivering to Manuel Gonzales
the amount of P158.25 (as per receipt, Exhibit "D") representing the balance on the amount of the said check, Exh. "B";

114

Eleventh. That the acts of acceptance of the check and application of its proceeds in the manner specified above were made without
previous inquiry by plaintiff from defendants:
Twelfth. That plaintiff filed or caused to be filed with the Office of the City Fiscal of Manila, a complaint for estafa against Manuel Gonzales
based on and arising from the acts of said Manuel Gonzales in paying his obligations with plaintiff and receiving the cash balance of the check,
Exh. "B" and that said complaint was subsequently dropped;
Thirteenth. That the exhibits mentioned in this stipulation and the other exhibits submitted previously, be considered as parts of this
stipulation, without necessity of formally offering them in evidence;
WHEREFORE, it is most respectfully prayed that this agreed stipulation of facts be admitted and that the parties hereto be given fifteen days
from today within which to submit simultaneously their memorandum to discuss the issues of law arising from the facts, reserving to either party
the right to submit reply memorandum, if necessary, within ten days from receipt of their main memoranda. (pp. 21-25, Defendant's Record on
Appeal).
No other evidence was submitted and upon said stipulation the court rendered the judgment already alluded above.
In their appeal defendants-appellants contend that the check is not a negotiable instrument, under the facts and circumstances stated in the stipulation of
facts, and that plaintiff is not a holder in due course. In support of the first contention, it is argued that defendant Gatchalian had no intention to transfer her
property in the instrument as it was for safekeeping merely and, therefore, there was no delivery required by law (Section 16, Negotiable Instruments
Law); that assuming for the sake of argument that delivery was not for safekeeping merely, delivery was conditional and the condition was not fulfilled.
In support of the contention that plaintiff-appellee is not a holder in due course, the appellant argues that plaintiff-appellee cannot be a holder in due
course because there was no negotiation prior to plaintiff-appellee's acquiring the possession of the check; that a holder in due course presupposes a
prior party from whose hands negotiation proceeded, and in the case at bar, plaintiff-appellee is the payee, the maker and the payee being original parties.
It is also claimed that the plaintiff-appellee is not a holder in due course because it acquired the check with notice of defect in the title of the holder, Manuel
Gonzales, and because under the circumstances stated in the stipulation of facts there were circumstances that brought suspicion about Gonzales'
possession and negotiation, which circumstances should have placed the plaintiff-appellee under the duty, to inquire into the title of the holder. The
circumstances are as follows:
The check is not a personal check of Manuel Gonzales. (Paragraph Ninth, Stipulation of Facts). Plaintiff could have inquired why a person
would use the check of another to pay his own debt. Furthermore, plaintiff had the "means of knowledge" inasmuch as defendant Hipolito
Gatchalian is personally acquainted with V. R. de Ocampo (Paragraph Sixth, Stipulation of Facts.).
The maker Anita C. Gatchalian is a complete stranger to Manuel Gonzales and Dr. V. R. de Ocampo (Paragraph Sixth, Stipulation of Facts).
The maker is not in any manner obligated to Ocampo Clinic nor to Manuel Gonzales. (Par. 7, Stipulation of Facts.)
The check could not have been intended to pay the hospital fees which amounted only to P441.75. The check is in the amount of P600.00,
which is in excess of the amount due plaintiff. (Par. 10, Stipulation of Facts).
It was necessary for plaintiff to give Manuel Gonzales change in the sum P158.25 (Par. 10, Stipulation of Facts). Since Manuel Gonzales is the
party obliged to pay, plaintiff should have been more cautious and wary in accepting a piece of paper and disbursing cold cash.
The check is payable to bearer. Hence, any person who holds it should have been subjected to inquiries. EVEN IN A BANK, CHECKS ARE
NOT CASHED WITHOUT INQUIRY FROM THE BEARER. The same inquiries should have been made by plaintiff. (Defendants-appellants'
brief, pp. 52-53)
Answering the first contention of appellant, counsel for plaintiff-appellee argues that in accordance with the best authority on the Negotiable Instruments
Law, plaintiff-appellee may be considered as a holder in due course, citing Brannan's Negotiable Instruments Law, 6th edition, page 252. On this issue
Brannan holds that a payee may be a holder in due course and says that to this effect is the greater weight of authority, thus:
Whether the payee may be a holder in due course under the N. I. L., as he was at common law, is a question upon which the courts are in
serious conflict. There can be no doubt that a proper interpretation of the act read as a whole leads to the conclusion that a payee may be a
holder in due course under any circumstance in which he meets the requirements of Sec. 52.
The argument of Professor Brannan in an earlier edition of this work has never been successfully answered and is here repeated.
Section 191 defines "holder" as the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof. Sec. 52 defendants
defines a holder in due course as "a holder who has taken the instrument under the following conditions: 1. That it is complete and regular on
its face. 2. 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. 3. That he took it in good faith and for value. 4. 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."

115

Since "holder", as defined in sec. 191, includes a payee who is in possession the word holder in the first clause of sec. 52 and in the second
subsection may be replaced by the definition in sec. 191 so as to read "a holder in due course is a payee or indorsee who is in possession,"
etc. (Brannan's on Negotiable Instruments Law, 6th ed., p. 543).
The first argument of the defendants-appellants, therefore, depends upon whether or not the plaintiff-appellee is a holder in due course. If it is such a
holder in due course, it is immaterial that it was the payee and an immediate party to the instrument.
The other contention of the plaintiff is that there has been no negotiation of the instrument, because the drawer did not deliver the instrument to Manuel
Gonzales with the intention of negotiating the same, or for the purpose of giving effect thereto, for as the stipulation of facts declares the check was to
remain in the possession Manuel Gonzales, and was not to be negotiated, but was to serve merely as evidence of good faith of defendants in their desire
to purchase the car being sold to them. Admitting that such was the intention of the drawer of the check when she delivered it to Manuel Gonzales, it was
no fault of the plaintiff-appellee drawee if Manuel Gonzales delivered the check or negotiated it. As the check was payable to the plaintiff-appellee, and
was entrusted to Manuel Gonzales by Gatchalian, the delivery to Manuel Gonzales was a delivery by the drawer to his own agent; in other words, Manuel
Gonzales was the agent of the drawer Anita Gatchalian insofar as the possession of the check is concerned. So, when the agent of drawer Manuel
Gonzales negotiated the check with the intention of getting its value from plaintiff-appellee, negotiation took place through no fault of the plaintiff-appellee,
unless it can be shown that the plaintiff-appellee should be considered as having notice of the defect in the possession of the holder Manuel Gonzales.
Our resolution of this issue leads us to a consideration of the last question presented by the appellants, i.e., whether the plaintiff-appellee may be
considered as a holder in due course.
Section 52, Negotiable Instruments Law, defines holder in due course, thus:
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.
The stipulation of facts expressly states that plaintiff-appellee was not aware of the circumstances under which the check was delivered to Manuel
Gonzales, but we agree with the defendants-appellants that the circumstances indicated by them in their briefs, such as the fact that appellants had no
obligation or liability to the Ocampo Clinic; that the amount of the check did not correspond exactly with the obligation of Matilde Gonzales to Dr. V. R. de
Ocampo; and that the check had two parallel lines in the upper left hand corner, which practice means that the check could only be deposited but may not
be converted into cash all these circumstances should have put the plaintiff-appellee to inquiry as to the why and wherefore of the possession of the
check by Manuel Gonzales, and why he used it to pay Matilde's account. It was payee's duty to ascertain from the holder Manuel Gonzales what the
nature of the latter's title to the check was or the nature of his possession. Having failed in this respect, we must declare that plaintiff-appellee was guilty of
gross neglect in not finding out the nature of the title and possession of Manuel Gonzales, amounting to legal absence of good faith, and it may not be
considered as a holder of the check in good faith. To such effect is the consensus of authority.
In order to show that the defendant had "knowledge of such facts that his action in taking the instrument amounted to bad faith," it is not
necessary to prove that the defendant knew the exact fraud that was practiced upon the plaintiff by the defendant's assignor, it being sufficient
to show that the defendant had notice that there was something wrong about his assignor's acquisition of title, although he did not have notice
of the particular wrong that was committed. Paika v. Perry, 225 Mass. 563, 114 N.E. 830.
It is sufficient that the buyer of a note had notice or knowledge that the note was in some way tainted with fraud. It is not necessary that he
should know the particulars or even the nature of the fraud, since all that is required is knowledge of such facts that his action in taking the note
amounted bad faith. Ozark Motor Co. v. Horton (Mo. App.), 196 S.W. 395. Accord. Davis v. First Nat. Bank, 26 Ariz. 621, 229 Pac. 391.
Liberty bonds stolen from the plaintiff were brought by the thief, a boy fifteen years old, less than five feet tall, immature in appearance and
bearing on his face the stamp a degenerate, to the defendants' clerk for sale. The boy stated that they belonged to his mother. The defendants
paid the boy for the bonds without any further inquiry. Held, the plaintiff could recover the value of the bonds. The term 'bad faith' does not
necessarily involve furtive motives, but means bad faith in a commercial sense. The manner in which the defendants conducted their Liberty
Loan department provided an easy way for thieves to dispose of their plunder. It was a case of "no questions asked." Although gross
negligence does not of itself constitute bad faith, it is evidence from which bad faith may be inferred. The circumstances thrust the duty upon
the defendants to make further inquiries and they had no right to shut their eyes deliberately to obvious facts. Morris v. Muir, 111 Misc. Rep.
739, 181 N.Y. Supp. 913, affd. in memo., 191 App. Div. 947, 181 N.Y. Supp. 945." (pp. 640-642, Brannan's Negotiable Instruments Law, 6th
ed.).
The above considerations would seem sufficient to justify our ruling that plaintiff-appellee should not be allowed to recover the value of the check. Let us
now examine the express provisions of the Negotiable Instruments Law pertinent to the matter to find if our ruling conforms thereto. Section 52 (c)
provides that a holder in due course is one who takes the instrument "in good faith and for value;" Section 59, "that every holder is deemed prima facie to
be a holder in due course;" and Section 52 (d), that in order that one may be a holder in due course it is necessary that "at the time the instrument was
negotiated to him "he had no notice of any . . . defect in the title of the person negotiating it;" and lastly Section 59, that every holder is deemed prima
facieto be a holder in due course.

116

In the case at bar the rule that a possessor of the instrument is prima faciea holder in due course does not apply because there was a defect in the title of
the holder (Manuel Gonzales), because the instrument is not payable to him or to bearer. On the other hand, the stipulation of facts indicated by the
appellants in their brief, like the fact that the drawer had no account with the payee; that the holder did not show or tell the payee why he had the check in
his possession and why he was using it for the payment of his own personal account show that holder's title was defective or suspicious, to say the
least. As holder's title was defective or suspicious, it cannot be stated that the payee acquired the check without knowledge of said defect in holder's title,
and for this reason the presumption that it is a holder in due course or that it acquired the instrument in good faith does not exist. And having presented no
evidence that it acquired the check in good faith, it (payee) cannot be considered as a holder in due course. In other words, under the circumstances of
the case, instead of the presumption that payee was a holder in good faith, the fact is that it acquired possession of the instrument under circumstances
that should have put it to inquiry as to the title of the holder who negotiated the check to it. The burden was, therefore, placed upon it to show that
notwithstanding the suspicious circumstances, it acquired the check in actual good faith.
The rule applicable to the case at bar is that described in the case of Howard National Bank v. Wilson, et al., 96 Vt. 438, 120 At. 889, 894, where the
Supreme Court of Vermont made the following disquisition:
Prior to the Negotiable Instruments Act, two distinct lines of cases had developed in this country. The first had its origin in Gill v. Cubitt, 3 B. &
C. 466, 10 E. L. 215, where the rule was distinctly laid down by the court of King's Bench that the purchaser of negotiable paper must exercise
reasonable prudence and caution, and that, if the circumstances were such as ought to have excited the suspicion of a prudent and careful
man, and he made no inquiry, he did not stand in the legal position of a bona fide holder. The rule was adopted by the courts of this country
generally and seem to have become a fixed rule in the law of negotiable paper. Later in Goodman v. Harvey, 4 A. & E. 870, 31 E. C. L. 381, the
English court abandoned its former position and adopted the rule that nothing short of actual bad faith or fraud in the purchaser would deprive
him of the character of a bona fide purchaser and let in defenses existing between prior parties, that no circumstances of suspicion merely, or
want of proper caution in the purchaser, would have this effect, and that even gross negligence would have no effect, except as evidence
tending to establish bad faith or fraud. Some of the American courts adhered to the earlier rule, while others followed the change inaugurated in
Goodman v. Harvey. The question was before this court in Roth v. Colvin, 32 Vt. 125, and, on full consideration of the question, a rule was
adopted in harmony with that announced in Gill v. Cubitt, which has been adhered to in subsequent cases, including those cited above. Stated
briefly, one line of cases including our own had adopted the test of the reasonably prudent man and the other that of actual good faith. It would
seem that it was the intent of the Negotiable Instruments Act to harmonize this disagreement by adopting the latter test. That such is the view
generally accepted by the courts appears from a recent review of the cases concerning what constitutes notice of defect. Brannan on Neg. Ins.
Law, 187-201. To effectuate the general purpose of the act to make uniform the Negotiable Instruments Law of those states which should enact
it, we are constrained to hold (contrary to the rule adopted in our former decisions) that negligence on the part of the plaintiff, or suspicious
circumstances sufficient to put a prudent man on inquiry, will not of themselves prevent a recovery, but are to be considered merely as
evidence bearing on the question of bad faith. See G. L. 3113, 3172, where such a course is required in construing other uniform acts.
It comes to this then: When the case has taken such shape that the plaintiff is called upon to prove himself a holder in due course to be entitled
to recover, he is required to establish the conditions entitling him to standing as such, including good faith in taking the instrument. It devolves
upon him to disclose the facts and circumstances attending the transfer, from which good or bad faith in the transaction may be inferred.
In the case at bar as the payee acquired the check under circumstances which should have put it to inquiry, why the holder had the check and used it to
pay his own personal account, the duty devolved upon it, plaintiff-appellee, to prove that it actually acquired said check in good faith. The stipulation of
facts contains no statement of such good faith, hence we are forced to the conclusion that plaintiff payee has not proved that it acquired the check in good
faith and may not be deemed a holder in due course thereof.
For the foregoing considerations, the decision appealed from should be, as it is hereby, reversed, and the defendants are absolved from the complaint.
With costs against plaintiff-appellee.
Padilla, Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon and De Leon, JJ., concur.
Bengzon, C.J., concurs in the result.

117

G.R. No. 70145 November 13, 1986

MARCELO A. MESINA, petitioner,
vs.
THE HONORABLE INTERMEDIATE APPELLATE COURT, HON. ARSENIO M. GONONG, in his capacity as Judge of Regional Trial Court Manila
(Branch VIII), JOSE GO, and ALBERT UY, respondents.

PARAS, J.:
This is an appeal by certiorari from the decision of the then Intermediate Appellate Court (IAC for short), now the Court of Appeals (CA) in AC-G.R. S.P.
04710, dated Jan. 22, 1985, which dismissed the petition for certiorari and prohibition filed by Marcelo A. Mesina against the trial court in Civil Case No.
84-22515. Said case (an Interpleader) was filed by Associated Bank against Jose Go and Marcelo A. Mesina regarding their conflicting claims over
Associated Bank Cashier's Check No. 011302 for P800,000.00, dated December 29, 1983.
Briefly, the facts and statement of the case are as follows:
Respondent Jose Go, on December 29, 1983, purchased from Associated Bank Cashier's Check No. 011302 for P800,000.00. Unfortunately, Jose Go left
said check on the top of the desk of the bank manager when he left the bank. The bank manager entrusted the check for safekeeping to a bank official, a
certain Albert Uy, who had then a visitor in the person of Alexander Lim. Uy had to answer a phone call on a nearby telephone after which he proceeded to
the men's room. When he returned to his desk, his visitor Lim was already gone. When Jose Go inquired for his cashier's check from Albert Uy, the check
was not in his folder and nowhere to be found. The latter advised Jose Go to go to the bank to accomplish a "STOP PAYMENT" order, which suggestion
Jose Go immediately followed. He also executed an affidavit of loss. Albert Uy went to the police to report the loss of the check, pointing to the person of
Alexander Lim as the one who could shed light on it.
The records of the police show that Associated Bank received the lost check for clearing on December 31, 1983, coming from Prudential Bank, Escolta
Branch. The check was immediately dishonored by Associated Bank by sending it back to Prudential Bank, with the words "Payment Stopped" stamped
on it. However, the same was again returned to Associated Bank on January 4, 1984 and for the second time it was dishonored. Several days later,
respondent Associated Bank received a letter, dated January 9, 1984, from a certain Atty. Lorenzo Navarro demanding payment on the cashier's check in
question, which was being held by his client. He however refused to reveal the name of his client and threatened to sue, if payment is not made.
Respondent bank, in its letter, dated January 20, 1984, replied saying the check belonged to Jose Go who lost it in the bank and is laying claim to it.
On February 1, 1984, police sent a letter to the Manager of the Prudential Bank, Escolta Branch, requesting assistance in Identifying the person who tried
to encash the check but said bank refused saying that it had to protect its client's interest and the Identity could only be revealed with the client's
conformity. Unsure of what to do on the matter, respondent Associated Bank on February 2, 1984 filed an action for Interpleader naming as respondent,
Jose Go and one John Doe, Atty. Navarro's then unnamed client. On even date, respondent bank received summons and copy of the complaint for
damages of a certain Marcelo A. Mesina from the Regional Trial Court (RTC) of Caloocan City filed on January 23, 1984 bearing the number C-11139.
Respondent bank moved to amend its complaint, having been notified for the first time of the name of Atty. Navarro's client and substituted Marcelo A.
Mesina for John Doe. Simultaneously, respondent bank, thru representative Albert Uy, informed Cpl. Gimao of the Western Police District that the lost
check of Jose Go is in the possession of Marcelo Mesina, herein petitioner. When Cpl. Gimao went to Marcelo Mesina to ask how he came to possess the
check, he said it was paid to him by Alexander Lim in a "certain transaction" but refused to elucidate further. An information for theft (Annex J) was

118

instituted against Alexander Lim and the corresponding warrant for his arrest was issued (Annex 6-A) which up to the date of the filing of this instant
petition remains unserved because of Alexander Lim's successful evation thereof.
Meanwhile, Jose Go filed his answer on February 24, 1984 in the Interpleader Case and moved to participate as intervenor in the complain for damages.
Albert Uy filed a motion of intervention and answer in the complaint for Interpleader. On the Scheduled date of pretrial conference inthe interpleader case,
it was disclosed that the "John Doe" impleaded as one of the defendants is actually petitioner Marcelo A. Mesina. Petitioner instead of filing his answer to
the complaint in the interpleader filed on May 17, 1984 an Omnibus Motion to Dismiss Ex Abudante Cautela alleging lack of jurisdiction in view of the
absence of an order to litigate, failure to state a cause of action and lack of personality to sue. Respondent bank in the other civil case (CC-11139) for
damages moved to dismiss suit in view of the existence already of the Interpleader case.
The trial court in the interpleader case issued an order dated July 13, 1984, denying the motion to dismiss of petitioner Mesina and ruling that respondent
bank's complaint sufficiently pleaded a cause of action for itnerpleader. Petitioner filed his motion for reconsideration which was denied by the trial court on
September 26, 1984. Upon motion for respondent Jose Go dated October 31, 1984, respondent judge issued an order on November 6, 1984, declaring
petitioner in default since his period to answer has already expirecd and set the ex-parte presentation of respondent bank's evidence on November 7,
1984.
Petitioner Mesina filed a petition for certioari with preliminary injunction with IAC to set aside 1) order of respondent court denying his omnibus Motion to
Dismiss 2) order of 3) the order of default against him.
On January 22, 1985, IAC rendered its decision dimissing the petition for certiorari. Petitioner Mesina filed his Motion for Reconsideration which was also
denied by the same court in its resolution dated February 18, 1985.
Meanwhile, on same date (February 18, 1985), the trial court in Civil Case #84-22515 (Interpleader) rendered a decisio, the dispositive portion reading as
follows:
WHEREFORE, in view of the foregoing, judgment is hereby rendered ordering plaintiff Associate Bank to replace Cashier's Check
No. 011302 in favor of Jose Go or its cas equivalent with legal rate of itnerest from date of complaint, and with costs of suit against
the latter.
SO ORDERED.
On March 29, 1985, the trial court in Civil Case No. C-11139, for damages, issued an order, the pertinent portion of which states:
The records of this case show that on August 20, 1984 proceedings in this case was (were) ordered suspended because the main
issue in Civil Case No. 84-22515 and in this instant case are the same which is: who between Marcelo Mesina and Jose Go is
entitled to payment of Associated Bank's Cashier's Check No. CC-011302? Said issue having been resolved already in Civil casde
No. 84-22515, really this instant case has become moot and academic.
WHEREFORE, in view of the foregoing, the motion sholud be as it is hereby granted and this case is ordered dismissed.
In view of the foregoing ruling no more action should be taken on the "Motion For Reconsideration (of the order admitting the
Intervention)" dated June 21, 1984 as well as the Motion For Reconsideration dated September 10, 1984.
SO ORDERED.
Petitioner now comes to Us, alleging that:
1. IAC erred in ruling that a cashier's check can be countermanded even in the hands of a holder in due course.
2. IAC erred in countenancing the filing and maintenance of an interpleader suit by a party who had earlier been sued on the same claim.
3. IAC erred in upholding the trial court's order declaring petitioner as in default when there was no proper order for him to plead in the interpleader
complaint.
4. IAC went beyond the scope of its certiorari jurisdiction by making findings of facts in advance of trial.
Petitioner now interposes the following prayer:
1. Reverse the decision of the IAC, dated January 22, 1985 and set aside the February 18, 1985 resolution denying the Motion for Reconsideration.
2. Annul the orders of respondent Judge of RTC Manila giving due course to the interpleader suit and declaring petitioner in default.
Petitioner's allegations hold no water. Theories and examples advanced by petitioner on causes and effects of a cashier's check such as 1) it cannot be
countermanded in the hands of a holder in due course and 2) a cashier's check is a bill of exchange drawn by the bank against itself-are general principles
which cannot be aptly applied to the case at bar, without considering other things. Petitioner failed to substantiate his claim that he is a holder in due
course and for consideration or value as shown by the established facts of the case. Admittedly, petitioner became the holder of the cashier's check as

119

endorsed by Alexander Lim who stole the check. He refused to say how and why it was passed to him. He had therefore notice of the defect of his title
over the check from the start. The holder of a cashier's check who is not a holder in due course cannot enforce such check against the issuing bank which
dishonors the same. If a payee of a cashier's check obtained it from the issuing bank by fraud, or if there is some other reason why the payee is not
entitled to collect the check, the respondent bank would, of course, have the right to refuse payment of the check when presented by the payee, since
respondent bank was aware of the facts surrounding the loss of the check in question. Moreover, there is no similarity in the cases cited by petitioner since
respondent bank did not issue the cashier's check in payment of its obligation. Jose Go bought it from respondent bank for purposes of transferring his
funds from respondent bank to another bank near his establishment realizing that carrying money in this form is safer than if it were in cash. The check
was Jose Go's property when it was misplaced or stolen, hence he stopped its payment. At the outset, respondent bank knew it was Jose Go's check and
no one else since Go had not paid or indorsed it to anyone. The bank was therefore liable to nobody on the check but Jose Go. The bank had no intention
to issue it to petitioner but only to buyer Jose Go. When payment on it was therefore stopped, respondent bank was not the one who did it but Jose Go,
the owner of the check. Respondent bank could not be drawer and drawee for clearly, Jose Go owns the money it represents and he is therefore the
drawer and the drawee in the same manner as if he has a current account and he issued a check against it; and from the moment said cashier's check
was lost and/or stolen no one outside of Jose Go can be termed a holder in due course because Jose Go had not indorsed it in due course. The check in
question suffers from the infirmity of not having been properly negotiated and for value by respondent Jose Go who as already been said is the real owner
of said instrument.
In his second assignment of error, petitioner stubbornly insists that there is no showing of conflicting claims and interpleader is out of the question. There
is enough evidence to establish the contrary. Considering the aforementioned facts and circumstances, respondent bank merely took the necessary
precaution not to make a mistake as to whom to pay and therefore interpleader was its proper remedy. It has been shown that the interpleader suit was
filed by respondent bank because petitioner and Jose Go were both laying their claims on the check, petitioner asking payment thereon and Jose Go as
the purchaser or owner. The allegation of petitioner that respondent bank had effectively relieved itself of its primary liability under the check by simply
filing a complaint for interpleader is belied by the willingness of respondent bank to issue a certificate of time deposit in the amount of P800,000
representing the cashier's check in question in the name of the Clerk of Court of Manila to be awarded to whoever wig be found by the court as validly
entitled to it. Said validity will depend on the strength of the parties' respective rights and titles thereto. Bank filed the interpleader suit not because
petitioner sued it but because petitioner is laying claim to the same check that Go is claiming. On the very day that the bank instituted the case in
interpleader, it was not aware of any suit for damages filed by petitioner against it as supported by the fact that the interpleader case was first entitled
Associated Bank vs. Jose Go and John Doe, but later on changed to Marcelo A. Mesina for John Doe when his name became known to respondent bank.
In his third assignment of error, petitioner assails the then respondent IAC in upholding the trial court's order declaring petitioner in default when there was
no proper order for him to plead in the interpleader case. Again, such contention is untenable. The trial court issued an order, compelling petitioner and
respondent Jose Go to file their Answers setting forth their respective claims. Subsequently, a Pre-Trial Conference was set with notice to parties to
submit position papers. Petitioner argues in his memorandum that this order requiring petitioner to file his answer was issued without jurisdiction alleging
that since he is presumably a holder in due course and for value, how can he be compelled to litigate against Jose Go who is not even a party to the
check? Such argument is trite and ridiculous if we have to consider that neither his name or Jose Go's name appears on the check. Following such line of
argument, petitioner is not a party to the check either and therefore has no valid claim to the Check. Furthermore, the Order of the trial court requiring the
parties to file their answers is to all intents and purposes an order to interplead, substantially and essentially and therefore in compliance with the
provisions of Rule 63 of the Rules of Court. What else is the purpose of a law suit but to litigate?
The records of the case show that respondent bank had to resort to details in support of its action for Interpleader. Before it resorted to Interpleader,
respondent bank took an precautionary and necessary measures to bring out the truth. On the other hand, petitioner concealed the circumstances known
to him and now that private respondent bank brought these circumstances out in court (which eventually rendered its decision in the light of these facts),
petitioner charges it with "gratuitous excursions into these non-issues." Respondent IAC cannot rule on whether respondent RTC committed an abuse of
discretion or not, without being apprised of the facts and reasons why respondent Associated Bank instituted the Interpleader case. Both parties were
given an opportunity to present their sides. Petitioner chose to withhold substantial facts. Respondents were not forbidden to present their side-this is the
purpose of the Comment of respondent to the petition. IAC decided the question by considering both the facts submitted by petitioner and those given by
respondents. IAC did not act therefore beyond the scope of the remedy sought in the petition.
WHEREFORE, finding that the instant petition is merely dilatory, the same is hereby denied and the assailed orders of the respondent court are hereby
AFFIRMED in toto.
SO ORDERED.
Feria (Chairman), Fernan, Alampay and Gutierrez, Jr., JJ., concur.

120

G.R. No. L-39641 February 28, 1983

METROPOL (BACOLOD) FINANCING & INVESTMENT CORPORATION, plaintiff-appellee,
vs.
SAMBOK MOTORS COMPANY and NG SAMBOK SONS MOTORS CO., LTD., defendants-appellants.
Rizal Quimpo & Cornelio P. Revena for plaintiff-appellee.
Diosdado Garingalao for defendants-appellants.

DE CASTRO, J.:
The former Court of Appeals, by its resolution dated October 16, 1974 certified this case to this Court the issue issued therein being one purely of law.
On April 15, 1969 Dr. Javier Villaruel executed a promissory note in favor of Ng Sambok Sons Motors Co., Ltd., in the amount of P15,939.00 payable in
twelve (12) equal monthly installments, beginning May 18, 1969, with interest at the rate of one percent per month. It is further provided that in case on
non-payment of any of the installments, the total principal sum then remaining unpaid shall become due and payable with an additional interest equal to
twenty-five percent of the total amount due.

121

On the same date, Sambok Motors Company (hereinafter referred to as Sambok), a sister company of Ng Sambok Sons Motors Co., Ltd., and under the
same management as the former, negotiated and indorsed the note in favor of plaintiff Metropol Financing & Investment Corporation with the following
indorsement:
Pay to the order of Metropol Bacolod Financing & Investment Corporation with recourse. Notice of Demand; Dishonor; Protest; and
Presentment are hereby waived.
SAMBOK MOTORS CO. (BACOLOD)
By:
RODOLFO G. NONILLO Asst. General Manager
The maker, Dr. Villaruel defaulted in the payment of his installments when they became due, so on October 30, 1969 plaintiff formally presented the
promissory note for payment to the maker. Dr. Villaruel failed to pay the promissory note as demanded, hence plaintiff notified Sambok as indorsee of said
note of the fact that the same has been dishonored and demanded payment.
Sambok failed to pay, so on November 26, 1969 plaintiff filed a complaint for collection of a sum of money before the Court of First Instance of Iloilo,
Branch I. Sambok did not deny its liability but contended that it could not be obliged to pay until after its co-defendant Dr. Villaruel has been declared
insolvent.
During the pendency of the case in the trial court, defendant Dr. Villaruel died, hence, on October 24, 1972 the lower court, on motion, dismissed the case
against Dr. Villaruel pursuant to Section 21, Rule 3 of the Rules of Court. 1
On plaintiff's motion for summary judgment, the trial court rendered its decision dated September 12, 1973, the dispositive portion of which reads as
follows:
WHEREFORE, judgment is rendered:
(a) Ordering Sambok Motors Company to pay to the plaintiff the sum of P15,939.00 plus the legal rate of interest from October 30,
1969;
(b) Ordering same defendant to pay to plaintiff the sum equivalent to 25% of P15,939.00 plus interest thereon until fully paid; and
(c) To pay the cost of suit.
Not satisfied with the decision, the present appeal was instituted, appellant Sambok raising a lone assignment of error as follows:
The trial court erred in not dismissing the complaint by finding defendant appellant Sambok Motors Company as assignor and a
qualified indorsee of the subject promissory note and in not holding it as only secondarily liable thereof.
Appellant Sambok argues that by adding the words "with recourse" in the indorsement of the note, it becomes a qualified indorser that being a qualified
indorser, it does not warrant that if said note is dishonored by the maker on presentment, it will pay the amount to the holder; that it only warrants the
following pursuant to Section 65 of the Negotiable Instruments Law: (a) that the instrument is genuine and in all respects what it purports to be; (b) that he
has a good title to it; (c) that all prior parties had capacity to contract; (d) that he has no knowledge of any fact which would impair the validity of the
instrument or render it valueless.
The appeal is without merit.
A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made by adding to the indorser's signature the
words "without recourse" or any words of similar import. 2 Such an indorsement relieves the indorser of the general obligation to pay if the instrument is
dishonored but not of the liability arising from warranties on the instrument as provided in Section 65 of the Negotiable Instruments Law already mentioned
herein. However, appellant Sambok indorsed the note "with recourse" and even waived the notice of demand, dishonor, protest and presentment.
"Recourse" means resort to a person who is secondarily liable after the default of the person who is primarily liable. 3 Appellant, by indorsing the note "with
recourse" does not make itself a qualified indorser but a general indorser who is secondarily liable, because by such indorsement, it agreed that if Dr.
Villaruel fails to pay the note, plaintiff-appellee can go after said appellant. The effect of such indorsement is that the note was indorsed without
qualification. A person who indorses without qualification engages that on due presentment, the note shall be accepted or paid, or both as the case may
be, and that if it be dishonored, he will pay the amount thereof to the holder. 4 Appellant Sambok's intention of indorsing the note without qualification is
made even more apparent by the fact that the notice of demand, dishonor, protest and presentment were an waived. The words added by said appellant
do not limit his liability, but rather confirm his obligation as a general indorser.
Lastly, the lower court did not err in not declaring appellant as only secondarily liable because after an instrument is dishonored by non-payment, the
person secondarily liable thereon ceases to be such and becomes a principal debtor. 5 His liabiliy becomes the same as that of the original obligor. 6
Consequently, the holder need not even proceed against the maker before suing the indorser.

122

WHEREFORE, the decision of the lower court is hereby affirmed. No costs.

SO ORDERED.
Makasiar (Chairman), Concepcion, Jr., Guerrero and Escolin, JJ., concur.
Aquino, J., is on leave.

G.R. No. 130756 January 21, 1999

ESTER B. MARALIT, petitioner,
vs.
JESUSA CORAZON L. IMPERIAL, respondent.

MENDOZA, J.:
This is a petition for review on certiorari of the decision, dated August 26, 1997, and the resolution, dated September 29, 1997, of the Regional Trial Court
of Naga City (Branch 21) in Special Civil Case No. RTC '97-3744.
The facts are as follows:

123

Petitioner Ester B. Maralit filed three complaints for estafa three falsification of commercial documents through reckless imprudence against respondent
Jesusa Corazon L. Imperial. 1 Maralit alleged that she was assistant manager of the Naga City branch of the Philippine National Bank, (PNB); that on May
20, 1992, June 1, 1992, and July 1, 1992 respondent Imperial separately deposited in her savings account at the PNB three United States treasury
warrants bearing USTW Nos. 2034-91254963, 2034-91180047, and 2034-33330760 and on the same days withdrew their peso equivalent of P59,216.86,
P130,743.60, and P130,326.00, respectively; and that the treasury warrants were subsequently returned one after the other by the United States Treasury,
through the Makati branch of the Citibank, on the ground that the amounts thereof had been altered. Maralit claimed that as a consequence, she was held
personally liable by the PNB for the total amount of P320,287.30.
In her counter-affidavit, respondent claimed that she merely helped a relative, Aida Abengoza, encash the treasury warrants; that she deposited the
treasury warrants in her savings account and then withdrew their peso equivalent with the approval of petitioner; that she gave the money to Aida
Abengoza; that she did not know that the amounts on the treasury warrants had been altered nor did she represent to petitioner that the treasury warrants
were genuine; and that upon being informed of the dishonor of the warrants she immediately contacted Aida Abengoza and signed an acknowledgment of
debt promising to pay the total amount of the treasury warrants.
After preliminary investigation, the City Prosecutor of Naga City filed three informations against respondent in the Municipal Trial Court of Naga City
(Branch 3).
On September 26, 1996, judgment was rendered as follows:
WHEREFORE, in view of the foregoing considerations, the Court finds no ground to hold the accused criminally liable for which she
is charged, hence Corazon Jesusa L. Imperial is ACQUITTED of all the charges against her. The accused however is civilly liable as
indorser of the checks which is (sic) the subject matter of the criminal action. 2
The decision having become final and executory, the MTC, on November 11, 1996, ordered the enforcement of the civil liability against the accused
arising from the criminal action. 3 The writ of execution, dated December 9, 1996, directed the sheriff as follows: 4
NOW, THEREFORE, you are hereby commanded to cause the execution of the aforesaid judgment in the amount of THREE
HUNDRED TWENTY THOUSAND TWO HUNDRED EIGHTY SIX & 46/100 (P320,286.46) ONLY, equivalent to the amount of the 3
three US$ checks amounting to $12,621.13, and to levy the goods and chattels of the defendant/s, except those which are exempt
from execution and to make the sale thereat in accordance with the procedure outlined by Rule 39, Revised Rules of Court and
such cases made and provided, together with all your lawful fees for the services of this writ.
Accordingly, the sheriff served a notice of garnishment on the PNB.
Respondent at first moved to declare her savings account exemp from execution on the ground that the same represented her salary as an employee of
the Commission on Audit, which was not even sufficient for expenses and that of her family. Later, she moved to quash the writ of execution on the ground
"that the judgment did not order the accused to pay [a] specific amount of money to a particular person as it merely adjudicated the criminal aspect but not
the civil aspect hence there was no judgment rendered which can be the subject of execution."
Both motions of respondent were denied by the MTC for lack of merit in its order, dated February 24, 1997. 5 Accordingly, an alias writ of execution was
issued.
On April 14, 1997, respondent filed a petition for certiorari and prohibition in the Regional Trial Court of Naga City, contending that the writ of execution
issued by the MTC was at variance with the judgment in the criminal cases.
The RTC issued a writ of preliminary injunction enjoining enforcement of the writ of execution issued by the M'TC. On August 26, 1997, it rendered a
decision, which, among other things, made permanent the injunction. The RTC held that the decision of the MTC did not really find respondent liable for
P320,286.46 because in fact it was petitioner who was found responsible for making the defraudation possible.
Petitioner moved for reconsideration alleging that respondent filed her petition for certiorari and prohibition more than three months after the MTC had
ordered execution of its decision on November 11, 1996, However, her motion was denied on September 28, 1997. 6 The RTC held that the three-month
period should be counted from April 1, 1997, when the alias writ of execution was issued, or from April 7, 1997, when the MTC denied private respondent's
motion for reconsideration of the order denying her motion to quash the writ of execution. The RTC likewise found the second ground of petitioner's motion
for reconsideration, i.e., that its decision was contrary to law and jurisprudence, devoid of merit.
Hence, this petition. Petitioner raises the following issues: 7
1.

Whether respondent's Petition for Certiorari and Prohibition under Rule 65 of the Rules of Court was filed out of time;

2.

Whether this case warrants the relaxation of the rule that "Certiorari is not a substitute for a lost or lapsed appeal."

3.

Whether or not the MTC committed grave abuse of discretion amounting to lack or excess of jurisdiction, when it issued the Order of
Execution, Writ of Execution and Alias Writ of Execution to implement its final and executory civil judgment in Criminal Cases No.
68697, 68698 and 68699, which reads:" . . . The accused however is civilly liable as indorser of the checks subject matter of the
criminal action."

4.

Whether or not the MTC merely adjudicated the criminal aspect but not the civil aspect of Criminal Cases 68697, 68698 and 68699.

5.

Whether there was substantial variance as between the dispositive portion of the civil judgment and the writ of execution issued
thereunder.

6.

Whether or not a court exercising certiorari jurisdiction has the authority to modify or alter the final and executory decision of the
lower court even by way of an obiter dictum.

124

Petitioner contends that the phrase "civilly liable" in the judgment part of the MTC's decision also connotes an order to pay on respondent's part.
It may fairly be assumed that the decision of the MTC was an adjudication of both the criminal and civil liability of respondent inasmuch as it does not
appear that petitioner instituted a separate civil action or reserved or waived the right to bring such action. The question is whether the decision of the
MTC finds respondent civilly liable and, in the affirmative, for how much. As already stated, the RTC held that the MTC did not really find respondent liable.
In reaching that conclusion, the RTC said:
A mere reading of the dispositive portion of the judgment and the writ of execution will readily show that there is variance between
the two. Whereas, the judgment pronounced [respondent herein] to be "civilly liable" as indorser of the checks which is the subject
matter of the criminal action," the writ of execution commanded the Sheriff "to cause the execution of the aforesaid judgment in the
amount of THREE HUNDRED TWENTY THOUSAND TWO HUNDRED EIGHTY SIX & 46/100 (P320,286.46) ONLY, equivalent to
the amount of the 3 three US$ checks amounting to $12,621.13, . . . ." In the judgment, nothing is mentioned about the amount for
which [respondent herein] is liable as indorser, but in the writ of execution, the civil liability of the [respondent herein] has already
been fixed at P320,286.46. The variance, therefore, between the judgment and the writ of execution is substantial because it
consists of the addition of the amount of the civil liability of the [respondent herein].
xxx xxx xxx
. . . The [MTC's] findings of facts and conclusions of law as expressed in the body of the decision do not support the dispositive
portion of the judgment that [respondent herein] is civilly liable. On the contrary a reading of the body of the judgment in question will
show that [respondent] is not civilly liable. For three (3) times, the Court stated in the body of its decision that it is [petitioner] Maralit
herself who should be faulted and be held responsible for the payment of the dishonored US Dollar checks.
Hereunder quoted are portions of the body of the decision in question showing that [respondent] herein should be held civilly liable
and that it was [petitioner] Maralit who should be blamed and held responsible:
. . . The Court however is quite intrigue[d] on why the accused was allowed to encash the peso equivalent
despite the fact that the check was deposited for collection and clearing. It is the established procedure of
banks that out of town checks and US Treasury Warrants should first be cleared before the same is to be
paid. More so if the holder is a second indorser. The private complainant in this regard explained that [as
assistant branch manager] she has the discretion and that there is no hold order appearing in the savings
account of the accused. She likewise explained that she trusted the accused whom she knew is working in the
same building and a depositor. In short she took the risk of approving the withdrawal of the peso equivalent,
without the check being cleared and if the same is dishonored she should be responsible. (page 5, judgment).
The information accuses the accused for disregarding the banking laws and procedure of the PNB. This is a
generous statement. In the first place the accused is not an employee of the bank. She has no control nor
supervision over its employees. If there is anyone who has disregarded banking laws, it is the private
complainant for approving withdrawals before the check were cleared. Mrs. Maralit is more knowledgeable of
the banking procedures of the bank of which she is the assistant manager. She knows the risk of approving
encashment before clearing. She took the risk therefore she should be responsible for the outcome of the risk
she has taken. (page 6, Judgment).
The Court is of the opinion that there was negligence on both the complainant and the accused but greater
responsibility should be borne by the private complainant. The accused could not have encashed and
deposited the checks without her approval. If the complainant was not remiss in her duty in imposing the
banking rules strictly, then these things could not have happened. (page 7, Judgment). 8
This portion of the decision of the MTC actually refers to respondent's criminal liability and not her civil liability. More specially, the portion in question
refers to the allegations in the three informations that respondent committed falsification of commercial documents through reckless imprudence by "1)
taking advantage of [her] position as state auditor of the Commission on Audit assigned at the PNB, Naga Branch, 2) disregard[ing] existing procedure,
banking laws, policies, and circulars of the PNB, 3) . . . not tak[ing] the necessary precaution to determine the genuineness of the Treasury Warrants and
the alteration of the amount[s] therein deposited and [in] encash[ing] the checks, and 4) . . . [her] negligence, carelessness, and imprudence [which]
caused damage and loss to [petitioner]." 9 Nevertheless, the MTC held that respondent was civilly liable as the penultimate paragraph of its decision
makes clear:
The Court symphatizes with the complainant that there was indeed damage and loss, but said loss is chargeable to the accused
who upon her indorsements warrant that the instrument is genuine in all respect what it purports to be and that she will pay the
amount thereof in case of dishonor. (Sec. 66 Negotiable Instrument Law). 10
Thus, while the MTC found petitioner partly responsible for the encashment of the altered checks, it found respondent civilly liable because of her
indorsements of the treasury warrants, in addition to the fact that respondent executed a notarized acknowledgment of debt promising to pay the total
amount of said warrants.
In this case, to affirm the RTC's decision would be to hold that respondent was absolved from both criminal and civil liability, by the MTC. Such reading of
the MTC decision will not, however, bear analysis. For one, the dispositive portion of the decision of the MTC expressly declares respondent to be "civilly
liable as indorser of the checks which is [sic] the subject matter of the criminal action." To find therefore that there is no declaration of civil liability of
respondent would be to disregard the judgment of the MTC. Worse, it would be to amend a final and executor decision of a court.
It is argued that the decision of the MTC did not order respondent, as accused in the case, to pay a specific amount of money to any particular person
such that it could not be an adjudication of respondent's civil liability. However, the ambiguity can easily be clarified by a resort to the text of the decision
or, what is properly called, the opinion part. Doing so, it is clear that it can only be to petitioner that respondent was made liable as the former was the
offended party in the case. As for that amount respondent is liable, it can only be for the total amount of the treasury warrants subject of the case,
determined according to their peso equivalent, in the decision of the MTC.

125

For another, that respondent should pay petitioner the amounts of the altered treasury warrants is the logical consequence of the MTC's holding that
private respondent is civilly liable for the treasury warrant subject of the case. 11
WHEREFORE, the decision of the Regional Trial Court of Naga City (Branch 21) is REVERSED.1wphi1.nt
SO ORDERED.
Bellosillo, Puno, Quisumbing and Buena, JJ., concur.

G.R. No. 128927 September 14, 1999

REMEDIOS NOTA SAPIERA, petitioner,
vs.
COURT OF APPEALS and RAMON SUA, respondents.

BELLOSILLO, J.:

126

REMEDIOS NOTA SAPIERA appeals to us through this petition for review the Decision of the Court of Appeals 1 which acquitted her of the crime of estafa
but held her liable nonetheless for the value of the checks she indorsed in favor of private respondent Ramon Sua.
On several occasions petitioner Remedios Nota Sapiera, a sari-sari store owner, purchased from Monrico Mart certain grocery items, mostly cigarettes,
and paid for them with checks issued by one Arturo de Guzman: (a) PCIB Check No. 157059 dated 26 February 1987 for P140,000.00; (b) PCIB Check
No. 157073 dated 26 February 1987 for P28,000.00; (c) PCIB Check No. 157057 dated 27 February 1987 for P42,150.00; and, d) Metrobank Check No.
DAG-045104758 PA dated 2 March 1987 for P125,000.00. These checks were signed at the back by petitioner. When presented for payment the checks
were dishonored because the drawer's account was already closed. Private respondent Ramon Sua informed Arturo de Guzman and petitioner about the
dishonor but both failed to pay the value of the checks. Hence, four (4) charges of estafa were filed against petitioner with the Regional Trial Court of
Dagupan City, docketed as Crim. Cases Nos. D-8728, D-8729, D-8730 and D-8731. Arturo de Guzman was charged with two (2) counts of violation of B.P.
Blg. 22, docketed as Crim. Cases Nos. D-8733 and D-8734. These cases against petitioner and de Guzman were consolidated and tried jointly.
On 27 December 1989 the court a quo 2 acquitted petitioner of all the charges of estafa but did not rule on whether she could be held civilly liable for the
checks she indorsed to private respondent. The trial court found Arturo de Guzman guilty of Violation of B.P. Blg. 22 on two (2) counts and sentenced him
to suffer imprisonment of six (6) months and one (1) day in each of the cases, and to pay private respondent P167,150.00 as civil indemnity.
Private respondent filed a notice of appeal with the trial court with regard to the civil aspect but the court refused to give due course to the appeal on the
ground that the acquittal of petitioner was absolute. Private respondent then filed a petition for mandamus with the Court of Appeals, docketed as CA-GR
SP No. 24626, praying that the court a quo be ordered to give due course to the appeal on the civil aspect of the decision. The Court of Appeals granted
the petition and ruled that private respondent could appeal with respect to the civil aspect the judgment of acquittal by the trial court.
On 22 January 1996, the Court of Appeals in CA-GR CV No. 36376 rendered the assailed Decision insofar as it sustained the appeal of private
respondent on the civil aspect and ordering petitioner to pay private respondent P335,000.00 representing the aggregate face value of the four (4) checks
indorsed by petitioner plus legal interest from the notice of dishonor.
Petitioner filed a motion for reconsideration of the Decision. On 19 March 1997 the Court of Appeals issued a Resolution noting the admission of both
parties that private respondent had already collected the amount of P125,000.00 from Arturo de Guzman with regard to his civil liability in Crim. Cases
Nos. 8733 and 8734. The appellate court noted that private respondent was the same offended party in the criminal cases against petitioner and against
de Guzman. Criminal Cases Nos. 8733 and 8734 against De Guzman, and Crim. Cases Nos. 8730 and 8729 against petitioner, involved the same
checks, to wit: PCIB Checks Nos. 157057 for P42,150.00 and Metrobank Check No. DAG-045104758 PA for P125,000.00.
Thus, the Court of Appeals ruled that private respondent could not recover twice on the same checks. Since he had collected P125,000.00 as civil
indemnity in Crim. Cases Nos. 8733 and 8734, this amount should be deducted from the sum total of the civil indemnity due him arising from the estafa
cases against petitioner. The appellate court then corrected its previous award, which was erroneously placed, at P335,000,00, to P335,150,00 as the
sum total of the amounts of the four (4) checks involved. Deducting the amount of P125,000.00 already collected by private respondent, petitioner was
adjudged to pay P210,150.00 as civil liability to private respondent. Hence, this petition alleging that respondent Court of Appeals erred in holding
petitioner civilly liable to private respondent because her acquittal by the trial court from charges of estafa in Crim. Cases Nos. D-8728, D-8729, D-8730
and D-8731 was absolute, the trial court having declared in its decision that the fact from which the civil liability might have arisen did not exist.
We cannot sustain petitioner. The issue is whether respondent Court of Appeals committed reversible error in requiring petitioner to pay civil indemnity to
private respondent after the trial court had acquitted of her of the criminal charges. Section 2, par. (b), of Rule 111 of the Rules of Court, as amended,
specifically provides: "Extinction of the penal action does not carry with it extinction of the civil, unless the extinction proceed from a declaration in a final
judgment that the fact from which the civil might arise did not exist."
The judgment of acquittal extinguishes the liability of the accused for damages only when it includes a declaration that the fact from which the civil liability
might arise did not exist. Thus, the civil liability is not extinguished by acquittal where: (a) the acquittal is based on reasonable doubt; (b) where the court
expressly declares that the liability of the accused is not criminal but only civil in nature; and, (c) where the civil liability is not derived from or based on the
criminal act of which the accused is acquitted. 3 Thus, under Art. 29 of the Civil Code
When the accused in a criminal prosecution is acquitted on the ground that his guilt has not been proved beyond reasonable doubt,
a civil action for damages for the same act or omission may be instituted. Such action requires only a preponderance of evidence.
Upon motion of the defendant, the court may require the plaintiff to file a bond to answer for damages in case the complaint should
be found to be malicious.
In a criminal case where the judgment of acquittal is based upon reasonable doubt, the court shall so declare. In the absence of any
declaration to that effect, it may be inferred from the text of the decision whether or not acquittal is due to that ground.
An examination of the decision in the criminal cases reveals these findings of the trial court
Evidence for the prosecution tends to show that on various occasions, Remedios Nota Sapiera purchased from Monrico Mart
grocery items (mostly cigarettes) which purchases were paid with checks issued by Arturo de Guzman: that those purchases and
payments with checks were as follows:
(a) Sales Invoice No. 20104 dated February 26, 1987 in the amount of P28,000.00, that said items purchased
were paid with PCIBank Check No. 157073 dated February 26, 1987;
(b) Sales Invoice No. 20108 dated February 26, 1987 in the amount of P140,000.00; that said items
purchased were paid with PCIBank No. 157059 dated February 26, 1987;
(c) Sales Invoice No. 20120 dated February 27, 1987 in the amount of P42,150.00; that said items were paid
with PCIBank Check No. 157057 dated February 27, 1987;
(d) Sales Invoice No. 20148 and 20149 both dated March 2, 1987 in the amount of P120,103.75; said items
were paid with Metrobank Check No. 045104758 dated March 2, 1987 in the amount of P125,000.00.

127

That all these checks were deposited with the Consolidated Bank and Trust Company, Dagupan Branch, for collection from the
drawee bank;
That when presented for payment by the collecting bank to the drawee bank, said checks were dishonored due to account closed,
as evidenced by check return slips; . . . . .
From the evidence, the Court finds that accused Remedios Nota Sapiera is the owner of a sari-sari store inside the public market;
that she sells can(ned) goods, candies and assorted grocery items; that she knows accused Arturo De Guzman, a customer since
February 1987; that de Guzman purchases from her grocery items including cigarettes; that she knows Ramon Sua; that she has
business dealings with him for 5 years; that her purchase orders were in clean sheets of paper; that she never pays in check; that
Ramon Sua asked her to sign subject checks as identification of the signature of Arturo de Guzman; that she pays in cash;
sometimes delayed by several days; that she signed the four (4) checks on the reverse side; that she did not know the subject
invoices; that de Guzman made the purchases and he issued the checks; that the goods were delivered to de Guzman; that she
was not informed of dishonored checks; and that counsel for Ramon Sua informed de Guzman and told him to pay . . . .
In the case of accused Remedios Nota Sapiera, the prosecution failed to prove conspiracy.
Based on the above findings of the trial court, the exoneration of petitioner of the charges of estafa was based on the failure of the prosecution to present
sufficient evidence showing conspiracy between her and the other accused Arturo de Guzman in defrauding private respondent. However, by her own
testimony, petitioner admitted having signed the four (4) checks in question on the reverse side. The evidence of the prosecution shows that petitioner
purchased goods from the grocery store of private respondent as shown by the sales invoices issued by private respondent; that these purchases were
paid with the four (4) subject checks issued by de Guzman; that petitioner signed the same checks on the reverse side; and when presented for payment,
the checks were dishonored by the drawee bank due to the closure of the drawer's account; and, petitioner was informed of the dishonor.
We affirm the findings of the Court of Appeals that despite the conflicting versions of the parties, it is undisputed that the four (4) checks issued by de
Guzman were signed by petitioner at the back without any indication as to how she should be bound thereby and, therefore, she is deemed to be an
indorser thereof. The Negotiable Instruments Law clearly provides
Sec. 17. Construction where instrument is ambiguous. Where the language of the instrument is ambiguous, or there are
admissions therein, the following rules of construction apply: . . . . (f) Where a signature is so placed upon the instrument that it is
not clear in what capacity the person making the same intended to sign, he is deemed an indorser. . . .
Sec. 63. When person deemed indorser. A person placing his signature upon all instrument otherwise than as maker, drawer or
acceptor, is deemed to be an indorser unless he clearly indicates by appropriate words his intention to be bound in some other
capacity.
Sec. 66. Liability of general indorser. Every indorser who indorses without qualification, warrants to all subsequent holders in due
course: (a) The matters and things mentioned in subdivisions (a), (b) and (c) of the next preceding section; and (b) That the
instrument is, at the time of the indorsement, valid and subsisting;
And, in addition, he engages that, on due presentment, it shall be accepted or paid or both, as the case may be, according to its
tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the
holder or to any subsequent indorser who may be compelled to pay it.
The dismissal of the criminal cases against petitioner did not erase her civil liability since the dismissal was due to insufficiency of evidence and not from a
declaration from the court that the fact from which the civil action might arise did not exist. 4 An accused acquitted of estafa may be nevertheless be held
civilly liable where the facts established by the evidence so warrant. The accused should be adjudged liable for the unpaid value of the checks signed by
her in favor of the complainant. 5
The rationale behind the award of civil indemnity despite a judgment of acquittal when evidence is sufficient to sustain the award was explained by the
Code Commission in connection with Art. 29 of the Civil Code, to wit:
The old rule that the acquittal of the accused in a criminal case also releases him from civil liability is one of the most serious flaws
in the Philippine legal system. It has given rise to numberless instances of miscarriage of justice, where the acquittal was due to a
reasonable doubt in the mind of the court as to the guilt of the accused. The reasoning followed is that inasmuch as the civil
responsibility is derived from the criminal offense, when the latter is not proved, civil liability cannot be demanded.
This is one of those cases where confused thinking leads to unfortunate and deplorable consequences. Such reasoning fails to draw
a clear line of demarcation between criminal liability and civil responsibility, and to determine the logical result of the distinction. The
two liabilities are separate and distinct from each other. One affects the social order and the other private rights. One is for
punishment or correction of the offender while the other is for reparation of damages suffered by file aggrieved party . . . . It is just
and proper that for the purposes of imprisonment of or fine upon the accused, the offense should be proved beyond reasonable
doubt. But the purpose of indemnifying the complaining party, why should the offense also be proved beyond reasonable doubt? Is
not the invasion or violation of every private right to be proved only by preponderance of evidence? Is the right of the aggrieved
person any less private because the wrongful acts is also punishable by the criminal law? 6
Finally, with regard to the computation of the civil liability of petitioner, the finding of the Court of Appeals that petitioner is civilly liable for the aggregate
value of the unpaid four (4) checks subject of the criminal cases in the sum of P335,150.00, less the amount of P125.000.00 already collected by private
respondent pending appeal, resulting in the amount of P210,150.00 still due private respondent, is a factual matter which is binding and conclusive upon
this Court.
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals dated 22 January 1996 as amended by its Resolution dated 19 March 1997
ordering petitioner Remedios Nota Sapiera to pay the private respondent Ramon Sua the remaining amount of P210,150.00 as civil liability, is AFFIRMED.
Costs against petitioners.

128

SO ORDERED.
Mendoza, Quisumbing and Buena, JJ., concur.

G.R. No. 74886 December 8, 1992

PRUDENTIAL BANK, petitioner,
vs.
INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS, INC. and ANACLETO R. CHI, respondents.

DAVIDE, JR., J.:

129

Petitioner seeks to review and set aside the decision 1 of public respondent; Intermediate Appellate Court (now Court of Appeals), dated 10 March 1986, in
AC-G.R. No. 66733 which affirmed in toto the 15 June 1978 decision of Branch 9 (Quezon City) of the then Court of First Instance (now Regional Trial
Court) of Rizal in Civil Case No. Q-19312. The latter involved an action instituted by the petitioner for the recovery of a sum of money representing the
amount paid by it to the Nissho Company Ltd. of Japan for textile machinery imported by the defendant, now private respondent, Philippine Rayon Mills,
Inc. (hereinafter Philippine Rayon), represented by co-defendant Anacleto R. Chi.
The facts which gave rise to the instant controversy are summarized by the public respondent as follows:
On August 8, 1962, defendant-appellant Philippine Rayon Mills, Inc. entered into a contract with Nissho Co., Ltd. of Japan for the
importation of textile machineries under a five-year deferred payment plan (Exhibit B, Plaintiff's Folder of Exhibits, p 2). To effect
payment for said machineries, the defendant-appellant applied for a commercial letter of credit with the Prudential Bank and Trust
Company in favor of Nissho. By virtue of said application, the Prudential Bank opened Letter of Credit No. DPP-63762 for
$128,548.78 (Exhibit A, Ibid., p. 1). Against this letter of credit, drafts were drawn and issued by Nissho (Exhibits X, X-1 to X-11,
Ibid., pp. 65, 66 to 76), which were all paid by the Prudential Bank through its correspondent in Japan, the Bank of Tokyo, Ltd. As
indicated on their faces, two of these drafts (Exhibit X and X-1, Ibid., pp. 65-66) were accepted by the defendant-appellant through
its president, Anacleto R. Chi, while the others were not (Exhibits X-2 to X-11, Ibid., pp. 66 to 76).
Upon the arrival of the machineries, the Prudential Bank indorsed the shipping documents to the defendant-appellant which
accepted delivery of the same. To enable the defendant-appellant to take delivery of the machineries, it executed, by prior
arrangement with the Prudential Bank, a trust receipt which was signed by Anacleto R. Chi in his capacity as President (sic) of
defendant-appellant company (Exhibit C, Ibid., p. 13).
At the back of the trust receipt is a printed form to be accomplished by two sureties who, by the very terms and conditions thereof,
were to be jointly and severally liable to the Prudential Bank should the defendant-appellant fail to pay the total amount or any
portion of the drafts issued by Nissho and paid for by Prudential Bank. The defendant-appellant was able to take delivery of the
textile machineries and installed the same at its factory site at 69 Obudan Street, Quezon City.
Sometime in 1967, the defendant-appellant ceased business operation (sic). On December 29, 1969, defendant-appellant's factory
was leased by Yupangco Cotton Mills for an annual rental of P200,000.00 (Exhibit I, Ibid., p. 22). The lease was renewed on
January 3, 1973 (Exhibit J, Ibid., p. 26). On January 5, 1974, all the textile machineries in the defendant-appellant's factory were
sold to AIC Development Corporation for P300,000.00 (Exhibit K, Ibid., p. 29).
The obligation of the defendant-appellant arising from the letter of credit and the trust receipt remained unpaid and unliquidated.
Repeated formal demands (Exhibits U, V, and W, Ibid., pp. 62, 63, 64) for the payment of the said trust receipt yielded no result
Hence, the present action for the collection of the principal amount of P956,384.95 was filed on October 3, 1974 against the
defendant-appellant and Anacleto R. Chi. In their respective answers, the defendants interposed identical special defenses, viz., the
complaint states no cause of action; if there is, the same has prescribed; and the plaintiff is guilty of laches. 2
On 15 June 1978, the trial court rendered its decision the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered sentencing the defendant Philippine Rayon Mills, Inc. to pay plaintiff the sum of
P153,645.22, the amounts due under Exhibits "X" & "X-1", with interest at 6% per annum beginning September 15, 1974 until fully
paid.
Insofar as the amounts involved in drafts Exhs. "X" (sic) to "X-11", inclusive, the same not having been accepted by defendant
Philippine Rayon Mills, Inc., plaintiff's cause of action thereon has not accrued, hence, the instant case is premature.
Insofar as defendant Anacleto R. Chi is concerned, the case is dismissed. Plaintiff is ordered to pay defendant Anacleto R. Chi the
sum of P20,000.00 as attorney's fees.
With costs against defendant Philippine Rayon Mills, Inc.
SO ORDERED. 3
Petitioner appealed the decision to the then Intermediate Appellate Court. In urging the said court to reverse or modify the decision, petitioner alleged in its
Brief that the trial court erred in (a) disregarding its right to reimbursement from the private respondents for the entire unpaid balance of the imported
machines, the total amount of which was paid to the Nissho Company Ltd., thereby violating the principle of the third party payor's right to reimbursement
provided for in the second paragraph of Article 1236 of the Civil Code and under the rule against unjust enrichment; (b) refusing to hold Anacleto R. Chi,
as the responsible officer of defendant corporation, liable under Section 13 of P.D No 115 for the entire unpaid balance of the imported machines covered
by the bank's trust receipt (Exhibit "C"); (c) finding that the solidary guaranty clause signed by Anacleto R. Chi is not a guaranty at all; (d) controverting the
judicial admissions of Anacleto R. Chi that he is at least a simple guarantor of the said trust receipt obligation; (e) contravening, based on the assumption
that Chi is a simple guarantor, Articles 2059, 2060 and 2062 of the Civil Code and the related evidence and jurisprudence which provide that such liability
had already attached; (f) contravening the judicial admissions of Philippine Rayon with respect to its liability to pay the petitioner the amounts involved in
the drafts (Exhibits "X", "X-l" to "X-11''); and (g) interpreting "sight" drafts as requiring acceptance by Philippine Rayon before the latter could be held liable
thereon. 4
In its decision, public respondent sustained the trial court in all respects. As to the first and last assigned errors, it ruled that the provision on unjust
enrichment, Article 2142 of the Civil Code, applies only if there is no express contract between the parties and there is a clear showing that the payment is
justified. In the instant case, the relationship existing between the petitioner and Philippine Rayon is governed by specific contracts, namely the application
for letters of credit, the promissory note, the drafts and the trust receipt. With respect to the last ten (10) drafts (Exhibits "X-2" to "X-11") which had not
been presented to and were not accepted by Philippine Rayon, petitioner was not justified in unilaterally paying the amounts stated therein. The public
respondent did not agree with the petitioner's claim that the drafts were sight drafts which did not require presentment for acceptance to Philippine Rayon
because paragraph 8 of the trust receipt presupposes prior acceptance of the drafts. Since the ten (10) drafts were not presented and accepted, no valid
demand for payment can be made.

130

Public respondent also disagreed with the petitioner's contention that private respondent Chi is solidarily liable with Philippine Rayon pursuant to Section
13 of P.D. No. 115 and based on his signature on the solidary guaranty clause at the dorsal side of the trust receipt. As to the first contention, the public
respondent ruled that the civil liability provided for in said Section 13 attaches only after conviction. As to the second, it expressed misgivings as to
whether Chi's signature on the trust receipt made the latter automatically liable thereon because the so-called solidary guaranty clause at the dorsal
portion of the trust receipt is to be signed not by one (1) person alone, but by two (2) persons; the last sentence of the same is incomplete and unsigned
by witnesses; and it is not acknowledged before a notary public. Besides, even granting that it was executed and acknowledged before a notary public,
Chi cannot be held liable therefor because the records fail to show that petitioner had either exhausted the properties of Philippine Rayon or had resorted
to all legal remedies as required in Article 2058 of the Civil Code. As provided for under Articles 2052 and 2054 of the Civil Code, the obligation of a
guarantor is merely accessory and subsidiary, respectively. Chi's liability would therefore arise only when the principal debtor fails to comply with his
obligation. 5
Its motion to reconsider the decision having been denied by the public respondent in its Resolution of 11 June 1986, 6 petitioner filed the instant petition on
31 July 1986 submitting the following legal issues:
I. WHETHER OR NOT THE RESPONDENT APPELLATE COURT GRIEVOUSLY ERRED IN DENYING PETITIONER'S CLAIM
FOR FULL REIMBURSEMENT AGAINST THE PRIVATE RESPONDENTS FOR THE PAYMENT PETITIONER MADE TO NISSHO
CO. LTD. FOR THE BENEFIT OF PRIVATE RESPONDENT UNDER ART. 1283 OF THE NEW CIVIL CODE OF THE PHILIPPINES
AND UNDER THE GENERAL PRINCIPLE AGAINST UNJUST ENRICHMENT;
II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY LIABLE UNDER THE TRUST RECEIPT (EXH. C);
III. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS OF RESPONDENT CHI HE IS LIABLE THEREON AND
TO WHAT EXTENT;
IV. WHETHER OR NOT RESPONDENT CHI IS MERELY A SIMPLE GUARANTOR; AND IF SO; HAS HIS LIABILITY AS SUCH
ALREADY ATTACHED;
V. WHETHER OR NOT AS THE SIGNATORY AND RESPONSIBLE OFFICER OF RESPONDENT PHIL. RAYON RESPONDENT
CHI IS PERSONALLY LIABLE PURSUANT TO THE PROVISION OF SECTION 13, P.D. 115;
VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS LIABLE TO THE PETITIONER UNDER THE TRUST RECEIPT (EXH. C);
VII. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS RESPONDENT PHIL. RAYON IS LIABLE TO THE
PETITIONER UNDER THE DRAFTS (EXHS. X, X-1 TO X-11) AND TO WHAT EXTENT;
VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR ACCEPTANCE FROM RESPONDENT PHIL. RAYON BEFORE THE
LATTER BECOMES LIABLE TO PETITIONER. 7
In the Resolution of 12 March 1990, 8 this Court gave due course to the petition after the filing of the Comment thereto by private respondent Anacleto Chi
and of the Reply to the latter by the petitioner; both parties were also required to submit their respective memoranda which they subsequently complied
with.
As We see it, the issues may be reduced as follows:
1. Whether presentment for acceptance of the drafts was indispensable to make Philippine Rayon liable
thereon;
2. Whether Philippine Rayon is liable on the basis of the trust receipt;
3. Whether private respondent Chi is jointly and severally liable with Philippine Rayon for the obligation sought
to be enforced and if not, whether he may be considered a guarantor; in the latter situation, whether the case
should have been dismissed on the ground of lack of cause of action as there was no prior exhaustion of
Philippine Rayon's properties.
Both the trial court and the public respondent ruled that Philippine Rayon could be held liable for the two (2) drafts, Exhibits "X" and "X-1", because only
these appear to have been accepted by the latter after due presentment. The liability for the remaining ten (10) drafts (Exhibits "X-2" to "X-11" inclusive)
did not arise because the same were not presented for acceptance. In short, both courts concluded that acceptance of the drafts by Philippine Rayon was
indispensable to make the latter liable thereon. We are unable to agree with this proposition. The transaction in the case at bar stemmed from Philippine
Rayon's application for a commercial letter of credit with the petitioner in the amount of $128,548.78 to cover the former's contract to purchase and import
loom and textile machinery from Nissho Company, Ltd. of Japan under a five-year deferred payment plan. Petitioner approved the application. As correctly
ruled by the trial court in its Order of 6 March 1975: 9
. . . By virtue of said Application and Agreement for Commercial Letter of Credit, plaintiff bank 10 was under obligation to pay through
its correspondent bank in Japan the drafts that Nisso (sic) Company, Ltd., periodically drew against said letter of credit from 1963 to
1968, pursuant to plaintiff's contract with the defendant Philippine Rayon Mills, Inc. In turn, defendant Philippine Rayon Mills, Inc.,
was obligated to pay plaintiff bank the amounts of the drafts drawn by Nisso (sic) Company, Ltd. against said plaintiff bank together
with any accruing commercial charges, interest, etc. pursuant to the terms and conditions stipulated in the Application and
Agreement of Commercial Letter of Credit Annex "A".
A letter of credit is defined as an engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other
demands for payment upon compliance with the conditions specified in the credit. 11 Through a letter of credit, the bank merely substitutes its own promise
to pay for one of its customers who in return promises to pay the bank the amount of funds mentioned in the letter of credit plus credit or commitment fees
mutually agreed upon. 12 In the instant case then, the drawee was necessarily the herein petitioner. It was to the latter that the drafts were presented for

131

payment. In fact, there was no need for acceptance as the issued drafts are sight drafts. Presentment for acceptance is necessary only in the cases
expressly provided for in Section 143 of the Negotiable Instruments Law (NIL). 13 The said section reads:
Sec. 143. When presentment for acceptance must be made. Presentment for acceptance must be made:
(a) Where the bill is payable after sight, or in any other case, where presentment for
acceptance is necessary in order to fix the maturity of the instrument; or
(b) Where the bill expressly stipulates that it shall be presented for acceptance; or
(c) Where the bill is drawn payable elsewhere than at the residence or place of business
of the drawee.
In no other case is presentment for acceptance necessary in order to render any party to the bill liable.
Obviously then, sight drafts do not require presentment for acceptance.
The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer; 14 this may be done in writing by the drawee in the bill
itself, or in a separate instrument. 15
The parties herein agree, and the trial court explicitly ruled, that the subject, drafts are sight drafts. Said the latter:
. . . In the instant case the drafts being at sight, they are supposed to be payable upon acceptance unless plaintiff bank has given
the Philippine Rayon Mills Inc. time within which to pay the same. The first two drafts (Annexes C & D, Exh. X & X-1) were duly
accepted as indicated on their face (sic), and upon such acceptance should have been paid forthwith. These two drafts were not
paid and although Philippine Rayon Mills
ought to have paid the same, the fact remains that until now they are still unpaid. 16
Corollarily, they are, pursuant to Section 7 of the NIL, payable on demand. Section 7 provides:
Sec. 7. When payable on demand. An instrument is payable on demand
(a) When so it is expressed to be payable on demand, or at sight, or on presentation; or
(b) In which no time for payment in expressed.
Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing
it, payable on demand. (emphasis supplied)
Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment at maturity of any accepted draft, bill of exchange or indebtedness
shall not be extinguished or modified" 17 does not, contrary to the holding of the public respondent, contemplate prior acceptance by Philippine
Rayon, but by the petitioner. Acceptance, however, was not even necessary in the first place because the drafts which were eventually issued
were sight drafts And even if these were not sight drafts, thereby necessitating acceptance, it would be the petitioner and not Philippine
Rayon which had to accept the same for the latter was not the drawee. Presentment for acceptance is defined an the production of a bill of
exchange to a drawee for acceptance. 18 The trial court and the public respondent, therefore, erred in ruling that presentment for acceptance
was an indispensable requisite for Philippine Rayon's liability on the drafts to attach. Contrary to both courts' pronouncements, Philippine
Rayon immediately became liable thereon upon petitioner's payment thereof. Such is the essence of the letter of credit issued by the petitioner.
A different conclusion would violate the principle upon which commercial letters of credit are founded because in such a case, both the
beneficiary and the issuer, Nissho Company Ltd. and the petitioner, respectively, would be placed at the mercy of Philippine Rayon even if the
latter had already received the imported machinery and the petitioner had fully paid for it. The typical setting and purpose of a letter of credit are
described in Hibernia Bank and Trust Co. vs. J. Aron & Co., Inc., 19 thus:
Commercial letters of credit have come into general use in international sales transactions where much time necessarily elapses
between the sale and the receipt by a purchaser of the merchandise, during which interval great price changes may occur. Buyers
and sellers struggle for the advantage of position. The seller is desirous of being paid as surely and as soon as possible, realizing
that the vendee at a distant point has it in his power to reject on trivial grounds merchandise on arrival, and cause considerable
hardship to the shipper. Letters of credit meet this condition by affording celerity and certainty of payment. Their purpose is to insure
to a seller payment of a definite amount upon presentation of documents. The bank deals only with documents. It has nothing to do
with the quality of the merchandise. Disputes as to the merchandise shipped may arise and be litigated later between vendor and
vendee, but they may not impede acceptance of drafts and payment by the issuing bank when the proper documents are presented.
The trial court and the public respondent likewise erred in disregarding the trust receipt and in not holding that Philippine Rayon was liable thereon. In
People vs. Yu Chai Ho, 20 this Court explains the nature of a trust receipt by quoting In re Dunlap Carpet Co., 21 thus:
By this arrangement a banker advances money to an intending importer, and thereby lends the aid of capital, of credit, or of
business facilities and agencies abroad, to the enterprise of foreign commerce. Much of this trade could hardly be carried on by any
other means, and therefore it is of the first importance that the fundamental factor in the transaction, the banker's advance of money
and credit, should receive the amplest protection. Accordingly, in order to secure that the banker shall be repaid at the critical point
that is, when the imported goods finally reach the hands of the intended vendee the banker takes the full title to the goods at
the very beginning; he takes it as soon as the goods are bought and settled for by his payments or acceptances in the foreign
country, and he continues to hold that title as his indispensable security until the goods are sold in the United States and the vendee
is called upon to pay for them. This security is not an ordinary pledge by the importer to the banker, for the importer has never
owned the goods, and moreover he is not able to deliver the possession; but the security is the complete title vested originally in the

132

bankers, and this characteristic of the transaction has again and again been recognized and protected by the courts. Of course, the
title is at bottom a security title, as it has sometimes been called, and the banker is always under the obligation to reconvey; but only
after his advances have been fully repaid and after the importer has fulfilled the other terms of the contract.
As further stated in National Bank vs. Viuda e Hijos de Angel Jose, 22 trust receipts:
. . . [I]n a certain manner, . . . partake of the nature of a conditional sale as provided by the Chattel Mortgage Law, that is, the
importer becomes absolute owner of the imported merchandise as soon an he has paid its price. The ownership of the merchandise
continues to be vested in the owner thereof or in the person who has advanced payment, until he has been paid in full, or if the
merchandise has already been sold, the proceeds of the sale should be turned over to him by the importer or by his representative
or successor in interest.
Under P.D. No. 115, otherwise known an the Trust Receipts Law, which took effect on 29 January 1973, a trust receipt transaction is defined as "any
transaction by and between a person referred to in this Decree as the entruster, and another person referred to in this Decree as the entrustee, whereby
the entruster, who owns or holds absolute title or security interests' over certain specified goods, documents or instruments, releases the same to the
possession of the entrustee upon the latter's execution and delivery to the entruster of a signed document called the "trust receipt" wherein the entrustee
binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents
or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the
trust receipt or the goods, instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in
the trusts receipt, or for other purposes substantially equivalent to any one of the following: . . ."
It is alleged in the complaint that private respondents "not only have presumably put said machinery to good use and have profited by its operation and/or
disposition but very recent information that (sic) reached plaintiff bank that defendants already sold the machinery covered by the trust receipt to
Yupangco Cotton Mills," and that "as trustees of the property covered by the trust receipt, . . . and therefore acting in fiduciary (sic) capacity, defendants
have willfully violated their duty to account for the whereabouts of the machinery covered by the trust receipt or for the proceeds of any lease, sale or other
disposition of the same that they may have made, notwithstanding demands therefor; defendants have fraudulently misapplied or converted to their own
use any money realized from the lease, sale, and other disposition of said machinery." 23 While there is no specific prayer for the delivery to the petitioner
by Philippine Rayon of the proceeds of the sale of the machinery covered by the trust receipt, such relief is covered by the general prayer for "such further
and other relief as may be just and equitable on the premises." 24 And although it is true that the petitioner commenced a criminal action for the violation of
the Trust Receipts Law, no legal obstacle prevented it from enforcing the civil liability arising out of the trust, receipt in a separate civil action. Under
Section 13 of the Trust Receipts Law, the failure of an entrustee to turn over the proceeds of the sale of goods, documents or instruments covered by a
trust receipt to the extent of the amount owing to the entruster or as appear in the trust receipt or to return said goods, documents or instruments if they
were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article
315, paragraph 1(b) of the Revised Penal Code. 25 Under Article 33 of the Civil Code, a civil action for damages, entirely separate and distinct from the
criminal action, may be brought by the injured party in cases of defamation, fraud and physical injuries. Estafa falls under fraud.
We also conclude, for the reason hereinafter discussed, and not for that adduced by the public respondent, that private respondent Chi's signature in the
dorsal portion of the trust receipt did not bind him solidarily with Philippine Rayon. The statement at the dorsal portion of the said trust receipt, which
petitioner describes as a "solidary guaranty clause", reads:
In consideration of the PRUDENTIAL BANK AND TRUST COMPANY complying with the foregoing, we jointly and severally agree
and undertake to pay on demand to the PRUDENTIAL BANK AND TRUST COMPANY all sums of money which the said
PRUDENTIAL BANK AND TRUST COMPANY may call upon us to pay arising out of or pertaining to, and/or in any event connected
with the default of and/or non-fulfillment in any respect of the undertaking of the aforesaid:
PHILIPPINE RAYON MILLS, INC.
We further agree that the PRUDENTIAL BANK AND TRUST COMPANY does not have to take any steps or exhaust its remedy
against aforesaid:
before making demand on me/us.
Petitioner insists that by virtue of the clear wording of the statement, specifically the clause ". . . we jointly and severally agree and undertake . . .," and the
concluding sentence on exhaustion, Chi's liability therein is solidary.
In holding otherwise, the public respondent ratiocinates as follows:
With respect to the second argument, we have our misgivings as to whether the mere signature of defendant-appellee Chi of (sic)
the guaranty agreement, Exhibit "C-1", will make it an actionable document. It should be noted that Exhibit "C-1" was prepared and
printed by the plaintiff-appellant. A perusal of Exhibit "C-1" shows that it was to be signed and executed by two persons. It was
signed only by defendant-appellee Chi. Exhibit "C-1" was to be witnessed by two persons, but no one signed in that capacity. The
last sentence of the guaranty clause is incomplete. Furthermore, the plaintiff-appellant also failed to have the purported guarantee
clause acknowledged before a notary public. All these show that the alleged guaranty provision was disregarded and, therefore, not
consummated.
But granting arguendo that the guaranty provision in Exhibit "C-1" was fully executed and acknowledged still defendant-appellee Chi
cannot be held liable thereunder because the records show that the plaintiff-appellant had neither exhausted the property of the
defendant-appellant nor had it resorted to all legal remedies against the said defendant-appellant as provided in Article 2058 of the
Civil Code. The obligation of a guarantor is merely accessory under Article 2052 of the Civil Code and subsidiary under Article 2054
of the Civil Code. Therefore, the liability of the defendant-appellee arises only when the principal debtor fails to comply with his
obligation. 27
Our own reading of the questioned solidary guaranty clause yields no other conclusion than that the obligation of Chi is only that of a guarantor. This is
further bolstered by the last sentence which speaks of waiver of exhaustion, which, nevertheless, is ineffective in this case because the space therein for
the party whose property may not be exhausted was not filled up. Under Article 2058 of the Civil Code, the defense of exhaustion (excussion) may be

133

raised by a guarantor before he may be held liable for the obligation. Petitioner likewise admits that the questioned provision is a solidary guaranty clause,
thereby clearly distinguishing it from a contract of surety. It, however, described the guaranty as solidary between the guarantors; this would have been
correct if two (2) guarantors had signed it. The clause "we jointly and severally agree and undertake" refers to the undertaking of the two (2) parties who
are to sign it or to the liability existing between themselves. It does not refer to the undertaking between either one or both of them on the one hand and
the petitioner on the other with respect to the liability described under the trust receipt. Elsewise stated, their liability is not divisible as between them, i.e.,
it can be enforced to its full extent against any one of them.
Furthermore, any doubt as to the import, or true intent of the solidary guaranty clause should be resolved against the petitioner. The trust receipt, together
with the questioned solidary guaranty clause, is on a form drafted and prepared solely by the petitioner; Chi's participation therein is limited to the affixing
of his signature thereon. It is, therefore, a contract of adhesion; 28 as such, it must be strictly construed against the party responsible for its preparation. 29
Neither can We agree with the reasoning of the public respondent that this solidary guaranty clause was effectively disregarded simply because it was not
signed and witnessed by two (2) persons and acknowledged before a notary public. While indeed, the clause ought to have been signed by two (2)
guarantors, the fact that it was only Chi who signed the same did not make his act an idle ceremony or render the clause totally meaningless. By his
signing, Chi became the sole guarantor. The attestation by witnesses and the acknowledgement before a notary public are not required by law to make a
party liable on the instrument. The rule is that contracts shall be obligatory in whatever form they may have been entered into, provided all the essential
requisites for their validity are present; however, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that
it be proved in a certain way, that requirement is absolute and indispensable. 30 With respect to a guaranty, 31 which is a promise to answer for the debt or
default of another, the law merely requires that it, or some note or memorandum thereof, be in writing. Otherwise, it would be unenforceable unless
ratified. 32 While the acknowledgement of a surety before a notary public is required to make the same a public document, under Article 1358 of the Civil
Code, a contract of guaranty does not have to appear in a public document.
And now to the other ground relied upon by the petitioner as basis for the solidary liability of Chi, namely the criminal proceedings against the latter for the
violation of P.D. No. 115. Petitioner claims that because of the said criminal proceedings, Chi would be answerable for the civil liability arising therefrom
pursuant to Section 13 of P.D. No. 115. Public respondent rejected this claim because such civil liability presupposes prior conviction as can be gleaned
from the phrase "without prejudice to the civil liability arising from the criminal offense." Both are wrong. The said section reads:
Sec. 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments
covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said goods,
documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the
crime of estafa, punishable under the provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three
thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code. If the violation or offense is
committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be
imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to
the civil liabilities arising from the criminal offense.
A close examination of the quoted provision reveals that it is the last sentence which provides for the correct solution. It is clear that if the violation or
offense is committed by a corporation, partnership, association or other juridical entities, the penalty shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible for the offense. The penalty referred to is imprisonment, the duration of which would depend on
the amount of the fraud as provided for in Article 315 of the Revised Penal Code. The reason for this is obvious: corporations, partnerships, associations
and other juridical entities cannot be put in jail. However, it is these entities which are made liable for the civil liability arising from the criminal offense. This
is the import of the clause "without prejudice to the civil liabilities arising from the criminal offense." And, as We stated earlier, since that violation of a trust
receipt constitutes fraud under Article 33 of the Civil Code, petitioner was acting well within its rights in filing an independent civil action to enforce the civil
liability arising therefrom against Philippine Rayon.
The remaining issue to be resolved concerns the propriety of the dismissal of the case against private respondent Chi. The trial court based the dismissal,
and the respondent Court its affirmance thereof, on the theory that Chi is not liable on the trust receipt in any capacity either as surety or as guarantor
because his signature at the dorsal portion thereof was useless; and even if he could be bound by such signature as a simple guarantor, he cannot,
pursuant to Article 2058 of the Civil Code, be compelled to pay until
after petitioner has exhausted and resorted to all legal remedies against the principal debtor, Philippine Rayon. The records fail to show that petitioner had
done so 33 Reliance is thus placed on Article 2058 of the Civil Code which provides:
Art. 2056. The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and
has resorted to all the legal remedies against the debtor.
Simply stated, there is as yet no cause of action against Chi.
We are not persuaded. Excussion is not a condition sine qua non for the institution of an action against a guarantor. In Southern Motors, Inc. vs. Barbosa,
34
this Court stated:
4. Although an ordinary personal guarantor not a mortgagor or pledgor may demand the aforementioned exhaustion, the
creditor may, prior thereto, secure a judgment against said guarantor, who shall be entitled, however, to a deferment of the
execution of said judgment against him until after the properties of the principal debtor shall have been exhausted to satisfy the
obligation involved in the case.
There was then nothing procedurally objectionable in impleading private respondent Chi as a co-defendant in Civil Case No. Q-19312 before the trial
court. As a matter of fact, Section 6, Rule 3 of the Rules of Court on permissive joinder of parties explicitly allows it. It reads:
Sec. 6. Permissive joinder of parties. All persons in whom or against whom any right to relief in respect to or arising out of the
same transaction or series of transactions is alleged to exist, whether jointly, severally, or in the alternative, may, except as
otherwise provided in these rules, join as plaintiffs or be joined as defendants in one complaint, where any question of law or fact
common to all such plaintiffs or to all such defendants may arise in the action; but the court may make such orders as may be just to
prevent any plaintiff or defendant from being embarrassed or put to expense in connection with any proceedings in which he may
have no interest.

134

This is the equity rule relating to multifariousness. It is based on trial convenience and is designed to permit the joinder of plaintiffs or defendants
whenever there is a common question of law or fact. It will save the parties unnecessary work, trouble and expense. 35
However, Chi's liability is limited to the principal obligation in the trust receipt plus all the accessories thereof including judicial costs; with respect to the
latter, he shall only be liable for those costs incurred after being judicially required to pay. 36 Interest and damages, being accessories of the principal
obligation, should also be paid; these, however, shall run only from the date of the filing of the complaint. Attorney's fees may even be allowed in
appropriate cases. 37
In the instant case, the attorney's fees to be paid by Chi cannot be the same as that to be paid by Philippine Rayon since it is only the trust receipt that is
covered by the guaranty and not the full extent of the latter's liability. All things considered, he can be held liable for the sum of P10,000.00 as attorney's
fees in favor of the petitioner.
Thus, the trial court committed grave abuse of discretion in dismissing the complaint as against private respondent Chi and condemning petitioner to pay
him P20,000.00 as attorney's fees.
In the light of the foregoing, it would no longer necessary to discuss the other issues raised by the petitioner
WHEREFORE, the instant Petition is hereby GRANTED.
The appealed Decision of 10 March 1986 of the public respondent in AC-G.R. CV No. 66733 and, necessarily, that of Branch 9 (Quezon City)
of the then Court of First Instance of Rizal in Civil Case No. Q-19312 are hereby REVERSED and SET ASIDE and another is hereby entered:
1. Declaring private respondent Philippine Rayon Mills, Inc. liable on the twelve drafts in question (Exhibits
"X", "X-1" to "X-11", inclusive) and on the trust receipt (Exhibit "C"), and ordering it to pay petitioner: (a) the
amounts due thereon in the total sum of P956,384.95 as of 15 September 1974, with interest thereon at six
percent (6%) per annum from 16 September 1974 until it is fully paid, less whatever may have been applied
thereto by virtue of foreclosure of mortgages, if any; (b) a sum equal to ten percent (10%) of the aforesaid
amount as attorney's fees; and (c) the costs.
2. Declaring private respondent Anacleto R. Chi secondarily liable on the trust receipt and ordering him to pay
the face value thereof, with interest at the legal rate, commencing from the date of the filing of the complaint in
Civil Case No. Q-19312 until the same is fully paid as well as the costs and attorney's fees in the sum of
P10,000.00 if the writ of execution for the enforcement of the above awards against Philippine Rayon Mills,
Inc. is returned unsatisfied.
Costs against private respondents.
SO ORDERED.
Gutierrez, Jr., Bidin, Romero and Melo, JJ., concur.

G.R. No. 117857

February 2, 2001

LUIS S. WONG, petitioner,

vs.
COURT OF APPEALS and PEOPLE OF THE PHILIPPINES, respondents.
QUISUMBING, J.:
For review on certiorari is the decision dated October 28, 1994 of the Court of Appeals in C.A. G.R. CR 11856 1 which affirmed the decision of the Regional
Trial Court of Cebu City, Branch 17, convicting petitioner on three (3) counts of Batas Pambansa Blg. 22 (the Bouncing Checks Law) violations, and
sentencing him to imprisonment of four (4) months for each count, and to pay private respondent the amounts of P5,500.00, P6,410.00 and P3,375.00,
respectively, corresponding to the value of the checks involved, with the legal rate of interest from the time of filing of the criminal charges, as well as to
pay the costs.1wphi1.nt

135

The factual antecedents of the case are as follows:

Petitioner Wong was an agent of Limtong Press. Inc. (LPI), a manufacturer of calendars. LPI would print sample calendars, then give them to agents to
present to customers. The agents would get the purchase orders of customers and forward them to LPI. After printing the calendars, LPI would ship the
calendars directly to the customers. Thereafter, the agents would come around to collect the payments. Petitioner, however, had a history of unremitted
collections, which he duly acknowledged in a confirmation receipt he co-signed with his wife.2 Hence, petitioners customers were required to issue
postdated checks before LPI would accept their purchase orders.
In early December 1985, Wong issued six (6) postdated checks totaling P18,025.00, all dated December 30, 1985 and drawn payable to the order of LPI,
as follows:
(1) Allied Banking Corporation (ABC) Check No. 660143464-C for P6,410.00 (Exh. "B");
(2) ABC Check No. 660143460-C for P540.00 (Exh. "C");
(3) ABC Check No. PA660143451-C for P5,500.00 (Exh. "D");
(4) ABC Check No. PA660143465-C for P1,100.00 (Exh. "E");
(5) ABC Check No. PA660143463-C for P3,375.00 (Exh. "F");
(6) ABC Check No. PA660143452-C for P1,100.00 (Exh. "G").
These checks were initially intended to guarantee the calendar orders of customers who failed to issue post-dated checks. However, following company
policy, LPI refused to accept the checks as guarantees. Instead, the parties agreed to apply the checks to the payment of petitioners unremitted
collections for 1984 amounting to P18,077.07.3 LPI waived the P52.07 difference.
Before the maturity of the checks, petitioner prevailed upon LPI not to deposit the checks and promised to replace them within 30 days. However,
petitioner reneged on his promise. Hence, on June 5, 1986, LPI deposited the checks with Rizal Commercial Banking Corporation (RCBC). The checks
were returned for the reason "account closed." The dishonor of the checks was evidenced by the RCBC return slip.
On June 20, 1986, complainant through counsel notified the petitioner of the dishonor. Petitioner failed to make arrangements for payment within five (5)
banking days.
On November 6, 1987, petitioner was charged with three (3) counts of violation of B.P. Blg. 22 4 under three separate Informations for the three checks
amounting to P5,500.00, P3,375.00, and P6,410.00.5
The Information in Criminal Case No. CBU-12055 reads as follows:6
That on or about the 30th day of December, 1985 and for sometime subsequent thereto, in the City of Cebu, Philippines, and within the
jurisdiction of this Honorable Court, the said accused, knowing at the time of issue of the check she/he does not have sufficient funds in or
credit with the drawee bank for the payment of such check in full upon its presentment, with deliberate intent, with intent of gain and of causing
damage, did then and there issue, make or draw Allied Banking Corporation Check No. 660143451 dated 12-30-85 in the amount of P5,500.00
payable to Manuel T. Limtong which check was issued in payment of an obligation of said accused, but when the said check was presented
with said bank, the same was dishonored for reason ACCOUNT CLOSED and despite notice and demands made to redeem or make good
said check, said accused failed and refused, and up to the present time still fails and refuses to do so, to the damage and prejudice of said
Manuel T. Limtong in the amount of P5,500.00 Philippine Currency.
Contrary to law.
Petitioner was similarly charged in Criminal Case No. 12057 for ABC Check No. 660143463 in the amount of P3,375.00, and in Criminal Case No. 12058
for ABC Check No. 660143464 for P6,410.00. Both cases were raffled to the same trial court.
Upon arraignment, Wong pleaded not guilty. Trial ensued.
Manuel T. Limtong, general manager of LPI, testified on behalf of the company, Limtong averred that he refused to accept the personal checks of
petitioner since it was against company policy to accept personal checks from agents. Hence, he and petitioner simply agreed to use the checks to pay
petitioners unremitted collections to LPI. According to Limtong, a few days before maturity of the checks, Wong requested him to defer the deposit of said
checks for lack of funds. Wong promised to replace them within thirty days, but failed to do so. Hence, upon advice of counsel, he deposited the checks
which were subsequently returned on the ground of "account closed."
The version of the defense is that petitioner issued the six (6) checks to guarantee the 1985 calendar bookings of his customers. According to petitioner,
he issued the checks not as payment for any obligation, but to guarantee the orders of his customers. In fact, the face value of the six (6) postdated
checks tallied with the total amount of the calendar orders of the six (6) customers of the accused, namely, Golden Friendship Supermarket, Inc.
(P6,410.00), New Society Rice and Corn Mill (P5,500.00), Cuesta Enterprises (P540.00), Pelrico Marketing (P1,100.00), New Asia Restaurant P3,375.00),
and New China Restaurant (P1,100.00). Although these customers had already paid their respective orders, petitioner claimed LPI did not return the said
checks to him.
On August 30, 1990, the trial court issued its decision, disposing as follows: 7
"Wherefore, premises considered, this Court finds the accused Luis S. Wong GUILTY beyond reasonable doubt of the offense of Violations of
Section 1 of Batas Pambansa Bilang 22 in THREE (3) Counts and is hereby sentenced to serve an imprisonment of FOUR (4) MONTHS for

136

each count; to pay Private Complainant Manuel T. Limtong the sums of Five Thousand Five Hundred (P5,500.00) Pesos, Six Thousand Four
Hundred Ten (P6,410.00) Pesos and Three Thousand Three Hundred Seventy-Five (P3,375.00) Pesos corresponding to the amounts indicated
in Allied Banking Checks Nos. 660143451, 66[0]143464 and 660143463 all issued on December 30, 1985 together with the legal rate of
interest from the time of the filing of the criminal charges in Court and pay the costs."8
Petitioner appealed his conviction to the Court of Appeals. On October 28, 1994, it affirmed the trial courts decision in toto.9
Hence, the present petition.10 Petitioner raises the following questions of law -11
May a complainant successfully prosecute a case under BP 22 --- if there is no more consideration or price or value ever the binding tie that it
is in contracts in general and in negotiable instruments in particular behind the checks? if even before he deposits the checks, he has
ceased to be a holder for value because the purchase orders (POs) guaranteed by the checks were already paid?
Given the fact that the checks lost their reason for being, as above stated, is it not then the duty of complainant knowing he is no longer a
holder for value to return the checks and not to deposit them ever? Upon what legal basis then may such a holder deposit them and get paid
twice?
Is petitioner, as the drawer of the guarantee checks which lost their reason for being, still bound under BP 22 to maintain his account long after
90 days from maturity of the checks?
May the prosecution apply the prima facie presumption of "knowledge of lack of funds" against the drawer if the checks were belatedly
deposited by the complainant 157 days after maturity, or will it be then necessary for the prosecution to show actual proof of "lack of funds"
during the 90-day term?
Petitioner insists that the checks were issued as guarantees for the 1985 purchase orders (POs) of his customers. He contends that private respondent is
not a "holder for value" considering that the checks were deposited by private respondent after the customers already paid their orders. Instead of
depositing the checks, private respondent should have returned the checks to him. Petitioner further assails the credibility of complainant considering that
his answers to cross-examination questions included: "I cannot recall, anymore" and "We have no more record."
In his Comment,12 the Solicitor General concedes that the checks might have been initially intended by petitioner to guarantee payments due from
customers, but upon the refusal of LPI to accept said personal checks per company policy, the parties had agreed that the checks would be used to pay
off petitioners unremitted collections. Petitioners contention that he did not demand the return of the checks because he trusted LPIs good faith is
contrary to human nature and sound business practice, according to the Solicitor General.
The issue as to whether the checks were issued merely as guarantee or for payment of petitioners unremitted collections is a factual issue involving as it
does the credibility of witnesses. Said factual issue has been settled by the trial court and Court of Appeals. Although initially intended to be used as
guarantee for the purchase orders of customers, they found the checks were eventually used to settle the remaining obligations of petitioner with LPI.
Although Manuel Limtong was the sole witness for the prosecution, his testimony was found sufficient to prove all the elements of the offense charged. 13
We find no cogent reason to depart from findings of both the trial and appellate courts. In cases elevated from the Court of Appeals, our review is confined
to allege errors of law. Its findings of fact are generally conclusive. Absent any showing that the findings by the respondent court are entirely devoid of any
substantiation on record, the same must stand.14 The lack of accounting between the parties is not the issue in this case. As repeatedly held, this Court is
not a trier of facts.15 Moreover, in Llamado v. Court of Appeals,16 we held that "[t]o determine the reason for which checks are issued, or the terms and
conditions for their issuance, will greatly erode the faith the public reposes in the stability and commercial value of checks as currency substitutes, and
bring about havoc in trade and in banking communities. So what the law punishes is the issuance of a bouncing check and not the purpose for which it
was issued nor the terms and conditions relating to its issuance. The mere act of issuing a worthless check is malum prohibitum." Nothing herein
persuades us to hold otherwise.
The only issue for our resolution now is whether or not the prosecution was able to establish beyond reasonable doubt all the elements of the offense
penalized under B.P. Blg. 22.
There are two (2) ways of violating B.P. Blg. 22: (1) by making or drawing and issuing a check to apply on account or for value knowing at the time of issue
that the check is not sufficiently funded; and (2) by having sufficient funds in or credit with the drawee bank at the time of issue but failing to keep sufficient
funds therein or credit with said bank to cover the full amount of the check when presented to the drawee bank within a period of ninety (90) days. 17
The elements of B.P. Blg. 22 under the first situation, pertinent to the present case, are: 18
"(1) The making, drawing and issuance of any check to apply for account or for value;
(2) The knowledge of the maker, drawer, or issuer that at the time of issue he does not have sufficient funds in or credit with the drawee bank
for the payment of such check in full upon its presentment; and
(3) The subsequent dishonor of the check by the drawee bank for insufficiency of funds or credit or dishonor for the same reason had not the
drawer, without any valid cause, ordered the bank to stop payment."
Petitioner contends that the first element does not exist because the checks were not issued to apply for account or for value. He attempts to distinguish
his situation from the usual "cut-and-dried" B.P. 22 case by claiming that the checks were issued as guarantee and the obligations they were supposed to
guarantee were already paid. This flawed argument has no factual basis, the RTC and CA having both ruled that the checks were in payment for
unremitted collections, and not as guarantee. Likewise, the argument has no legal basis, for what B.P. Blg. 22 punishes is the issuance of a bouncing
check and not the purpose for which it was issued nor the terms and conditions relating to its issuance. 19
As to the second element, B.P. Blg. 22 creates a presumption juris tantum that the second element prima facie exists when the first and third elements of
the offense are present.20 Thus, the makers knowledge is presumed from the dishonor of the check for insufficiency of funds. 21

137

Petitioner avers that since the complainant deposited the checks on June 5, 1986, or 157 days after the December 30, 1985 maturity date, the
presumption of knowledge of lack of funds under Section 2 of B.P. Blg. 22 should not apply to him. He further claims that he should not be expected to
keep his bank account active and funded beyond the ninety-day period.
Section 2 of B.P. Blg. 22 provides:
Evidence of knowledge of insufficient funds. The making, drawing and issuance of a check payment of which is refused by the drawee
because of insufficient funds in or credit with such bank, when presented within ninety (90) days from the date of the check, shall be prima
facie evidence of knowledge of such insufficiency of funds or credit unless such maker or drawer pays the holder thereof the amount due
thereon, or makes arrangements for payment in full by the drawee of such check within five (5) banking days after receiving notice that such
check has not been paid by the drawee.
An essential element of the offense is "knowledge" on the part of the maker or drawer of the check of the insufficiency of his funds in or credit with the
bank to cover the check upon its presentment. Since this involves a state of mind difficult to establish, the statute itself creates a prima facie presumption
of such knowledge where payment of the check "is refused by the drawee because of insufficient funds in or credit with such bank when presented within
ninety (90) days from the date of the check." To mitigate the harshness of the law in its application, the statute provides that such presumption shall not
arise if within five (5) banking days from receipt of the notice of dishonor, the maker or drawer makes arrangements for payment of the check by the bank
or pays the holder the amount of the check.22
Contrary to petitioners assertions, nowhere in said provision does the law require a maker to maintain funds in his bank account for only 90 days. Rather,
the clear import of the law is to establish a prima facie presumption of knowledge of such insufficiency of funds under the following conditions (1)
presentment within 90 days from date of the check, and (2) the dishonor of the check and failure of the maker to make arrangements for payment in full
within 5 banking days after notice thereof. That the check must be deposited within ninety (90) days is simply one of the conditions for the prima facie
presumption of knowledge of lack of funds to arise. It is not an element of the offense. Neither does it discharge petitioner from his duty to maintain
sufficient funds in the account within a reasonable time thereof. Under Section 186 of the Negotiable Instruments Law, "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." By
current banking practice, a check becomes stale after more than six (6) months,23 or 180 days. Private respondent herein deposited the checks 157 days
after the date of the check. Hence said checks cannot be considered stale. Only the presumption of knowledge of insufficiency of funds was lost, but such
knowledge could still be proven by direct or circumstantial evidence. As found by the trial court, private respondent did not deposit the checks because of
the reassurance of petitioner that he would issue new checks. Upon his failure to do so, LPI was constrained to deposit the said checks. After the checks
were dishonored, petitioner was duly notified of such fact but failed to make arrangements for full payment within five (5) banking days thereof. There is,
on record, sufficient evidence that petitioner had knowledge of the insufficiency of his funds in or credit with the drawee bank at the time of issuance of the
checks. And despite petitioners insistent plea of innocence, we find no error in the respondent courts affirmance of his conviction by the trial court for
violations of the Bouncing Checks Law.
However, pursuant to the policy guidelines in Administrative Circular No. 12-2000, which took effect on November 21, 2000, the penalty imposed on
petitioner should now be modified to a fine of not less than but not more than double the amount of the checks that were dishonored.
WHEREFORE, the petition is DENIED. Petitioner Luis S. Wong is found liable for violation of Batas Pambansa Blg. 22 but the penalty imposed on him is
hereby MODIFIED so that the sentence of imprisonment is deleted. Petitioner is ORDERED to pay a FINE of (1) P6,750.00, equivalent to double the
amount of the check involved in Criminal Case No. CBU-12057, (2) P12,820.00, equivalent to double the amount of the check involved in Criminal Case
No. CBU-12058, and (3) P11,000.00, equivalent to double the amount of the check involved in Criminal Case No. CBU-12055, with subsidiary
imprisonment24 in case of insolvency to pay the aforesaid fines. Finally, as civil indemnity, petitioner is also ordered to pay to LPI the face value of said
checks totaling P18,025.00 with legal interest thereon from the time of filing the criminal charges in court, as well as to pay the costs.1wphi1.nt
SO ORDERED.
Bellosillo, Mendoza, Buena, and De Leon, Jr., JJ., concur.

G.R. No. 141968

February 12, 2001

THE INTERNATIONAL CORPORATE BANK (now UNION BANK OF THE PHILIPPINES), petitioner,
vs.
SPS. FRANCIS S. GUECO and MA. LUZ E. GUECO, respondents.
KAPUNAN, J.:
The respondent Gueco Spouses obtained a loan from petitioner International Corporate Bank (now Union Bank of the Philippines) to purchase a car - a
Nissan Sentra 1600 4DR, 1989 Model. In consideration thereof, the Spouses executed promissory notes which were payable in monthly installments and
chattel mortgage over the car to serve as security for the notes.1wphi1.nt
The Spouses defaulted in payment of installments. Consequently, the Bank filed on August 7, 1995 a civil action docketed as Civil Case No. 658-95 for
"Sum of Money with Prayer for a Writ of Replevin"1 before the Metropolitan Trial Court of Pasay City, Branch 45.2 On August 25, 1995, Dr. Francis Gueco
was served summons and was fetched by the sheriff and representative of the bank for a meeting in the bank premises. Desi Tomas, the Bank's Assistant

138

Vice President demanded payment of the amount of P184,000.00 which represents the unpaid balance for the car loan. After some negotiations and
computation, the amount was lowered to P154,000.00, However, as a result of the non-payment of the reduced amount on that date, the car was detained
inside the bank's compound.
On August 28, 1995, Dr. Gueco went to the bank and talked with its Administrative Support, Auto Loans/Credit Card Collection Head, Jefferson Rivera.
The negotiations resulted in the further reduction of the outstanding loan to P150,000.00.
On August 29, 1995, Dr. Gueco delivered a manager's check in amount of P150,000.00 but the car was not released because of his refusal to sign the
Joint Motion to Dismiss. It is the contention of the Gueco spouses and their counsel that Dr. Gueco need not sign the motion for joint dismissal considering
that they had not yet filed their Answer. Petitioner, however, insisted that the joint motion to dismiss is standard operating procedure in their bank to effect
a compromise and to preclude future filing of claims, counterclaims or suits for damages.
After several demand letters and meetings with bank representatives, the respondents Gueco spouses initiated a civil action for damages before the
Metropolitan Trial Court of Quezon City, Branch 33. The Metropolitan Trial Court dismissed the complaint for lack of merit. 3
On appeal to the Regional Trial Court, Branch 227 of Quezon City, the decision of the Metropolitan Trial Court was reversed. In its decision, the RTC held
that there was a meeting of the minds between the parties as to the reduction of the amount of indebtedness and the release of the car but said
agreement did not include the signing of the joint motion to dismiss as a condition sine qua non for the effectivity of the compromise. The court further
ordered the bank:
1. to return immediately the subject car to the appellants in good working condition; Appellee may deposit the Manager's check - the proceeds
of which have long been under the control of the issuing bank in favor of the appellee since its issuance, whereas the funds have long been
paid by appellants to .secure said Manager's Check, over which appellants have no control;
2. to pay the appellants the sum of P50,000.00 as moral damages; P25,000.00 as exemplary damages, and P25,000.00 as attorney's fees,
and
3. to pay the cost of suit.
In other respect, the decision of the Metropolitan Trial Court Branch 33 is hereby AFFIRMED.4
The case was elevated to the Court of Appeals, which on February 17, 2000, issued the assailed decision, the decretal portion of which reads:
WHEREFORE, premises considered, the petition for review on certiorari is hereby DENIED and the Decision of the Regional Trial Court of
Quezon City, Branch 227, in Civil Case No. Q-97-31176, for lack of any reversible error, is AFFIRMED in toto. Costs against petitioner.
SO ORDERED.5
The Court of Appeals essentially relied on the respect accorded to the finality of the findings of facts by the lower court and on the latter's finding of the
existence of fraud which constitutes the basis for the award of damages.
The petitioner comes to this Court by way of petition for review on certiorari under Rule 45 of the Rules of Court, raising the following assigned errors:
I
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO AGREEMENT WITH RESPECT TO THE EXECUTION OF THE
JOINT MOTION TO DISMISS AS A CONDITION FOR THE COMPROMISE AGREEMENT.
II
THE COURT OF APPEALS ERRED IN GRANTING MORAL AND EXEMPLARY DAMAGES AND ATTORNEY'S FEES IN FAVOR OF THE
RESPONDENTS.
III
THE COURT OF APPEALS ERRED IN HOLDING THAT THE PETITIONER RETURN THE SUBJECT CAR TO THE RESPONDENTS,
WITHOUT MAKING ANY PROVISION FOR THE ISSUANCE OF THE NEW MANAGER'S/CASHIER'S CHECK BY THE RESPONDENTS IN
FAVOR OF THE PETITIONER IN LIEU OF THE ORIGINAL CASHIER'S CHECK THAT ALREADY BECAME STALE. 6
As to the first issue, we find for the respondents. The issue as to what constitutes the terms of the oral compromise or any subsequent novation is a
question of fact that was resolved by the Regional Trial Court and the Court of Appeals in favor of respondents. It is well settled that the findings of fact of
the lower court, especially when affirmed by the Court of Appeals, are binding upon this Court.7 While there are exceptions to this rule,8 the present case
does not fall under anyone of them, the petitioner's claim to the contrary, notwithstanding.
Being an affirmative allegation, petitioner has the burden of evidence to prove his claim that the oral compromise entered into by the parties on August 28,
1995 included the stipulation that the parties would jointly file a motion to dismiss. This petitioner failed to do. Notably, even the Metropolitan Trial Court,
while ruling in favor of the petitioner and thereby dismissing the complaint, did not make a factual finding that the compromise agreement included the
condition of the signing of a joint motion to dismiss.
The Court of Appeals made the factual findings in this wise:

139

In support of its claim, petitioner presented the testimony of Mr. Jefferson Rivera who related that respondent Dr. Gueco was aware that the
signing of the draft of the Joint Motion to Dismiss was one of the conditions set by the bank for the acceptance of the reduced amount of
indebtedness and the release of the car. (TSN, October 23, 1996, pp. 17-21, Rollo, pp. 18, 5). Respondents, however, maintained that no such
condition was ever discussed during their meeting of August 28, 1995 (Rollo, p. 32).
The trial court, whose factual findings are entitled to respect since it has the 'opportunity to directly observe the witnesses and to determine by
their demeanor on the stand the probative value of their testimonies' (People vs. Yadao, et al. 216 SCRA 1, 7 [1992]), failed to make a
categorical finding on the issue. In dismissing the claim of damages of the respondents, it merely observed that respondents are not entitled to
indemnity since it was their unjustified reluctance to sign of the Joint Motion to Dismiss that delayed the release of the car. The trial court
opined, thus:
'As regards the third issue, plaintiffs' claim for damages is unavailing. First, the plaintiffs could have avoided the renting of another
car and could have avoided this litigation had he signed the Joint Motion to Dismiss. While it is true that herein defendant can
unilaterally dismiss the case for collection of sum of money with replevin, it is equally true that there is nothing wrong for the plaintiff
to affix his signature in the Joint Motion to Dismiss, for after all, the dismissal of the case against him is for his own good and benefit.
In fact, the signing of the Joint Motion to Dismiss gives the plaintiff three (3) advantages. First, he will recover his car. Second, he
will pay his obligation to the bank on its reduced amount of P150,000.00 instead of its original claim of P184,985.09. And third, the
case against him will be dismissed. Plaintiffs, likewise, are not entitled to the award of moral damages and exemplary damages as
there is no showing that the defendant bank acted fraudulently or in bad faith.' (Rollo, p. 15)
The Court has noted, however, that the trial court, in its findings of facts, clearly indicated that the agreement of the parties on August 28, 1995
was merely for the lowering of the price, hence 'xxx On August 28, 1995, bank representative Jefferson Rivera and plaintiff entered into an oral compromise agreement, whereby
the original claim of the bank of P184,985.09 was reduced to P150,000.00 and that upon payment of which, plaintiff was informed
that the subject motor vehicle would be released to him.' (Rollo, p. 12)
The lower court, on the other hand, expressly made a finding that petitioner failed to include the aforesaid signing of the Joint Motion to Dismiss
as part of the agreement. In dismissing petitioner's claim, the lower court declared, thus:
'If it is true, as the appellees allege, that the signing of the joint motion was a condition sine qua non for the reduction of the
appellants' obligation, it is only reasonable and logical to assume that the joint motion should have been shown to Dr. Gueco in the
August 28, 1995 meeting. Why Dr. Gueco was not given a copy of the joint motion that day of August 28, 1995, for his family or legal
counsel to see to be brought signed, together with the P150,000.00 in manager's check form to be submitted on the following day
on August 29, 1995? (sic) [I]s a question whereby the answer up to now eludes this Court's comprehension. The appellees would
like this Court to believe that Dr Gueco was informed by Mr. Rivera Rivera of the bank requirement of signing the joint motion on
August 28, 1995 but he did not bother to show a copy thereof to his family or legal counsel that day August 28, 1995. This part of the
theory of appellee is too complicated for any simple oral agreement. The idea of a Joint Motion to Dismiss being signed as a
condition to the pushing through a deal surfaced only on August 29, 1995.
'This Court is not convinced by the appellees' posturing. Such claim rests on too slender a frame, being inconsistent with human
experience. Considering the effect of the signing of the Joint Motion to Dismiss on the appellants' substantive right, it is more in
accord with human experience to expect Dr. Gueco, upon being shown the Joint Motion to Dismiss, to refuse to pay the Manager's
Check and for the bank to refuse to accept the manager's check. The only logical explanation for this inaction is that Dr. Gueco was
not shown the Joint Motion to Dismiss in the meeting of August 28, 1995, bolstering his claim that its signing was never put into
consideration in reaching a compromise.' xxx.9
We see no reason to reverse.
Anent the issue of award of damages, we find the claim of petitioner meritorious. In finding the petitioner liable for damages, both .the Regional Trial Court
and the Court of Appeals ruled that there was fraud on the part of the petitioner. The CA thus declared:
The lower court's finding of fraud which became the basis of the award of damages was likewise sufficiently proven. Fraud under Article 1170 of
the Civil Code of the Philippines, as amended is the 'deliberate and intentional evasion of the normal fulfillment of obligation' When petitioner
refused to release the car despite respondent's tender of payment in the form of a manager's check, the former intentionally evaded its
obligation and thereby became liable for moral and exemplary damages, as well as attorney's fees.10
We disagree.
Fraud has been defined as the deliberate intention to cause damage or prejudice. It is the voluntary execution of a wrongful act, or a willful omission,
knowing and intending the effects which naturally and necessarily arise from such act or omission; the fraud referred to in Article 1170 of the Civil Code is
the deliberate and intentional evasion of the normal fulfillment of obligation.11 We fail to see how the act of the petitioner bank in requiring the respondent
to sign the joint motion to dismiss could constitute as fraud. True, petitioner may have been remiss in informing Dr. Gueco that the signing of a joint motion
to dismiss is a standard operating procedure of petitioner bank. However, this can not in anyway have prejudiced Dr. Gueco. The motion to dismiss was in
fact also for the benefit of Dr. Gueco, as the case filed by petitioner against it before the lower court would be dismissed with prejudice. The whole point of
the parties entering into the compromise agreement was in order that Dr. Gueco would pay his outstanding account and in return petitioner would return
the car and drop the case for money and replevin before the Metropolitan Trial Court. The joint motion to dismiss was but a natural consequence of the
compromise agreement and simply stated that Dr. Gueco had fully settled his obligation, hence, the dismissal of the case. Petitioner's act of requiring Dr.
Gueco to sign the joint motion to dismiss can not be said to be a deliberate attempt on the part of petitioner to renege on the compromise agreement of
the parties. It should, likewise, be noted that in cases of breach of contract, moral damages may only be awarded when the breach was attended by fraud
or bad faith.12 The law presumes good faith. Dr. Gueco failed to present an iota of evidence to overcome this presumption. In fact, the act of petitioner
bank in lowering the debt of Dr. Gueco from P184,000.00 to P150,000.00 is indicative of its good faith and sincere desire to settle the case. If respondent
did suffer any damage, as a result of the withholding of his car by petitioner, he has only himself to blame. Necessarily, the claim for exemplary damages
must fait. In no way, may the conduct of petitioner be characterized as "wanton, fraudulent, reckless, oppressive or malevolent." 13

140

We, likewise, find for the petitioner with respect to the third assigned error. In the meeting of August 29, 1995, respondent Dr. Gueco delivered a
manager's check representing the reduced amount of P150,000.00. Said check was given to Mr. Rivera, a representative of respondent bank. However,
since Dr. Gueco refused to sign the joint motion to dismiss, he was made to execute a statement to the effect that he was withholding the payment of the
check.14 Subsequently, in a letter addressed to Ms. Desi Tomas, vice president of the bank, dated September 4, 1995, Dr. Gueco instructed the bank to
disregard the 'hold order" letter and demanded the immediate release of his car,15 to which the former replied that the condition of signing the joint motion
to dismiss must be satisfied and that they had kept the check which could be claimed by Dr. Gueco anytime. 16 While there is controversy as to whether the
document evidencing the order to hold payment of the check was formally offered as evidence by petitioners, 17 it appears from the pleadings that said
check has not been encashed.
The decision of the Regional Trial Court, which was affirmed in toto by the Court of Appeals, orders the petitioner:
1. to return immediately the subject car to the appellants in good working condition. Appellee may deposit the Manager's Check - the proceeds
of which have long been under the control of the issuing bank in favor of the appellee since its issuance, whereas the funds have long been
paid by appellants to secure said Manager's Check over which appellants have no control.18
Respondents would make us hold that petitioner should return the car or its value and that the latter, because of its own negligence, should suffer the loss
occasioned by the fact that the check had become stale.19 It is their position that delivery of the manager's check produced the effect of payment 20 and,
thus, petitioner was negligent in opting not to deposit or use said check. Rudimentary sense of justice and fair play would not countenance respondents'
position.
A stale check is one which has not been presented for payment within a reasonable time after its issue. It is valueless and, therefore, should not be paid.
Under the negotiable instruments law, an instrument not payable on demand must be presented for payment on the day it falls due. When the instrument
is payable on demand, presentment must be made within a reasonable time after its issue. In the case of a bill of exchange, presentment is sufficient if
made within a reasonable time after the last negotiation thereof.21
A check must be presented for payment within a reasonable time after its issue,22 and in determining what is a "reasonable time," regard is to be had to
the nature of the instrument, the usage of trade or business with respect to such instruments, and the facts of the particular case. 23 The test is whether the
payee employed such diligence as a prudent man exercises in his own affairs.24 This is because the nature and theory behind the use of a check points to
its immediate use and payability. In a case, a check payable on demand which was long overdue by about two and a half (2-1/2) years was considered a
stale check.25 Failure of a payee to encash a check for more than ten (10) years undoubtedly resulted in the check becoming stale. 26 Thus, even a delay of
one (1) week27 or two (2) days,28 under the specific circumstances of the cited cases constituted unreasonable time as a matter of law.
In the case at bar, however, the check involved is not an ordinary bill of exchange but a manager's check. A manager's check is one drawn by the bank's
manager upon the bank itself. It is similar to a cashier's check both as to effect and use. A cashier's check is a check of the bank's cashier on his own or
another check. In effect, it is a bill of exchange drawn by the cashier of a bank upon the bank itself, and accepted in advance by the act of its issuance. 29 It
is really the bank's own check and may be treated as a promissory note with the bank as a maker.30 The check becomes the primary obligation of the bank
which issues it and constitutes its written promise to pay upon demand. The mere issuance of it is considered an acceptance thereof. If treated as
promissory note, the drawer would be the maker and in which case the holder need not prove presentment for payment or present the bill to the drawee
for acceptance.31
Even assuming that presentment is needed, failure to present for payment within a reasonable time will result to the discharge of the drawer only to the
extent of the loss caused by the delay.32 Failure to present on time, thus, does not totally wipe out all liability. In fact, the legal situation amounts to an
acknowledgment of liability in the sum stated in the check. In this case, the Gueco spouses have not alleged, much less shown that they or the bank
which issued the manager's check has suffered damage or loss caused by the delay or non-presentment. Definitely, the original obligation to pay certainly
has not been erased.
It has been held that, if the check had become stale, it becomes imperative that the circumstances that caused its non-presentment be determined. 33 In
the case at bar, there is no doubt that the petitioner bank held on the check and refused to encash the same because of the controversy surrounding the
signing of the joint motion to dismiss. We see no bad faith or negligence in this position taken by the Bank.1wphi1.nt
WHEREFORE, premises considered, the petition for review is given due course. The decision of the Court of Appeals affirming the decision of the
Regional Trial Court is SET ASIDE. Respondents are further ordered to pay the original obligation amounting to P150,000.00 to the petitioner upon
surrender or cancellation of the manager's check in the latter's possession, afterwhich, petitioner is to return the subject motor vehicle in good working
condition.
SO ORDERED.
Davide, Jr., Puno, Pardo, and Ynares-Santiago, JJ., concur.
G.R. No. 101163 January 11, 1993
STATE INVESTMENT HOUSE, INC., petitioner,
vs.
COURT OF APPEALS and NORA B. MOULIC, respondents.
Escober, Alon & Associates for petitioner.
Martin D. Pantaleon for private respondents.

BELLOSILLO, J.:

141

The liability to a holder in due course of the drawer of checks issued to another merely as security, and the right of a real estate mortgagee after
extrajudicial foreclosure to recover the balance of the obligation, are the issues in this Petition for Review of the Decision of respondent Court of Appeals.
Private respondent Nora B. Moulic issued to Corazon Victoriano, as security for pieces of jewelry to be sold on commission, two (2) post-dated Equitable
Banking Corporation checks in the amount of Fifty Thousand Pesos (P50,000.00) each, one dated 30 August 1979 and the other, 30 September 1979.
Thereafter, the payee negotiated the checks to petitioner State Investment House. Inc. (STATE).
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. On 20 December 1979, STATE 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.
On 6 October 1983, STATE sued to recover the value of the checks plus attorney's fees and expenses of litigation.
In her Answer, 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.
On 26 May 1988, the trial court dismissed the Complaint as well as the Third-Party Complaint, and ordered STATE to pay MOULIC P3,000.00 for
attorney's fees.
STATE 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 STATE 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. The sale of the jewelry was never
effected; the checks, therefore, ceased to serve their purpose as security for the jewelry.
We are not persuaded.
The negotiability of the checks is not in dispute. Indubitably, they were negotiable. After all, at the pre-trial, the parties agreed to limit the issue to whether
or not STATE was a holder of the checks in due course. 1
In this regard, Sec. 52 of the Negotiable Instruments Law provides
Sec. 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 was 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.
Culled from the foregoing, a prima facie presumption exists that the holder of a negotiable instrument is a holder in due course. 2 Consequently, the burden
of proving that STATE is not a holder in due course lies in the person who disputes the presumption. In this regard, MOULIC failed.
The evidence clearly shows that: (a) on their faces the post-dated checks were complete and regular: (b) petitioner bought these checks from the payee,
Corazon Victoriano, before their due dates; 3 (c) petitioner took these checks in good faith and for value, albeit at a discounted price; and, (d) petitioner
was never informed nor made aware that these checks were merely issued to payee as security and not for value.
Consequently, STATE is indeed a holder in due course. As such, it holds the instruments free from any defect of title of prior parties, and from defenses
available to prior parties among themselves; STATE may, therefore, enforce full payment of the checks. 4
MOULIC cannot set up against STATE the defense that there was failure or absence of consideration. MOULIC can only invoke this defense against
STATE if it was privy to the purpose for which they were issued and therefore is not a holder in due course.
That the post-dated checks were merely issued as security is not a ground for the discharge of the instrument as against a holder in due course. For the
only grounds are those outlined in Sec. 119 of the Negotiable Instruments Law:
Sec. 119. Instrument; how discharged. A negotiable instrument is discharged: (a) By payment in due course by or on behalf of the
principal debtor; (b) By payment in due course by the party accommodated, where the instrument is made or accepted for his
accommodation; (c) By the intentional cancellation thereof by the holder; (d) By any other act which will discharge a simple contract
for the payment of money; (e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right.
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, 5 burning it, 6 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 Sec. 119 does not specify what these acts are, e.g., Art. 1231 of the Civil Code 7 which enumerates the modes of extinguishing
obligations. Again, none of the modes outlined therein is applicable in the instant case as Sec. 119 contemplates of a situation where the holder of the
instrument is the creditor while its drawer is the debtor. In the present action, the payee, Corazon Victoriano, was no longer MOULIC's creditor at the time
the jewelry was returned.

142

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.
Moreover, the fact that STATE failed to give Notice of Dishonor to MOULIC is of no moment. The need for such notice is not absolute; there are
exceptions under Sec. 114 of the Negotiable Instruments Law:
Sec. 114. When notice need not be given to drawer. Notice of dishonor is not required to be given to the drawer in the following
cases: (a) Where the drawer and the drawee are the same person; (b) When the drawee is a fictitious person or a person not having
capacity to contract; (c) When the drawer is the person to whom the instrument is presented for payment: (d) Where the drawer has
no right to expect or require that the drawee or acceptor will honor the instrument; (e) Where the drawer had countermanded
payment.
Indeed, MOULIC'S actuations leave much to be desired. She did not retrieve the checks when she returned the jewelry. She simply withdrew her funds
from her drawee bank and transferred them to another to protect herself. After withdrawing her funds, she could not have expected her checks to be
honored. In other words, she was responsible for the dishonor of her checks, hence, there was no need to serve her Notice of Dishonor, which is simply
bringing to the knowledge of the drawer or indorser of the instrument, either verbally or by writing, the fact that a specified instrument, upon proper
proceedings taken, has not been accepted or has not been paid, and that the party notified is expected to pay it. 8
In addition, the Negotiable Instruments Law was enacted for the purpose of facilitating, not hindering or hampering transactions in commercial paper.
Thus, the said statute should not be tampered with haphazardly or lightly. Nor should it be brushed aside in order to meet the necessities in a single case.
9

The drawing and negotiation of a check have certain effects aside from the transfer of title or the incurring of liability in regard to the instrument by the
transferor. The holder who takes the negotiated paper makes a contract with the parties on the face of the instrument. There is an implied representation
that funds or credit are available for the payment of the instrument in the bank upon which it is drawn. 10 Consequently, the withdrawal of the money from
the drawee bank to avoid liability on the checks cannot prejudice the rights of holders in due course. In the instant case, such withdrawal renders the
drawer, Nora B. Moulic, liable to STATE, a holder in due course of the checks.
Under the facts of this case, STATE could not expect payment as MOULIC left no funds with the drawee bank to meet her obligation on the checks, 11 so
that Notice of Dishonor would be futile.
The Court of Appeals also held that allowing recovery on the checks would constitute unjust enrichment on the part of STATE Investment House, Inc. This
is error.
The record shows that Mr. Romelito Caoili, an Account Assistant, testified that the obligation of Corazon Victoriano and her husband at the time their
property mortgaged to STATE was extrajudicially foreclosed amounted to P1.9 million; the bid price at public auction was only P1 million. 12 Thus, the value
of the property foreclosed was not even enough to pay the debt in full.
Where the proceeds of the sale are insufficient to cover the debt in an extrajudicial foreclosure of mortgage, the mortgagee is entitled to claim the
deficiency from the debtor. 13 The step thus taken by the mortgagee-bank in resorting to an extra-judicial foreclosure was merely to find a proceeding for
the sale of the property and its action cannot be taken to mean a waiver of its right to demand payment for the whole debt. 14 For, while Act 3135, as
amended, does not discuss the mortgagee's right to recover such deficiency, it does not contain any provision either, expressly or impliedly, prohibiting
recovery. In this jurisdiction, when the legislature intends to foreclose the right of a creditor to sue for any deficiency resulting from foreclosure of a security
given to guarantee an obligation, it so expressly provides. For instance, with respect to pledges, Art. 2115 of the Civil Code 15 does not allow the creditor to
recover the deficiency from the sale of the thing pledged. Likewise, in the case of a chattel mortgage, or a thing sold on installment basis, in the event of
foreclosure, the vendor "shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary will
be void". 16
It is clear then that in the absence of a similar provision in Act No. 3135, as amended, it cannot be concluded that the creditor loses his right recognized by
the Rules of Court to take action for the recovery of any unpaid balance on the principal obligation simply because he has chosen to extrajudicially
foreclose the real estate mortgage pursuant to a Special Power of Attorney given him by the mortgagor in the contract of mortgage. 17
The filing of the Complaint and the Third-Party Complaint to enforce the checks against MOULIC and the VICTORIANO spouses, respectively, is just
another means of recovering the unpaid balance of the debt of the VICTORIANOs.
In fine, MOULIC, as drawer, is liable for the value of the checks she issued to the holder in due course, STATE, without prejudice to any action for
recompense she may pursue against the VICTORIANOs as Third-Party Defendants who had already been declared as in default.
WHEREFORE, the petition is GRANTED. The decision appealed from is REVERSED and a new one entered declaring private respondent NORA B.
MOULIC liable to petitioner STATE INVESTMENT HOUSE, INC., for the value of EBC Checks Nos. 30089658 and 30089660 in the total amount of
P100,000.00, P3,000.00 as attorney's fees, and the costs of suit, without prejudice to any action for recompense she may pursue against the
VICTORIANOs as Third-Party Defendants.
Costs against private respondent.
SO ORDERED.
Cruz and Grio-Aquino, JJ., concur.
Padilla, J., took no part.

143

G.R. No. 93048 March 3, 1994

BATAAN CIGAR AND CIGARETTE FACTORY, INC., petitioner,
vs.
THE COURT OF APPEALS and STATE INVESTMENT HOUSE, INC., respondents.
Teresita Gandiongco Oledan for petitioner.
Acaban & Sabado for private respondent.

NOCON, J.:

144

For our review is the decision of the Court of Appeals in the case entitled "State Investment House, Inc. v. Bataan Cigar & Cigarette Factory Inc.," 1
affirming the decision of the Regional Trial Court 2 in a complaint filed by the State Investment House, Inc. (hereinafter referred to as SIHI) for collection on
three unpaid checks issued by Bataan Cigar & Cigarette Factory, Inc. (hereinafter referred to as BCCFI). The foregoing decisions unanimously ruled in
favor of SIHI, the private respondent in this case.
Emanating from the records are the following facts. Petitioner, Bataan Cigar & Cigarette Factory, Inc. (BCCFI), a corporation involved in the manufacturing
of cigarettes, engaged one of its suppliers, King Tim Pua George (herein after referred to as George King), to deliver 2,000 bales of tobacco leaf starting
October 1978. In consideration thereof, BCCFI, on July 13, 1978 issued crossed checks post dated sometime in March 1979 in the total amount of
P820,000.00. 3
Relying on the supplier's representation that he would complete delivery within three months from December 5, 1978, petitioner agreed to purchase
additional 2,500 bales of tobacco leaves, despite the supplier's failure to deliver in accordance with their earlier agreement. Again petitioner issued post
dated crossed checks in the total amount of P1,100,000.00, payable sometime in September 1979. 4
During these times, George King was simultaneously dealing with private respondent SIHI. On July 19, 1978, he sold at a discount check TCBT 551826 5
bearing an amount of P164,000.00, post dated March 31, 1979, drawn by petitioner, naming George King as payee to SIHI. On December 19 and 26,
1978, he again sold to respondent checks TCBT Nos. 608967 & 608968, 6 both in the amount of P100,000.00, post dated September 15 & 30, 1979
respectively, drawn by petitioner in favor of George King.
In as much as George King failed to deliver the bales of tobacco leaf as agreed despite petitioner's demand, BCCFI issued on March 30, 1979, a stop
payment order on all checks payable to George King, including check TCBT 551826. Subsequently, stop payment was also ordered on checks TCBT Nos.
608967 & 608968 on September 14 & 28, 1979, respectively, due to George King's failure to deliver the tobacco leaves.
Efforts of SIHI to collect from BCCFI having failed, it instituted the present case, naming only BCCFI as party defendant. The trial court pronounced SIHI
as having a valid claim being a holder in due course. It further said that the non-inclusion of King Tim Pua George as party defendant is immaterial in this
case, since he, as payee, is not an indispensable party.
The main issue then is whether SIHI, a second indorser, a holder of crossed checks, is a holder in due course, to be able to collect from the drawer,
BCCFI.
The Negotiable Instruments Law states what constitutes a holder in due course, thus:
Sec. 52 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.
Section 59 of the NIL further states that every holder is deemed prima facie a holder in due course. However, when it is shown that the title of any person
who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims, acquired the title as
holder in due course.
The facts in this present case are on all fours to the case of State Investment House, Inc. (the very respondent in this case) v. Intermediate Appellate
Court 7 wherein we made a discourse on the effects of crossing of checks.
As preliminary, a check is defined by law as a bill of exchange drawn on a bank payable on demand. 8 There are a variety of checks, the more popular of
which are the memorandum check, cashier's check, traveler's check and crossed check. Crossed check is one where two parallel lines are drawn across
its face or across a corner thereof. It may be crossed generally or specially.
A check is crossed specially when the name of a particular banker or a company is written between the parallel lines drawn. It is crossed generally when
only the words "and company" are written or nothing is written at all between the parallel lines. It may be issued so that the presentment can be made only
by a bank. Veritably the Negotiable Instruments Law (NIL) does not mention "crossed checks," although Article 541 9 of the Code of Commerce refers to
such instruments.
According to commentators, the negotiability of a check is not affected by its being crossed, whether specially or generally. It may legally be negotiated
from one person to another as long as the one who encashes the check with the drawee bank is another bank, or if it is specially crossed, by the bank
mentioned between the parallel lines. 10 This is specially true in England where the Negotiable Instrument Law originated.
In the Philippine business setting, however, we used to be beset with bouncing checks, forging of checks, and so forth that banks have become quite
guarded in encashing checks, particularly those which name a specific payee. Unless one is a valued client, a bank will not even accept second
indorsements on checks.
In order to preserve the credit worthiness of checks, jurisprudence has pronounced that crossing of a check should have the following effects: (a) the
check may not be encashed but only deposited in the bank; (b) the check may be negotiated only once to one who has an account with a bank; (c) and
the act of crossing the check serves as warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has
received the check pursuant to that purpose, otherwise, he is not a holder in due course. 11

145

The foregoing was adopted in the case of SIHI v. IAC, supra. In that case, New Sikatuna Wood Industries, Inc. also sold at a discount to SIHI three post
dated crossed checks, issued by Anita Pea Chua naming as payee New Sikatuna Wood Industries, Inc. Ruling that SIHI was not a holder in due course,
we then said:
The three checks in the case at bar had been crossed generally and issued payable to New Sikatuna Wood Industries, Inc. which
could only mean that the drawer had intended the same for deposit only by the rightful person, i.e. the payee named therein.
Apparently, it was not the payee who presented the same for payment and therefore, there was no proper presentment, and the
liability did not attach to the drawer. Thus, in the absence of due presentment, the drawer did not become liable. Consequently, no
right of recourse is available to petitioner (SIHI) against the drawer of the subject checks, private respondent wife (Anita),
considering that petitioner is not the proper party authorized to make presentment of the checks in question.
xxx xxx xxx
That the subject checks had been issued subject to the condition that private respondents (Anita and her husband) on due date
would make the back up deposit for said checks but which condition apparently was not made, thus resulting in the nonconsummation of the loan intended to be granted by private respondents to New Sikatuna Wood Industries, Inc., constitutes a good
defense against petitioner who is not a holder in due course. 12
It is then settled that crossing of checks should put the holder on inquiry and upon him devolves the duty to ascertain the indorser's title to the check or the
nature of his possession. Failing in this respect, the holder is declared guilty of gross negligence amounting to legal absence of good faith, contrary to
Sec. 52(c) of the Negotiable Instruments Law, 13 and as such the consensus of authority is to the effect that the holder of the check is not a holder in due
course.
In the present case, BCCFI's defense in stopping payment is as good to SIHI as it is to George King. Because, really, the checks were issued with the
intention that George King would supply BCCFI with the bales of tobacco leaf. There being failure of consideration, SIHI is not a holder in due course.
Consequently, BCCFI cannot be obliged to pay the checks.
The foregoing does not mean, however, that respondent could not recover from the checks. The only disadvantage of a holder who is not a holder in due
course is that the instrument is subject to defenses as if it were
non-negotiable. 14 Hence, respondent can collect from the immediate indorser, in this case, George King.
WHEREFORE, finding that the court a quo erred in the application of law, the instant petition is hereby GRANTED. The decision of the Regional Trial
Court as affirmed by the Court of Appeals is hereby REVERSED. Cost against private respondent.
SO ORDERED.
Narvasa, C.J., Regalado and Puno, JJ., concur.
Padilla, J., took no part.

G.R. No. 84281 May 27, 1994

CITYTRUST BANKING CORPORATION, petitioner,
vs.
THE INTERMEDIATE APPELLATE COURT and EMME HERRERO, respondents.
Agcaoili and Associates for petitioner.
David B. Agoncillo for private respondent.
Humberto B. Basco, collaborating counsel for private respondent.

146

VITUG, J.:
This case emanated from a complaint filed by private respondent Emme Herrero for damages against petitioner Citytrust Banking Corporation. In her
complaint, private respondent averred that she, a businesswoman, made regular deposits, starting September of 1979, with petitioner Citytrust Banking
Corporation at its Burgos branch in Calamba, Laguna. On 15 May 1980, she deposited with petitioner the amount of Thirty One Thousand Five Hundred
Pesos (P31,500.00), in cash, in order to amply cover six (6) postdated checks she issued, viz:
Check No. Amount
007383 P1,507.00
007384 1,262.00
007387 4,299.00
007387 2,204.00
007492 6,281.00
007400 4,716.00
When presented for encashment upon maturity, all the checks were dishonored due to "insufficient funds." The last check No. 007400,
however, was personally redeemed by private respondent in cash before it could be redeposited.
Petitioner, in its answer, asserted that it was due to private respondent's fault that her checks were dishonored. It averred that instead of stating her correct
account number, i.e., 29000823, in her deposit slip, she inaccurately wrote 2900823.
The Regional Trial Court (Branch XXXIV) of Calamba, Laguna, on
27 February 1984, dismissed the complaint for lack of merit; thus:
WHEREFORE, judgment is hereby rendered in favor of the defendant and against the plaintiff, DISMISSING the complaint for lack
of merit, plaintiff is hereby adjudged to pay the defendant reasonable attorney's fee in the amount of FIVE THOUSAND PESOS
(P5,000.00) plus cost of suit.
Private respondent went to the Court of Appeals, which found the appeal meritorious. Hence, it rendered judgment, on 15 July 1988, reversing the trial
court's decision. The appellate court ruled:
WHEREFORE, the judgment appealed from is REVERSED and a new one entered thereby ordering defendant to pay plaintiff
nominal damages of P2,000.00, temperate and moderate damages of P5,000.00, and attorney's fees of P4,000.00.
The counterclaim of defendant is dismissed for lack of merit, with costs against him.
Petitioner Citytrust Banking Corporation is now before us in this petition for review on certiorari.
Petitioner bank concedes that it is its obligation to honor checks issued by private respondent which are sufficiently funded, but, it contends, private
respondent has also the duty to use her account in accordance with the rules of petitioner bank to which she has contractually acceded. Among such
rules, contained in its "brochures" governing current account deposits, is the following printed provision:
In making a deposit . . . kindly insure accuracy in filing said deposit slip forms as we hold ourselves free of any liability for loss due to
an incorrect account number indicated in the deposit slip although the name of the depositor is correctly written.
Exactly the same issue was addressed by the appellate court, which, after its deliberations, made the following findings and conclusions: 1
We cannot uphold the position of defendant. For, even if it be true that there was error on the part of the plaintiff in omitting a "zero"
in her account number, yet, it is a fact that her name, "Emme E. Herrero", is clearly written on said deposit slip (Exh. "B"). This is
controlling in determining in whose account the deposit is made or should be posted. This is so because it is not likely to commit an
error in one's name than merely relying on numbers which are difficult to remember, especially a number with eight (8) digits as the
account numbers of defendant's depositors. We view the use of numbers as simply for the convenience of the bank but was never
intended to disregard the real name of its depositors. The bank is engaged in business impressed with public interest, and it is its
duty to protect in return its many clients and depositors who transact business with it. It should not be a matter of the bank alone
receiving deposits, lending out money and collecting interests. It is also its obligation to see to it that all funds invested with it are
properly accounted for and duly posted in its ledgers.
In the case before Us, We are not persuaded that defendant bank was not free from blame for the fiasco. In the first place, the teller
should not have accepted plaintiff's deposit without correcting the account number on the deposit slip which, obviously, was
erroneous because, as pointed out by defendant, it contained only seven (7) digits instead of eight (8). Second, the complete name
of plaintiff depositor appears in bold letters on the deposit slip (Exh. "B"). There could be no mistaking in her name, and that the
deposit was made in her name, "Emma E. Herrero." In fact, defendant's teller should not have fed her deposit slip to the computer
knowing that her account number written thereon was wrong as it contained only seven (7) digits. As it happened, according to
defendant, plaintiff's deposit had to be consigned to the suspense accounts pending verification. This, indeed, could have been
avoided at the first instance had the teller of defendant bank performed her duties efficiently and well. For then she could have
readily detected that the account number in the name of "Emma E. Herrero" was erroneous and would be rejected by the computer.
That is, or should be, part of the training and standard operating procedure of the bank's employees. On the other hand, the
depositors are not concerned with banking procedure. That is the responsibility of the bank and its employees. Depositors are only
concerned with the facility of depositing their money, earning interest thereon, if any, and withdrawing therefrom, particularly
businessmen, like plaintiff, who are supposed to be always "on-the-go". Plaintiff's account is a "current account" which should
immediately be posted. After all, it does not earn interest. At least, the forbearance should be commensurated with prompt, efficient
and satisfactory service.

147

Bank clients are supposed to rely on the services extended by the bank, including the assurance that their deposits will be duly
credited them as soon as they are made. For, any delay in crediting their account can be embarrassing to them as in the case of
plaintiff.
We agree with plaintiff that
. . . even in computerized systems of accounts, ways and means are available whereby deposits with
erroneous account numbers are properly credited depositor's correct account numbers. They add that failure
on the part of the defendant to do so is negligence for which they are liable. As proof thereof plaintiff alludes to
five particular incidents where plaintiff admittedly wrongly indicated her account number in her deposit slips
(Exhs. "J", "L", "N", "O" and "P"), but were nevertheless properly credited her deposit (pp. 4-5, Decision).
We have already ruled in Mundin v. Far East Bank & Trust Co., AC-G.R. CV No. 03639, prom. Nov. 2, 1985, quoting the court a quo
in an almost identical set of facts, that
Having accepted a deposit in the course of its business transactions, it behooved upon defendant bank to see
to it and without recklessness that the depositor was accurately credited therefor. To post a deposit in
somebody else's name despite the name of the depositor clearly written on the deposit slip is indeed sheer
negligence which could have easily been avoided if defendant bank exercised due diligence and
circumspection in the acceptance and posting of plaintiff's deposit.
We subscribe to the above disquisitions of the appellate court. In Simex International (Manila), Inc. vs. Court of Appeals, 183 SCRA 360, reiterated in
Bank of Philippine Islands vs. Intermediate Appellate Court, 206 SCRA 408, we similarly said, in cautioning depository banks on their fiduciary
responsibility, that
In every case, the depositor expects the bank to treat his account with utmost fidelity, whether such account consists only of a few
hundred pesos or of millions. The bank must record every single transaction accurately, down to the last centavo, and as promptly
as possible. This has to be done if the account is to reflect at any given time the amount of money the depositor can dispose of as
he sees fit, confident that the bank will deliver it as and to whomever he directs. A blunder on the part of the bank, such as the
dishonor of a check without good reason, can cause the depositor not a little embarrassment if not also financial loss and perhaps
even civil and criminal litigation.
The point is that as a business affected with public interest and because of the nature of its functions, the bank is under obligation to
treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship.
We agree with petitioner, however, that it is wrong to award, along with nominal damages, temperate or moderate damages. The two awards are
incompatible and cannot be granted concurrently. Nominal damages are given in order that a right of the plaintiff, which has been violated or invaded by
the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him (Art. 2221, New Civil
Code; Manila Banking Corp. vs. Intermediate Appellate Court, 131 SCRA 271). Temperate or moderate damages, which are more than nominal but less
than compensatory damages, on the other hand, may be recovered when the court finds that some pecuniary loss has been suffered but its amount
cannot, from the nature of the case, be proved with reasonable certainty (Art. 2224, New Civil Code).
In the instant case, we also find need for vindicating the wrong done on private respondent, and we accordingly agree with the Court of Appeals in
granting to her nominal damages but not in similarly awarding temperate or moderate damages.
WHEREFORE, the appealed decision is MODIFIED by deleting the award of temperate or moderate damages. In all other respects, the appellate court's
decision is AFFIRMED. No costs in this instance.
SO ORDERED.
Feliciano, Bidin, Romero and Melo, JJ., concur.

G.R. No. 108555 December 20, 1994

RAMON TAN, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and RIZAL COMMERCIAL BANKING CORPORATION, respondents.
Yulo, Quisumbing, Torres, Ali & Bello Law Offices for petitioner.
Siguion Reyna, Montecillo & Ongsiako for private respondent.

KAPUNAN, J.:

148

This petition seeks to set aside the decision of the Court of Appeals dated January 12, 1993 in CA-G.R. CV No. 31083, entitled Ramon Tan, plaintiffappellee, vs. Rizal Commercial Banking Corporation, defendant-appellant, reversing the decision of the Regional Trial Court dated December 28, 1990
ordering respondent bank Rizal Commercial Banking Corporation (RCBC), Binondo Branch, to pay petitioner damages and attorney's fees in the amount
of ONE MILLION THIRTY FIVE THOUSAND (P1,035,000.00) PESOS.
The following are the uncontroverted facts:
Petitioner Ramon Tan, a trader-businessman and community leader in Puerto Princesa, had maintained since 1976 Current Account No. 109058068 with
respondent bank's Binondo branch. On March 11, 1988, to avoid carrying cash while enroute to Manila, he secured a Cashier's Check No. L 406000126
from the Philippine Commercial Industrial Bank (PCIB), Puerto Princesa branch, in the amount of Thirty Thousand (P30,000.00) Pesos, payable to his
order. He deposited the check in his account with RCBC Binondo on March 15. On the same day, RCBC erroneously sent the same cashier's check for
clearing to the Central Bank which was returned for having been "missent" or "misrouted." 1 The next day, March 16, RCBC debited the amount covered by
the same cashier's check from the account of the petitioner. Respondent bank at this time had not informed the petitioner of its action which the latter
claims he learned of only 42 days after, specifically on March 16, when he received the bank's debit memo. 2 Relying on the common knowledge that a
cashier's check was as good as cash, that the usual banking practice that local checks are cleared within three (3) working days and regional checks
within seven (7) working days, and the fact that the cashier's check was accepted, petitioner issued two (2) personal checks both dated March 18. Check
No. 040719 in the name of Go Lac for Five Thousand Five Hundred (P5,5000.00) Pesos was presented on April 25, 3 more than 30 days from petitioner's
deposit date of the cashier's check. Check
No. 040718 in the name of MS Development Trading Corporation for Six Thousand Fifty-Three Pesos and Seventy Centavos (P6,053.70) was returned
twice on March 24, nine (9) days from his deposit date and again on April 26, twenty-two days after the day the cashier's check was deposited for
insufficiency of funds. 4
Petitioner, alleging to have suffered humiliation and loss of face in the business sector due to the bounced checks, filed a complaint against RCBC for
damages in the Regional Trial Court of Palawan and Puerto Princesa, Branch 47, docketed as Civil Case No. 2101. 5
During the trial, petitioner sought to prove:
First, that it was RCBC's responsibility to call his attention there and then that he had erroneously filled the wrong deposit slip at the time he deposited the
cashier's check with the respondent bank's teller and it was negligence on RCBC's part not to have done so; 6
Second, that RCBC had been remiss in the performance of its obligation to the petitioner when it "missent" the cashier's check to the Central Bank
knowing, as it should, that the source of the check, PCIB, Puerto Princesa Branch, is not included in the areas required to be cleared by the Central Bank,
a fact known to the banking world and surely to the respondent bank; 7
Third, that RCBC upon knowing of its error in "missending" the cashier's check to the Central Bank did not attempt to rectify its "misclearing" error by
clearing it seasonably with PCIB, Puerto Princesa, thru its own RCBC Puerto Princesa Branch with whom it had direct radio contact; 8
Fourth, that as an old client, with twelve (12) years of good standing then, RCBC should have given him more consideration by exerting greater diligence
in clearing the check with PCIB, Puerto Princesa, to protect its client's interest; 9
Fifth, that RCBC failed to inform petitioner promptly that the check had not been cleared, despite its debiting without delay the amount covered by the
check from the account of the petitioner and hastily charging the latter service fees immediately after the return of the "missent checks"; 10 and
Finally, that the bounced checks resulting from RCBC's "misclearing" had put in doubt his credibility among his business peers and sullied his reputation
as a community leader which he had painstakingly cultivated for years. His community standing as a business-socio-civic leader was a source of pride for
him in his old age of 70. He cited being Chairman of Palawan Boy Scout Council, 2-term President of the Rotary Club of Puerto Princesa, member of
Palawan Chamber of Commerce and Industry, member of the Monitoring Team of the Palawan Integrated Area Development Project, member of Lion's
Club, Philippine Rifle Pistol Association and the Saturday Health Club to justify his claim for moral damages. 11
In its defense, RCBC disowning any negligence, put the blame for the "misrouting" on the petitioner for using the wrong check deposit slip. It insisted that
the misuse of a local check deposit slip, instead of a regional check deposit slip, triggered the "misrouting" by RCBC of the cashier's check to the Central
Bank and it was petitioner's negligent "misuse" of a local deposit slip which was the proximate cause of the "misrouting," thus he should bear the
consequence. 12
RCBC alleged that it complied strictly with accepted banking practice when it debited the amount of P30,000.00 against petitioner's account since under
Resolution No. 2202 dated December 21, 1979 of the Monetary Board, it is a matter of policy to prohibit the drawing against uncollected deposits
(DAUDS) except when the drawings are made against uncollected deposits representing bank manager's/cashier's/treasurer's checks, treasury warrants,
postal money orders and duly funded "on us" checks which may be permitted at the discretion of each bank. 13 Without crediting the P30,000.00 deposit,
petitioner's balance before and after was Two Thousand Seven Hundred
Ninety-Two Pesos and the (P2,792.88) Eighty-Eight Centavos. 14 Thus, it dishonored the two (2) checks amounting to P11,553.70 since they were drawn
against insufficient funds. RCBC added that petitioner had no bills purchase (BP) line which allows a depositor to receive or draw from proceeds of a
check without waiting it to be cleared. Besides, RCBC maintained, had it forwarded the Cashier's Check to PCIB Puerto Princesa, Palawan, it would take
at least twenty (20) working days for the cashier's check to be cleared and it would take the same length of time to clear the two (2) personal checks of
Tan. 15
RCBC further asseverated it was merely acting as petitioner's collecting agent and it assumed no responsibility beyond care in selecting correspondents
under the theory that where a check is deposited with a collecting bank the relationship created is that of agency and not creditor-debtor, thus it cannot be
liable. 16
Finally, respondent claimed that serious attempts were made to contact petitioner through the telephone numbers in the signature specimen card of
petitioner but to no avail. 17 The Assistant Branch Accountant of RCBC Binondo Branch testified that the first telephone number in the card had been
deleted from the phone company's list and that when RCBC tried to contact petitioner's daughter Evelyn Tan-Banzon thru a certain telephone number and
when they asked for Evelyn Tan, they were told there was no such person. 18

149

The trial court rendered a decision on December 28, 1990 in petitioner's favor, the dispositive portion 19 of which reads:
WHEREFORE, premises considered, plaintiff having proven the allegations of his verified complaint by preponderance of evidence,
the court hereby renders judgment ordering defendant bank, Binondo Branch, Manila, to pay him damages and attorney's fees in
the total amount of P1,035,000.00 Philippine Currency, broken down as follows: P700,000.00 as moral damages, P200,000.00 as
exemplary damages; P135,000.00 which is 15% of the sum herein awarded to plaintiff, as attorney's fees and to pay costs of suit.
For having failed to prove by any receipt or writing to underpin it, plaintiff's claim for actual damage is denied for lack of merit.
IT IS SO ORDERED.
RCBC appealed to the Court of Appeals contending that the trial court erred in holding RCBC liable to petitioner on account of its alleged negligence and
in awarding petitioner moral and exemplary damages and attorney's fees.
The Court of Appeals on January 12, 1993 rendered a decision 20 with the following decretal portion:
WHEREFORE, and upon all the foregoing, the decision of the court below is REVERSED and this complaint is DISMISSED without
pronouncement as to cost.
The Court of Appeals' decision is based on the following findings: 21
What appeared to have caused the unfortunate incident was that the plaintiff filled up the wrong deposit slip which led to the sending
of the check to the Central Bank when the clearing should have been made elsewhere.
But the claim of the plaintiff that he was not advised that the Cashier's check was missent does not seem to be correct. The
evidence indicated that the defendant bank thru its personnel had called him up thru telephone in the number (No. 60-45-23) which
he gave in his specimen signature card. But it came out, that said telephone number was no longer active or was already deleted
from the list of telephone numbers.
There was an instruction on the part of the plaintiff for the bank to contact his daughter, Mrs. Evelyn Tan Banzon and according to
the plaintiff, she too, was not contacted as per his instruction. The evidence, however, indicated that Ms. Evelyn Tan also could not
be contacted at the number supposed to pertain to her as appeared in the specimen signature card. In other words while there was
compliance with the instructions given by the plaintiff but said instructions were faulty. The plaintiff as a customer of the bank is
under obligation to inform the defendant of any changes in the telephone numbers to be contacted in the event of any exigency.
All in all, the facts indicate that the refusal of RCBC to credit the amount of P30,000.00 to the plaintiff's current account is consistent
with the accepted banking practice. As the defendant bank had claimed, under Resolution No. 2202 dated December 21, 1979 of
the Monetary Board, it had been emphatically declared as a matter of policy that no drawings should be made against uncollected
deposits except when the drawings are made against uncollected deposits representing bank manager's/cashier's/treasurer's
checks, treasury warrants, postal money orders, and duly funded "on-us" checks as may be permitted at the discretion of each
bank.
It is clear that immediate payment without awaiting clearance of a cashier's check is discretionary with the bank to whom the check
is presented and such being the case, the refusal to allow it as in this case is not to be equated with negligence in the basic
perception that discretion is not demandable as a right. In the instant case, prior to the deposit of P30,000.00, the plaintiff's account
appeared to be only in the amount of P2,792.98. So the two (2) checks issued by the plaintiff amounting to P11,553.70 had to be
dishonored since they were drawn against insufficient funds.
What the plaintiff should have done, before issuing the two (2) checks, was to await the clearance of the Cashier's check and his
failure to do so is a fault not ascribable to the defendant who appeared under the circumstance merely to have followed the usual
banking practice.
Petitioner now seeks to reverse the decision of the Court of Appeals and affirm that of the lower court. He raises the following errors:
1. THE HONORABLE COURT OF APPEALS COMMITTED GROSS AND MANIFEST ERROR IN CONCLUDING THAT THE
NEGLIGENCE WAS ASCRIBABLE TO HEREIN PETITIONER.
2. THE HONORABLE COURT OF APPEALS GRAVELY ABUSED ITS DISCRETION IN FINDING THAT THE RESPONDENT BANK
HAD NOT BEEN REMISS IN THE PERFORMANCE OF ITS OBLIGATIONS TO HEREIN PETITIONER.
3. THE HONORABLE COURT OF APPEALS COMMITTED GROSS AND MANIFEST ERROR AND GRAVE ABUSE OF
DISCRETION IN REVERSING THE AWARD OF MORAL AND EXEMPLARY DAMAGES TO THE PETITIONER.
4. THE HONORABLE COURT OF APPEALS COMMITTED GROSS AND MANIFEST ERROR AND GRAVE ABUSE OF
DISCRETION IN NOT AWARDING ATTORNEY'S FEES TO PETITIONER.
In a most recent case decided by this Court, City Trust Corporation v. The Intermediate Appellate Court, 22 involving damages against City Trust Banking
Corporation, the depositor, instead of stating her correct account number 29000823 inaccurately wrote 2900823. Because of this error, six postdated
checks amounting to P20,209.00 she issued were dishonored for insufficiency of funds. The Regional Trial Court dismissed the complaint for lack of merit.
The Court of Appeals, however, found the appeal meritorious and ordered the bank to pay nominal damages of P2,000.00, temperate and moderate
damages of P5,000.00 and attorney's fees of P4,000.00. Upon review, this Court quoted with favor the disquisition of the appellate court:

150

We cannot uphold the position of defendant. For, even if it be true that there was error on the part of the plaintiff in omitting a zero in
her account number, yet, it is a fact that her name, Emma E. Herrero, is clearly written on said deposit slip (Exh. B). This is
controlling in determining in whose account the deposit is made or should be posted. This is so because it is not likely to commit an
error in one's name that merely relying on numbers which are difficult to remember, especially a number with eight (8) digits as the
account numbers of defendant's depositors. We view the use of numbers as simply for the convenience of the bank but was never
intended to disregard the real name of its depositors. The bank is engaged in business impressed with public interests, and it is its
duty to protect in return its many clients and depositors who transact business with it. It should not be a matter of the bank alone
receiving deposits, lending out money and collecting interests. It is also its obligation to see to it that all funds invested with it are
properly accounted for and duly posted in its ledgers.
In the case before Us, we are not persuaded that defendant bank was not free from blame for the fiasco. In the first place, the teller
should not have accepted plaintiff's deposit without correcting the account number on the deposit slip which, obviously, was
erroneous because, as pointed out by defendant, it contained only seven (7) digits instead of eight (8). Second, the complete name
of plaintiff depositor appears in bold letters on the deposit slip (Exh. B). There could be no mistaking in her name, and that the
deposit was made in her name, Emma E. Herrero. In fact, defendant's teller should not have fed her deposit slip to the computer
knowing that her account number written thereon was wrong as it contained only seven (7) digits. As it happened, according to
defendant, plaintiff's deposit had to be consigned to the suspense accounts pending verification. This, indeed, could have been
avoided at the first instance had the teller of defendant bank performed her duties efficiently and well. For then she could have
readily detected that the account number in the name of Emma E. Herrero was erroneous and would be rejected by the computer.
That is, or should be, part of the training and standard operating procedure of the bank's employees. On the other hand, the
depositors are not concerned with banking procedure. That is the responsibility of the bank and its employees. Depositors are only
concerned with the facility of depositing their money, earning interest thereon, if any, and withdrawing therefrom, particularly
businessmen, like plaintiff, who are supposed to be always on-the-go. Plaintiff's account is a current account which should
immediately be posted. After all, it does not earn interest. At least, the forbearance should be commensurated with prompt, efficient
and satisfactory service.
Bank clients are supposed to rely on the services extended by the bank, including the assurance that their deposits will be duly
credited them as soon as they are made. For, any delay in crediting their account can be embarrassing to them as in the case of
plaintiff.
The point is that as a business affected with public interest and because of the nature of its functions, the bank is under obligation to
treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship. (Emphasis
supplied).
In the light of the above-cited case, the respondent bank cannot exculpate itself from liability by claiming that its depositor "impliedly instructed" the bank to
clear his check with the Central Bank by filling a local check deposit slip. Such posture is disingenuous, to say the least. First, why would RCBC follow a
patently erroneous act born of ignorance or inattention or both. Second, bank transactions pass through a succession of bank personnel whose duty is to
check and countercheck transactions for possible errors. In the instant case, the teller should not have accepted the local deposit slip with the cashier's
check that on its face was clearly a regional check without calling the depositor's attention to the mistake at the very moment this was presented to her.
Neither should everyone else down the line who processed the same check for clearing have allowed the check to be sent to Central Bank. Depositors do
not pretend to be past master of banking technicalities, much more of clearing procedures. As soon as their deposits are accepted by the bank teller, they
wholly repose trust in the bank personnel's mastery of banking, their and the bank's sworn profession of diligence and meticulousness in giving
irreproachable service.
We do not subscribe to RCBC's assertion that petitioner's use of the wrong deposit slip was the proximate cause of the clearing fiasco and so, petitioner
must bear the consequence. In Pilipinas Bank, v. CA, 23 this Court said:
The bank is not expected to be infallible but, as correctly observed by respondent Appellate Court, in this instance, it must bear the
blame for not discovering the mistake of its teller despite the established procedure requiring the papers and bank books to pass
through a battery of bank personnel whose duty it is to check and countercheck them for possible errors. Apparently, the officials
and employees tasked to do that did not perform their duties with due care, . . .
So it is in the instance case, where the conclusion is inevitable that respondent RCBC had been remiss in the performance of its duty and obligation to its
client, as well as to itself. We draw attention to the fact that the two dishonored checks issued by petitioner, Check No. 040719 and Check
No. 040718 were presented for payment 24 more than 45 days from the day the cashier's check was deposited. This gave RCBC more than ample time to
have cleared the cashier's check had it corrected its "missending" the same upon return from Central Bank using the correct slip this time so it can be
cleared properly. Instead, RCBC promptly debited the amount of P30,000.00 against petitioner's account and left it at that.
We observe, likewise, that RCBC inquired about an Evelyn Tan but no Evelyn Tan-Banzon as specifically instructed in the same signature card. (Emphasis
supplied) 25
RCBC insists that immediate payment without awaiting clearance of a cashier's check is discretionary with the bank to whom the check is presented and
such being the case, its refusal to immediately pay the cashier's check in this case is not to be equated with negligence on its part. We find this disturbing
and unfortunate.
An ordinary check is not a mere undertaking to pay an amount of money. There is an element of certainty or assurance that it will be paid upon
presentation that is why it is perceived as a convenient substitute for currency in commercial and financial transactions. The basis of the perception being
confidence. Any practice that destroys that confidence will impair the usefulness of the check as a currency substitute and create havoc in trade circles
and the banking community. 26
Now, what was presented for deposit in the instant cases was not just an ordinary check but a cashier's check payable to the account of the depositor
himself. A cashier's check is a primary obligation of the issuing bank and accepted in advance by its mere issuance. 27 By its very nature, a cashier's check
is the bank's order to pay drawn upon itself, committing in effect its total resources, integrity and honor behind the check. A cashier's check by its peculiar
character and general use in the commercial world is regarded substantially to be as good as the money which it represents. 28 In this case, therefore,
PCIB by issuing the check created an unconditional credit in favor of any collecting bank.

151

All these considered, petitioner's reliance on the layman's perception that a cashier's check is as good as cash is not entirely misplaced, as it is rooted in
practice, tradition, and principle. We see no reason thus why this so-called discretion was not exercised in favor of petitioner, specially since PCIB and
RCBC are members of the same clearing house group relying on each other's solvency. RCBC could surely rely on the solvency of PCIB when the latter
issued its cashier's check.
On the third and fourth issue, RCBC contends that moral damages cannot be recovered in an action for breach of contract since under Article 2219 of the
New Civil Code, the instant case is not among those enumerated. For an award of moral damages in a breach of contract, it is imperative that the party
acted in bad faith or fraudulently as provided for in Art. 2220 of the Civil Code, to wit:
Art. 2220. Willful injury to property may be a legal ground for awarding moral damages if the court should find that, under the
circumstances, such damages are justly due. The same rule applies to breaches of contract where the defendant acted fraudulently
or in bad faith.
In the absence of moral damages, RCBC argues, exemplary damages cannot be awarded under Art. 2225 of the same Code which states:
Exemplary damages or corrective damages are imposed, by way of example or correction for the public good, in addition to the
moral, temperate, liquidated or compensatory damages.
We hold that petitioner has the right to recover moral damages even if the bank's negligence may not have been attended with malice and bad faith. In
American Express International, Inc. v. IAC, 29 we held:
While petitioner was not in bad faith, its negligence caused the private respondent to suffer mental anguish, serious anxiety,
embarrassment and humiliation, for which he is entitled to recover, reasonable moral damages (Art. 2217, Civil Code).
In Zenith Insurance Corporation v. CA, 30 we also said that moral damages are not meant to enrich a complainant at the expense of defendant. It is only
intended to alleviate the moral suffering he has undergone. In the instant case, we find the award of P700,000.00 as moral damages excessive and,
accordingly, reduce it to one hundred thousand (P100,000.00) pesos. We find the award of exemplary damages of P200,000.00 unjustified in the absence
of malice, bad faith or gross negligence. 31 The award of reasonable attorney's fees is proper for the petitioner was compelled to litigate to protect his
interest. 32
IN VIEW WHEREOF, we REVERSE the decision of respondent Court of Appeals and hereby order private respondent RCBC, Binondo Branch, to pay
petitioner the amount of one hundred thousand (P100,000.00) pesos as moral damages and the sum of fifty thousand (P50,000.00) pesos as attorney's
fees, plus costs.
SO ORDERED.
Padilla, Davide, Jr., Bellosillo and Quiason, JJ., concur.

G.R. No. 105188 January 23, 1998

MYRON C. PAPA, Administrator of the Testate Estate of Angela M. Butte, petitioner,
vs.
A.U. VALENCIA and CO. INC., FELIX PEARROYO, SPS. ARSENIO B. REYES & AMANDA SANTOS, and DELFIN JAO, respondents.

KAPUNAN, J.:
In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner Myron C. Papa seeks to reverse and set aside 1) the Decision dated
27 January 1992 of the Court of Appeals which affirmed with modification the decision of the trial court; and 2) the Resolution dated 22 April 1992 of the
same court, which denied petitioner's motion for reconsideration of the above decision.

152

The antecedent facts of this case are as follows:

Sometime in June 1982, herein private respondents A.U. Valencia and Co., Inc. (hereinafter referred to as respondent Valencia, for brevity) and Felix
Pearroyo (hereinafter called respondent Pearroyo), filed with the Regional Trial Court of Pasig, Branch 151, a complaint for specific performance
against herein petitioner Myron C. Papa, in his capacity as administrator of the Testate Estate of one Angela M. Butte.
The complaint alleged that on 15 June 1973, petitioner Myron C. Papa, acting as attorney-in-fact of Angela M. Butte, sold to respondent Pearroyo,
through respondent Valencia, a parcel of land, consisting of 286.60 square meters, located at corner Retiro and Cadiz Streets, La Loma, Quezon City, and
covered by Transfer Certificate of Title No. 28993 of the Register of Deeds of Quezon City; that prior to the alleged sale, the said property, together with
several other parcels of land likewise owned by Angela M. Butte, had been mortgaged by her to the Associated Banking Corporation (now Associated
Citizens Bank); that after the alleged sale, but before the title to the subject property had been released, Angela M. Butte passed away; that despite
representations made by herein respondents to the bank to release the title to the property sold to respondent Pearroyo, the bank refused to release it
unless and until all the mortgaged properties of the late Angela M. Butte were also redeemed; that in order to protect his rights and interests over the
property, respondent Pearroyo caused the annotation on the title of an adverse claim as evidenced by Entry No. P.E.-6118/T-28993, inscribed on 18
January 1997.
The complaint further alleged that it was only upon the release of the title to the property, sometime in April 1977, that respondents Valencia and
Pearroyo discovered that the mortgage rights of the bank had been assigned to one Tomas L. Parpana (now deceased), as special administrator of the
Estate of Ramon Papa, Jr., on 12 April 1977; that since then, herein petitioner had been collecting monthly rentals in the amount of P800.00 from the
tenants of the property, knowing that said property had already been sold to private respondents on 15 June 1973; that despite repeated demands from
said respondents, petitioner refused and failed to deliver the title to the property. Thereupon, respondents Valencia and Pearroyo filed a complaint for
specific performance, praying that petitioner be ordered to deliver to respondent Pearroyo the title to the subject property (TCT 28993); to turn over to the
latter the sum of P72,000.00 as accrued rentals as of April 1982, and the monthly rental of P800.00 until the property is delivered to respondent
Pearroyo; to pay respondents the sum of P20,000.00 as attorney's fees; and to pay the costs of the suit.
In his Answer, petitioner admitted that the lot had been mortgaged to the Associated Banking Corporation (now Associated Citizens Bank). He contended,
however, that the complaint did not state a cause of action; that the real property in interest was the Testate Estate of Angela M. Butte, which should have
been joined as a party defendant; that the case amounted to a claim against the Estate of Angela M. Butte and should have been filed in Special
Proceedings No. A-17910 before the Probate Court in Quezon City; and that, if as alleged in the complaint, the property had been assigned to Tomas L.
Parpana, as special administrator of the Estate of Ramon Papa, Jr., said estate should be impleaded. Petitioner, likewise, claimed that he could not recall
in detail the transaction which allegedly occurred in 1973; that he did not have TCT No. 28993 in his possession; that he could not be held personally
liable as he signed the deed merely as attorney-in-fact of said Angela M. Butte. Finally, petitioner asseverated that as a result of the filing of the case, he
was compelled to hire the services of counsel for a fee of P20,000.00 for which respondents should be held liable.
Upon his motion, herein private respondent Delfin Jao was allowed to intervene in the case. Making common cause with respondents Valencia and
Pearroyo, respondent Jao alleged that the subject lot which had been sold to respondent Pearroyo through respondent Valencia was in turn sold to him
on 20 August 1973 for the sum of P71,500.00, upon his paying earnest money in the amount of P5,000.00. He, therefore, prayed that judgment be
rendered in favor of respondents, the latter in turn be ordered to execute in his favor the appropriate deed of conveyance covering the property in question
and to turn over to him the rentals which aforesaid respondents sought to collect from petitioner Myron V. Papa.
Respondent Jao, likewise, averred that as a result of petitioner's refusal to deliver the title to the property to respondents Valencia and Pearroyo, who in
turn failed to deliver the said title to him, he suffered mental anguish and serious anxiety for which he sought payment of moral damages; and, additionally,
the payment of attorney's fees and costs.
For his part, petitioner, as administrator of the Testate Estate of Angela M. Butte, filed a third-party complaint against herein private respondents, spouses
Arsenio B. Reyes and Amanda Santos (respondent Reyes spouses, for short). He averred, among other's that the late Angela M. Butte was the owner of
the subject property; that due to non-payment of real estate tax said property was sold at public auction the City Treasurer of Quezon City to the
respondent Reyes spouses on 21 January 1980 for the sum of P14,000.00; that the one-year period of redemption had expired; that respondents Valencia
and Pearroyo had sued petitioner Papa as administrator of the estate of Angela M. Butte, for the delivery of the title to the property; that the same
aforenamed respondents had acknowledged that the price paid by them was insufficient, and that they were willing to add a reasonable amount or a
minimum of P55,000.00 to the price upon delivery of the property, considering that the same was estimated to be worth P143,000.00; that petitioner was
willing to reimburse respondents Reyes spouses whatever amount they might have paid for taxes and other charges, since the subject property was still
registered in the name of the late Angela M. Butte; that it was inequitable to allow respondent Reyes spouses to acquire property estimated to be worth
P143,000.00, for a measly sum of P14,000.00. Petitioner prayed that judgment be rendered canceling the tax sale to respondent Reyes spouses;
restoring the subject property to him upon payment by him to said respondent Reyes spouses of the amount of P14,000.00, plus legal interest; and,
ordering respondents Valencia and Pearroyo to pay him at least P55,000.00 plus everything they might have to pay the Reyes spouses in recovering the
property.
Respondent Reyes spouses in their Answer raised the defense of prescription of petitioner's right to redeem the property.
At the trial, only respondent Pearroyo testified. All the other parties only submitted documentary proof.
On 29 June 1987, the trial court rendered a decision, the dispositive portion of which reads:
WHEREUPON, judgment is hereby rendered as follows:
1) Allowing defendant to redeem from third-party defendants and ordering the latter to allow the former to redeem the property in
question, by paying the sum of P14,000.00 plus legal interest of 12% thereon from January 21, 1980;
2) Ordering defendant to execute a Deed of Absolute Sale in favor of plaintiff Felix Pearroyo covering the property in question and
to deliver peaceful possession and enjoyment of the said property to the said plaintiff, free from any liens and encumbrances;
Should this not be possible, for any reason not attributable to defendant, said defendant is ordered to pay to plaintiff Felix Pearroyo
the sum of P45,000.00 plus legal interest of 12% from June 15, 1973;

153

3) Ordering plaintiff Felix Pearroyo to execute and deliver to intervenor a deed of absolute sale over the same property, upon the
latter's payment to the former of the balance of the purchase price of P71,500.00;
Should this not be possible, plaintiff Felix Pearroyo is ordered to pay intervenor the sum of P5,000.00 plus legal interest of 12%
from August 23, 1973; and
4) Ordering defendant to pay plaintiffs the amount of P5,000.00 for and as attorney's fees and litigation expenses.
SO ORDERED. 1
Petitioner appealed the aforesaid decision of the trial court to the Court of Appeals, alleging among others that the sale was never "consummated" as he
did not encash the check (in the amount of P40,000.00) given by respondents Valencia and Pearroyo in payment of the full purchase price of the subject
lot. He maintained that what said respondent had actually paid was only the amount of P5,000.00 (in cash) as earnest money.
Respondent Reyes spouses, likewise, appealed the above decision. However, their appeal was dismissed because of failure to file their appellant's brief.
On 27 January 1992, the Court of Appeals rendered a decision, affirming with modification the trial court's decision, thus:
WHEREFORE, the second paragraph of the dispositive portion of the appealed decision is MODIFIED, by ordering the defendantappellant to deliver to plaintiff-appellees the owner's duplicate of TCT No. 28993 of Angela M. Butte and the peaceful possession
and enjoyment of the lot in question or, if the owner's duplicate certificate cannot be produced, to authorize the Register of Deeds to
cancel it and issue a certificate of title in the name of Felix Pearroyo. In all other respects, the decision appealed from is
AFFIRMED. Costs against defendant-appellant Myron C. Papa.
SO ORDERED. 2
In affirming the trial court's decision, respondent court held that contrary to petitioner's claim that he did not encash the aforesaid check, and therefore, the
sale was not consummated, there was no evidence at all that petitioner did not, in fact, encash said check. On the other hand, respondent Pearroyo
testified in court that petitioner Papa had received the amount of P45,000.00 and issued receipts therefor. According to respondent court, the presumption
is that the check was encashed, especially since the payment by check was not denied by defendant-appellant (herein petitioner) who, in his Answer,
merely alleged that he "can no longer recall the transaction which is supposed to have happened 10 years ago." 3
On petitioner's claim that he cannot be held personally liable as he had acted merely as attorney-in-fact of the owner, Angela M. Butte, respondent court
held that such contention is without merit. This action was not brought against him in his personal capacity, but in his capacity as the administrator of the
Testate Estate of Angela M. Butte. 4
On petitioner's contention that the estate of Angela M. Butte should have been joined in the action as the real party in interest, respondent court held that
pursuant to Rule 3, Section 3 of the Rules of Court, the estate of Angela M. Butte does not have to be joined in the action. Likewise, the estate of Ramon
Papa, Jr., is not an indispensable party under Rule 3, Section 7 of the same Rules. For the fact is that Ramon Papa, Jr., or his estate, was not a party to
the Deed of Absolute Sale, and it is basic law that contracts bind only those who are parties thereto. 5
Respondent court observed that the conditions under which the mortgage rights of the bank were assigned are not clear. In any case, any obligation which
the estate of Angela M. Butte might have to the estate of Ramon Papa, Jr. is strictly between them. Respondents Valencia and Pearroyo are not bound
by any such obligation.
Petitioner filed a motion for reconsideration of the above decision, which motion was denied by respondent Court of Appeals.
Hence, this petition wherein petitioner raises the following issues:
I. THE CONCLUSION OR FINDING OF THE COURT OF APPEALS THAT THE SALE IN QUESTION WAS CONSUMMATED IS
GROUNDED ON SPECULATION OR CONJECTURE, AND IS CONTRARY TO THE APPLICABLE LEGAL PRINCIPLE.
II. THE COURT OF APPEALS, IN MODIFYING THE DECISION OF THE TRIAL COURT, ERRED BECAUSE IT, IN EFFECT,
CANCELLED OR NULLIFIED AN ASSIGNMENT OF THE SUBJECT PROPERTY IN FAVOR OF THE ESTATE OF RAMON PAPA,
JR. WHICH IS NOT A PARTY IN THIS CASE.
III. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE ESTATE OF ANGELA M. BUTTE AND THE ESTATE OF
RAMON PAPA, JR. ARE INDISPENSABLE PARTIES IN THIS
CASE. 6
Petitioner argues that respondent Court of Appeals erred in concluding that alleged sale of the subject property had been consummated. He contends that
such a conclusion is based on the erroneous presumption that the check (in the amount of P40,000.00) had been cashed, citing Art. 1249 of the Civil
Code, which provides, in part, that payment by checks shall produce the effect of payment only when they have been cashed or when through the fault of
the creditor they have been impaired. 7 Petitioner insists that he never cashed said check; and, such being the case, its delivery never produced the effect
of payment. Petitioner, while admitting that he had issued receipts for the payments, asserts that said receipts, particularly the receipt of PCIB Check No.
761025 in the amount of P40,000.00, do not prove payment. He avers that there must be a showing that said check had been encashed. If, according to
petitioner, the check had been encashed, respondent Pearroyo should have presented PCIB Check No. 761025 duly stamped received by the payee, or
at least its microfilm copy.
Petitioner finally avers that, in fact, the consideration for the sale was still in the hands of respondents Valencia and Pearroyo, as evidenced by a letter
addressed to him in which said respondents wrote, in part:

154

. . . Please be informed that I had been authorized by Dr. Ramon Papa, Jr., heir of Mrs. Angela M. Butte to pay you the
aforementioned amount of P75,000.00 for the release and cancellation of subject property's mortgage. The money is with me and if
it is alright with you, I would like to tender the payment as soon as possible. . . . 8
We find no merit in petitioner's arguments.
It is an undisputed fact that respondents Valencia and Pearroyo had given petitioner Myron C. Papa the amounts of Five Thousand Pesos (P5,000.00) in
cash on 24 May 1973, and Forty Thousand Pesos (P40,000.00) in check on 15 June 1973, in payment of the purchase price of the subject lot. Petitioner
himself admits having received said amounts, 9 and having issued receipts therefor. 10 Petitioner's assertion that he never encashed the aforesaid check is
not substantiated and is at odds with his statement in his answer that "he can no longer recall the transaction which is supposed to have happened 10
years ago." After more than ten (10) years from the payment in party by cash and in part by check, the presumption is that the check had been encashed.
As already stated, he even waived the presentation of oral evidence.
Granting that petitioner had never encashed the check, his failure to do so for more than ten (10) years undoubtedly resulted in the impairment of the
check through his unreasonable and unexplained delay.
While it is true that the delivery of a check produces the effect of payment only when it is cashed, pursuant to Art. 1249 of the Civil Code, the rule is
otherwise if the debtor is prejudiced by the creditor's unreasonable delay in presentment. The acceptance of a check implies an undertaking of due
diligence in presenting it for payment, and if he from whom it is received sustains loss by want of such diligence, it will be held to operate as actual
payment of the debt or obligation for which it was given. 11 It has, likewise, been held that if no presentment is made at all, the drawer cannot be held liable
irrespective of loss or injury 12 unless presentment is otherwise excused. This is in harmony with Article 1249 of the Civil Code under which payment by
way of check or other negotiable instrument is conditioned on its being cashed, except when through the fault of the creditor, the instrument is impaired.
The payee of a check would be a creditor under this provision and if its no-payment is caused by his negligence, payment will be deemed effected and the
obligation for which the check was given as conditional payment will be discharged. 13
Considering that respondents Valencia and Pearroyo had fulfilled their part of the contract of sale by delivering the payment of the purchase price, said
respondents, therefore, had the right to compel petitioner to deliver to them the owner's duplicate of TCT No. 28993 of Angela M. Butte and the peaceful
possession and enjoyment of the lot in question.
With regard to the alleged assignment of mortgage rights, respondent Court of Appeals has found that the conditions under which said mortgage rights of
the bank were assigned are not clear. Indeed, a perusal of the original records of the case would show that there is nothing there that could shed light on
the transactions leading to the said assignment of rights; nor is there any evidence on record of the conditions under which said mortgage rights were
assigned. What is certain is that despite the said assignment of mortgage rights, the title to the subject property has remained in the name of the late
Angela M. Butte. 14 This much is admitted by petitioner himself in his answer to respondent's complaint as well as in the third-party complaint that petitioner
filed against respondent-spouses Arsenio B. Reyes and Amanda Santos. 15 Assuming arquendo that the mortgage rights of the Associated Citizens Bank
had been assigned to the estate of Ramon Papa, Jr., and granting that the assigned mortgage rights validly exists and constitute a lien on the property, the
estate may file the appropriate action to enforce such lien. The cause of action for specific performance which respondents Valencia and Pearroyo have
against petitioner is different from the cause of action which the estate of Ramon Papa, Jr. may have to enforce whatever rights or liens it has on the
property by reason of its being an alleged assignee of the bank's rights of mortgage.
Finally, the estate of Angela M. Butte is not an indispensable party. Under Section 3 of Rule 3 of the Rules of Court, an executor or administrator may sue
or be sued without joining the party for whose benefit the action is presented or defended, thus:
Sec. 3. Representative parties. A trustee of an express trust, a guardian, executor or administrator, or a party authorized by
statute, may sue or be sued without joining the party for whose benefit the action is presented or defended; but the court may, at any
stage of the proceedings, order such beneficiary to be made a party. An agent acting in his own name and for the benefit of an
undisclosed principal may sue or be sued without joining the principal except when the contract involves things belonging to the
principal. 16
Neither is the estate of Ramon Papa, Jr. an indispensable party without whom, no final determination of the action can be had. Whatever prior and
subsisting mortgage rights the estate of Ramon Papa, Jr. has over the property may still be enforced regardless of the change in ownership thereof.
WHEREFORE, the petition for review is hereby DENIED and the Decision of the Court of Appeals, dated 27 January 1992 is AFFIRMED.
SO ORDERED.
Davide, Jr., Bellosillo and Vitug, JJ., concur

155

i
ii
iii
iv
v
vi
vii
viii
ix
x
xi
xii
xiii
xiv
xv
xvi
xvii