[G.R. No. 107382.

January 31, 1996] such as the checks in this case, the signature of its rightful
ASSOCIATED BANK, petitioner, vs. HON. COURT OF APPEALS, holder (here, the payee hospital) is essential to transfer title to
PROVINCE OF TARLAC and PHiLIPPINE NATIONAL the same instrument. When the holders indorsement is forged,
all parties prior to the forgery may raise the real defense of
BANK, respondents.
forgery against all parties subsequent thereto.
[G.R. No. 107612. January 31, 1996]
PHILIPPINE NATIONAL BANK, petitioner, vs. HONORABLE 5. ID.; ID.; ID.; LIABILITY OF GENERAL ENDORSER. - An
COURT OF APPEALS, PROVINCE OF TARLAC, and indorser of an order instrument warrants that the instrument is
ASSOCIATED BANK, respondents. 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;
SYLLABUS and that the instrument is at the time of his indorsement valid
and subsisting. He cannot interpose the defense that
1. COMMERCIAL LAW; NEGOTIABLE INSTRUMENTS; A signatures prior to him are forged.
FORGED SIGNATURE IS WHOLLY INOPERATIVE AND NO
ONE CAN GAIN TITLE TO THE INSTRUMENT THROUGH IT. - 6. ID.; ID.; ID.; ID.; COLLECTING BANK WHERE CHECK IS
A forged signature, whether it be that of the drawer or the DEPOSITED AND INDORSES CHECK, AN INDORSER. - A
payee, is wholly inoperative and no one can gain title to the collecting bank where a check is deposited and which indorses
instrument through it. A person whose signature to an the check upon presentment with the drawee bank, is such an
instrument was forged was never aparty and never consented indorser. So even if the indorsement on the check deposited by
to the contract which allegedly gave rise to such instrument. the bankss client is forged, the collecting bank is bound by his
Section 23 does not avoid the instrument but only the forged warranties as an indorser and cannot set up the defense of
signature. Thus, a forged indorsement does not operate as the forgery as against the drawee bank.
payees indorsement.
7. ID.; ID.; ID.; PAYMENT UNDER A FORGED INDORSEMENT
2. ID.; ID.; ID.; EXCEPTION. - The exception to the general rule IS NOT TO THE DRAWERS ORDER; REASON. - The bank on
in Section 23 is where a party against whom it is sought to which a check is drawn, known as the drawee bank, is under
enforce a right is precluded from setting up the forgery or want strict liability to pay the check to the order of the payee. The
of authority. Parties who warrant or admit the genuineness of drawers instructions are reflected on the face and by the terms
the signature in question and those who, by their acts, silence of the check. Payment under a forged indorsement is not to the
or negligence are estopped from setting up the defense of drawers order. When the drawee bank pays a person other
forgery, are precluded from using this defense. Indorsers, than the payee, it does not comply with the terms of the check
persons negotiating by delivery and acceptors are warrantors of and violates its duty to charge its customers (the drawer)
the genuineness of the signatures on the instrument. account only for properly payable items. Since the drawee bank
did not pay a holder or other person entitled to receive
3. ID.; ID.; BEARER INSTRUMENT; SIGNATURE OF PAYEE OR payment, it has no right to reimbursement from the drawer. The
HOLDER, NOT NECESSARY TO PASS TITLE TO THE general rule then is that the drawee bank may not debit the
INSTRUMENT. - In bearer instruments, the signature of the drawers account and is not entitled to indemnification from the
payee or holder is unnecessary to pass title to the instrument. drawer. The risk of loss must perforce fall on the drawee bank.
Hence, when the indorsement is a forgery, only the person
whose signature is forged can raise the defense of forgery 8. ID.; ID.; ID.; ID.; EXCEPTIONS. - If the drawee bank can
against a holder in due course. prove a failure by the customer/drawer to exercise ordinary care
that substantially contributed to the making of the forged
4. ID.; ID.; ORDER INSTRUMENT; SIGNATURE OF HOLDER, signature, the drawer is precluded from asserting the forgery. If
ESSENTIAL TO TRANSFER TITLE TO THE INSTRUMENT; at the same time the drawee bank was also negligent to the
EFFECT OF FORGED INDORSEMENT OF HOLDER. - Where point of substantially contributing to the loss, then such loss
the instrument is payable to order at the time of the forgery,
 from the forgery can be apportioned between the negligent forged indorsement. It warrants that the instrument is genuine,
drawer and the negligent bank. and that it is valid and subsisting at the time of his
indorsement. Because the indorsement is a forgery, the
9. ID.; ID.; ID.; WHERE THE DRAWERS SIGNATURE IS collecting bank commits a breach of this warranty and will be
FORGED, THE DRAWER CAN RECOVER FROM THE accountable to the drawee bank. This liability scheme operates
DRAWEE BANK. - In cases involving a forged check, where the without regard to fault on the part of the collecting/presenting
drawers signature is forged, the drawer can recover from the bank. Even if the latter bank was not negligent, it would still be
drawee bank. No drawee bank has a right to pay a forged liable to the drawee bank because of its indorsement. The Court
check. If it does, it shall have to recredit the amount of the has consistently ruled that the collecting bank or last endorser
check to the account of the drawer. The liability chain ends with generally suffers the loss because it has the duty to ascertain
the drawee bank whose responsibility it is to know the drawers the genuineness of all prior endorsements considering that the
signature since the latter is its customer. act of presenting the check for payment to the drawee is an
10. ID.; ID.; ID.; IN CASES OF FORGED INDORSEMENTS, THE assertion that the party making the presentment has done its
LOSS FALLS ON THE PARTY WHO TOOK THE CHECK FROM duty to ascertain the genuineness of the endorsements.
THE FORGER OR THE FORGER HIMSELF. In cases involving Moreover, the collecting bank is made liable because it is privy
checks with forged indorsements, such as the present petition, to the depositor who negotiated the check. The bank knows
the chain of liability does not end with the drawee bank. The him, his address and history because he is a client. It has taken
drawee bank may not debit the account of the drawer but may a risk on his deposit. The bank is also in a better position to
generally pass liability back through the collection chain to the detect forgery, fraud or irregularity in the indorsement.
party who took from the forger and, of course, to the forger 13. ID.; ID.; ID.; DRAWEE BANK NOT LIABLE FOR LOSS ON
himself, if available. In other words, the drawee bank can seek FORGED INDORSEMENT; REASON. - The drawee bank is not
reimbursement or a return of the amount it paid from the similarly situated as the collecting bank because the former
presentor bank or person. Theoretically, the latter can demand makes no warranty as to the genuineness of any indorsement.
reimbursement from the person who indorsed the check to it The drawee banks duty is but to verify the genuineness of the
and so on. The loss falls on the party who took the check from drawers signature and not of the indorsement because the
the forger, or on the forger himself. Since a forged indorsement drawer is its client.
is inoperative, the collecting bank had no right to be paid by the
drawee bank. The former must necessarily return the money 14. ID.; ID.; ID.; ID.; DUTY OF DRAWEE BANK TO PROMPTLY
paid by the latter because it was paid wrongfully. INFORM PRESENTOR OF THE FORGERY UPON DISCOVERY;
EFFECT OF FAILURE TO PROMPTLY INFORM. The drawee
11. ID.; ID.; ID.; ID.; CASE AT BAR. - In this case, the checks bank can recover the amount paid on the check bearing a
were indorsed by the collecting bank (Associated Bank) to the forged indorsement from the collecting bank. However, a
drawee bank (PNB). The former will necessarily be liable to the drawee bank has the duty to promptly inform the presentor of
latter for the checks bearing forged indorsements. If the forgery the forgery upon discovery. If the drawee bank delays in
is that of the payees or holders indorsement, the collecting informing the presentor of the forgery, thereby depriving said
bank is held liable, without prejudice to the latter proceeding presentor of the right to recover from the forger, the former is
against the forger. deemed negligent and can no longer recover from the
12. ID.; ID.; ID.; GENERAL INDORSER; COLLECTING BANK OR presentor.
LAST ENDORSER SUFFERS LOSS ON FORGED IN- 15. ID.; ID.; ID.; ID.; ID.; ID.; EFFECT OF CON-TRIBUTORY
DORSEMENT; REASON. - More importantly, by reason of the NEGLIGENCE IN CASE AT BAR. - Applying these rules to the
statutory warranty of a general indorser in Section 66 of the case at bench, PNB, the drawee bank, cannot debit the current
Negotiable Instruments Law, a collecting bank which indorses a account of the Province of Tarlac because it paid checks which
check bearing a forged indorsement and presents it to .the bore forged indorsements. However, if the Province of Tarlac as
drawee bank guarantees all prior indorsements, including the drawer was negligent to the point of substantially contributing
to the loss, then the drawee bank PNB can charge its account. If Tarlac can only recover fifty percent(50%) of P203,300.00 from
both drawee bank-PNB and drawer-Province of TarJac were PNB. The collecting bank, Associated Bank, shall be liable to
negligent, the loss should be properly apportioned between PNB for fifty (50%) percent of P203,300.00. It is liable on its
them. The loss incurred by drawee bank-PNB can be passed on warranties as indorser of the checks which were deposited by
to the collecting bank-Associated Bank which presented and Fausto Pangilinan, having guaranteed the genuineness of all
indorsed the checks to it. Associated Bank can, in turn, hold the prior indorsements, including that of the chief of the payee
forger, Fausto Pangilinan, liable. If PNB negligently delayed in hospital, Dr. Adena Canlas. Associated Bank was also remiss in
informing Associated Bank of the forgery, thus depriving the its duty to ascertain the genuineness of the payees
latter of the opportunity to recover from the forger, it forfeits its indorsement.
right to reimbursement and will be made to bear the loss. After
careful examination of the records, the Court finds that the 16. ID.; ID.; ID.; FORGERY; DELAY IN INFORMING
Province of Tarlac was equally negligent and should, therefore, COLLECTING BANK OF FORGERY BY THE DRAWEE BANK
share the burden of loss from the checks bearing a forged SIGNIFIES NEGLIGENCE. - A delay in informing the collecting
indorsement. The Province of Tarlac permitted Fausto Pangilinan bank (Associated Bank) of the forgery, which deprives it of the
to collect the checks when the latter, having already retired opportunity to go after the forger, signifies negligence on the
from government service, was no longer connected with the part of the drawee bank (PNB) and will preclude it from claiming
hospital. With the exception of the first check (dated January 17, reimbursement.
1978), all the checks were issued and released after 17. ID.; ID.; ID.; RETURN OF FORGED INDORSEMENT; 24-
Pangilinans retirement on February 28, 1978. After nearly three HOUR PERIOD BUT NOT BEYOND PERIOD FOR FILING
years, the Treasurers office was still releasing the checks to the LEGAL ACTION FOR BANKS OUTSIDE METRO MANILA;
retired cashier. In addition, some of the aid allotment checks CASE AT BAR. - Under Section 4(c) of CB Circular No. 580,
were released to Pangilinan and the others to Elizabeth Juco, items bearing a forged endorsement shall be returned within
the new cashier. The fact that there were now two persons twenty-four (24) hours after discovery of the forgery but in no
collecting the checks for the hospital is an unmistakable sign of event beyond the period fixed or provided by law for filing of a
an irregularity which should have alerted employees in the legal action by the returning bank. Section 23 of the PCHC Rules
Treasurers office of the fraud being committed. There is also deleted the requirement that items bearing a forged
evidence indicating that the provincial employees were aware endorsement should be returned within twenty-four hours.
of Pangilinans retirement and consequent dissociation from the Associated Bank now argues that the aforementioned Central
hospital. The failure of the Province of Tarlac to exercise due Bank Circular is applicable. Since PNB did not return the
care contributed to a significant degree to the loss tantamount questioned checks within twenty-four hours, but several days
to negligence. Hence, the Province of Tarlac should be liable for later, Associated Bank alleges that PNB should be considered
part of the total amount paid on the questioned checks. The negligent and not entitled to reimbursement of the amount it
drawee bank PNB also breached its duty to pay only according paid on the checks. The Central Bank circular was in force for all
to the terms of the check. Hence, it cannot escape liability and banks until June 1980 when the Philippine Clearing House
should also bear part of the loss. The Court finds as reasonable, Corporation (PCHC) was set up and commenced operations.
the proportionate sharing of fifty percent - fifty percent (50%- Banks in Metro Manila were covered by the PCHC while banks
50%). Due to the negligence of the Province of Tarlac in located elsewhere still had to go through Central Bank Clearing.
releasing the checks to an unauthorized person (Fausto In any event, the twenty-four-hour return rule was adopted by
Pangilinan), in allowing the retired hospital cashier to receive the PCHC until it was changed in 1982. The contending banks
the checks for the payee hospital for a period close to three herein, which are both branches in Tarlac province, are
years and in not properly ascertaining why the retired hospital therefore not covered by PCHC Rules but by CB Circular No.
cashier was collecting checks for the payee hospital in addition 580. Clearly then, the CB circular was applicable when the
to the hospitals real cashier, respondent Province contributed forgery of the checks was discovered in 1981.
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
18. ID.; ID.; ID.; ID.; RATIONALE. - The rule mandates that the indorsed the checks is also a customer of the drawee bank.
checks be returned within twenty-four hours after discovery of PNBs duty was to verify the genuineness of the drawers
the forgery but in no event beyond the period fixed by law for signature and not the genuineness of payees indorsement.
filing a legal action. The rationale of the rule is to give the Associated Bank, as the collecting bank, is the entity with the
collecting bank (which indorsed the check) adequate duty to verify the genuineness of the payees indorsement.
opportunity to proceed against the forger. If prompt notice is
not given, the collecting bank maybe prejudiced and lose the 21. CIVIL LAW; OBLIGATIONS AND CON-TRACTS; THERE IS
opportunity to go after its depositor. NO PRIVITY OF CONTRACT BETWEEN THE DRAWER AND
COLLECTING BANK; DRAWER CAN RECOVER FROM
19. ID.; ID.; ID.; ID.; FAILURE TO RETURN FORGED DRAWEE BANK AND DRAWEE BANK CAN SEEK
INDORSEMENT WITHIN 24 HOURS FROM DISCOVERY REIMBURSEMENT FROM COLLECTING BANK. - PNB also
DOES NOT PREJUDICE COLLECTING BANK WHICH avers that respondent court erred in adjudging circuitous
PRESENTED FORGER AS ITS REBUTTAL WITNESS. The liability by directing PNB to return to the Province of Tarlac the
Court finds that even if PNB did not return the questioned amount of the checks and then directing Associated Bank to
checks to Associated Bank within twenty-four hours, as reimburse PNB. The Court finds nothing wrong with the mode of
mandated by the rule, PNB did not commit negligent delay. the award. The drawer, Province of Tarlac, is a client or
Under the circumstances, PNB gave prompt notice to Associated customer of the PNB, not of Associated Bank. There is no privity
Bank and the latter bank was not prejudiced in going after of contract between the drawer and the collecting bank.
Fausto Pangilinan. After the Province of Tarlac informed PNB of
the forgeries, PNB necessarily had to inspect the checks and 22. COMMERCIAL LAW; BANKS; BANK DEPOSITS ARE LOANS;
conduct its own investigation. Thereafter, it requested the RECOVERY OF AMOUNT DEPOSITED IN CURRENT
Provincial Treasurers office on March 31, 1981 to return the ACCOUNT GIVEN 6% INTEREST PER ANNUM. - The trial
checks for verification. The Province of Tarlac returned the court made PNB and Associated Bank liable with legal interest
checks only on April 22, 1981. Two days later, Associated Bank from March 20, 1981, the date of extrajudicial demand made by
received the checks from PNB. Associated Bank was also the Province of Tarlac on PNB. The payments to be made in this
furnished a copy of the Provinces letter of demand to PNB case stem from the deposits of the Province of Tarlac in its
dated March 20, 1981, thus giving it notice of the forgeries. At current account with the PNB. Bank deposits are considered
this time, however, Pangilinans account with Associated had under the law as loans. Central Bank Circular No. 416 prescribes
only P24.63 in it. Had Associated Bank decided to debit a twelve percent (12%) interest per annum for loans,
Pangilinans account, it could not have recovered the amounts forebearance of money, goods or credits in the absence of
paid on the questioned checks. In addition, while Associated express stipulation. Normally, current accounts are likewise
Bank filed a fourth-party complaint against Fausto Pangilinan, it interest-bearing, by express contract, thus excluding them from
did not present evidence against Pangilinan and even presented the coverage of CB Circular No. 416. In this case, however, the
him as its rebuttal witness. Hence, Associated Bank was not actual interest rate, if any, for the current account opened by
prejudiced by PNBs failure to comply with the twenty-four-hour the Province of Tarlac with PNB was not given in evidence.
return rule. Hence, the Court deems it wise to affirm the trial courts use of
the legal interest rate, or six percent (6%) per annum. The
20. REMEDIAL LAW; ACTIONS; ESTOPPEL; WILL NOT APPLY interest rate shall be computed from the date of default, or the
TO DRAWEE BANK WHO FAID AND CLEARED CHECKS date of judicial or extrajudicial demand. The trial court did not
WITH FORGED INDORSEMENT. - Associated Bank contends err in granting legal interest from March 20, 1981, the date of
that PNB is estopped from requiring reimbursement because extrajudicial demand.
the latter paid and cleared the checks. The Court finds this
contention unmeritorious. Even if PNB cleared and paid the DECISION
checks, it can still recover from Associated Bank. This is true
even if the payees Chief Officer who was supposed to have ROMERO, J.:
 Where thirty checks bearing forged endorsements are paid, who withdraw the money when the check was cleared and paid by the
bears the loss, the drawer, the drawee bank or the collecting bank? drawee bank, PNB.
This is the main issue in these consolidated petitions for review After forging the signature of Dr. Adena Canlas who was chief of
assailing the decision of the Court of Appeals in Province of Tarlac the payee hospital, Pangilinan followed the same procedure for the
v. Philippine National Bank v. Associated Bank v. Fausto Pangilinan, second check, in the amount of P5,000.00 and dated April 20,
et. al. (CA-G.R. No. CV No. 17962).1 1978,5 as well as for twenty-eight other checks, of various amounts
and on various dates. The last check negotiated by Pangilinan was
The facts of the case are as follows: for P8,000.00 and dated February 10, 1981.6 All the checks bore the
The Province of Tarlac maintains a current account with the stamp of Associated Bank which reads All prior endorsements
Philippine National Bank (PNB) Tarlac Branch where the provincial guaranteed ASSOCIATED BANK.
funds are deposited. Checks issued by the Province are signed by Jesus David, the manager of Associated Bank testified that
the Provincial Treasurer and countersigned by the Provincial Auditor Pangilinan made it appear that the checks were paid to him for
or the Secretary of the Sangguniang Bayan. certain projects with the hospital. 7 He did not find as irregular the
A portion of the funds of the province is allocated to the fact that the checks were not payable to Pangilinan but to the
Concepcion Emergency Hospital. 2 The allotment checks for said Concepcion Emergency Hospital. While he admitted that his wife
government hospital are drawn to the order of Concepcion. and Pangilinans wife are first cousins, the manager denied having
Emergency Hospital, Concepcion, Tarlac or The Chief, Concepcion given Pangilinan preferential treatment on this account. 8
Emergency Hospital, Concepcion, Tarlac. The checks are released On February 26, 1981, the Provincial Treasurer wrote the
by the Office of the Provincial Treasurer and received for the hospital manager of the PNB seeking the restoration of the various amounts
by its administrative officer and cashier. debited from the current account of the Province. 9
In January 1981, the books of account of the Provincial Treasurer In turn, the PNB manager demanded reimbursement from the
were post-audited by the Provincial Auditor. It was then discovered Associated Bank on May 15, 1981.10
that the hospital did not receive several allotment checks drawn by
the Province. As both banks resisted payment, the Province of Tarlac brought
suit against PNB which, in turn, impleaded Associated Bank as third-
On February 19, 1981, the Provincial Treasurer requested the party defendant. The latter then filed a fourth-party complaint
manager of the PNB to return all of its cleared checks which were against Adena Canlas and Fausto Pangilinan.11
issued from 1977 to 1980 in order to verify the regularity of their
encashment. After the checks were examined, the Provincial After trial on the merits, the lower court rendered its decision on
Treasurer learned that 30 checks amounting to P203,300.00 were March 21, 1988, disposing as follows:
encashed by one Fausto Pangilinan, with the Associated Bank acting
as collecting bank. WHEREFORE, in view of the foregoing, judgment is hereby
It turned out that Fausto Pangilinan, who was the administrative rendered:
officer and cashier of payee hospital until his retirement on February
28, 1978, collected the questioned checks from the office of the 1. On the basic complaint, in favor of plaintiff Province of Tarlac and
Provincial Treasurer. He claimed to be assisting or helping the against defendant Philippine National Bank (PNB), ordering the
hospital follow up the release of the checks and had official latter to pay to the former, the sum of Two Hundred Three Thousand
receipts.3 Pangilinan sought to encash the first check 4 with Three Hundred (P203,300.00) Pesos with legal interest thereon from
Associated Bank. However, the manager of Associated Bank refused March 20, 1981 until fully paid;
and suggested that Pangilinan deposit the check in his personal
savings account with the same bank. Pangilinan was able to 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 contractual stipulations among and between member-banks. As
to reimburse to the former the amount of Two Hundred Three such, they cannot prevail over the aforesaid CB Circular.
Thousand Three Hundred (P203,300.00) Pesos with legal interests
thereon from March 20, 1981 until fully paid;. 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
3. On the fourth-party complaint, the same is hereby ordered guarantee (for all prior indorsements), it merely followed a
dismissed for lack of cause of action as against fourth-party mandatory requirement for clearing and had no choice but to place
defendant Adena Canlas and lack of jurisdiction over the person of the stamp of guarantee; otherwise, there would be no clearing. The
fourth-party defendant Fausto Pangilinan as against the latter. bank will be in a no-win situation and will always bear the loss as
against the drawee bank.16
4. On the counterclaims on the complaint, third-party complaint and
fourth-party complaint, the same are hereby ordered dismissed for Associated Bank also claims that since PNB already cleared and
lack of merit. paid the value of the forged checks in question, it is now estopped
from asserting the defense that Associated Bank guaranteed prior
SO ORDERED.12 indorsements. The drawee bank allegedly has the primary duty to
verify the genuineness of payees indorsement before paying the
check.17
PNB and Associated Bank appealed to the Court of
AppealS.13 Respondent court affirmed the trial courts decision in While both banks are innocent of the forgery, Associated Bank
toto on September 30, 1992. claims that PNB was at fault and should solely bear the loss because
it cleared and paid the forged checks.
Hence these consolidated petitions which seek a reversal of
respondent appellate courts decision. xxx xxx xxx
PNB assigned two errors. First, the bank contends that The case at bench concerns checks payable to the order of
respondent court erred in exempting the Province of Tarlac from Concepcion Emergency Hospital or its Chief. They were properly
liability when, in fact, the latter was negligent because it delivered issued and bear the genuine signatures of the drawer, the Province
and released the questioned checks to Fausto Pangilinan who was of Tarlac. The infirmity in the questioned checks lies in the payees
then already retired as the hospitals cashier and administrative (Concepcion Emergency Hospital) indorsements which are forgeries.
officer. PNB also maintains its innocence and alleges that as At the time of their indorsement, the checks were order
between two innocent persons, the one whose act was the cause of instruments.
the loss, in this case the Province of Tarlac, bears the loss.
Checks having forged indorsements should be differentiated
Next, PNB asserts that it was error for the court to order it to from forged checks or checks bearing the forged signature of the
pay the province and then seek reimbursement from Associated drawer.
Bank. According to petitioner bank, respondent appellate Court
should have directed Associated Bank to pay the adjudged liability Section 23 of the Negotiable Instruments Law (NIL) provides:
directly to the Province of Tarlac to avoid circuity. 14
Sec. 23. FORGED SIGNATURE, EFFECT OF. - When a signature is
Associated Bank, on the other hand, argues that the order of forged or made without authority of the person whose signature it
liability should be totally reversed, with the drawee bank (PNB) purports to be, it is wholly inoperative, and no right to retain the
solely and ultimately bearing the loss. instrument, or to give a discharge therefor, or to enforce payment
Respondent court allegedly erred in applying Section 23 of the thereof against any party thereto, can be acquired through or under
Philippine Clearing House Rules instead of Central Bank Circular No. such signature unless the party against whom it is sought to enforce
580, which, being an administrative regulation issued pursuant to such right is precluded from setting up the forgery or want of
law, has the force and effect of law.15 The PCHC Rules are merely authority.
 A forged signature, whether it be that of the drawer or the The bank on which a check is drawn, known as the drawee
payee, is wholly inoperative and no one can gain title to the bank, is under strict liability to pay the check to the order of the
instrument through it. A person whose signature to an instrument payee. The drawers instructions are reflected on the face and by
was forged was never a party and never consented to the contract the terms of the check. Payment under a forged indorsement is not
which allegedly gave rise to such instrument. 18 Section 23 does not to the drawers order. When the drawee bank pays a person other
avoid the instrument but only the forged signature. 19 Thus, a forged than the payee, it does not comply with the terms of the check and
indorsement does not operate as the payees indorsement. violates its duty to charge its customers (the drawer) account only
for properly payable items. Since the drawee bank did not pay a
The exception to the general rule in Section 23 is where a holder or other person entitled to receive payment, it has no right to
party against whom it is sought to enforce a right is precluded from reimbursement from the drawer.24 The general rule then is that the
setting up the forgery or want of authority. Parties who warrant or drawee bank may not debit the drawers account and is not entitled
admit the genuineness of the signature in question and those who, to indemnification from the drawer.25 The risk of loss must perforce
by their acts, silence or negligence are estopped from setting up the fall on the drawee bank.
defense of forgery, are precluded from using this defense. Indorsers,
persons negotiating by delivery and acceptors are warrantors of the However, if the drawee bank can prove a failure by the
genuineness of the signatures on the instIument.20 customer/drawer to exercise ordinary care that substantially
contributed to the making of the forged signature, the drawer is
In bearer instruments, the signature of the payee or holder is precluded from asserting the forgery.
unnecessary to pass title to the instrument. Hence, when the
indorsement is a forgery, only the person whose signature is forged If at the same time the drawee bank was also negligent to the
can raise the defense of forgery against a holder in due course. 21 point of substantially contributing to the loss, then such loss from
the forgery can be apportioned between the negligent drawer and
The checks involved in this case are order instruments, hence, the negligent bank.26
the following discussion is made with reference to the effects of a
forged indorsement on an instrument payable to order. In cases involving a forged check, where the drawers signature
is forged, the drawer can recover from the drawee bank. No drawee
Where the instrument is payable to order at the time of the bank has a right to pay a forged check. If it does, it shall have to
forgery, such as the checks in this case, the signature of its rightful recredit the amount of the check to the account of the drawer. The
holder (here, the payee hospital) is essential to transfer title to the liability chain ends with the drawee bank whose responsibility it is to
same instrument. When the holders indorsement is forged, all know the drawers signature since the latter is its customer. 27
parties prior to the forgery may raise the real defense of forgery
against all parties subsequent thereto.22 In cases involving checks with forged indorsements, such as the
present petition, the chain of liability does not end with the drawee
An indorser of an order instrument warrants that the bank. The drawee bank may not debit the account of the drawer but
instrument is genuine and in all respects what it purports to be; that may generally pass liability back through the collection chain to the
he has a good title to it; that all prior parties had capacity to party who took from the forger and, of course, to the forger himself,
contract; and that the instrument is at the time of his indorsement if available.28 In other words, the drawee bank can seek
valid and subsisting.23 He cannot interpose the defense that reimbursement or a return of the amount it paid from the presentor
signatures prior to him are forged. bank or person.29 Theoretically, the latter can demand
A collecting bank where a check is deposited and which reimbursement from the person who indorsed the check to it and so
indorses the check upon presentment with the drawee bank, is such on. The loss falls on the party who took the check from the forger, or
an indorser. So even if the indorsement on the check deposited by on the forger himself.
the bankss client is forged, the collecting bank is bound by his In this case, the checks were indorsed by the collecting bank
warranties as an indorser and cannot set up the defense of forgery (Associated Bank) to the drawee bank (PNB). The former will
as against the drawee bank. necessarily be liable to the latter for the checks bearing forged
indorsements. If the forgery is that of the payees or holders
indorsement, the collecting bank is held liable, without prejudice to Applying these rules to the case at bench, PNB, the drawee
the latter proceeding against the forger. bank, cannot debit the current account of
the Province of Tarlac because it paid checks which bore forged
Since a forged indorsement is inoperative, the collecting bank indorsements. However, if the Province of Tarlac as drawer was
had no right to be paid by the drawee bank. The former must negligent to the point of substantially contributing to the loss, then
necessarily return the money paid by the latter because it was paid the drawee bank PNB can charge its account. If both drawee bank-
wrongfully.30 PNB and drawer-Province of Tarlac were negligent, the loss should
More importantly, by reason of the statutory warranty of a be properly apportioned between them.
general indorser in Section 66 of the Negotiable Instruments Law, a The loss incurred by drawee bank-PNB can be passed on to the
collecting bank which indorses a check bearing a forged collecting bank-Associated Bank which presented and indorsed the
indorsement and presents it to the drawee bank guarantees all prior checks to it. Associated Bank can, in turn, hold the forger, Fausto
indorsements, including the forged indorsement. It warrants that the Pangilinan, liable.
instrument is genuine, and that it is valid and subsisting at the time
of his indorsement. Because the indorsement is a forgery, the If PNB negligently delayed in informing Associated Bank of the
collecting bank commits a breach of this warranty and will be forgery, thus depriving the latter of the opportunity to recover from
accountable to the drawee bank. This liability scheme operates the forger, it forfeits its right to reimbursement and will be made to
without regard to fault on the part of the collecting/presenting bank. bear the loss.
Even if the latter bank was not negligent, it would still be liable to
the drawee bank because of its indorsement. After careful examination of the records, the Court finds that
the Province of Tarlac was equally negligent and should, therefore,
The Court has consistently ruled that the collecting bank or share the burden of loss from the checks bearing a forged
last endorser generally suffers the loss because it has the duty to indorsement.
ascertain the genuineness of all prior endorsements considering
that the act of presenting the check for payment to the drawee is an The Province of Tarlac permitted Fausto Pangilinan to collect the
assertion that the party making the presentment has done its duty checks when the latter, having already retired from government
to ascertain the genuineness of the endorsements. 31 service, was no longer connected with the hospital. With the
exception of the first check (dated January 17, 1978), all the checks
The drawee bank is not similarly situated as the collecting bank were issued and released after Pangilinans retirement on February
because the former makes no warranty as to the genuineness of 28, 1978. After nearly three years, the Treasurers office was still
any indorsement.32 The drawee banks duty is but to verify the releasing the checks to the retired cashier. In addition, some of the
genuineness of the drawers signature and not of the indorsement aid allotment checks were released to Pangilinan and the others to
because the drawer is its client. Elizabeth Juco, the new cashier. The fact that there were now two
persons collecting the checks for the hospital is an unmistakable
Moreover, the collecting bank is made liable because it is privy sign of an irregularity which should have alerted employees in the
to the depositor who negotiated the check. The bank knows him, his Treasurers office of the fraud being committed. There is also
address and history because he is a client. It has taken a risk on his evidence indicating that the provincial employees were aware of
deposit. The bank is also in a better position to detect forgery, fraud Pangilinans retirement and consequent dissociation from the
or irregularity in the indorsement. hospital. Jose Meru, the Provincial Treasurer, testified:.
Hence, the drawee bank can recover the amount paid on the ATTY. MORGA:
check bearing a forged indorsement from the collecting bank.
However, a drawee bank has the duty to promptly inform the Q : Now, is it true that for a given month there were two
presentor of the forgery upon discovery. If the drawee bank delays releases of checks, one went to Mr. Pangilinan and one
in informing the presentor of the forgery, thereby depriving said went to Miss Juco?
presentor of the right to recover from the forger, the former is
deemed negligent and can no longer recover from the presentor. 33 JOSE MERU:
 A : Yes, sir. to Concepcion Emergency Hospital but it was Fausto Pangilinan who
deposited the checks in his personal savings account.
Q : Will you please tell us how at the time (sic) when the
authorized representative Although Associated Bank claims that the guarantee
of Concepcion Emergency Hospital is and was stamped on the checks (All prior and/or lack of endorsements
supposed to be Miss Juco? guaranteed) is merely a requirement forced upon it by clearing
house rules, it cannot but remain liable. The stamp guaranteeing
A : Well, as far as my investigation show (sic) the assistant prior indorsements is not an empty rubric which a bank must fulfill
cashier told me that Pangilinan represented himself as for the sake of convenience. A bank is not required to accept all the
also authorized to help in the release of these checks checks negotiated to it. It is within the bahks discretion to receive a
and we were apparently misled because they accepted check for no banking institution would consciously or deliberately
the representation of Pangilinan that he was helping accept a check bearing a forged indorsement. When a check is
them in the release of the checks and besides deposited with the collecting bank, it takes a risk on its depositor. It
according to them they were, Pangilinan, like the rest, is only logical that this bank be held accountable for checks
was able to present an official receipt to acknowledge deposited by its customers.
these receipts and according to them since this is a
government check and believed that it will eventually A delay in informing the collecting bank (Associated Bank) of
go to the hospital following the standard procedure of the forgery, which deprives it of the opportunity to go after the
negotiating government checks, they released the forger, signifies negligence on the part of the drawee bank (PNB)
checks to Pangilinan aside from Miss Juco.34 and will preclude it from claiming reimbursement.
The failure of the Province of Tarlac to exercise due care It is here that Associated Banks assignment of error concerning
contributed to a significant degree to the loss tantamount to C.B. Circular No. 580 and Section 23 of the Philippine Clearing
negligence. Hence, the Province of Tarlac should be liable for part of House Corporation Rules comes to fore. Under Section 4(c) of CB
the total amount paid on the questioned checks. Circular No. 580, items bearing a forged endorsement shall be
returned within twenty-four (24) hours after discovery of the forgery
The drawee bank PNB also breached its duty to pay only but in no event beyond the period fixed or provided by law for filing
according to the terms of the check. Hence, it cannot escape liability of a legal action by the returning bank. Section 23 of the PCHC Rules
and should also bear part of the loss. deleted the requirement that items bearing a forged endorsement
As earlier stated, PNB can recover from the collecting bank. should be returned within twenty-four hours. Associated Bank now
argues that the aforementioned Central Bank Circular is applicable.
In the case of Associated Bank v. CA, 35 six crossed checks with Since PNB did not return the questioned checks within twenty-four
forged indorsements were deposited in the forgers account with the hours, but several days later, Associated Bank alleges that PNB
collecting bank and were later paid by four different drawee banks. should be considered negligent and not entitled to reimbursement
The Court found the collecting bank (Associated) to be negligent of the amount it paid on the checks.
and held:
The Court deems it unnecessary to discuss Associated Banks
assertions that CB Circular No. 580 is an administrative regulation
The Bank should have first verified his right to endorse the crossed
issued pursuant to law and as such, must prevail over the PCHC
checks, of which he was not the payee, and to deposit the proceeds
rule. The Central Bank circular was in force for all banks until June
of the checks to his own account. The Bank was by reason of the
1980 when the Philippine Clearing House Corporation (PCHC) was
nature of the checks put upon notice that they were issued for
set up and commenced operations. Banks in Metro Manila were
deposit only to the private respondents account. xxx
covered by the PCHC while banks located elsewhere still had to go
through Central Bank Clearing. In any event, the twenty-four-hour
The situation in the case at bench is analogous to the above return rule was adopted by the PCHC until it was changed in 1982.
case, for it was not the payee who deposited the checks with the The contending banks herein, which are both branches in Tarlac
collecting bank. Here, the checks were all payable
province, are therefore not covered by PCHC Rules but by CB PNB also avers that respondent court erred in adjudging
Circular No. 580. Clearly then, the CB circular was applicable when circuitous liability by directing PNB to return to
the forgery of the checks was discovered in 1981. the Province of Tarlac the amount of the checks and then directing
Associated Bank to reimburse PNB. The Court finds nothing wrong
The rule mandates that the checks be returned within twenty- with the mode of the award. The drawer, Province of Tarlac, is a
four hours after discovery of the forgery but in no event beyond the client or customer of the PNB, not of Associated Bank. There is no
period fixed by law for filing a legal action. The rationale of the rule privity of contract between the drawer and the collecting bank.
is to give the collecting bank (which indorsed the check) adequate
opportunity to proceed against the forger. If prompt notice is not The trial court made PNB and Associated Bank liable with legal
given, the collecting bank maybe prejudiced and lose the interest from March 20, 1981, the date of extrajudicial demand
opportunity to go after its depositor. 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
The Court finds that even if PNB did not return the questioned current account with the PNB. Bank deposits are considered under
checks to Associated Bank within twenty-four hours, as mandated the law as loans.40 Central Bank Circular No. 416 prescribes a twelve
by the rule, PNB did not commit negligent delay. Under the percent (12%) interest per annum for loans, forebearance of money,
circumstances, PNB gave prompt notice to Associated Bank and the goods or credits in the absence of express stipulation. Normally,
latter bank was not prejudiced in going after Fausto Pangilinan. After current accounts are likewise interest-bearing, by express contract,
the Province of Tarlac informed PNB of the forgeries, PNB necessarily thus excluding them from the coverage of CB Circular No. 416. In
had to inspect the checks and conduct its own investigation. this case, however, the actual interest rate, if any, for the current
Thereafter, it requested the Provincial Treasurers office on March account opened by the Province of Tarlac with PNB was not given in
31, 1981 to return the checks for verification. evidence. Hence, the Court deems it wise to affirm the trial courts
The Province of Tarlac returned the checks only on April 22, 1981. use of the legal interest rate, or six percent (6%) per annum. The
Two days later, Associated Bank received the checks from PNB. 36 interest rate shall be computed from the date of default, or the date
Associated Bank was also furnished a copy of the Provinces of judicial or extrajudicial demand. 41 The trial court did not err in
letter of demand to PNB dated March 20, 1981, thus giving it notice granting legal interest from March 20, 1981, the date of extrajudicial
of the forgeries. At this time, however, Pangilinans account with demand.
Associated had only P24.63 in it. 37 Had Associated Bank decided to The Court finds as reasonable, the proportionate sharing of fifty
debit Pangilinans account, it could not have recovered the amounts percent - fifty percent (50%-50%). Due to the negligence of the
paid on the questioned checks. In addition, while Associated Bank Province of Tarlac in releasing the checks to an unauthorized person
filed a fourth-party complaint against Fausto Pangilinan, it did not (Fausto Pangilinan), in allowing the retired hospital cashier to
present evidence against Pangilinan and even presented him as its receive the checks for the payee hospital for a period close to three
rebuttal witness.38 Hence, Associated Bank was not prejudiced by years and in not properly ascertaining why the retired hospital
PNBs failure to comply with the twenty-four-hour return rule. cashier was collecting checks for the payee hospital in addition to
Next, Associated Bank contends that PNB is estopped from the hospitals real cashier, respondent Province contributed to the
requiring reimbursement because the latter paid and cleared the loss amounting to. P203,300.00 and shall be liable to the PNB for
checks. The Court finds this contention unmeritorious. Even if PNB fifty (50%) percent thereof. In effect, the Province of Tarlac can only
cleared and paid the checks, it can still recover from Associated recover fifty percent(50%) of P203,300.00 from PNB.
Bank. This is true even if the payees Chief Officer who was The collecting bank, Associated Bank, shall be liable to PNB for
supposed to have indorsed the checks is also a customer of the fifty (50%) percent of P203,300.00. It is liable on its warranties as
drawee bank.39 PNBs duty was to verify the genuineness of the indorser of the checks which were deposited by Fausto Pangilinan,
drawers signature and not the genuineness of payees having guaranteed the genuineness of all prior indorsements,
indorsement. Associated Bank, as the collecting bank, is the entity including that of the chief of the payee hospital, Dr. Adena Canlas.
with the duty to verify the genuineness of the payees indorsement. Associated Bank was also remiss in its duty to ascertain the
genuineness of the payees indorsement.
 IN VIEW OF THE FOREGOING, the petition for review filed by On 25 May 1992 the petition pending before the Court of Appeals
the Philippine National Bank (G.R. No. 107612) is hereby PARTIALLY was dismissed. Thus the trial court, finding no more legal obstacle
GRANTED. The petition for review filed by the Associated Bank (G.R. to act on the motion for examination of the garnishees, directed
No. 107382) is hereby DENIED. The decision of the trial court is petitioner on 4 November 1992 to submit his report showing the
MODIFIED. The Philippine National Bank shall pay fifty percent (50%) amount of the garnished salaries of Mabanto, Jr., within fifteen (15)
of P203,300.00 to the Province of Tarlac, with legal interest from days from receipt 2 taking into consideration the provisions of Sec.
March 20, 1981 until the payment thereof. Associated Bank shall 12, pars. (f) and (i), Rule 39 of the Rules of Court.
pay fifty percent (50%) of P203,300.00 to the Philippine National
Bank, likewise, with legal interest from March 20, 1981 until On 24 November 1992 private respondent filed a motion to require
payment is made. SO ORDERED. petitioner to explain why he should not be cited in contempt of court
for failing to comply with the order of 4 November 1992.

On the other hand, on 19 January 1993 petitioner moved to quash

G.R. No. 111190 June 27, 1995
the notice of garnishment claiming that he was not in possession of
any money, funds, credit, property or anything of value belonging to
LORETO D. DE LA VICTORIA, as City Fiscal of Mandaue City Mabanto, Jr., except his salary and RATA checks, but that said checks
and in his personal capacity as garnishee,petitioner, were not yet properties of Mabanto, Jr., until delivered to him. He
vs. further claimed that, as such, they were still public funds which
HON. JOSE P. BURGOS, Presiding Judge, RTC, Br. XVII, Cebu could not be subject to garnishment.
City, and RAUL H. SESBREO, respondents.
On 9 March 1993 the trial court denied both motions and ordered
BELLOSILLO, J.: petitioner to immediately comply with its order of 4 November
1992. 3 It opined that the checks of Mabanto, Jr., had already been
RAUL H. SESBREO filed a complaint for damages against Assistant released through petitioner by the Department of Justice duly signed
City Fiscals Bienvenido N. Mabanto, Jr., and Dario D. Rama, Jr., by the officer concerned. Upon service of the writ of garnishment,
before the Regional Trial Court of Cebu City. After trial judgment was petitioner as custodian of the checks was under obligation to hold
rendered ordering the defendants to pay P11,000.00 to the plaintiff, them for the judgment creditor. Petitioner became a virtual party to,
private respondent herein. The decision having become final and or a forced intervenor in, the case and the trial court thereby
executory, on motion of the latter, the trial court ordered its acquired jurisdiction to bind him to its orders and processes with a
execution. This order was questioned by the defendants before the view to the complete satisfaction of the judgment. Additionally,
Court of Appeals. However, on 15 January 1992 a writ of execution there was no sufficient reason for petitioner to hold the checks
was issued. because they were no longer government funds and presumably
delivered to the payee, conformably with the last sentence of Sec.
On 4 February 1992 a notice of garnishment was served on 16 of the Negotiable Instruments Law.
petitioner Loreto D. de la Victoria as City Fiscal of Mandaue City
where defendant Mabanto, Jr., was then detailed. The notice With regard to the contempt charge, the trial court was not morally
directed petitioner not to disburse, transfer, release or convey to convinced of petitioner's guilt. For, while his explanation suffered
any other person except to the deputy sheriff concerned the salary from procedural infirmities nevertheless he took pains in
checks or other checks, monies, or cash due or belonging to enlightening the court by sending a written explanation dated 22
Mabanto, Jr., under penalty of law. 1 On 10 March 1992 private July 1992 requesting for the lifting of the notice of garnishment on
respondent filed a motion before the trial court for examination of the ground that the notice should have been sent to the Finance
the garnishees. Officer of the Department of Justice. Petitioner insists that he had no
authority to segregate a portion of the salary of Mabanto, Jr. The
explanation however was not submitted to the trial court for action According to the trial court, the checks of Mabanto, Jr., were already
since the stenographic reporter failed to attach it to the record. 4 released by the Department of Justice duly signed by the officer
concerned through petitioner and upon service of the writ of
On 20 April 1993 the motion for reconsideration was denied. The garnishment by the sheriff petitioner was under obligation to hold
trial court explained that it was not the duty of the garnishee to them for the judgment creditor. It recognized the role of petitioner
inquire or judge for himself whether the issuance of the order of ascustodian of the checks. At the same time however it considered
execution, writ of execution and notice of garnishment was justified. the checks as no longer government funds and presumed delivered
His only duty was to turn over the garnished checks to the trial court to the payee based on the last sentence of Sec. 16 of the Negotiable
which issued the order of execution. 5 Instruments Law which states: "And where the instrument is no
longer in the possession of a party whose signature appears
Petitioner raises the following relevant issues: (1) whether a check thereon, a valid and intentional delivery by him is presumed." Yet,
still in the hands of the maker or its duly authorized representative the presumption is not conclusive because the last portion of the
is owned by the payee before physical delivery to the latter: and, (2) provision says "until the contrary is proved." However this phrase
whether the salary check of a government official or employee was deleted by the trial court for no apparent reason. Proof to the
funded with public funds can be subject to garnishment. contrary is its own finding that the checks were in the custody of
petitioner. Inasmuch as said checks had not yet been delivered to
Mabanto, Jr., they did not belong to him and still had the character
Petitioner reiterates his position that the salary checks were not of public funds. In Tiro v. Hontanosas 8 we ruled that
owned by Mabanto, Jr., because they were not yet delivered to him,
and that petitioner as garnishee has no legal obligation to hold and
deliver them to the trial court to be applied to Mabanto, Jr.'s The salary check of a government officer or employee
judgment debt. The thesis of petitioner is that the salary checks still such as a teacher does not belong to him before it is
formed part of public funds and therefore beyond the reach of physically delivered to him. Until that time the check
garnishment proceedings. belongs to the government. Accordingly, before there
is actual delivery of the check, the payee has no
power over it; he cannot assign it without the consent
Petitioner has well argued his case. of the Government.

Garnishment is considered as a species of attachment for reaching As a necessary consequence of being public fund, the checks may
credits belonging to the judgment debtor owing to him from a not be garnished to satisfy the judgment. 9 The rationale behind this
stranger to the litigation. 6 Emphasis is laid on the phrase doctrine is obvious consideration of public policy. The Court
"belonging to the judgment debtor" since it is the focal point in succinctly stated in Commissioner of Public Highways v. San
resolving the issues raised. Diego 10 that

As Assistant City Fiscal, the source of the salary of Mabanto, Jr., is The functions and public services rendered by the
public funds. He receives his compensation in the form of checks State cannot be allowed to be paralyzed or disrupted
from the Department of Justice through petitioner as City Fiscal of by the diversion of public funds from their legitimate
Mandaue City and head of office. Under Sec. 16 of the Negotiable and specific objects, as appropriated by law.
Instruments Law, every contract on a negotiable instrument is
incomplete and revocable until delivery of the instrument for the
purpose of giving effect thereto. As ordinarily understood, delivery In denying petitioner's motion for reconsideration, the trial court
means the transfer of the possession of the instrument by the expressed the additional ratiocination that it was not the duty of the
maker or drawer with intent to transfer title to the payee and garnishee to inquire or judge for himself whether the issuance of the
recognize him as the holder thereof. 7 order of execution, the writ of execution, and the notice of
garnishment was justified, citing our ruling in Philippine Commercial
Industrial Bank v. Court of Appeals. 11 Our precise ruling in that case
was that "[I]t is not incumbent upon the garnishee to inquire or to Emanating from the records are the following facts. Petitioner,
judge for itself whether or not the order for the advance execution Bataan Cigar & Cigarette Factory, Inc. (BCCFI), a corporation
of a judgment is valid." But that is invoking only the general rule. involved in the manufacturing of cigarettes, engaged one of its
We have also established therein the compelling reasons, as suppliers, King Tim Pua George (herein after referred to as George
exceptions thereto, which were not taken into account by the trial King), to deliver 2,000 bales of tobacco leaf starting October 1978.
court, e.g., a defect on the face of the writ or actual knowledge by In consideration thereof, BCCFI, on July 13, 1978 issued crossed
the garnishee of lack of entitlement on the part of the garnisher. It is checks post dated sometime in March 1979 in the total amount of
worth to note that the ruling referred to the validity of advance P820,000.00. 3
execution of judgments, but a careful scrutiny of that case and
similar cases reveals that it was applicable to a notice of Relying on the supplier's representation that he would complete
garnishment as well. In the case at bench, it was incumbent upon delivery within three months from December 5, 1978, petitioner
petitioner to inquire into the validity of the notice of garnishment as agreed to purchase additional 2,500 bales of tobacco leaves,
he had actual knowledge of the non-entitlement of private despite the supplier's failure to deliver in accordance with their
respondent to the checks in question. Consequently, we find no earlier agreement. Again petitioner issued post dated crossed
difficulty concluding that the trial court exceeded its jurisdiction in checks in the total amount of P1,100,000.00, payable sometime in
issuing the notice of garnishment concerning the salary checks of September 1979. 4
Mabanto, Jr., in the possession of petitioner.
During these times, George King was simultaneously dealing with
WHEREFORE, the petition is GRANTED. The orders of 9 March 1993 private respondent SIHI. On July 19, 1978, he sold at a discount
and 20 April 1993 of the Regional Trial Court of Cebu City, Br. 17, check TCBT 551826 5 bearing an amount of P164,000.00, post dated
subject of the petition are SET ASIDE. The notice of garnishment March 31, 1979, drawn by petitioner, naming George King as payee
served on petitioner dated 3 February 1992 is ordered to SIHI. On December 19 and 26, 1978, he again sold to respondent
DISCHARGED. SO ORDERED. 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.

G.R. No. 93048 March 3, 1994 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,
BATAAN CIGAR AND CIGARETTE FACTORY, INC., petitioner, 1979, a stop payment order on all checks payable to George King,
vs. including check TCBT 551826. Subsequently, stop payment was also
THE COURT OF APPEALS and STATE INVESTMENT HOUSE, ordered on checks TCBT Nos. 608967 & 608968 on September 14 &
INC., respondents. 28, 1979, respectively, due to George King's failure to deliver the
tobacco leaves.
NOCON, J.:
Efforts of SIHI to collect from BCCFI having failed, it instituted the
present case, naming only BCCFI as party defendant. The trial court
For our review is the decision of the Court of Appeals in the case
pronounced SIHI as having a valid claim being a holder in due
entitled "State Investment House, Inc. v. Bataan Cigar & Cigarette
course. It further said that the non-inclusion of King Tim Pua George
Factory Inc.," 1 affirming the decision of the Regional Trial Court 2 in a
as party defendant is immaterial in this case, since he, as payee, is
complaint filed by the State Investment House, Inc. (hereinafter
not an indispensable party.
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 main issue then is whether SIHI, a second indorser, a holder of
the private respondent in this case. 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 checks," although Article 541 9
of the Code of Commerce refers to
due course, thus: such instruments.

Sec. 52 A holder in due course is a holder who has taken the According to commentators, the negotiability of a check is not
instrument under the following conditions: affected by its being crossed, whether specially or generally. It may
legally be negotiated from one person to another as long as the one
(a) That it is complete and regular upon its face; who encashes the check with the drawee bank is another bank, or if
it is specially crossed, by the bank mentioned between the parallel
(b) That he became the holder of it before it was overdue, and lines. 10 This is specially true in England where the Negotiable
without notice that it had been previously dishonored, if such Instrument Law originated.
was the fact;
In the Philippine business setting, however, we used to be beset
(c) That he took it in good faith and for value; 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
(d) That at the time it was negotiated to him he had no notice will not even accept second indorsements on checks.
of any infirmity in the instrument or defect in the title of the
person negotiating it.
In order to preserve the credit worthiness of checks, jurisprudence
has pronounced that crossing of a check should have the following
Section 59 of the NIL further states that every holder is effects: (a) the check may not be encashed but only deposited in
deemed prima facie a holder in due course. However, when it is the bank; (b) the check may be negotiated only once to one who
shown that the title of any person who has negotiated the has an account with a bank; (c) and the act of crossing the check
instrument was defective, the burden is on the holder to prove that serves as warning to the holder that the check has been issued for a
he or some person under whom he claims, acquired the title as definite purpose so that he must inquire if he has received the
holder in due course. check pursuant to that purpose, otherwise, he is not a holder in due
course. 11
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. The foregoing was adopted in the case of SIHI v. IAC, supra. In that
Intermediate Appellate Court 7 wherein we made a discourse on the case, New Sikatuna Wood Industries, Inc. also sold at a discount to
effects of crossing of checks. SIHI three post dated crossed checks, issued by Anita Pea Chua
naming as payee New Sikatuna Wood Industries, Inc. Ruling that
As preliminary, a check is defined by law as a bill of exchange drawn SIHI was not a holder in due course, we then said:
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, The three checks in the case at bar had been crossed generally
traveler's check and crossed check. Crossed check is one where two and issued payable to New Sikatuna Wood Industries, Inc.
parallel lines are drawn across its face or across a corner thereof. It which could only mean that the drawer had intended the same
may be crossed generally or specially. for deposit only by the rightful person, i.e. the payee named
therein. Apparently, it was not the payee who presented the
A check is crossed specially when the name of a particular banker or same for payment and therefore, there was no proper
a company is written between the parallel lines drawn. It is crossed presentment, and the liability did not attach to the drawer.
generally when only the words "and company" are written or Thus, in the absence of due presentment, the drawer did not
nothing is written at all between the parallel lines. It may be issued become liable. Consequently, no right of recourse is available
so that the presentment can be made only by a bank. Veritably the to petitioner (SIHI) against the drawer of the subject checks,
Negotiable Instruments Law (NIL) does not mention "crossed private respondent wife (Anita), considering that petitioner is
 not the proper party authorized to make presentment of the G.R. No. L-2516 September 25, 1950
checks in question.
ANG TEK LIAN, petitioner,
xxx xxx xxx vs.
THE COURT OF APPEALS, respondent.
That the subject checks had been issued subject to the
condition that private respondents (Anita and her husband) on BENGZON, J.:
due date would make the back up deposit for said checks but
which condition apparently was not made, thus resulting in the For having issued a rubber check, Ang Tek Lian was convicted
non-consummation of the loan intended to be granted by of estafa in the Court of First Instance of Manila. The Court of
private respondents to New Sikatuna Wood Industries, Inc., Appeals affirmed the verdict.
constitutes a good defense against petitioner who is not a
holder in due course. 12 It appears that, knowing he had no funds therefor, Ang Tek Lian
drew on Saturday, November 16, 1946, the check Exhibits A upon
It is then settled that crossing of checks should put the holder on the China Banking Corporation for the sum of P4,000, payable to the
inquiry and upon him devolves the duty to ascertain the indorser's order of "cash". He delivered it to Lee Hua Hong in exchange for
title to the check or the nature of his possession. Failing in this money which the latter handed in act. On November 18, 1946, the
respect, the holder is declared guilty of gross negligence amounting next business day, the check was presented by Lee Hua Hong to the
to legal absence of good faith, contrary to Sec. 52(c) of the drawee bank for payment, but it was dishonored for insufficiency of
Negotiable Instruments Law, 13 and as such the consensus of funds, the balance of the deposit of Ang Tek Lian on both dates
authority is to the effect that the holder of the check is not a holder being P335 only.
in due course.
The Court of Appeals believed the version of Lee Huan Hong who
In the present case, BCCFI's defense in stopping payment is as good testified that "on November 16, 1946, appellant went to his
to SIHI as it is to George King. Because, really, the checks were (complainant's) office, at 1217 Herran, Paco, Manila, and asked him
issued with the intention that George King would supply BCCFI with to exchange Exhibit A which he (appellant) then brought with him
the bales of tobacco leaf. There being failure of consideration, SIHI is with cash alleging that he needed badly the sum of P4,000
not a holder in due course. Consequently, BCCFI cannot be obliged represented by the check, but could not withdraw it from the bank,
to pay the checks. 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
The foregoing does not mean, however, that respondent could not to meet Exhibit A, and because they used to borrow money from
recover from the checks. The only disadvantage of a holder who is each other, even before the war, and appellant owns a hotel and
not a holder in due course is that the instrument is subject to restaurant known as the North Bay Hotel, said complainant
defenses as if it were delivered to him, on the same date, the sum of P4,000 in cash; that
non-negotiable. 14 Hence, respondent can collect from the despite repeated efforts to notify him that the check had been
immediate indorser, in this case, George King. 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
WHEREFORE, finding that the court a quo erred in the application of complaint for estafa filed in connection therewith; and that
law, the instant petition is hereby GRANTED. The decision of the appellant has not paid as yet the amount of the check, or any part
Regional Trial Court as affirmed by the Court of Appeals is hereby thereof."
REVERSED. Cost against private respondent. SO ORDERED.
Inasmuch as the findings of fact of the Court of Appeals are final, A check payable to the order of cash is a bearer instrument.
the only question of law for decision is whether under the facts Bacal vs. National City Bank of New York (1933), 146 Misc.,
found, estafa had been accomplished. 732; 262 N. Y. S., 839; Cleary vs. De Beck Plate Glass Co.
(1907), 54 Misc., 537; 104 N. Y. S., 831; Massachusetts
Article 315, paragraph (d), subsection 2 of the Revised Penal Code, Bonding & Insurance Co. vs. Pittsburgh Pipe & Supply Co.
punishes swindling committed "By post dating a check, or issuing (Tex. Civ. App., 1939), 135 S. W. (2d), 818. See also H. Cook
such check in payment of an obligation the offender knowing that at & Son vs. Moody (1916), 17 Ga. App., 465; 87 S. E., 713.
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, Where a check is made payable to the order of "cash", the
and without informing the payee of such circumstances". word cash "does not purport to be the name of any person",
and hence the instrument is payable to bearer. The drawee
We believe that under this provision of law Ang Tek Lian was bank need not obtain any indorsement of the check, but may
properly held liable. In this connection, it must be stated that, as pay it to the person presenting it without any
explained in People vs. Fernandez (59 Phil., 615), estafa is indorsement. . . . (Zollmann, Banks and Banking, Permanent
committed by issuing either a postdated check or an ordinary check Edition, Vol. 6, p. 494.)
to accomplish the deceit.
Of course, if the bank is not sure of the bearer's identity or financial
It is argued, however, that as the check had been made payable to solvency, it has the right to demand identification and /or assurance
"cash" and had not been endorsed by Ang Tek Lian, the defendant is against possible complications, for instance, (a) forgery of
not guilty of the offense charged. Based on the proposition that "by drawer's signature, (b) loss of the check by the rightful owner, (c)
uniform practice of all banks in the Philippines a check so drawn is raising of the amount payable, etc. The bank may therefore require,
invariably dishonored," the following line of reasoning is advanced in for its protection, that the indorsement of the drawer or of some
support of the argument: other person known to it be obtained. But where the Bank is
satisfied of the identity and /or the economic standing of the bearer
. . . When, therefore, he (the offended party ) accepted the who tenders the check for collection, it will pay the instrument
check (Exhibit A) from the appellant, he did so with full without further question; and it would incur no liability to the drawer
knowledge that it would be dishonored upon presentment. In in thus acting.
that sense, the appellant could not be said to have acted
fraudulently because the complainant, in so accepting the A check payable to bearer is authority for payment to holder.
check as it was drawn, must be considered, by every rational Where a check is in the ordinary form, and is payable to
consideration, to have done so fully aware of the risk he was bearer, so that no indorsement is required, a bank, to which
running thereby." (Brief for the appellant, p. 11.) it is presented for payment, need not have the holder
identified, and is not negligent in falling to do so. . . . (Michie
We are not aware of the uniformity of such practice. Instances have on Banks and Banking, Permanent Edition, Vol. 5, p. 343.)
undoubtedly occurred wherein the Bank required the indorsement of
the drawer before honoring a check payable to "cash." But cases . . . Consequently, a drawee bank to which a bearer check is
there are too, where no such requirement had been made . It presented for payment need not necessarily have the holder
depends upon the circumstances of each transaction. identified and ordinarily may not be charged with negligence
in failing to do so. See Opinions 6C:2 and 6C:3 If the bank
Under the Negotiable Instruments Law (sec. 9 [d], a check drawn has no reasonable cause for suspecting any irregularity, it
payable to the order of "cash" is a check payable to bearer, and the will be protected in paying a bearer check, "no matter what
bank may pay it to the person presenting it for payment without the facts unknown to it may have occurred prior to the
drawer's indorsement. presentment." 1 Morse, Banks and Banking, sec. 393.
 Although a bank is entitled to pay the amount of a bearer IT IS SO ORDERED. (Rollo P. 126)
check without further inquiry, it is entirely reasonable for the
bank to insist that holder give satisfactory proof of his The antecedent facts of this case are as follows:
identity. . . . (Paton's Digest, Vol. I, p. 1089.)
In its complaint dated May 9,1968, filed with the City Court of
Anyway, it is significant, and conclusive, that the form of the check Manila, (Civil Case No. 170859) against the private respondents for
Exhibit A was totally unconnected with its dishonor. The Court of the collection and payment of P4,500.00 representing the face value
Appeals declared that it was returned unsatisfied because the of an unpaid and dishonored cheek, the petitioner alleged, among
drawer had insufficient funds not because the drawer's others, that on September 13, 1960, the private respondents
indorsement was lacking. approached the petitioner at its office in Manila and asked the latter
to extend to them an accommodation loan in the sum of P4,500.00,
Wherefore, there being no question as to the correctness of the Philippine Currency, which they needed in their business, and which
penalty imposed on the appellant, the writ ofcertiorari is denied and they promised to pay, jointly and severally, in one month time; that
the decision of the Court of Appeals is hereby affirmed, with costs. they proposed to pay the petitioner interest thereon at the rate of
14% per annum, as in fact they delivered to the petitioner the China
Banking Corporation Check No. VN-915564, dated September 13,
1960, for P4,500.00, drawn by Dy Hian Tat, and signed by them at
the back of said check, with the assurance that after one month
G.R. No. L-36549 October 5, 1988
from September 13, 1960, the said check would be redeemed by
them by paying cash in the sum of P4,500.00, or the said check can
FAR EAST REALTY INVESTMENT INC., petitioner-appellant, be presented for payment on or immediately after one month and
vs. said bank would honor the same; that, in order to accomodate the
THE HONORABLE COURT OF APPEALS, DY HIAN TAT, SIY CHEE private respondents, the petitioner agreed and actually extended to
and GAW SUY AN, respondents-appellees. the private respondents an accommodation loan in the sum of
P4,500.00 under the aforesaid conditions proposed by the private
PARAS, J. respondents, which amount was delivered to the later; that on
March 5, 1964, the aforesaid check was presented for payment to
This is a petition for review of the February 12, 1973 decision of the the China Banking Corporation, but said check bounced and was not
Court of Appeals * in CA-G.R. No. 01031-SP, "Dy Hian Tat, et al. v. cashed by said bank, for the reason that the current account of the
Hon. Alberto Francisco, et als.", reversing the judgment of the Court drawer thereof had already been closed; and that subsequently, the
of First Instance of Manila, which ordered private respondents to petitioner demanded from the private respondents the payment of
pay, jointly and severally, the petitioner the sum of P4,500.00 plus their aforesaid loan obligation, but the latter failed and refused to
interest at the rate of 14% per annum, from September 13, 1960, pay notwithstanding repeated demands therefor (Rollo, pp. 35-37).
until fully paid, plus the sum of P1,000.00 as attorney's fees.
Private respondent Gaw Suy An filed an answer with compulsory
The dispositive portion of respondent appellate court's decision counterclaim dated July 8, 1968 denying the material allegations
reads: contained in the complaint and by way of special and affirmative
defenses alleged that the petitioner has no cause of action against
IN VIEW WHEREOF, this Court is constrained to grant as it him because as it appears on the endorsement at the back of CBC
now grants, the remedy prayed for; the judgment sought to Check No. VN-915564, he signed said endorsement for his principal,
be reviewed is hereby reversed; complaint is dismissed; but the Victory Hardware and not for his own individual account, hence,
for lack of sufficient merit, the claim of defendants for could not be made personally liable therefor and granting that he
attorney's fees and damages is overruled; costs are however acted in his own capacity as the endorser, he has been wholly
adjudged against plaintiff in all instances.
discharged by delay in presentment of the check for payment. the sum of P500.00 by way of attorney's fees, plus the costs
(Rollo, pp. 39-40). of suit.

Private respondent Dy Hian Tat likewise filed his answer with The counterclaim filed by the defendants Gaw Suy An and
compulsory counterclaim, dated February 27, 1970, denying the Dy Hiat Tat are hereby dismissed for lack of basis.
material allegations contained in the complaint and by way of
special and affirmative defenses alleged that he never had any SO ORDERED. (Rollo, p. 45).
transaction or negotiation of any check with the petitioner at
anytime, so it could not be true that he and the other defendants The decision of the city court was appealed by the private
approached the petitioner on September 13, 1960, for an respondents to the Court of First Instance of Manila, where the case
accommodation loan of P4,500.00 for which they delivered to the was heard de novo for lack of transcript of stenographic notes taken
petitioner CBC Check No. VN-915564 dated September 13, 1960 in the city court.
because as far as he could remember, said check was delivered by
him to Sin Chin Juat Grocery and not to the petitioner; that the
manner the said check was negotiated is clearly evident by the After trial, the Court of First Instance of Manila, Branch
endorsement at its back which clearly belies the claim of the IX, *** rendered a decision in Civil Case No. 80583, dated October
petitioner that he (Dy Hian Tat) was one of those who approached 15, 1971, affirming the decision of the city court, the dispositive
the petitioner at its office on September 13, 1960 to deliver the portion of which reads as follows:
check in exchange for an accommodation loan of P4,500.00; that
according to the immediate endorser, Gaw Suy An, who endorsed WHEREFORE' in view of all the foregoing considerations,
the check for his principal, Victory Hardware, this check was judgment is hereby rendered in favor of the plaintiff and
delivered to the Asian Surety & Insurance Co., Inc., to be applied to against defendants Dy Hian Tat, Gaw Suy An and Siy Chee
the indebtedness of the Victory Hardware with said Insurance ordering the latter to pay, jointly and severally, the plaintiff
Company; and that petitioner not being a holder of the check for the sum of P4,500.00, plus interest at the rate of 14% per
value, has no recourse against the immediate endorser, and neither annum, from September 13, 1960, until fully paid, plus the
with the drawer thereof, and considering that this check in question sum of Pl,000.00 in the concept of attorney's fees; and costs
was dated September 13, 1960 and deposited only for payment on of suit.
March 5, 1964, this unreasonable delay in presentment wholly
discharged not only the endorser but also the drawer (Rollo, pp. 43- SO ORDERED. (Rollo, p. 9).
44).
The private respondents filed a petition for review of the foregoing
On March 31, 1970, private respondent Siy CHEE was declared in decision with the Court of Appeals.
default
(Rollo, p. 45). On February 12, 1973, the appellate court, finding that the
questioned check was not given as collateral to guarantee a loan
After hearing, the City Court of Manila ** rendered its decision in secured by the three private respondents who allegedly came as a
favor of the petitioner, the dispositive portion of which reads: group to the Far East Realty Investment, Inc., on September 13,
1960, but passed through other hands before reaching the
After considering the evidence presented by the parties, petitioner and the said check was not presented within a reasonable
judgment is hereby rendered, ordering the three defendants time and after its issuance, reversed the decision of the Court of
to pay the plaintiff, jointly and severally, the sum of First Instance (Rollo, p. 126).
P4,500.00 with interest thereon at the legal rate from
September 13, 1960 until the said amount is fully paid; plus Its motion for reconsideration having been denied, petitioner filed
the instant petition.
The main issue in this case is whether or not presentment for It is further argued by the private respondents that in order to
payment and notice of dishonor of the questioned check were made charge the persons secondarily liable, such as drawer and
within reasonable time. endorsers, the instrument must be presented for payment on the
date and period therein mentioned in the instrument, if it is payable
The petitioner argues that presentment for payment may be on a fixed date, or within a reasonable time after issue, otherwise,
dispensed with if it will be useless. Hence, the drawer is liable upon the drawer and endorsers are discharged from liability. The
a check although it has not been presented to the bank for payment questioned check was dated September 13, 1960. Granting that it
and although payment has not been refused, where such a was agreed that it will only be deposited after one month from its
presentment would be useless because of the conduct or action of date, it should have been deposited for payment after one month
the drawer in the matter or where the check is drawn on insufficient and not only on March 5, 1964. This delay in the presentment for
funds or no funds. Likewise, presentment for payment is not payment of the check cannot be construed as a reasonable time.
required in order to charge the drawer, and that notice of dishonor
is not required to be given to the drawer where he has no right to The petition is devoid of merit.
expect or require that the drawee or acceptor wig pay or honor the
instrument. Therefore, where presentment for payment and notice Where the instrument is not payable on demand, presentment must
of dishonor are not necessary as when funds are insufficient to meet be made on the day it fags due. Where it is payable on demand,
a check, the drawer is liable, whether such presentment and notice presentment must be made within a reasonable time after issue,
be totally omitted or merely delayed. However, in a situation where except that in the case of a bill of exchange, presentment for
the presentment and/or notice is required to be made without payment will be sufficient if made within a reasonable time after the
unreasonable delay, the drawer is discharged "pro tanto" or only up last negotiation thereof. (Section 71, Negotiable Instruments Law).
to the degree of the loss suffered, by reason of delay. Since
discharge is the exception to the general rule, the loss must be Notice may be given as soon as the instrument is dishonored; and
proven by the drawer. The drawer in the instant case has not unless delay is excused must be given within the time fixed by the
presented in evidence any loss which he may have suffered by law (Section 102, Negotiable Instruments Law).
reason of the delay.
No hard and fast demarcation line can be drawn between what may
On the other hand, the private respondents maintain that the be considered as a reasonable or an unreasonable time, because
questioned check was in fact drawn by Dy Bun Kim son of Dy Hiat "reasonable time" depends upon the peculiar facts and
Tat, and delivered to the Sin Chin Juat Grocery in payment of grocery circumstances in each case (Tolentino, Commentaries and
goods for the Goodyear Climber and not to the Far East with which Jurisprudence on Commercial Laws of the Philippines, Vol. I, Eighth
private respondents have no transaction of any kind. Such being the Edition, p. 327).
case, said check was not delivered directly to the Far East in
exchange for the alleged P4,500.00 as claimed by William Li Yao.
Therefore, the alleged cash of P4,500.00 claimed to have been It is obvious in this case that presentment and notice of dishonor
delivered by Li Yao on September 13, 1960 could not in fact be were not made within a reasonable time.
considered as the consideration for Far East as holder of the check
because said delivery of the check in exchange for the alleged "Reasonable time" has been defined as so much time as is
P4,500.00 is contrary to the findings of fact by the Court of Appeals. necessary under the circumstances for a reasonable prudent and
Petitioner, therefore, cannot be considered a holder of the check for diligent man to do, conveniently, what the contract or duty requires
value and in due course. Whether there was due presentment or not should be done, having a regard for the rights, and possibility of
of the check, or whether there was notice of dishonor or not to the loss, if any, to the other party (Citizens' Bank Bldg. v. L & E.
drawer and endorsers, the petitioner cannot recover the amount of Wertheirmer 189 S.W. 361, 362, 126 Ark, 38, Ann. Cas. 1917 E,
P4,500.00 which was in fact not delivered to the private 520).
respondents nor the amount of the check for lack of consideration.
In the instant case, the check in question was issued on September reduced amount on that date, the car was detained inside the
13, 1960, but was presented to the drawee bank only on March 5, bank's compound.
1964, and dishonored on the same date. After dishonor by the
drawee bank, a formal notice of dishonor was made by the On August 28, 1995, Dr. Gueco went to the bank and talked with its
petitioner through a letter dated April 27, 1968. Under these Administrative Support, Auto Loans/Credit Card Collection Head,
circumstances, the petitioner undoubtedly failed to exercise Jefferson Rivera. The negotiations resulted in the further reduction
prudence and diligence on what he ought to do al. required by law. of the outstanding loan to P150,000.00.
The petitioner likewise failed to show any justification for the
unreasonable delay. 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
PREMISES CONSIDERED, the petition is DENIED and the decision of refusal to sign the Joint Motion to Dismiss. It is the contention of the
the Court of Appeals is AFFIRMED. SO ORDERED. 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
G.R. No. 141968 February 12, 2001 compromise and to preclude future filing of claims, counterclaims or
suits for damages.
THE INTERNATIONAL CORPORATE BANK (now UNION BANK
OF THE PHILIPPINES), petitioner, After several demand letters and meetings with bank
vs. representatives, the respondents Gueco spouses initiated a civil
SPS. FRANCIS S. GUECO and MA. LUZ E. GUECO, respondents. 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
KAPUNAN, J.:
On appeal to the Regional Trial Court, Branch 227 of Quezon City,
The respondent Gueco Spouses obtained a loan from petitioner
the decision of the Metropolitan Trial Court was reversed. In its
International Corporate Bank (now Union Bank of the Philippines) to
decision, the RTC held that there was a meeting of the minds
purchase a car - a Nissan Sentra 1600 4DR, 1989 Model. In
between the parties as to the reduction of the amount of
consideration thereof, the Spouses executed promissory notes
indebtedness and the release of the car but said agreement did not
which were payable in monthly installments and chattel mortgage
include the signing of the joint motion to dismiss as a condition sine
over the car to serve as security for the notes.1wphi1.nt
qua non for the effectivity of the compromise. The court further
ordered the bank:
The Spouses defaulted in payment of installments. Consequently,
the Bank filed on August 7, 1995 a civil action docketed as Civil
1. to return immediately the subject car to the appellants in
Case No. 658-95 for "Sum of Money with Prayer for a Writ of
good working condition; Appellee may deposit the Manager's
Replevin"1 before the Metropolitan Trial Court of Pasay City, Branch
check - the proceeds of which have long been under the
45.2 On August 25, 1995, Dr. Francis Gueco was served summons
control of the issuing bank in favor of the appellee since its
and was fetched by the sheriff and representative of the bank for a
issuance, whereas the funds have long been paid by
meeting in the bank premises. Desi Tomas, the Bank's Assistant Vice
appellants to .secure said Manager's Check, over which
President demanded payment of the amount of P184,000.00 which
appellants have no control;
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
 2. to pay the appellants the sum of P50,000.00 as moral III
damages; P25,000.00 as exemplary damages, and
P25,000.00 as attorney's fees, and THE COURT OF APPEALS ERRED IN HOLDING THAT THE
PETITIONER RETURN THE SUBJECT CAR TO THE
3. to pay the cost of suit. RESPONDENTS, WITHOUT MAKING ANY PROVISION FOR THE
ISSUANCE OF THE NEW MANAGER'S/CASHIER'S CHECK BY
In other respect, the decision of the Metropolitan Trial Court THE RESPONDENTS IN FAVOR OF THE PETITIONER IN LIEU OF
Branch 33 is hereby AFFIRMED.4 THE ORIGINAL CASHIER'S CHECK THAT ALREADY BECAME
STALE.6
The case was elevated to the Court of Appeals, which on February
17, 2000, issued the assailed decision, the decretal portion of which As to the first issue, we find for the respondents. The issue as to
reads: what constitutes the terms of the oral compromise or any
subsequent novation is a question of fact that was resolved by the
WHEREFORE, premises considered, the petition for review on Regional Trial Court and the Court of Appeals in favor of
certiorari is hereby DENIED and the Decision of the Regional respondents. It is well settled that the findings of fact of the lower
Trial Court of Quezon City, Branch 227, in Civil Case No. Q- court, especially when affirmed by the Court of Appeals, are binding
97-31176, for lack of any reversible error, is AFFIRMED in upon this Court.7 While there are exceptions to this rule,8 the
toto. Costs against petitioner. present case does not fall under anyone of them, the petitioner's
claim to the contrary, notwithstanding.
SO ORDERED.5
Being an affirmative allegation, petitioner has the burden of
evidence to prove his claim that the oral compromise entered into
The Court of Appeals essentially relied on the respect accorded to by the parties on August 28, 1995 included the stipulation that the
the finality of the findings of facts by the lower court and on the parties would jointly file a motion to dismiss. This petitioner failed to
latter's finding of the existence of fraud which constitutes the basis do. Notably, even the Metropolitan Trial Court, while ruling in favor
for the award of damages. of the petitioner and thereby dismissing the complaint, did not make
a factual finding that the compromise agreement included the
The petitioner comes to this Court by way of petition for review condition of the signing of a joint motion to dismiss.
on certiorari under Rule 45 of the Rules of Court, raising the
following assigned errors: The Court of Appeals made the factual findings in this wise:

I In support of its claim, petitioner presented the testimony of

Mr. Jefferson Rivera who related that respondent Dr. Gueco
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE was aware that the signing of the draft of the Joint Motion to
WAS NO AGREEMENT WITH RESPECT TO THE EXECUTION OF Dismiss was one of the conditions set by the bank for the
THE JOINT MOTION TO DISMISS AS A CONDITION FOR THE acceptance of the reduced amount of indebtedness and the
COMPROMISE AGREEMENT. release of the car. (TSN, October 23, 1996, pp. 17-21, Rollo,
pp. 18, 5). Respondents, however, maintained that no such
II condition was ever discussed during their meeting of August
28, 1995 (Rollo, p. 32).
THE COURT OF APPEALS ERRED IN GRANTING MORAL AND
EXEMPLARY DAMAGES AND ATTORNEY'S FEES IN FAVOR OF The trial court, whose factual findings are entitled to respect
THE RESPONDENTS. since it has the 'opportunity to directly observe the witnesses
and to determine by their demeanor on the stand the The lower court, on the other hand, expressly made a finding
probative value of their testimonies' (People vs. Yadao, et al. that petitioner failed to include the aforesaid signing of the
216 SCRA 1, 7 [1992]), failed to make a categorical finding Joint Motion to Dismiss as part of the agreement. In
on the issue. In dismissing the claim of damages of the dismissing petitioner's claim, the lower court declared, thus:
respondents, it merely observed that respondents are not
entitled to indemnity since it was their unjustified reluctance 'If it is true, as the appellees allege, that the signing
to sign of the Joint Motion to Dismiss that delayed the release of the joint motion was a condition sine qua nonfor
of the car. The trial court opined, thus: the reduction of the appellants' obligation, it is only
reasonable and logical to assume that the joint
'As regards the third issue, plaintiffs' claim for motion should have been shown to Dr. Gueco in the
damages is unavailing. First, the plaintiffs could have August 28, 1995 meeting. Why Dr. Gueco was not
avoided the renting of another car and could have given a copy of the joint motion that day of August
avoided this litigation had he signed the Joint Motion 28, 1995, for his family or legal counsel to see to be
to Dismiss. While it is true that herein defendant can brought signed, together with the P150,000.00 in
unilaterally dismiss the case for collection of sum of manager's check form to be submitted on the
money with replevin, it is equally true that there is following day on August 29, 1995? (sic) [I]s a question
nothing wrong for the plaintiff to affix his signature in whereby the answer up to now eludes this Court's
the Joint Motion to Dismiss, for after all, the dismissal comprehension. The appellees would like this Court to
of the case against him is for his own good and believe that Dr Gueco was informed by Mr. Rivera
benefit. In fact, the signing of the Joint Motion to Rivera of the bank requirement of signing the joint
Dismiss gives the plaintiff three (3) advantages. First, motion on August 28, 1995 but he did not bother to
he will recover his car. Second, he will pay his show a copy thereof to his family or legal counsel that
obligation to the bank on its reduced amount of day August 28, 1995. This part of the theory of
P150,000.00 instead of its original claim of appellee is too complicated for any simple oral
P184,985.09. And third, the case against him will be agreement. The idea of a Joint Motion to Dismiss
dismissed. Plaintiffs, likewise, are not entitled to the being signed as a condition to the pushing through a
award of moral damages and exemplary damages as deal surfaced only on August 29, 1995.
there is no showing that the defendant bank acted
fraudulently or in bad faith.' (Rollo, p. 15) 'This Court is not convinced by the appellees'
posturing. Such claim rests on too slender a frame,
The Court has noted, however, that the trial court, in its being inconsistent with human experience.
findings of facts, clearly indicated that the agreement of the Considering the effect of the signing of the Joint
parties on August 28, 1995 was merely for the lowering of Motion to Dismiss on the appellants' substantive right,
the price, hence - it is more in accord with human experience to expect
Dr. Gueco, upon being shown the Joint Motion to
'xxx On August 28, 1995, bank representative Dismiss, to refuse to pay the Manager's Check and for
Jefferson Rivera and plaintiff entered into an oral the bank to refuse to accept the manager's check.
compromise agreement, whereby the original claim of The only logical explanation for this inaction is that
the bank of P184,985.09 was reduced to P150,000.00 Dr. Gueco was not shown the Joint Motion to Dismiss
and that upon payment of which, plaintiff was in the meeting of August 28, 1995, bolstering his
informed that the subject motor vehicle would be claim that its signing was never put into consideration
released to him.' (Rollo, p. 12) 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 iota of evidence to overcome this presumption. In fact, the act of
meritorious. In finding the petitioner liable for damages, both .the petitioner bank in lowering the debt of Dr. Gueco from P184,000.00
Regional Trial Court and the Court of Appeals ruled that there was to P150,000.00 is indicative of its good faith and sincere desire to
fraud on the part of the petitioner. The CA thus declared: 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
The lower court's finding of fraud which became the basis of blame. Necessarily, the claim for exemplary damages must fait. In
the award of damages was likewise sufficiently proven. Fraud no way, may the conduct of petitioner be characterized as "wanton,
under Article 1170 of the Civil Code of the Philippines, as fraudulent, reckless, oppressive or malevolent."13
amended is the 'deliberate and intentional evasion of the
normal fulfillment of obligation' When petitioner refused to We, likewise, find for the petitioner with respect to the third
release the car despite respondent's tender of payment in assigned error. In the meeting of August 29, 1995, respondent Dr.
the form of a manager's check, the former intentionally Gueco delivered a manager's check representing the reduced
evaded its obligation and thereby became liable for moral amount of P150,000.00. Said check was given to Mr. Rivera, a
and exemplary damages, as well as attorney's fees.10 representative of respondent bank. However, since Dr. Gueco
refused to sign the joint motion to dismiss, he was made to execute
We disagree. a statement to the effect that he was withholding the payment of
the check.14 Subsequently, in a letter addressed to Ms. Desi Tomas,
Fraud has been defined as the deliberate intention to cause damage vice president of the bank, dated September 4, 1995, Dr. Gueco
or prejudice. It is the voluntary execution of a wrongful act, or a instructed the bank to disregard the 'hold order" letter and
willful omission, knowing and intending the effects which naturally demanded the immediate release of his car,15 to which the former
and necessarily arise from such act or omission; the fraud referred replied that the condition of signing the joint motion to dismiss must
to in Article 1170 of the Civil Code is the deliberate and intentional be satisfied and that they had kept the check which could be
evasion of the normal fulfillment of obligation.11 We fail to see how claimed by Dr. Gueco anytime.16 While there is controversy as to
the act of the petitioner bank in requiring the respondent to sign the whether the document evidencing the order to hold payment of the
joint motion to dismiss could constitute as fraud. True, petitioner check was formally offered as evidence by petitioners,17 it appears
may have been remiss in informing Dr. Gueco that the signing of a from the pleadings that said check has not been encashed.
joint motion to dismiss is a standard operating procedure of
petitioner bank. However, this can not in anyway have prejudiced The decision of the Regional Trial Court, which was affirmed in
Dr. Gueco. The motion to dismiss was in fact also for the benefit of toto by the Court of Appeals, orders the petitioner:
Dr. Gueco, as the case filed by petitioner against it before the lower
court would be dismissed with prejudice. The whole point of the 1. to return immediately the subject car to the appellants in
parties entering into the compromise agreement was in order that good working condition. Appellee may deposit the Manager's
Dr. Gueco would pay his outstanding account and in return Check - the proceeds of which have long been under the
petitioner would return the car and drop the case for money and control of the issuing bank in favor of the appellee since its
replevin before the Metropolitan Trial Court. The joint motion to issuance, whereas the funds have long been paid by
dismiss was but a natural consequence of the compromise appellants to secure said Manager's Check over which
agreement and simply stated that Dr. Gueco had fully settled his appellants have no control.18
obligation, hence, the dismissal of the case. Petitioner's act of
requiring Dr. Gueco to sign the joint motion to dismiss can not be Respondents would make us hold that petitioner should return the
said to be a deliberate attempt on the part of petitioner to renege car or its value and that the latter, because of its own negligence,
on the compromise agreement of the parties. It should, likewise, be should suffer the loss occasioned by the fact that the check had
noted that in cases of breach of contract, moral damages may only become stale.19 It is their position that delivery of the manager's
be awarded when the breach was attended by fraud or bad check produced the effect of payment20 and, thus, petitioner was
faith.12 The law presumes good faith. Dr. Gueco failed to present an negligent in opting not to deposit or use said check. Rudimentary
sense of justice and fair play would not countenance respondents' Even assuming that presentment is needed, failure to present for
position. 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
A stale check is one which has not been presented for payment present on time, thus, does not totally wipe out all liability. In fact,
within a reasonable time after its issue. It is valueless and, the legal situation amounts to an acknowledgment of liability in the
therefore, should not be paid. Under the negotiable instruments law, sum stated in the check. In this case, the Gueco spouses have not
an instrument not payable on demand must be presented for alleged, much less shown that they or the bank which issued the
payment on the day it falls due. When the instrument is payable on manager's check has suffered damage or loss caused by the delay
demand, presentment must be made within a reasonable time after or non-presentment. Definitely, the original obligation to pay
its issue. In the case of a bill of exchange, presentment is sufficient certainly has not been erased.
if made within a reasonable time after the last negotiation thereof. 21
It has been held that, if the check had become stale, it becomes
A check must be presented for payment within a reasonable time imperative that the circumstances that caused its non-presentment
after its issue,22 and in determining what is a "reasonable time," be determined.33 In the case at bar, there is no doubt that the
regard is to be had to the nature of the instrument, the usage of petitioner bank held on the check and refused to encash the same
trade or business with respect to such instruments, and the facts of because of the controversy surrounding the signing of the joint
the particular case.23 The test is whether the payee employed such motion to dismiss. We see no bad faith or negligence in this position
diligence as a prudent man exercises in his own affairs.24 This is taken by the Bank.1wphi1.nt
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 WHEREFORE, premises considered, the petition for review is given
demand which was long overdue by about two and a half (2-1/2) due course. The decision of the Court of Appeals affirming the
years was considered a stale check.25 Failure of a payee to encash a decision of the Regional Trial Court is SET ASIDE. Respondents are
check for more than ten (10) years undoubtedly resulted in the further ordered to pay the original obligation amounting to
check becoming stale.26 Thus, even a delay of one (1) week27 or two P150,000.00 to the petitioner upon surrender or cancellation of the
(2) days,28 under the specific circumstances of the cited cases manager's check in the latter's possession, afterwhich, petitioner is
constituted unreasonable time as a matter of law. to return the subject motor vehicle in good working condition. SO
ORDERED.
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 [G.R. No. 159590. October 18, 2004]
itself, and accepted in advance by the act of its issuance. 29 It is
HONGKONG AND SHANGHAI BANKING CORPORATION
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 LIMITED, petitioner, vs. CECILIA DIEZ
obligation of the bank which issues it and constitutes its written CATALAN,respondent.
promise to pay upon demand. The mere issuance of it is considered [G.R. No. 159591. October 18, 2004]
an acceptance thereof. If treated as promissory note, the drawer HSBC INTERNATIONAL TRUSTEE LIMITED, petitioner,
would be the maker and in which case the holder need not prove vs. CECILIA DIEZ CATALAN, respondent.
presentment for payment or present the bill to the drawee for
acceptance.31
DECISION
AUSTRIA-MARTINEZ, J.:
 Before us are two petitions for review on certiorari under Rule Sometime in March 1997, Thomson issued five HSBANK checks
45 of the Rules of Court separately filed by the Hongkong and payable to Catalan, to wit:
Shanghai Banking Corporation Limited (HSBANK) and HSBC
International Trustee Limited (HSBC TRUSTEE). They seek the CHECK NO. DATE AMOUNT
reversal of the consolidated Decision, [1] dated August 14, 2003, of
the Court of Appeals (CA) in CA-G.R. SP Nos. 75756 and 75757, 807852 Mar. 15, 1997 $600,000.00
which dismissed the petitions for certiorari of herein petitioners 807853 Mar. 17, 1997 800,000.00
assailing the Order, dated May 15, 2002, of the Regional Trial Court, 807854 Mar. 17, 1997 600,000.00
Branch 44, Bacolod City (RTC) in Civil Case No. 01-11372 that 807855 Mar. 22, 1997 600,000.00
denied their respective motions to dismiss the amended complaint 807856 Mar. 23, 1997 600,000.00
of respondent Cecilia Diez Catalan. TOTAL $3,200,000.0
The factual antecedents are as follows: 0

On January 29, 2001, respondent filed before the RTC, a The checks when deposited were returned by HSBANK
complaint for a sum of money with damages against petitioner purportedly for reason of payment stopped pending confirmation,
HSBANK, docketed as Civil Case No. 01-11372, due to HSBANKs despite the fact that the checks were duly funded. On March 18,
alleged wanton refusal to pay her the value of five HSBANK checks 1997, Thomson wrote a letter to a certain Ricky Sousa [7] of HSBANK
issued by Frederick Arthur Thomson (Thomson) amounting to confirming the checks he issued to Catalan and requesting that all
HK$3,200,000.00.[2] his checks be cleared. On March 20, 1997, Thomson wrote another
letter to Sousa of HSBANK requesting an advice in writing to be sent
On February 7, 2001, summons was served on HSBANK at to the Philippine National Bank, through the fastest means, that the
the Enterprise Center, Tower I, Ayala Avenue corner Paseo de Roxas checks he previously issued to Catalan were already
St.,Makati City.[3] HSBANK filed a Motion for Extension of Time to File cleared. Thereafter, Catalan demanded that HSBANK make good
Answer or Motion to Dismiss dated February 21, 2001. [4] Then, it the checks issued by Thomson. On May 16, 1997, Marilou A.
filed a Motion to Dismiss, dated March 8, 2001, on the grounds that Lozada, personal secretary and attorney-in-fact of Thomson, wrote a
(a) the RTC has no jurisdiction over the subject matter of the letter to Sousa of HSBANK informing him that HSBANKs failure to
complaint; (b) the RTC has not acquired jurisdiction for failure of the clear all the checks had saddened Thomson and requesting that the
plaintiff to pay the correct filing or docket fees; (c) the RTC has no clearing of the checks be facilitated. Subsequently, Thomson died
jurisdiction over the person of HSBANK; (d) the complaint does not and Catalan forwarded her demand to HSBC TRUSTEE. Catalan sent
state a cause of action against HSBANK; and (e) plaintiff engages in photocopies of the returned checks to HSBC TRUSTEE. Not satisfied,
forum-shopping.[5] HSBC TRUSTEE through deceit and trickery, required Catalan, as a
condition for the acceptance of the checks, to submit the original
On September 10, 2001, Catalan filed an Amended Complaint
copies of the returned checks, purportedly, to hasten payment of
impleading petitioner HSBC TRUSTEE as co-defendant and invoking
her claim. HSBC TRUSTEE succeeded in its calculated deception
Article 19 of the Civil Code as basis for her cause of action. [6]
because on April 21, 1999, Catalan and her former counsel went to
The Amended Complaint alleges: Hongkong at their own expense to personally deliver the originals of
the returned checks to the officers of HSBC TRUSTEE, anxious of
Defendants HSBANK and HSBC TRUSTEE, doing business in the receiving the money value of the checks but HSBC TRUSTEE despite
Philippines, are corporations duly organized under the laws of the receipt of the original checks, refused to pay Catalans
British Virgin Islands with head office at 1 Grenville Street, St. Helier claim. Having seen and received the original of the checks, upon its
Jersey, Channel Islands and with branch offices at Level 12, 1 request, HSBC TRUSTEE is deemed to have impliedly accepted the
Queens Road Central, Hongkong and may be served with summons checks. Moreover, the refusal of HSBANK and HSBC TRUSTEE to pay
and other court processes through their main office in Manila with the checks is equivalent to illegal freezing of ones deposit. On the
address at HSBC, the Enterprise Center, Tower 1, Ayala Avenue assurance of HSBC TRUSTEE that her claim will soon be paid, as she
corner Paseo de Roxas Street, Makati City. was made to believe that payments of the checks shall be made by
HSBC TRUSTEE upon sight, the unsuspecting Catalan left the acquired jurisdiction over the person of HSBANK for improper
originals of the checks with HSBC TRUSTEE and was given only an service of summons; and, (e) it did not submit to the jurisdiction of
acknowledgment receipt. Catalan made several demands and after the RTC by filing a motion for extension of time to file a motion to
several more follow ups, on August 16, 1999, Phoenix Lam, Senior dismiss.[10]
Vice President of HSBC TRUSTEE, in obvious disregard of her valid
claim, informed Catalan that her claim is disapproved. No reason or Meanwhile, on October 17, 2001, summons for HSBC TRUSTEE
explanation whatsoever was made why her claim was disapproved, was tendered to the In House Counsel of HSBANK (Makati Branch) at
neither were the checks returned to her. Catalan appealed for the Enterprise Center, Tower 1, Ayala Avenue corner Paseo de
fairness and understanding, in the hope that HSBC TRUSTEE would Roxas, Makati. Without submitting itself to the jurisdiction of the
act fairly and justly on her claim but these demands were met by a RTC, HSBC TRUSTEE filed a Special Appearance for Motion to
stonewall of silence. On June 9, 2000, Catalan through counsel sent Dismiss Amended Complaint, dated October 29, 2001, questioning
a last and final demand to HSBC TRUSTEE to remit the amount the jurisdiction of the RTC over it.[11] HSBC TRUSTEE alleges that
covered by the checks but despite receipt of said letter, no payment tender of summons through HSBANK Makati did not confer upon the
was made. Clearly, the act of the HSBANK and HSBC TRUSTEE in RTC jurisdiction over it because: (a) it is a corporation separate and
refusing to honor and pay the checks validly issued by Thomson distinct from HSBANK; (b) it does not hold office at the HSBANK
violates the abuse of rights principle under Article 19 of the Civil Makati or in any other place in the Philippines; (c) it has not
Code which requires that everyone must act with justice, give authorized HSBANK Makati to receive summons for it; and, (d) it has
everyone his due and observe honesty and good faith. The refusal no resident agent upon whom summons may be served because it
of HSBANK and HSBC TRUSTEE to pay the checks without any valid does not transact business in the Philippines.
reason is intended solely to prejudice and injure Catalan. When Subsequently, HSBC TRUSTEE filed a Submission, dated
they declined payment of the checks despite instructions of the November 15, 2001, attaching the Affidavit executed in Hongkong
drawer, Thomson, to honor them, coupled with the fact that the by Phoenix Lam, Senior Vice-President of HSBC TRUSTEE, attesting
checks were duly funded, they acted in bad faith, thus causing to the fact that: 1) HSBC TRUSTEE has not done nor is it doing
damage to Catalan. A person may not exercise his right unjustly or business in the Philippines; 2) it does not maintain any office in
in a manner that is not in keeping with honesty or good faith, Makati or anywhere in the Philippines; 3) it has not appointed any
otherwise he opens himself to liability for abuse of right. [8] agent in Philippines; and 4) HSBANK Makati has no authority to
Catalan prays that HSBANK and HSBC TRUSTEE be ordered to receive any summons or court processes for HSBC TRUSTEE. [12]
pay P20,864,000.00 representing the value of the five checks at the On May 15, 2002, the RTC issued an Order denying the two
rate of P6.52 per HK$1 as of January 29, 2001 for the acts of motions to dismiss.[13] The RTC held that it has jurisdiction over the
HSBANK and HSBC TRUSTEE in refusing to pay the amount justly subject matter of the action because it is an action for damages
due her, in addition to moral and exemplary damages, attorneys under Article 19 of the Civil Code for the acts of unjustly refusing to
fees and litigation expenses.[9] honor the checks issued by Thomson and not a money claim against
On October 2, 2001, HSBANK filed a Motion to Dismiss Amended the estate of Thomson; that Catalan did not engage in forum-
Complaint on the grounds that: (a) the RTC has no jurisdiction over shopping because the elements thereof are not attendant in the
the subject matter of the complaint since the action is a money case; that the question of cause of action should be threshed out or
claim for a debt contracted by Thomson before his death which ventilated during the proceedings in the main action and after the
should have been filed in the estate or intestate proceedings of plaintiff and defendants have adduced evidence in their favor; that
Thomson; (b) Catalan engages in forum shopping by filing the suit it acquired jurisdiction over the person of defendants because the
and at the same time filing a claim in the probate proceeding filed question of whether a foreign corporation is doing business or not in
with another branch of the RTC; (c) the amended complaint states the Philippines cannot be a subject of a Motion to Dismiss but
no cause of action against HSBANK since it has no obligation to pay should be ventilated in the trial on the merits; and defendants
the checks as it has not accepted the checks and Catalan did not re- voluntarily submitted to the jurisdiction of the RTC setting up in their
deposit the checks or make a formal protest; (d) the RTC has not Motions to Dismiss other grounds aside from lack of jurisdiction.
 HSBANK and HSBC TRUSTEE filed separate motions for ARTHUR THOMSON, TO PAY SUBJECT CHECKS ISSUED BY THE LATE
reconsideration[14] but both proved futile as they were denied by the FREDERICK ARTHUR THOMSON, ADMITTEDLY IN PAYMENT OF HIS
RTC in an Order dated December 20, 2002.[15] INDEBTEDNESS TO CATALAN.
On February 21, 2003, Catalan moved to declare HSBANK and
HSBC TRUSTEE in default for failure to file their answer to the II.
amended complaint.
THE COURT OF APPEALS COMMITTED SERIOUS ERROR IN HOLDING
On March 5, 2003, HSBANK and HSBC TRUSTEE filed separate THAT THE AMENDED COMPLAINT DOES NOT SEEK TO ORDER
petitions for certiorari and/or prohibition with the CA, docketed as HSBANK AND HSBC INTERNATIONAL TRUSTEE LIMITED TO PAY THE
CA-G.R. SP Nos. 75756[16] and 75757,[17] respectively. OBLIGATION OF THE (SIC) FREDERICK ARTHUR THOMSON AS
EVIDENCED BY THE CHECKS, BUT PRAYS FOR DAMAGES EQUIVALENT
Subsequently, HSBANK and HSBC TRUSTEE filed before the RTC
OR COMPUTED ON THE BASIS OF THE VALUE OF THE CHECKS
separate Answers ad cautelam, both dated March 18, 2003, as a
BECAUSE THE DEFENDANTS FAILED TO COMPLY WITH THE
precaution against being declared in default and without prejudice
MANDATES OF ARTICLE 19 OF THE NEW CIVIL CODE.
to the separate petitions for certiorari and/or prohibition then
pending with the CA.[18]
III.
Meanwhile, the two petitions for certiorari before the CA were
consolidated and after responsive pleadings were filed, the cases THE COURT OF APPEALS COMMITTED SERIOUS ERROR IN HOLDING
were deemed submitted for decision. THAT ALLEGATIONS IN THE AMENDED COMPLAINT MAKE OUT A
In a consolidated Decision dated August 14, 2003, the CA CAUSE OF ACTION WHICH COULD MERIT A FAVORABLE JUDGMENT IF
dismissed the two petitions for certiorari. [19] The CA held that the FOUND TO BE TRUE, OR IN NOT HOLDING THAT THE AMENDED
filing of petitioners answers before the RTC rendered moot and COMPLAINT STATES NO CAUSE OF ACTION AGAINST HSBANK, AS
academic the issue of the RTCs lack of jurisdiction over the person DRAWEE BANK.
of the petitioners; that the RTC has jurisdiction over the subject
matter since it is one for damages under Article 19 of the Civil Code IV.
for the alleged unjust acts of petitioners and not a money claim
against the estate of Thomson; and, that the amended complaint THE COURT OF APPEALS COMMITTED SERIOUS ERROR IN
states a cause of action under Article 19 of the Civil Code which DISREGARDING THE FACT THAT CATALAN ENGAGED IN FORUM
could merit a favorable judgment if found to be true. The CA noted SHOPPING BY FILING THE AMENDED COMPLAINT WHILE HER
that Catalan may have prayed for payment of the value of the PETITION FOR THE PROBATE OF THE SUPPOSED WILL OF THE
checks but ratiocinated that she merely used the value as basis for DECEASED FREDERICK ARTHUR THOMSON IS PENDING WITH
the computation of the damages. ANOTHER BRANCH OF THE COURT A QUO.
Hence, the present petitions.
In G.R. No. 159590, HSBANK submits the following assigned
errors: V.

I. THE COURT OF APPEALS COMMITTED SERIOUS ERROR IN HOLDING

THAT HSBANK HAD SUBMITTED TO THE JURISDICTION OF THE
THE COURT OF APPEALS COMMITTED SERIOUS ERROR IN HOLDING COURT A QUO BY SUBMITTING AN ANSWER TO THE AMENDED
THAT THE COURT A QUO, ACTING AS AN (SIC) REGULAR COURT, HAS COMPLAINT.[20]
JURISDICTION OVER THE AMENDED COMPLAINT SEEKING TO ORDER
HSBC TRUSTEE, THE EXECUTOR OF THE DECEASED FREDERICK
 In G.R. No. 159591, HSBC TRUSTEE also assigns the foregoing We shall resolve the issue in seriatim.
first, second and fifth errors as its own.[21] In addition, it claims that:
Does the complaint state a cause of action against HSBANK and
HSBC TRUSTEE?
THE COURT OF APPEALS COMMITTED SERIOUS ERROR IN NOT
ORDERING THE DISMISSAL OF THE AMENDED COMPLAINT AGAINST The elementary test for failure to state a cause of action is
HSBC TRUSTEE DESPITE THE FACT IT HAS NOT BEEN DULY SERVED whether the complaint alleges facts which if true would justify the
WITH SUMMONS. [22] relief demanded. Stated otherwise, may the court render a valid
judgment upon the facts alleged therein? [23] The inquiry is into the
HSBANK and HSBC TRUSTEE contend in common that Catalan sufficiency, not the veracity of the material allegations. [24] If the
has no cause of action for abuse of rights under Article 19 of the allegations in the complaint furnish sufficient basis on which it can
Civil Code; that her complaint, under the guise of a claim for be maintained, it should not be dismissed regardless of the defense
damages, is actually a money claim against the estate of Thomson that may be presented by the defendants. [25]
arising from checks issued by the latter in her favor in payment of
Catalan anchors her complaint for damages on Article 19 of the
indebtedness.
Civil Code. It speaks of the fundamental principle of law and human
HSBANK claims that the money claim should be dismissed on conduct that a person "must, in the exercise of his rights and in the
the ground of forum-shopping since Catalan also filed a petition for performance of his duties, act with justice, give every one his due,
probate of the alleged last will of Thomson before RTC, Branch 48, and observe honesty and good faith." It sets the standards which
Bacolod City, docketed as Spec. Proc No. 00-892. In addition, may be observed not only in the exercise of ones rights but also in
HSBANK imputes error upon the CA in holding that by filing an the performance of ones duties. When a right is exercised in a
answer to the amended complaint, petitioners are estopped from manner which does not conform with the norms enshrined in Article
questioning the jurisdiction of the RTC. 19 and results in damage to another, a legal wrong is thereby
committed for which the wrongdoer must be held responsible. [26] But
HSBC TRUSTEE maintains that the RTC did not acquire a right, though by itself legal because recognized or granted by law
jurisdiction over it for improper service of summons. as such, may nevertheless become the source of some illegality. A
In her Comment, Catalan insists that her complaint is one for person should be protected only when he acts in the legitimate
damages under Article 19 of the Civil Code for the wanton refusal to exercise of his right, that is, when he acts with prudence and in
honor and pay the value of five checks issued by the Thomson good faith; but not when he acts with negligence or abuse. [27] There
amounting to HK$3,200,000.00. She argues that the issue of is an abuse of right when it is exercised for the only purpose of
jurisdiction has been rendered moot by petitioners participation in prejudicing or injuring another. The exercise of a right must be in
the proceedings before the RTC. accordance with the purpose for which it was established, and must
not be excessive or unduly harsh; there must be no intention to
Succinctly, the issues boil down to the following: injure another.[28]
1) Does the complaint state a cause of action? Thus, in order to be liable under the abuse of rights principle,
three elements must concur, to wit: (a) that there is a legal right or
2) Did Catalan engage in forum-shopping by filing the duty; (b) which is exercised in bad faith; and (c) for the sole intent of
complaint for damages when she also filed a petition for probate of prejudicing or injuring another.[29]
the alleged last will of Thomson with another branch of the RTC?
and, In this instance, after carefully examining the amended
complaint, we are convinced that the allegations therein are in the
3) Did the RTC acquire jurisdiction over HSBANK and nature of anaction based on tort under Article 19 of the Civil
HSBC TRUSTEE? Corollary thereto, did the filing of the answer Code. It is evident that Catalan is suing HSBANK and HSBC
before the RTC render the issue of lack of jurisdiction moot and TRUSTEE for unjustified and willful refusal to pay the value of the
academic? checks.
 HSBANK is being sued for unwarranted failure to pay the checks constitute res judicata and thus would cause the dismissal of the
notwithstanding the repeated assurance of the drawer Thomson as rest.[31]
to the authenticity of the checks and frequent directives to pay the
value thereof to Catalan. Her allegations in the complaint that the Thus, there is forum-shopping when there exist: a) identity of
gross inaction of HSBANK on Thomsons instructions, as well as its parties, or at least such parties as represent the same interests in
evident failure to inform Catalan of the reason for its continued both actions, b) identity of rights asserted and relief prayed for, the
inaction and non-payment of the checks, smack of insouciance on relief being founded on the same facts, and c) the identity of the
its part, are sufficient statements of clear abuse of right for which it two preceding particulars is such that any judgment rendered in the
may be held liable to Catalan for any damages she incurred pending case, regardless of which party is successful would amount
resulting therefrom. HSBANKs actions, or lack thereof, prevented to res judicata in the other.[32]
Catalan from seeking further redress with Thomson for the recovery Applying the foregoing requisites to the case before us in
of her claim while the latter was alive. relation to Spec. Proc No. 00-892, the probate proceeding brought
HSBANK claims that Catalan has no cause of action because by Catalan before RTC, Branch 48, Bacolod City, it is obvious that
under Section 189 of the Negotiable Instruments Law, a check of forum-shopping does not exist.
itself does not operate as an assignment of any part of the funds to There is no identity of parties. HSBANK is not a party in the
the credit of the drawer with the bank, and the bank is not liable to probate proceeding. HSBC TRUSTEE is only a party in the probate
the holder unless and until it accepts or certifies it. However, proceeding because it is the executor and trustee named in the
HSBANK is not being sued on the value of the check itself but for Hongkong will of Thomson. HSBC TRUSTEE is representing the
how it acted in relation to Catalans claim for payment despite the interest of the estate of Thomson and not its own corporate interest.
repeated directives of the drawer Thomson to recognize the check
the latter issued. Catalan may have prayed that she be paid the With respect to the second and third requisites, a scrutiny of the
value of the checks but it is axiomatic that what determines the entirety of the allegations of the amended complaint in this case
nature of an action, as well as which court has jurisdiction over it, reveals that the rights asserted and reliefs prayed for therein are
are the allegations of the complaint, irrespective of whether or not different from those pleaded in the probate proceeding, such that a
the plaintiff is entitled to recover upon all or some of the claims judgment in one case would not bar the prosecution of the other
asserted therein.[30] case. Verily, there can be no forum-shopping where in one
proceeding a party raises a claim for damages based on tort and, in
Anent HSBC TRUSTEE, it is being sued for the baseless rejection another proceeding a party seeks the allowance of an alleged last
of Catalans claim. When Catalan parted with the checks as a will based on ones claim as an heir. After all, the merits of the
requirement for the processing of her claim, even going to the action for damages is not to be determined in the probate
extent of traveling to Hongkong to deliver personally the checks, proceeding and vice versa. Undeniably, the facts or evidence as
HSBC TRUSTEE summarily disapproved her claim with nary a would support and establish the two causes of action are not the
reason. HSBC TRUSTEE gave no heed to Catalans incessant same.[33] Consequently, HSBANKs reliance on the principle of forum-
appeals for an explanation. Her pleas fell on deaf and uncaring shopping is clearly misplaced.
corporate ears. Clearly, HSBC TRUSTEEs acts are anathema to the
prescription for human conduct enshrined in Article 19 of the Civil Did the RTC acquire jurisdiction over HSBANK and HSBC
Code. TRUSTEE?

Did Catalan engage in forum-shopping? The Rules of Court provides that a court generally acquires
jurisdiction over a person through either a valid service of summons
It has been held that forum-shopping exists where a litigant in the manner required by law or the persons voluntary appearance
sues the same party against whom another action or actions for the in court.[34]
alleged violation of the same right and the enforcement of the same
relief is/are still pending, the defense of litis pendentia in one case is In holding that it acquired jurisdiction over HSBANK and HSBC
a bar to the others; and, a final judgment in one would TRUSTEE, the RTC held that both voluntarily submitted to the
jurisdiction of the court by setting up in their Motions to Dismiss academic. The Answer of HSBC TRUSTEE was only filed to prevent
other grounds aside from lack of jurisdiction. On the other hand, the any declaration that it had by its inaction waived the right to file
CA ruled that HSBANK and HSBC TRUSTEE are estopped from responsive pleadings.
challenging the jurisdiction of the RTC because they filed their
respective answers before the RTC. Admittedly, HSBC TRUSTEE is a foreign corporation, organized
and existing under the laws of the British Virgin Islands. For proper
We find that both lower courts overlooked Section 20 of Rule 14 service of summons on foreign corporations, Section 12 of Rule 14
of the 1997 Rules of Civil Procedure which provides that the of the Revised Rules of Court provides:
inclusion in a motion to dismiss of other grounds aside from lack of
jurisdiction over the person of the defendant shall not be deemed a SEC. 12. Service upon foreign private juridical entity. When the
voluntary appearance. Nonetheless, such omission does not aid defendant is a foreign private juridical entity which has transacted
HSBANKs case. business in the Philippines, service may be made on its resident
It must be noted that HSBANK initially filed a Motion for agent designated in accordance with law for that purpose, or if there
Extension of Time to File Answer or Motion to Dismiss. [35] HSBANK be no such agent, on the government official designated by law to
already invoked the RTCs jurisdiction over it by praying that its that effect, or on any of its officers or agents within the Philippines.
motion for extension of time to file answer or a motion to dismiss be
granted. The Court has held that the filing of motions seeking In French Oil Mill Machinery Co., Inc. vs. Court of Appeals,[39] we
affirmative relief, such as, to admit answer, for additional time to file had occasion to rule that it is not enough to merely allege in the
answer, for reconsideration of a default judgment, and to lift order complaint that a defendant foreign corporation is doing
of default with motion for reconsideration, are considered voluntary business. For purposes of the rule on summons, the fact of doing
submission to the jurisdiction of the court.[36] Consequently, business must first be "established by appropriate allegations in the
HSBANKs expressed reservation in its Answer ad cautelam that it complaint" and the court in determining such fact need not go
filed the same as a mere precaution against being declared in beyond the allegations therein.[40]
default, and without prejudice to the Petition for Certiorari and/or The allegations in the amended complaint subject of the
Prohibition xxx now pending before the Court of Appeals[37] to assail present cases did not sufficiently show the fact of HSBC TRUSTEEs
the jurisdiction of the RTC over it is of no moment. Having earlier doing business in the Philippines. It does not appear at all that
invoked the jurisdiction of the RTC to secure affirmative relief in its HSBC TRUSTEE had performed any act which would give the general
motion for additional time to file answer or motion to dismiss, public the impression that it had been engaging, or intends to
HSBANK, effectively submitted voluntarily to the jurisdiction of the engage in its ordinary and usual business undertakings in the
RTC and is thereby estopped from asserting otherwise, even before country. Absent from the amended complaint is an allegation that
this Court. HSBC TRUSTEE had performed any act in the country that would
In contrast, the filing by HSBC TRUSTEE of a motion to dismiss place it within the sphere of the courts jurisdiction.
cannot be considered a voluntary submission to the jurisdiction of We have held that a general allegation, standing alone, that a
the RTC. It was a conditional appearance, entered precisely to party is doing business in the Philippines does not make it so; a
question the regularity of the service of summons. It is settled that conclusion of fact or law cannot be derived from the
a party who makes a special appearance in court challenging the unsubstantiated assertions of parties notwithstanding the demands
jurisdiction of said court, e.g., invalidity of the service of summons, of convenience or dispatch in legal actions, otherwise, the Court
cannot be considered to have submitted himself to the jurisdiction would be guilty of sorcery; extracting substance out of nothingness.
of the court.[38] HSBC TRUSTEE has been consistent in all its [41]
pleadings in assailing the service of summons and the jurisdiction of
the RTC over it. Thus, HSBC TRUSTEE cannot be declared in Besides, there is no allegation in the amended complaint that
estoppel when it filed an Answer ad cautelam before the RTC while HSBANK is the domestic agent of HSBC TRUSTEE to warrant service
its petition for certiorari was pending before the CA. Such answer of summons upon it. Thus, the summons tendered to the In House
did not render the petition for certiorari before the CA moot and
Counsel of HSBANK (Makati Branch) for HSBC TRUSTEE was clearly The parties are substantially agreed on the following facts as found
improper. by both lower courts:
There being no proper service of summons, the RTC cannot take
cognizance of the case against HSBC TRUSTEE for lack of In 1980, plaintiff Ricardo S. Santos, Jr. was the vice-president
jurisdiction over it. Any proceeding undertaken by the RTC is of Mover Enterprises, Inc. in-charge of marketing and sales;
therefore null and void.[42] Accordingly, the complaint against HSBC and the president of the said corporation was Atty. Oscar Z.
TRUSTEE should have been dismissed for lack of jurisdiction over it. Benares. On April 30, 1980, Atty. Benares, in accommodation
of his clients, the spouses Jaime and Clarita Ong, issued
WHEREFORE, the petition in G.R. No. 159590 is DENIED. The Check No. 093553 drawn against Traders Royal Bank, dated
Decision of the Court of Appeals, dated August 14, 2003, in CA-G.R. June 14, 1980, in the amount of P45,000.00 (Exh- 'I') payable
SP No. 75757 dismissing the petition for certiorari of the Hongkong to defendant Ernestina Crisologo-Jose. Since the check was
and Shanghai Banking Corporation Limited is AFFIRMED. under the account of Mover Enterprises, Inc., the same was
to be signed by its president, Atty. Oscar Z. Benares, and the
The petition in G.R. No. 159591 is GRANTED. The Decision of treasurer of the said corporation. However, since at that
the Court of Appeals, dated August 14, 2003, in CA-G.R. SP No. time, the treasurer of Mover Enterprises was not available,
75756 dismissing the petition for certiorari of the HSBC International Atty. Benares prevailed upon the plaintiff, Ricardo S. Santos,
Trustee Limited is REVERSED and SET ASIDE. The Regional Trial Jr., to sign the aforesaid chEck as an alternate story. Plaintiff
Court, Branch 44, Bacolod City is declared without jurisdiction to Ricardo S. Santos, Jr. did sign the check.
take cognizance of Civil Case No. 01-11372 against the HSBC
International Trustee Limited, and all its orders and issuances with
It appears that the check (Exh. '1') was issued to defendant
respect to the latter are hereby ANNULLED and SET ASIDE. The said
Ernestina Crisologo-Jose in consideration of the waiver or
Regional Trial Court is hereby ORDERED to DESIST from maintaining
quitclaim by said defendant over a certain property which
further proceedings against the HSBC International Trustee Limited
the Government Service Insurance System (GSIS) agreed to
in the case aforestated.
sell to the clients of Atty. Oscar Benares, the spouses Jaime
SO ORDERED. 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
G.R. No. 80599 September 15, 1989 Royal Bank cheek bearing No. 379299 dated August 10,
1980, in the same amount of P45,000.00 (Exhs. 'A' and '2'),
ERNESTINA CRISOLOGO-JOSE, petitioner, also payable to the defendant Jose. This replacement check
vs. was also signed by Atty. Oscar Z. Benares and by the plaintiff
COURT OF APPEALS and RICARDO S. SANTOS, JR. in his own Ricardo S. Santos, Jr. When defendant deposited this
behalf and as Vice-President for Sales of Mover Enterprises, replacement check (Exhs. 'A' and '2') with her account at
Inc., respondents. 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
REGALADO, J.:
reason. Hence, defendant through counsel was constrained
to file a criminal complaint for violation of Batas Pambansa
Petitioner seeks the annulment of the decision 1 of respondent Court Blg. 22 with the Quezon City Fiscal's Office against Atty.
of Appeals, promulgated on September 8, 1987, which reversed the Oscar Z. Benares and plaintiff Ricardo S. Santos, Jr. The
decision of the trial Court 2 dismissing the complaint for investigating Assistant City Fiscal, Alfonso Llamas,
consignation filed by therein plaintiff Ricardo S. Santos, Jr.
 accordingly filed an amended information with the court president of said corporation, hence he is not liable thereon under
charging both Oscar Benares and Ricardo S. Santos, Jr., for the Negotiable Instruments Law.
violation of Batas Pambansa Blg. 22 docketed as Criminal
Case No. Q-14867 of then Court of First Instance of Rizal, The pertinent provision of said law referred to provides:
Quezon City.
Sec. 29. Liability of accommodation party an
Meanwhile, during the preliminary investigation of the accommodation party is one who has signed the instrument
criminal charge against Benares and the plaintiff herein, as maker, drawer, acceptor, or indorser, without receiving
before Assistant City Fiscal Alfonso T. Llamas, plaintiff Ricardo value therefor, and for the purpose of lending his name to
S. Santos, Jr. tendered cashier's check No. CC 160152 for some other person. Such a person is liable on the
P45,000.00 dated April 10, 1981 to the defendant Ernestina instrument to a holder for value, notwithstanding such
Crisologo-Jose, the complainant in that criminal case. The holder, at the time of taking the instrument, knew him to be
defendant refused to receive the cashier's check in payment only an accommodation party.
of the dishonored check in the amount of P45,000.00. Hence,
plaintiff encashed the aforesaid cashier's check and Consequently, to be considered an accommodation party, a person
subsequently deposited said amount of P45,000.00 with the must (1) be a party to the instrument, signing as maker, drawer,
Clerk of Court on August 14, 1981 (Exhs. 'D' and 'E'). acceptor, or indorser, (2) not receive value therefor, and (3) sign for
Incidentally, the cashier's check adverted to above was the purpose of lending his name for the credit of some other person.
purchased by Atty. Oscar Z. Benares and given to the plaintiff
herein to be applied in payment of the dishonored check. 3
Based on the foregoing requisites, it is not a valid defense that the
accommodation party did not receive any valuable consideration
After trial, the court a quo, holding that it was "not persuaded to when he executed the instrument. From the standpoint of contract
believe that consignation referred to in Article 1256 of the Civil Code law, he differs from the ordinary concept of a debtor therein in the
is applicable to this case," rendered judgment dismissing plaintiff s sense that he has not received any valuable consideration for the
complaint and defendant's counterclaim. 4 instrument he signs. Nevertheless, he is liable to a holder for value
as if the contract was not for accommodation 5in whatever capacity
As earlier stated, respondent court reversed and set aside said such accommodation party signed the instrument, whether
judgment of dismissal and revived the complaint for consignation, primarily or secondarily. Thus, it has been held that in lending his
directing the trial court to give due course thereto. name to the accommodated party, the accommodation party is in
effect a surety for the latter. 6
Hence, the instant petition, the assignment of errors wherein are
prefatorily stated and discussed seriatim. Assuming arguendo that Mover Enterprises, Inc. is the
accommodation party in this case, as petitioner suggests, the
1. Petitioner contends that respondent Court of Appeals erred inevitable question is whether or not it may be held liable on the
in holding that private respondent, one of the signatories of accommodation instrument, that is, the check issued in favor of
the check issued under the account of Mover Enterprises, herein petitioner.
Inc., is an accommodation party under the Negotiable
Instruments Law and a debtor of petitioner to the extent of We hold in the negative.
the amount of said check.
The aforequoted provision of the Negotiable Instruments Law which
Petitioner avers that the accommodation party in this case is Mover holds an accommodation party liable on the instrument to a holder
Enterprises, Inc. and not private respondent who merely signed the for value, although such holder at the time of taking the instrument
check in question in a representative capacity, that is, as vice- knew him to be only an accommodation party, does not include nor
apply to corporations which are accommodation parties. 7 This is a personal undertaking of said corporate officers was apparent to
because the issue or indorsement of negotiable paper by a petitioner by reason of her personal involvement in the financial
corporation without consideration and for the accommodation of arrangement and the fact that, while it was the corporation's check
another is ultra vires. 8 Hence, one who has taken the instrument which was issued to her for the amount involved, she actually had
with knowledge of the accommodation nature thereof cannot no transaction directly with said corporation.
recover against a corporation where it is only an accommodation
party. If the form of the instrument, or the nature of the transaction, There should be no legal obstacle, therefore, to petitioner's claims
is such as to charge the indorsee with knowledge that the issue or being directed personally against Atty. Oscar Z. Benares and
indorsement of the instrument by the corporation is for the respondent Ricardo S. Santos, Jr., president and vice-president,
accommodation of another, he cannot recover against the respectively, of Mover Enterprises, Inc.
corporation thereon. 9
2. On her second assignment of error, petitioner argues that
By way of exception, an officer or agent of a corporation shall have the Court of Appeals erred in holding that the consignation of
the power to execute or indorse a negotiable paper in the name of the sum of P45,000.00, made by private respondent after his
the corporation for the accommodation of a third person only if tender of payment was refused by petitioner, was proper
specifically authorized to do so. 10 Corollarily, corporate officers, under Article 1256 of the Civil Code.
such as the president and vice-president, have no power to execute
for mere accommodation a negotiable instrument of the corporation Petitioner's submission is that no creditor-debtor relationship exists
for their individual debts or transactions arising from or in relation to between the parties, hence consignation is not proper.
matters in which the corporation has no legitimate concern. Since Concomitantly, this argument was premised on the assumption that
such accommodation paper cannot thus be enforced against the private respondent Santos is not an accommodation party.
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 As previously discussed, however, respondent Santos is an
therefor, as well as the consequences arising from their acts in accommodation party and is, therefore, liable for the value of the
connection therewith. 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 instant case falls squarely within the purview of the aforesaid the other co-signatory or, for that matter, as a lone signatory in an
decisional rules. If we indulge petitioner in her aforesaid postulation, accommodation instrument. Under the doctrine in Philippine Bank of
then she is effectively barred from recovering from Mover Commerce vs. Aruego, supra, he is in effect a co-surety for the
Enterprises, Inc. the value of the check. Be that as it may, petitioner accommodated party with whom he and his co-signatory, as the
is not without recourse. other co-surety, assume solidary liability ex lege for the debt
involved. With the dishonor of the check, there was created a
The fact that for lack of capacity the corporation is not bound by an debtor-creditor relationship, as between Atty. Benares and
accommodation paper does not thereby absolve, but should render respondent Santos, on the one hand, and petitioner, on the other.
personally liable, the signatories of said instrument where the facts This circumstance enables respondent Santos to resort to an action
show that the accommodation involved was for their personal of consignation where his tender of payment had been refused by
account, undertaking or purpose and the creditor was aware thereof. petitioner.

Petitioner, as hereinbefore explained, was evidently charged with We interpose the caveat, however, that by holding that the remedy
the knowledge that the cheek was issued at the instance and for the of consignation is proper under the given circumstances, we do not
personal account of Atty. Benares who merely prevailed upon thereby rule that all the operative facts for consignation which
respondent Santos to act as co-signatory in accordance with the would produce the effect of payment are present in this case. Those
arrangement of the corporation with its depository bank. That it was 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 consigned the amount of P45,000.00 on August 14, 1981,
Civil Case No. Q-33160, for which reason it has advisedly been between August 7, 1981, the date when plaintiff-appellant
directed by respondent court to give due course to the complaint for receive (sic) the notice of non-payment, and August 14,
consignation, and which would be subject to such issues or claims 1981, the date when the debt due was deposited with the
as may be raised by defendant and the counterclaim filed therein Clerk of Court (a Saturday and a Sunday which are not
which is hereby ordered similarly revived. banking days) intervened. The fifth banking day fell on
August 14, 1981. Hence, no criminal liability has yet
3. That respondent court virtually prejudged Criminal Case attached to plaintiff-appellant when he deposited the amount
No. Q-14687 of the Regional Trial Court of Quezon City filed of P45,000.00 with the Court a quo on August 14, 1981. 11
against private respondent for violation of Batas Pambansa
Blg. 22, by holding that no criminal liability had yet attached That said observations made in the civil case at bar and the
to private respondent when he deposited with the court the intrusion into the merits of the criminal case pending in another
amount of P45,000.00 is the final plaint of petitioner. 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
We sustain petitioner on this score. instance, whether or not the period of five banking days had
expired, in the process determining whether notice of dishonor
Indeed, respondent court went beyond the ratiocination called for in should be reckoned from any prior notice if any has been given or
the appeal to it in CA-G.R. CV. No. 05464. In its own decision therein, from receipt by private respondents of the subpoena therein with
it declared that "(t)he lone issue dwells in the question of whether supporting affidavits, if any, or from the first day of actual
an accommodation party can validly consign the amount of the debt preliminary investigation; and whether there was a justification for
due with the court after his tender of payment was refused by the not making the requisite arrangements for payment in full of such
creditor." Yet, from the commercial and civil law aspects check by the drawee bank within the said period. These are matters
determinative of said issue, it digressed into the merits of the alien to the present controversy on tender and consignation of
aforesaid Criminal Case No. Q-14867, thus: payment, where no such period and its legal effects are involved.

Section 2 of B.P. 22 establishes the prima facie evidence of These are aside from the considerations that the disputed period
knowledge of such insufficiency of funds or credit. Thus, the involved in the criminal case is only a presumptive rule, juris
making, drawing and issuance of a check, payment of which tantum at that, to determine whether or not there was knowledge of
is refused by the drawee because of insufficient funds in or insufficiency of funds in or credit with the drawee bank; that
credit with such bank is prima facie evidence of knowledge of payment of civil liability is not a mode for extinguishment of criminal
insufficiency of funds or credit, when the check is presented liability; and that the requisite quantum of evidence in the two types
within 90 days from the date of the check. of cases are not the same.

It will be noted that the last part of Section 2 of B.P. 22 To repeat, the foregoing matters are properly addressed to the trial
provides that the element of knowledge of insufficiency of court in Criminal Case No. Q-14867, the resolution of which should
funds or credit is not present and, therefore, the crime does not be interfered with by respondent Court of Appeals at the present
not exist, when the drawer pays the holder the amount due posture of said case, much less preempted by the inappropriate and
or makes arrangements for payment in full by the drawee of unnecessary holdings in the aforequoted portion of the decision of
such check within five (5) banking days after receiving notice said respondent court. Consequently, we modify the decision of
that such check has not been paid by the drawee. 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
Based on the foregoing consideration, this Court finds that of the accused therein are concerned.
the plaintiff-appellant acted within Ms legal rights when he
WHEREFORE, subject to the aforesaid modifications, the judgment to pay the plaintiff the sum of P28,414.40 with
of respondent Court of Appeals is AFFIRMED. SO ORDERED. 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.

G.R. No. 76788 January 22, 1990 The counterclaim of defendant is dismissed.

JUANITA SALAS, petitioner, With costs against defendant. 1

vs.
HON. COURT OF APPEALS and FIRST FINANCE & LEASING Both petitioner and private respondent appealed the aforesaid
CORPORATION, respondents. decision to the Court of Appeals.

FERNAN, C.J.: Imputing fraud, bad faith and misrepresentation against VMS for
having delivered a different vehicle to petitioner, the latter prayed
Assailed in this petition for review on certiorari is the decision of the for a reversal of the trial court's decision so that she may be
Court of Appeals in C.A.-G.R. CV No. 00757 entitled "Filinvest absolved from the obligation under the contract.
Finance & Leasing Corporation v. Salas", which modified the decision
of the Regional Trial Court of San Fernando, Pampanga in Civil Case On October 27, 1986, the Court of Appeals rendered its assailed
No. 5915, a collection suit between the same parties. decision, the pertinent portion of which is quoted hereunder:

Records disclose that on February 6, 1980, Juanita Salas (hereinafter The allegations, statements, or admissions contained
referred to as petitioner) bought a motor vehicle from the Violago in a pleading are conclusive as against the pleader. A
Motor Sales Corporation (VMS for brevity) for P58,138.20 as party cannot subsequently take a position
evidenced by a promissory note. This note was subsequently contradictory of, or inconsistent with his pleadings
endorsed to Filinvest Finance & Leasing Corporation (hereinafter (Cunanan vs. Amparo, 80 Phil. 227). Admissions made
referred to as private respondent) which financed the purchase. by the parties in the pleadings, or in the course of the
trial or other proceedings, do not require proof and
Petitioner defaulted in her installments beginning May 21, 1980 cannot be contradicted unless previously shown to
allegedly due to a discrepancy in the engine and chassis numbers of have been made through palpable mistake (Sec. 2,
the vehicle delivered to her and those indicated in the sales invoice, Rule 129, Revised Rules of Court; Sta. Ana vs.
certificate of registration and deed of chattel mortgage, which fact Maliwat, L-23023, Aug. 31, 1968, 24 SCRA 1018).
she discovered when the vehicle figured in an accident on 9 May
1980. When an action or defense is founded upon a written
instrument, copied in or attached to the
This failure to pay prompted private respondent to initiate Civil Case corresponding pleading as provided in the preceding
No. 5915 for a sum of money against petitioner before the Regional section, the genuineness and due execution of the
Trial Court of San Fernando, Pampanga. 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,
In its decision dated September 10, 1982, the trial court held, thus:
Rule 8, Revised Rules of Court; Hibbered vs. Rohde
and McMillian, 32 Phil. 476).
WHEREFORE, and in view of all the foregoing,
judgment is hereby rendered ordering the defendant
 A perusal of the evidence shows that the amount of shown in the sales invoice and petitioner's initial downpayment of
P58,138.20 stated in the promissory note is the P17,855.70 allegedly evidenced by a receipt. Said decision was
amount assumed by the plaintiff in financing the however reversed later on, with the same court ordering defendant
purchase of defendant's motor vehicle from the VMS instead to return to petitioner the sum of P17,855.70.
Violago Motor Sales Corp., the monthly amortization Parenthetically, said decision is still pending consideration by the
of winch is Pl,614.95 for 36 months. Considering that First Civil Case Division of the Court of Appeals, upon an appeal by
the defendant was able to pay twice (as admitted by VMS, docketed as AC-G.R. No. 02922. 5
the plaintiff, defendant's account became delinquent
only beginning May, 1980) or in the total sum of Private respondent in its comment, prays for the dismissal of the
P3,229.90, she is therefore liable to pay the remaining petition and counters that the issues raised and the allegations
balance of P54,908.30 at l4% per annum from adduced therein are a mere rehash of those presented and already
October 2, 1980 until full payment. passed upon in the court below, and that the judgment in the
"breach of contract" suit cannot be invoked as an authority as the
WHEREFORE, considering the foregoing, the appealed same is still pending determination in the appellate court.
decision is hereby modified ordering the defendant to
pay the plaintiff the sum of P54,908.30 at 14% per We see no cogent reason to disturb the challenged decision.
annum from October 2, 1980 until full payment. The
decision is AFFIRMED in all other respects. With costs The pivotal issue in this case is whether the promissory note in
to defendant. 2 question is a negotiable instrument which will bar completely all the
available defenses of the petitioner against private respondent.
Petitioner's motion for reconsideration was denied; hence, the
present recourse. Petitioner's liability on the promissory note, the due execution and
genuineness of which she never denied under oath is, under the
In the petition before us, petitioner assigns twelve (12) errors which foregoing factual milieu, as inevitable as it is clearly established.
focus on the alleged fraud, bad faith and misrepresentation of
Violago Motor Sales Corporation in the conduct of its business and The records reveal that involved herein is not a simple case of
which fraud, bad faith and misrepresentation supposedly released assignment of credit as petitioner would have it appear, where the
petitioner from any liability to private respondent who should assignee merely steps into the shoes of, is open to all defenses
instead proceed against VMS. 3 available against and can enforce payment only to the same extent
as, the assignor-vendor.
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 Recently, in the case of Consolidated Plywood Industries Inc. v. IFC
ever existed between her and VMS and therefore none had been Leasing and Acceptance Corp., 6 this Court had the occasion to
assigned in favor of private respondent. clearly distinguish between a negotiable and a non-negotiable
instrument.
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 Among others, the instrument in order to be considered negotiable
to answer for damages because VMS was earlier sued by her for must contain the so-called "words of negotiability i.e., must be
"breach of contract with damages" before the Regional Trial Court of payable to "order" or "bearer"". Under Section 8 of the Negotiable
Olongapo City, Branch LXXII, docketed as Civil Case No. 2916-0. She Instruments Law, there are only two ways by which an instrument
cites as authority the decision therein where the court originally may be made payable to order. There must always be a specified
ordered petitioner to pay the remaining balance of the motor person named in the instrument and the bill or note is to be paid to
vehicle installments in the amount of P31,644.30 representing the the person designated in the instrument or to any person to whom
difference between the agreed consideration of P49,000.00 as
he has indorsed and delivered the same. Without the words "or xxx xxx xxx
order or "to the order of", the instrument is payable only to the
person designated therein and is therefore non-negotiable. Any Maker; Co-Maker:
subsequent purchaser thereof will not enjoy the advantages of
being a holder of a negotiable instrument, but will merely "step into (SIGNED) JUANITA SALAS _________________
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 Address:
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, WITNESSES

the basis of private respondent's claim against petitioner is a
promissory note which bears all the earmarks of negotiability. SIGNED: ILLEGIBLE SIGNED: ILLEGIBLE
TAN # TAN #
The pertinent portion of the note reads:
PAY TO THE ORDER OF
PROMISSORY NOTE FILINVEST FINANCE AND LEASING CORPORATION
(MONTHLY)
VIOLAGO MOTOR SALES CORPORATION
P58,138.20 BY: (SIGNED) GENEVEVA V. BALTAZAR
San Fernando, Pampanga, Philippines Cash Manager 8
Feb. 11, 1980
A careful study of the questioned promissory note shows that it is a
For value received, I/We jointly and severally, promise negotiable instrument, having complied with the requisites under
to pay Violago Motor Sales Corporation or order, at its the law as follows: [a] it is in writing and signed by the maker
office in San Fernando, Pampanga, the sum of FIFTY Juanita Salas; [b] it contains an unconditional promise to pay the
EIGHT THOUSAND ONE HUNDRED THIRTY EIGHT & amount of P58,138.20; [c] it is payable at a fixed or determinable
201/100 ONLY (P58,138.20) Philippine currency, which future time which is "P1,614.95 monthly for 36 months due and
amount includes interest at 14% per annum based on payable on the 21 st day of each month starting March 21, 1980
the diminishing balance, the said principal sum, to be thru and inclusive of Feb. 21, 1983;" [d] it is payable to Violago
payable, without need of notice or demand, in Motor Sales Corporation, or order and as such, [e] the drawee is
installments of the amounts following and at the named or indicated with certainty. 9
dates hereinafter set forth, to wit: P1,614.95 monthly
for "36" months due and payable on the 21st day of It was negotiated by indorsement in writing on the instrument itself
each month starting March 21, 1980 thru and payable to the Order of Filinvest Finance and Leasing
inclusive of February 21, 1983. P_________ monthly for Corporation 10 and it is an indorsement of the entire instrument. 11
______ months due and payable on the ______ day of
each month starting _____198__ thru and inclusive of Under the circumstances, there appears to be no question that
_____, 198________ provided that interest at 14% per Filinvest is a holder in due course, having taken the instrument
annum shall be added on each unpaid installment under the following conditions: [a] it is complete and regular upon
from maturity hereof until fully paid. 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 THE HONORABLE COURT OF APPEALS, THE PHILIPPINE
Filinvest, the latter had no notice of any infirmity in the instrument NATIONAL BANK, RAMON C. CONCEPCION and MANUEL M.
or defect in the title of VMS Corporation. 12 TAMAYO, partners of the defunct partnership Concepcion &
Tamayo Construction Company, JOSE TORIBIO, Atty-in-Fact of
Accordingly, respondent corporation holds the instrument free from Concepcion & Tamayo Construction Company, and THE
any defect of title of prior parties, and free from defenses available DISTRICT ENGINEER, Puerto Princesa, Palawan, respondents.
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. GUTIERREZ, JR., J.:

Even assuming for the sake of argument that there is an iota of This is a petition for review seeking to annul and set aside the
truth in petitioner's allegation that there was in fact deception made decision of the Court of Appeals, now the Intermediate Appellate
upon her in that the vehicle she purchased was different from that Court, affirming the order of the trial court which dismissed the
actually delivered to her, this matter cannot be passed upon in the petitioners' complaint for cancellation of their real estate mortgage
case before us, where the VMS was never impleaded as a party. and held them jointly and severally liable with the principal debtors
on a promissory note which they signed as accommodation makers.
Whatever issue is raised or claim presented against VMS must be
resolved in the "breach of contract" case. The factual background of this case is stated in the decision of the
appellate court:
Hence, we reach a similar opinion as did respondent court when it
held: Appellants are the registered owners of a parcel of
land located in Sampaloc, Manila, and covered by
We can only extend our sympathies to the defendant T.C.T. 35161 of the Register of Deeds of Manila. On
(herein petitioner) in this unfortunate incident. October 7, 1954, this property was mortgaged by the
Indeed, there is nothing We can do as far as the appellants to the Philippine National Bank, hereinafter
Violago Motor Sales Corporation is concerned since it called PNB, to guarantee a loan of P1,000.00
is not a party in this case. To even discuss the issue extended to one Domingo Prudencio.
as to whether or not the Violago Motor Sales
Corporation is liable in the transaction in question Sometime in 1955, the Concepcion & Tamayo
would amount, to denial of due process, hence, Construction Company, hereinafter called Company,
improper and unconstitutional. She should have had a pending contract with the Bureau of Public
impleaded Violago Motor Sales. 14 Works, hereinafter called the Bureau, for the
construction of the municipal building in Puerto
IN VIEW OF THE FOREGOING, the assailed decision is hereby Princess, Palawan, in the amount of P36,800.00 and,
AFFIRMED. With costs against petitioner. SO ORDERED. as said Company needed funds for said construction,
Jose Toribio, appellants' relative, and attorney-in-fact
of the Company, approached the appellants asking
them to mortgage their property to secure the loan of
P10,000.00 which the Company was negotiating with
G.R. No. L-34539 July 14, 1986
the PNB.

EULALIO PRUDENCIO and ELISA T. PRUDENCIO, petitioners,

vs.
After some persuasion appellants signed on without the knowledge of appellants, which entitled
December 23, 1955 the 'Amendment of Real Estate the latter to a cancellation of their mortgage contract.
Mortgage', mortgaging their said property to the PNB
to guaranty the loan of P10,000.00 extended to the Failing in their bid to have the real estate mortgage
Company. The terms and conditions of the original cancelled, appellants filed on June 27, 1959 this
mortgage for Pl,000.00 were made integral part of the action against the PNB, the Company, the latter's
new mortgage for P10,000.00 and both documents attorney-in-fact Jose Toribio, and the District Engineer
were registered with the Register of Deeds of Manila. of Puerto Princesa, Palawan, seeking the cancellation
The promissory note covering the loan of P10,000.00 of their real estate mortgage. The complaint was
dated December 29, 1955, maturing on April 27, amended to exclude the Company as defendant, it
1956, was signed by Jose Toribio, as attorney-in-fact having been shown that its life as a partnership had
of the Company, and by the appellants. Appellants already expired and, in lieu thereof, Ramon
also signed the portion of the promissory note Concepcion and Manuel M. Tamayo, partners of the
indicating that they are requesting the PNB to issue defunct Company, were impleaded in their private
the Check covering the loan to the Company. On the capacity as defendants.
same date (December 23, 1955) that the
'Amendment of Real Estate' was executed, Jose After hearing, the trial court rendered judgment, denying the prayer
Toribio, in the same capacity as attorney-in- fact of in the complaint that the petitioners be absolved from their
the Company, executed also the 'Deed of Assignment' obligation under the mortgage contract and that the said mortgage
assigning all payments to be made by the Bureau to be released or cancelled. The petitioners were ordered to pay jointly
the Company on account of the contract for the and severally with their co-makers Ramon C. Concepcion and
construction of the Puerto Princesa building in favor of Manuel M. Tamayo the sum of P11,900.19 with interest at the rate of
the PNB. 6% per annum from the date of the filing of the complaint on June
27, 1959 until fully paid and Pl,000.00 attorney's fees.
This assignment of credit to the contrary
notwithstanding, the Bureau; with approval, of the The decision also provided that if the judgment was not satisfied
PNB, conditioned, however that they should be for within 90 days from its receipt, the mortgaged properties together
labor and materials, made three payments to the with all the improvements thereon belonging to the petitioners
Company on account of the contract price totalling would be sold at public auction and applied to the judgment debt.
P11,234.40. The Bureau's last request for P5,000.00
on June 20, 1956, however, was denied by the PNB for
the reason that since the loan was already overdue as The Court of Appeals affirmed the trial court's decision in toto
of April 28, 1956, the remaining balance of the stating that, as accommodation makers, the petitioners' liability is
contract price should be applied to the loan. that of solidary co-makers and that since "the amounts released to
the construction company were used therein and, therefore, were
spent for the successful accomplishment of the work constructed
The Company abandoned the work, as a consequence for, the authorization made by the Philippine National Bank of
of which on June 30, 1956, the Bureau rescinded the partial payments to the construction company which was also one of
construction contract and assumed the work of the solidary debtors cannot constitute a valid defense on the part of
completing the building. On November 14, 1958, the other solidary debtors. Moreover, those who rendered services
appellants wrote the PNB contending that since the and furnished materials in the construction are preferred creditors
PNB authorized payments to the Company instead of and have a lien on the price of the contract." The appellate court
on account of the loan guaranteed by the mortgage further held that PNB had no obligation whatsoever to notify the
there was a change in the conditions of the contract petitioners of its authorizing the three payments in the total amount
of Pll,234.00 in favor of the Company because aside from the fact
that the petitioners were not parties to the deed of assignment, Liability of accommodation party. An
there was no stipulation in said deed making it obligatory on the accommodation party is one who has signed the
part of the PNB to notify the petitioners everytime it authorizes instrument as maker, drawer, acceptor, or indorser,
payment to the Company. It ruled that the petitioners cannot ask to without receiving value therefor, and for the purpose
be released from the real estate mortgage. of lending his name to some other person. Such a
person is liable on the instrument to a holder for
In this petition, the petitioners raise the following issues which they value, notwithstanding such holder at the time of
present in the form of errors: taking the instrument knew him to be only an
accommodation party.
I. First Assignment of Error.
In the case of Philippine Bank of Commerce v. Aruego (102 SCRA
THE HONORABLE COURT OF APPEALS ERRED IN 530, 539), we held that "... in lending his name to the
HOLDING THAT HEREIN PETITIONERS WERE SOLIDARY accommodated party, the accommodation party is in effect a surety.
CO-DEBTORS INSTEAD OF SURETIES: ... . " However, unlike in a contract of suretyship, the liability of the
accommodation party remains not only primary but also
unconditional to a holder for value such that even if the
II. Second Assignment of Error. accommodated party receives an extension of the period for
payment without the consent of the accommodation party, the
THE HONORABLE COURT OF APPEALS ERRED IN latter is still liable for the whole obligation and such extension does
HOLDING THAT PETITIONERS WERE NOT RELEASED not release him because as far as a holder for value is concerned,
FROM THEIR OBLIGATION TO THE RESPONDENT PNB, he is a solidary co- debtor.
WHEN THE PNB, WITHOUT THE KNOWLEDGE AND
CONSENT OF PETITIONERS, CHANGED THE TENOR Expounding on the nature of the liability of an accommodation
AND CONDITION OF THE ASSIGNMENT OF PAYMENTS petition party under the aforequoted section, we ruled in Ang Tiong
MADE BY THE PRINCIPAL DEBTOR; CONCEPCION & v. Ting (22 SCRA 713, 716):
TAMAYO CONSTRUCTION COMPANY; AND RELEASED
TO SUCH PRINCIPAL DEBTOR PAYMENTS FROM THE
BUREAU OF PUBLIC WORKS WHICH WERE MORE THAN 3. That the appellant, again assuming him to be an
ENOUGH TO WIPE OUT THE INDEBTEDNESS TO THE accommodation indorser, may obtain security from
PNB. the maker to protect himself against the danger of
insolvency of the latter, cannot in any manner affect
his liability to the appellee, as the said remedy is a
The petitioners contend that as accommodation makers, the nature matter of concern exclusively between
of their liability is only that of mere sureties instead of solidary co- accommodation indorser and accommodated party.
debtors such that "a material alteration in the principal contract, So that the appellant stands only as a surety in
effected by the creditor without the knowledge and consent of the relation to the maker, granting this to be true for the
sureties, completely discharges the sureties from all liability on the sake of argument, is immaterial to the claim of the
contract of suretyship. " They state that when respondent PNB did appellee, and does not a whit diminish nor defeat the
not apply the initial and subsequent payments to the petitioners' rights of the latter who is a holder for value. The
debt as provided for in the deed of assignment, they were released liability of the appellant remains primary and
from their obligation as sureties and, therefore, the real estate unconditional. To sanction the appellant's theory is to
mortgage executed by them should have been cancelled. give unwarranted legal recognition to the patent
absurdity of a situation where an indorser, when sued
Section 29 of the Negotiable Instrument Law provides: on an instrument by a holder in due course and for
value, can escape liability on his indorsement by the
 convenient expedient of interposing the defense that before maturity, and without any notice of any
he is a mere accommodation indorser. infirmity, from a holder, not the maker. to whom it
was negotiated as a completed instrument, is a
There is, therefore, no question that as accommodation makers, holder in due course within the purview of a
petitioners would be primarily and unconditionally liable on the Negotiable Instruments law, so as to preclude the
promissory note to a holder for value, regardless of whether they defense of fraud and failure of consideration between
stand as sureties or solidary co-debtors since such distinction would the maker and the holder to whom the instrument,
be entirely immaterial and inconsequential as far as a holder for was delivered.
value is concerned. Consequently, the petitioners cannot claim to
have been released from their obligation simply because the time of Similarly, in the case of Stone v. Goldberg & Lewis (60 Southern
payment of such obligation was temporarily deferred by PNB Reporter 748) on rehearing and quoting Daniel on Negotiable
without their knowledge and consent. There has to be another basis Instruments, it was held:
for their claim of having been freed from their obligation. The
question which should be resolved in this instant petition, therefore, It is a general principle of the law merchant that, as
is whether or not PNB can be considered a holder for value under between the immediate parties to a negotiable
Section 29 of the Negotiable Instruments Law such that the instrument-the parties between whom there is a
petitioners must be necessarily barred from setting up the defense privity-the consideration may be inquired into; and as
of want of consideration or some other personal defenses which to them the only superiority of a bill or note over
may be set up against a party who is not a holder in due course. other unsealed evidence of debt is that it prima facie
imports a consideration.
A holder for value under Section 29 of the Negotiable Instruments
Law is one who must meet all the requirements of a holder in due Although as a general rule, a payee may be considered a holder in
course under Section 52 of the same law except notice of want of due course we think that such a rule cannot apply with respect to
consideration. (Agbayani, Commercial Laws of the Philippines, 1964, the respondent PNB. Not only was PNB an immediate party or in
p. 208). If he does not qualify as a holder in due course then he privy to the promissory note, that is, it had dealt directly with the
holds the instrument subject to the same defenses as if it were non- petitioners knowing fully well that the latter only signed as
negotiable (Section 58, Negotiable Instruments Law). accommodation makers but more important, it was the Deed of
Assignment executed by the Construction Company in favor of PNB
In the case at bar, can PNB, the payee of the promissory note be which principally moved the petitioners to sign the promissory note
considered a holder in due course? also in favor of PNB. Petitioners were made to believe and on that
belief entered into the agreement that no other conditions would
Petitioners contend that the payee PNB is an immediate party and, alter the terms thereof and yet, PNB altered the same. The Deed of
therefore, is not a holder in due course and stands on no better Assignment specifically provided that Jose F. Toribio, on behalf of the
footing than a mere assignee. Company, "have assigned, transferred and conveyed and by these
presents, do assign, transfer and convey unto the said Philippine
In those cases where a payee was considered a holder in due National Bank, its successors and assigns all payments to be
course, such payee either acquired the note from another holder or received from the Bureau of Public Works on account of contract for
has not directly dealt with the maker thereof. As was held in the the construction of the Puerto Princesa Municipal Building in
case of Bank of Commerce and Savings v. Randell (186 Palawan, involving the total amount of P 36,000.00" and that "This
NorthWestern Reporter 71): assignment shall be irrevocable and subject to the terms and
conditions of the promissory note and or any other kind of
documents which the Philippine National Bank have required or may
We conclude, therefore, that a payee who receives a require the assignor to execute to evidence the above-mentioned
negotiable promissory note, in good faith, for value, obligation."
Under the terms of the above Deed, it is clear that there are no assignment was shown to the spouses that they consented to the
further conditions which could possibly alter the agreement without mortgage and signed the promissory note in the Bank's favor.
the consent of the petitioners such as the grant of greater priority to
obligations other than the payment of the loan due to the PNB and Article 2085 of the Civil Code enumerates the requisites of a valid
part of which loan was guaranteed by the petitioners in the amount mortgage contract. Petitioners do not dispute the validity of the
of P10,000.00. mortgage. They only want to have it cancelled because the Bank
violated the deed of assignment and extended the period of time of
This, notwithstanding, PNB approved the Bureau's release of three payment of the promissory note without the petitioners' consent
payments directly to the Company instead of paying the same to and to the latter's detriment.
the Bank. This approval was in violation of the Deed of Assignment
and without any notice to the petitioners who stood to lose their The mortgage cannot be separated from the promissory note for it
property once the promissory note falls due without the same is the latter which is the basis of determining whether the mortgage
having been paid because the PNB, in effect, waived payments of should be foreclosed or cancelled. Without the promissory note
the first three releases. From the foregoing circumstances, PNB can which determines the amount of indebtedness there would have
not be regarded as having acted in good faith which is also one of been no basis for the mortgage.
the requisites of a holder in due course under Section 52 of the
Negotiable Instruments Law. The PNB knew that the promissory note True, if the Bank had not been the assignee, then the petition
which it took from the accommodation makers was signed by the petitioners would be obliged to pay the Bank as their creditor on the
latter because of full reliance on the Deed of Assignment, which, promissory note, irrespective of whether or not the deed of
PNB had no intention to comply with strictly. Worse, the third assignment had been violated. However, the assignee and the
payment to the Company in the amount of P4,293.60 was approved creditor in this case are one and the samethe Bank itself. When
by PNB although the promissory note was almost a month overdue, the Bank violated the deed of assignment, it prejudiced itself
an act which is clearly detrimental to the petitioners. because its very violation was the reason why it was not paid on
time in its capacity as creditor in the promissory note. It would be
We, therefore, hold that respondent PNB is not a holder in due unfair to make the petitioners now answer for the debt or to
course. Thus, the petitioners can validly set up their personal foreclose on their property.
defense of release from the real estate mortgage against PNB. The
latter, in authorizing the third payment to the Company after the Neither can PNB justify its acts on the ground that the Bureau of
promissory note became due, in effect, extended the term of the Public Works approved the deed of assignment with the condition
payment of the note without the consent of the accommodation that the wages of laborers and materials needed in the construction
makers who stand as sureties to the accommodated party and to all work must take precedence over the payment of the promissory
other parties who are not holders in due course or who do not derive note. In the first place, PNB did not need the approval of the Bureau.
their right from the same, including PNB. But even if it did, it should have informed the petitioners about the
amendment of the deed of assignment. Secondly, the wages and
It may be argued that the Prudencios could have mortgaged their materials have already been paid. That issue is academic. What is in
property even without the promissory note. The records show, dispute is who should bear the loss in this case. As between the
however, that they would not have mortgaged the lot were it not for petitioners and the Bank, the law and the equities of the case favor
the sake of the Company whose attorney-in-fact was their relative. the petitioners, And thirdly, the wages and materials constitute a
The spouses did not need the money for themselves. lien only on the constructed building but do not enjoy preference
over the loan unless there is a liquidation proceeding such as in
The attorney-in-fact tried twice to convince the Prudencios to insolvency or settlement of estate. (See Philippine Savings Bank v.
mortgage their property in order to secure a loan in favor of the Lantin, 124 SCRA 476). There were remedies available at the time if
Company but the Prudencios refused. It was only when the deed of the laborers and the creditors had not been paid. The fact is, they
have been paid. Hence, when the PNB accepted the condition
imposed by the Bureau without the knowledge or consent of the At the time of the trial, the parties submitted a stipulation of facts,
petitioners, it amended the deed of assignment which, as stated which reads as follows:
earlier, was the principal reason why the petitioners consented to
become accommodation makers. Plaintiff and defendants through their respective undersigned
attorney's respectfully submit the following Agreed
WHEREFORE, the petition is GRANTED. The decision of the Court of Stipulation of Facts;
Appeals affirming the decision of the trial court is hereby REVERSED
and SET ASIDE and a new one entered absolving the petitioners First. That on or about 8 September 1953, in the evening,
from liability on the promissory note and under the mortgage defendant Anita C. Gatchalian who was then interested in
contract. The Philippine National Bank is ordered to release the real looking for a car for the use of her husband and the family,
estate mortgage constituted on the property of the petitioners and was shown and offered a car by Manuel Gonzales who was
to pay the amount of THREE THOUSAND PESOS (P3,000.00) as accompanied by Emil Fajardo, the latter being personally
attorney's fees. known to defendant Anita C. Gatchalian;

SO ORDERED. 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
G.R. No. L-15126 November 30, 1961 were not known to plaintiff;

VICENTE R. DE OCAMPO & CO., plaintiff-appellee, Third. That defendant Anita C. Gatchalian, finding the
vs. price of the car quoted by Manuel Gonzales to her
ANITA GATCHALIAN, ET AL., defendants-appellants. 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
LABRADOR, J.:
on this request of defendant Anita C. Gatchalian, Manuel
Gonzales advised her that the owner of the car will not be
Appeal from a judgment of the Court of First Instance of Manila, Hon. willing to give the certificate of registration unless there is a
Conrado M. Velasquez, presiding, sentencing the defendants to pay showing that the party interested in the purchase of said car
the plaintiff the sum of P600, with legal interest from September 10, is ready and willing to make such purchase and that for this
1953 until paid, and to pay the costs. purpose Manuel Gonzales requested defendant Anita C.
Gatchalian to give him (Manuel Gonzales) a check which will
The action is for the recovery of the value of a check for P600 be shown to the owner as evidence of buyer's good faith in
payable to the plaintiff and drawn by defendant Anita C. Gatchalian. the intention to purchase the said car, the said check to be
The complaint sets forth the check and alleges that plaintiff for safekeeping only of Manuel Gonzales and to be returned
received it in payment of the indebtedness of one Matilde Gonzales; to defendant Anita C. Gatchalian the following day when
that upon receipt of said check, plaintiff gave Matilde Gonzales Manuel Gonzales brings the car and the certificate of
P158.25, the difference between the face value of the check and registration, but which facts were not known to plaintiff;
Matilde Gonzales' indebtedness. The defendants admit the
execution of the check but they allege in their answer, as Fourth. That relying on these representations of Manuel
affirmative defense, that it was issued subject to a condition, which Gonzales and with his assurance that said check will be only
was not fulfilled, and that plaintiff was guilty of gross negligence in for safekeeping and which will be returned to said defendant
not taking steps to protect itself. 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, Manuel Gonzales from its hospital, accepted said check,
defendant Anita C. Gatchalian drew and issued a check, Exh. applying P441.75 (Exhibit "A") thereof to payment of said
"B"; that Manuel Gonzales executed and issued a receipt for fees and expenses and delivering to Manuel Gonzales the
said check, Exh. "1"; amount of P158.25 (as per receipt, Exhibit "D") representing
the balance on the amount of the said check, Exh. "B";
Fifth. That on the failure of Manuel Gonzales to appear the
day following and on his failure to bring the car and its Eleventh. That the acts of acceptance of the check and
certificate of registration and to return the check, Exh. "B", application of its proceeds in the manner specified above
on the following day as previously agreed upon, defendant were made without previous inquiry by plaintiff from
Anita C. Gatchalian issued a "Stop Payment Order" on the defendants:
check, Exh. "3", with the drawee bank. Said "Stop Payment
Order" was issued without previous notice on plaintiff not Twelfth. That plaintiff filed or caused to be filed with the
being know to defendant, Anita C. Gatchalian and who Office of the City Fiscal of Manila, a complaint for estafa
furthermore had no reason to know check was given to against Manuel Gonzales based on and arising from the acts
plaintiff; of said Manuel Gonzales in paying his obligations with
plaintiff and receiving the cash balance of the check, Exh.
Sixth. That defendants, both or either of them, did not "B" and that said complaint was subsequently dropped;
know personally Manuel Gonzales or any member of his
family at any time prior to September 1953, but that Thirteenth. That the exhibits mentioned in this stipulation
defendant Hipolito Gatchalian is personally acquainted with and the other exhibits submitted previously, be considered
V. R. de Ocampo; as parts of this stipulation, without necessity of formally
offering them in evidence;
Seventh. That defendants, both or either of them, had no
arrangements or agreement with the Ocampo Clinic at any WHEREFORE, it is most respectfully prayed that this agreed
time prior to, on or after 9 September 1953 for the stipulation of facts be admitted and that the parties hereto
hospitalization of the wife of Manuel Gonzales and neither or be given fifteen days from today within which to submit
both of said defendants had assumed, expressly or impliedly, simultaneously their memorandum to discuss the issues of
with the Ocampo Clinic, the obligation of Manuel Gonzales or law arising from the facts, reserving to either party the right
his wife for the hospitalization of the latter; to submit reply memorandum, if necessary, within ten days
from receipt of their main memoranda. (pp. 21-25,
Eight. That defendants, both or either of them, had no Defendant's Record on Appeal).
obligation or liability, directly or indirectly with the Ocampo
Clinic before, or on 9 September 1953; No other evidence was submitted and upon said stipulation the
court rendered the judgment already alluded above.
Ninth. That Manuel Gonzales having received the check
Exh. "B" from defendant Anita C. Gatchalian under the In their appeal defendants-appellants contend that the check is not
representations and conditions herein above specified, a negotiable instrument, under the facts and circumstances stated
delivered the same to the Ocampo Clinic, in payment of the in the stipulation of facts, and that plaintiff is not a holder in due
fees and expenses arising from the hospitalization of his course. In support of the first contention, it is argued that defendant
wife; Gatchalian had no intention to transfer her property in the
instrument as it was for safekeeping merely and, therefore, there
Tenth. That plaintiff for and in consideration of fees and was no delivery required by law (Section 16, Negotiable Instruments
expenses of hospitalization and the release of the wife of Law); that assuming for the sake of argument that delivery was not
for safekeeping merely, delivery was conditional and the condition have been more cautious and wary in accepting a piece of
was not fulfilled. paper and disbursing cold cash.

In support of the contention that plaintiff-appellee is not a holder in The check is payable to bearer. Hence, any person who holds
due course, the appellant argues that plaintiff-appellee cannot be a it should have been subjected to inquiries. EVEN IN A BANK,
holder in due course because there was no negotiation prior to CHECKS ARE NOT CASHED WITHOUT INQUIRY FROM THE
plaintiff-appellee's acquiring the possession of the check; that a BEARER. The same inquiries should have been made by
holder in due course presupposes a prior party from whose hands plaintiff. (Defendants-appellants' brief, pp. 52-53)
negotiation proceeded, and in the case at bar, plaintiff-appellee is
the payee, the maker and the payee being original parties. It is also Answering the first contention of appellant, counsel for plaintiff-
claimed that the plaintiff-appellee is not a holder in due course appellee argues that in accordance with the best authority on the
because it acquired the check with notice of defect in the title of the Negotiable Instruments Law, plaintiff-appellee may be considered as
holder, Manuel Gonzales, and because under the circumstances a holder in due course, citing Brannan's Negotiable Instruments
stated in the stipulation of facts there were circumstances that Law, 6th edition, page 252. On this issue Brannan holds that a
brought suspicion about Gonzales' possession and negotiation, payee may be a holder in due course and says that to this effect is
which circumstances should have placed the plaintiff-appellee under the greater weight of authority, thus:
the duty, to inquire into the title of the holder. The circumstances
are as follows: 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 check is not a personal check of Manuel Gonzales. the courts are in serious conflict. There can be no doubt that
(Paragraph Ninth, Stipulation of Facts). Plaintiff could have a proper interpretation of the act read as a whole leads to
inquired why a person would use the check of another to pay the conclusion that a payee may be a holder in due course
his own debt. Furthermore, plaintiff had the "means of under any circumstance in which he meets the requirements
knowledge" inasmuch as defendant Hipolito Gatchalian is of Sec. 52.
personally acquainted with V. R. de Ocampo (Paragraph
Sixth, Stipulation of Facts.). The argument of Professor Brannan in an earlier edition of
this work has never been successfully answered and is here
The maker Anita C. Gatchalian is a complete stranger to repeated.
Manuel Gonzales and Dr. V. R. de Ocampo (Paragraph Sixth,
Stipulation of Facts). Section 191 defines "holder" as the payee or indorsee of a
bill or note, who is in possession of it, or the bearer thereof.
The maker is not in any manner obligated to Ocampo Clinic Sec. 52 defendants defines a holder in due course as "a
nor to Manuel Gonzales. (Par. 7, Stipulation of Facts.) holder who has taken the instrument under the following
conditions: 1. That it is complete and regular on its face. 2.
The check could not have been intended to pay the hospital That he became the holder of it before it was overdue, and
fees which amounted only to P441.75. The check is in the without notice that it had been previously dishonored, if such
amount of P600.00, which is in excess of the amount due was the fact. 3. That he took it in good faith and for value. 4.
plaintiff. (Par. 10, Stipulation of Facts). 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
It was necessary for plaintiff to give Manuel Gonzales change person negotiating it."
in the sum P158.25 (Par. 10, Stipulation of Facts). Since
Manuel Gonzales is the party obliged to pay, plaintiff should 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 (b) That he became the holder of it before it was overdue,
definition in sec. 191 so as to read "a holder in due course is and without notice that it had been previously dishonored, if
a payee or indorsee who is in possession," etc. (Brannan's on such was the fact;
Negotiable Instruments Law, 6th ed., p. 543).
(c) That he took it in good faith and for value;
The first argument of the defendants-appellants, therefore, depends
upon whether or not the plaintiff-appellee is a holder in due course. (d) That at the time it was negotiated to him he had no
If it is such a holder in due course, it is immaterial that it was the notice of any infirmity in the instrument or defect in the title
payee and an immediate party to the instrument. of the person negotiating it.

The other contention of the plaintiff is that there has been no The stipulation of facts expressly states that plaintiff-appellee was
negotiation of the instrument, because the drawer did not deliver not aware of the circumstances under which the check was
the instrument to Manuel Gonzales with the intention of negotiating delivered to Manuel Gonzales, but we agree with the defendants-
the same, or for the purpose of giving effect thereto, for as the appellants that the circumstances indicated by them in their briefs,
stipulation of facts declares the check was to remain in the such as the fact that appellants had no obligation or liability to the
possession Manuel Gonzales, and was not to be negotiated, but was Ocampo Clinic; that the amount of the check did not correspond
to serve merely as evidence of good faith of defendants in their exactly with the obligation of Matilde Gonzales to Dr. V. R. de
desire to purchase the car being sold to them. Admitting that such Ocampo; and that the check had two parallel lines in the upper left
was the intention of the drawer of the check when she delivered it hand corner, which practice means that the check could only be
to Manuel Gonzales, it was no fault of the plaintiff-appellee drawee if deposited but may not be converted into cash all these
Manuel Gonzales delivered the check or negotiated it. As the check circumstances should have put the plaintiff-appellee to inquiry as to
was payable to the plaintiff-appellee, and was entrusted to Manuel the why and wherefore of the possession of the check by Manuel
Gonzales by Gatchalian, the delivery to Manuel Gonzales was a Gonzales, and why he used it to pay Matilde's account. It was
delivery by the drawer to his own agent; in other words, Manuel payee's duty to ascertain from the holder Manuel Gonzales what the
Gonzales was the agent of the drawer Anita Gatchalian insofar as nature of the latter's title to the check was or the nature of his
the possession of the check is concerned. So, when the agent of possession. Having failed in this respect, we must declare that
drawer Manuel Gonzales negotiated the check with the intention of plaintiff-appellee was guilty of gross neglect in not finding out the
getting its value from plaintiff-appellee, negotiation took place nature of the title and possession of Manuel Gonzales, amounting to
through no fault of the plaintiff-appellee, unless it can be shown that legal absence of good faith, and it may not be considered as a
the plaintiff-appellee should be considered as having notice of the holder of the check in good faith. To such effect is the consensus of
defect in the possession of the holder Manuel Gonzales. Our authority.
resolution of this issue leads us to a consideration of the last
question presented by the appellants, i.e., whether the plaintiff- In order to show that the defendant had "knowledge of such
appellee may be considered as a holder in due course. facts that his action in taking the instrument amounted to
bad faith," it is not necessary to prove that the defendant
Section 52, Negotiable Instruments Law, defines holder in due knew the exact fraud that was practiced upon the plaintiff by
course, thus: the defendant's assignor, it being sufficient to show that the
defendant had notice that there was something wrong about
A holder in due course is a holder who has taken the his assignor's acquisition of title, although he did not have
instrument under the following conditions: notice of the particular wrong that was committed. Paika v.
Perry, 225 Mass. 563, 114 N.E. 830.
(a) That it is complete and regular upon its face;
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 was a defect in the title of the holder (Manuel Gonzales), because
even the nature of the fraud, since all that is required is the instrument is not payable to him or to bearer. On the other
knowledge of such facts that his action in taking the note hand, the stipulation of facts indicated by the appellants in their
amounted bad faith. Ozark Motor Co. v. Horton (Mo. App.), brief, like the fact that the drawer had no account with the payee;
196 S.W. 395. Accord. Davis v. First Nat. Bank, 26 Ariz. 621, that the holder did not show or tell the payee why he had the check
229 Pac. 391. 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
Liberty bonds stolen from the plaintiff were brought by the suspicious, to say the least. As holder's title was defective or
thief, a boy fifteen years old, less than five feet tall, suspicious, it cannot be stated that the payee acquired the check
immature in appearance and bearing on his face the stamp a without knowledge of said defect in holder's title, and for this reason
degenerate, to the defendants' clerk for sale. The boy stated the presumption that it is a holder in due course or that it acquired
that they belonged to his mother. The defendants paid the the instrument in good faith does not exist. And having presented
boy for the bonds without any further inquiry. Held, the no evidence that it acquired the check in good faith, it (payee)
plaintiff could recover the value of the bonds. The term 'bad cannot be considered as a holder in due course. In other words,
faith' does not necessarily involve furtive motives, but means under the circumstances of the case, instead of the presumption
bad faith in a commercial sense. The manner in which the that payee was a holder in good faith, the fact is that it acquired
defendants conducted their Liberty Loan department possession of the instrument under circumstances that should have
provided an easy way for thieves to dispose of their plunder. put it to inquiry as to the title of the holder who negotiated the
It was a case of "no questions asked." Although gross check to it. The burden was, therefore, placed upon it to show that
negligence does not of itself constitute bad faith, it is notwithstanding the suspicious circumstances, it acquired the check
evidence from which bad faith may be inferred. The in actual good faith.
circumstances thrust the duty upon the defendants to make
further inquiries and they had no right to shut their eyes The rule applicable to the case at bar is that described in the case of
deliberately to obvious facts. Morris v. Muir, 111 Misc. Rep. Howard National Bank v. Wilson, et al., 96 Vt. 438, 120 At. 889, 894,
739, 181 N.Y. Supp. 913, affd. in memo., 191 App. Div. 947, where the Supreme Court of Vermont made the following
181 N.Y. Supp. 945." (pp. 640-642, Brannan's Negotiable disquisition:
Instruments Law, 6th ed.).
Prior to the Negotiable Instruments Act, two distinct lines of
The above considerations would seem sufficient to justify our ruling cases had developed in this country. The first had its origin in
that plaintiff-appellee should not be allowed to recover the value of Gill v. Cubitt, 3 B. & C. 466, 10 E. L. 215, where the rule was
the check. Let us now examine the express provisions of the distinctly laid down by the court of King's Bench that the
Negotiable Instruments Law pertinent to the matter to find if our purchaser of negotiable paper must exercise reasonable
ruling conforms thereto. Section 52 (c) provides that a holder in due prudence and caution, and that, if the circumstances were
course is one who takes the instrument "in good faith and for such as ought to have excited the suspicion of a prudent and
value;" Section 59, "that every holder is deemed prima facie to be a careful man, and he made no inquiry, he did not stand in the
holder in due course;" and Section 52 (d), that in order that one may legal position of a bona fide holder. The rule was adopted by
be a holder in due course it is necessary that "at the time the the courts of this country generally and seem to have
instrument was negotiated to him "he had no notice of any . . . become a fixed rule in the law of negotiable paper. Later in
defect in the title of the person negotiating it;" and lastly Section 59, Goodman v. Harvey, 4 A. & E. 870, 31 E. C. L. 381, the
that every holder is deemed prima facieto be a holder in due English court abandoned its former position and adopted the
course. rule that nothing short of actual bad faith or fraud in the
purchaser would deprive him of the character of a bona fide
In the case at bar the rule that a possessor of the instrument purchaser and let in defenses existing between prior parties,
is prima faciea holder in due course does not apply because there that no circumstances of suspicion merely, or want of proper
 caution in the purchaser, would have this effect, and that For the foregoing considerations, the decision appealed from should
even gross negligence would have no effect, except as be, as it is hereby, reversed, and the defendants are absolved from
evidence tending to establish bad faith or fraud. Some of the the complaint. With costs against plaintiff-appellee.
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.