Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-40824 February 23, 1989
GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner,
vs.
COURT OF APPEALS and MR. & MRS. ISABELO R. RACHO, respondents.
The Government Corporate Counsel for petitioner.
Lorenzo A. Sales for private respondents.

REGALADO , J.:
Private respondents, Mr. and Mrs. Isabelo R. Racho, together with the spouses Mr. and Mrs Flaviano
Lagasca, executed a deed of mortgage, dated November 13, 1957, in favor of petitioner
Government Service Insurance System (hereinafter referred to as GSIS) and subsequently, another
deed of mortgage, dated April 14, 1958, in connection with two loans granted by the latter in the
sums of P 11,500.00 and P 3,000.00, respectively. 1 A parcel of land covered by Transfer Certificate
of Title No. 38989 of the Register of Deed of Quezon City, co-owned by said mortgagor spouses,
was given as security under the aforesaid two deeds. 2 They also executed a 'promissory note"
which states in part:
... for value received, we the undersigned ... JOINTLY, SEVERALLY and
SOLIDARILY, promise to pay the GOVERNMENT SERVICE INSURANCE SYSTEM
the sum of . . . (P 11,500.00) Philippine Currency, with interest at the rate of six (6%)
per centum compounded monthly payable in . . . (120)equal monthly installments
of . . . (P 127.65) each. 3
On July 11, 1961, the Lagasca spouses executed an instrument denominated "Assumption of
Mortgage" under which they obligated themselves to assume the aforesaid obligation to the GSIS
and to secure the release of the mortgage covering that portion of the land belonging to herein
private respondents and which was mortgaged to the GSIS. 4 This undertaking was not fulfilled. 5
Upon failure of the mortgagors to comply with the conditions of the mortgage, particularly the
payment of the amortizations due, GSIS extrajudicially foreclosed the mortgage and caused the
mortgaged property to be sold at public auction on December 3, 1962. 6
More than two years thereafter, or on August 23, 1965, herein private respondents filed a complaint
against the petitioner and the Lagasca spouses in the former Court of
First Instance of Quezon City, 7 praying that the extrajudicial foreclosure "made on, their property
and all other documents executed in relation thereto in favor of the Government Service Insurance

System" be declared null and void. It was further prayed that they be allowed to recover said
property, and/or the GSIS be ordered to pay them the value thereof, and/or they be allowed to
repurchase the land. Additionally, they asked for actual and moral damages and attorney's fees.
In their aforesaid complaint, private respondents alleged that they signed the mortgage contracts not
as sureties or guarantors for the Lagasca spouses but they merely gave their common property to
the said co-owners who were solely benefited by the loans from the GSIS.
The trial court rendered judgment on February 25, 1968 dismissing the complaint for failure to
establish a cause of action. 8
Said decision was reversed by the respondent Court of Appeals 9 which held that:
... although formally they are co-mortgagors, they are so only for accomodation (sic)
in that the GSIS required their consent to the mortgage of the entire parcel of land
which was covered with only one certificate of title, with full knowledge that the loans
secured thereby were solely for the benefit of the appellant (sic) spouses who alone
applied for the loan.
xxxx
'It is, therefore, clear that as against the GSIS, appellants have a valid cause for
having foreclosed the mortgage without having given sufficient notice to them as
required either as to their delinquency in the payment of amortization or as to the
subsequent foreclosure of the mortgage by reason of any default in such payment.
The notice published in the newspaper, 'Daily Record (Exh. 12) and posted pursuant
to Sec 3 of Act 3135 is not the notice to which the mortgagor is entitled upon the
application being made for an extrajudicial foreclosure. ... 10
On the foregoing findings, the respondent court consequently decreed thatIn view of all the foregoing, the judgment appealed from is hereby reversed, and
another one entered (1) declaring the foreclosure of the mortgage void insofar as it
affects the share of the appellants; (2) directing the GSIS to reconvey to appellants
their share of the mortgaged property, or the value thereof if already sold to third
party, in the sum of P 35,000.00, and (3) ordering the appellees Flaviano Lagasca
and Esther Lagasca to pay the appellants the sum of P 10,00.00 as moral damages,
P 5,000.00 as attorney's fees, and costs. 11
The case is now before us in this petition for review.
In submitting their case to this Court, both parties relied on the provisions of Section 29 of Act No.
2031, otherwise known as the Negotiable Instruments Law, which provide that an accommodation
party is one who has signed an instrument as maker, drawer, acceptor of indorser without receiving
value therefor, but is held liable on the instrument to a holder for value although the latter knew him
to be only an accommodation party.
This approach of both parties appears to be misdirected and their reliance misplaced. The
promissory note hereinbefore quoted, as well as the mortgage deeds subject of this case, are clearly

not negotiable instruments. These documents do not comply with the fourth requisite to be
considered as such under Section 1 of Act No. 2031 because they are neither payable to order nor
to bearer. The note is payable to a specified party, the GSIS. Absent the aforesaid requisite, the
provisions of Act No. 2031 would not apply; governance shall be afforded, instead, by the provisions
of the Civil Code and special laws on mortgages.
As earlier indicated, the factual findings of respondent court are that private respondents signed the
documents "only to give their consent to the mortgage as required by GSIS", with the latter having
full knowledge that the loans secured thereby were solely for the benefit of the Lagasca
spouses. 12 This appears to be duly supported by sufficient evidence on record. Indeed, it would be
unusual for the GSIS to arrange for and deduct the monthly amortizations on the loans from the
salary as an army officer of Flaviano Lagasca without likewise affecting deductions from the salary of
Isabelo Racho who was also an army sergeant. Then there is also the undisputed fact, as already
stated, that the Lagasca spouses executed a so-called "Assumption of Mortgage" promising to
exclude private respondents and their share of the mortgaged property from liability to the
mortgagee. There is no intimation that the former executed such instrument for a consideration, thus
confirming that they did so pursuant to their original agreement.
The parol evidence rule 13 cannot be used by petitioner as a shield in this case for it is clear that
there was no objection in the court below regarding the admissibility of the testimony and documents
that were presented to prove that the private respondents signed the mortgage papers just to
accommodate their co-owners, the Lagasca spouses. Besides, the introduction of such evidence
falls under the exception to said rule, there being allegations in the complaint of private respondents
in the court below regarding the failure of the mortgage contracts to express the true agreement of
the parties.14
However, contrary to the holding of the respondent court, it cannot be said that private respondents
are without liability under the aforesaid mortgage contracts. The factual context of this case is
precisely what is contemplated in the last paragraph of Article 2085 of the Civil Code to the effect
that third persons who are not parties to the principal obligation may secure the latter by pledging or
mortgaging their own property
So long as valid consent was given, the fact that the loans were solely for the benefit of the Lagasca
spouses would not invalidate the mortgage with respect to private respondents' share in the
property. In consenting thereto, even assuming that private respondents may not be assuming
personal liability for the debt, their share in the property shall nevertheless secure and respond for
the performance of the principal obligation. The parties to the mortgage could not have intended that
the same would apply only to the aliquot portion of the Lagasca spouses in the property, otherwise
the consent of the private respondents would not have been required.
The supposed requirement of prior demand on the private respondents would not be in point here
since the mortgage contracts created obligations with specific terms for the compliance thereof. The
facts further show that the private respondents expressly bound themselves as solidary debtors in
the promissory note hereinbefore quoted.
Coming now to the extrajudicial foreclosure effected by GSIS, We cannot agree with the ruling of
respondent court that lack of notice to the private respondents of the extrajudicial foreclosure sale
impairs the validity thereof. In Bonnevie, et al. vs. Court of appeals, et al., 15 the Court ruled that Act

No. 3135, as amended, does not require personal notice on the mortgagor, quoting the requirement
on notice in such cases as follows:
Section 3. Notice shall be given by posting notices of sale for not less than twenty
days in at least three public places of the municipality where the property is situated,
and if such property is worth more than four hundred pesos, such notice shall also be
published once a week for at least three consecutive weeks in a newspaper of
general circulation in the municipality or city.
There is no showing that the foregoing requirement on notice was not complied with in the
foreclosure sale complained of .
The respondent court, therefore, erred in annulling the mortgage insofar as it affected the share of
private respondents or in directing reconveyance of their property or the payment of the value
thereof Indubitably, whether or not private respondents herein benefited from the loan, the mortgage
and the extrajudicial foreclosure proceedings were valid.
WHEREFORE, judgment is hereby rendered REVERSING the decision of the respondent Court of
Appeals and REINSTATING the decision of the court a quo in Civil Case No. Q-9418 thereof.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

G.R. No. L-40796 July 31, 1975

REPUBLIC BANK, plaintiff-appellee,
vs.
MAURICIA T. EBRADA, defendant-appellant.
Sabino de Leon, Jr. for plaintiff-appellee.
Julio Baldonado for defendant-appellant.

MARTIN, J.:
Appeal on a question of law of the decision of the Court of First Instance of Manila, Branch XXIII in
Civil Case No. 69288, entitled "Republic Bank vs. Mauricia T. Ebrada."
On or about February 27, 1963 defendant Mauricia T. Ebrada, encashed Back Pay Check No.
508060 dated January 15, 1963 for P1,246.08 at the main office of the plaintiff Republic Bank at
Escolta, Manila. The check was issued by the Bureau of Treasury. 1 Plaintiff Bank was later advised
by the said bureau that the alleged indorsement on the reverse side of the aforesaid check by the
payee, "Martin Lorenzo" was a forgery 2 since the latter had allegedly died as of July 14,
1952. 3 Plaintiff Bank was then requested by the Bureau of Treasury to refund the amount of
P1,246.08. 4 To recover what it had refunded to the Bureau of Treasury, plaintiff Bank made verbal
and formal demands upon defendant Ebrada to account for the sum of P1,246.08, but said
defendant refused to do so. So plaintiff Bank sued defendant Ebrada before the City Court of Manila.
On July 11, 1966, defendant Ebrada filed her answer denying the material allegations of the
complaint and as affirmative defenses alleged that she was a holder in due course of the check in
question, or at the very least, has acquired her rights from a holder in due course and therefore
entitled to the proceeds thereof. She also alleged that the plaintiff Bank has no cause of action
against her; that it is in estoppel, or so negligent as not to be entitled to recover anything from her. 5
About the same day, July 11, 1966 defendant Ebrada filed a Third-Party complaint against Adelaida
Dominguez who, in turn, filed on September 14, 1966 a Fourth-Party complaint against Justina Tinio.

On March 21, 1967, the City Court of Manila rendered judgment for the plaintiff Bank against
defendant Ebrada; for Third-Party plaintiff against Third-Party defendant, Adelaida Dominguez, and
for Fourth-Party plaintiff against Fourth-Party defendant, Justina Tinio.
From the judgment of the City Court, defendant Ebrada took an appeal to the Court of First Instance
of Manila where the parties submitted a partial stipulation of facts as follows:
COME NOW the undersigned counsel for the plaintiff, defendant, Third-Party
defendant and Fourth-Party plaintiff and unto this Honorable Court most respectfully
submit the following:
PARTIAL STIPULATION OF FACTS
1. That they admit their respective capacities to sue and be sued;
2. That on January 15, 1963 the Treasury of the Philippines issued its Check No. BP508060, payable to the order of one MARTIN LORENZO, in the sum of P1,246.08,
and drawn on the Republic Bank, plaintiff herein, which check will be marked as
Exhibit "A" for the plaintiff;
3. That the back side of aforementioned check bears the following signatures, in this
order:
1) MARTIN LORENZO;
2) RAMON R. LORENZO;
3) DELIA DOMINGUEZ; and
4) MAURICIA T. EBRADA;
4. That the aforementioned check was delivered to the defendant MAURICIA T. EBRADA by the
Third-Party defendant and Fourth-Party plaintiff ADELAIDA DOMINGUEZ, for the purpose of
encashment;
5. That the signature of defendant MAURICIA T. EBRADA was affixed on said check
on February 27, 1963 when she encashed it with the plaintiff Bank;
6. That immediately after defendant MAURICIA T. EBRADA received the cash
proceeds of said check in the sum of P1,246.08 from the plaintiff Bank, she
immediately turned over the said amount to the third-party defendant and fourth-party
plaintiff ADELAIDA DOMINGUEZ, who in turn handed the said amount to the fourthparty defendant JUSTINA TINIO on the same date, as evidenced by the receipt
signed by her which will be marked as Exhibit "1-Dominguez"; and
7. That the parties hereto reserve the right to present evidence on any other fact not
covered by the foregoing stipulations,
Manila, Philippines, June 6, 1969.

Based on the foregoing stipulation of facts and the documentary evidence presented, the trial court
rendered a decision, the dispositive portion of which reads as follows:
WHEREFORE, the Court renders judgment ordering the defendant Mauricia T.
Ebrada to pay the plaintiff the amount of ONE THOUSAND TWO FORTY-SIX 08/100
(P1,246.08), with interest at the legal rate from the filing of the complaint on June 16,
1966, until fully paid, plus the costs in both instances against Mauricia T. Ebrada.
The right of Mauricia T. Ebrada to file whatever claim she may have against Adelaida
Dominguez in connection with this case is hereby reserved. The right of the estate of
Dominguez to file the fourth-party complaint against Justina Tinio is also reserved.
SO ORDERED.
In her appeal, defendant-appellant presses that the lower court erred:
IN ORDERING THE APPELLANT TO PAY THE APPELLEE THE FACE VALUE OF
THE SUBJECT CHECK AFTER FINDING THAT THE DRAWER ISSUED THE
SUBJECT CHECK TO A PERSON ALREADY DECEASED FOR 11- YEARS AND
THAT THE APPELLANT DID NOT BENEFIT FROM ENCASHING SAID CHECK.
From the stipulation of facts it is admitted that the check in question was delivered to defendantappellant by Adelaida Dominguez for the purpose of encashment and that her signature was affixed
on said check when she cashed it with the plaintiff Bank. Likewise it is admitted that defendantappellant was the last indorser of the said check. As such indorser, she was supposed to have
warranted that she has good title to said check; for under Section 65 of the Negotiable Instruments
Law: 6
Every person negotiating an instrument by delivery or by qualified indorsement,
warrants:
(a) That the instrument is genuine and in all respects what it purports to be.
(b) That she has good title to it.
xxx xxx xxx
and under Section 65 of the same Act:
Every indorser who indorses without qualification warrants to all subsequent holders
in due course:
(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next
preceding sections;
(b) That the instrument is at the time of his indorsement valid and subsisting.

It turned out, however, that the signature of the original payee of the check, Martin Lorenzo was a
forgery because he was already dead 7 almost 11 years before the check in question was issued by
the Bureau of Treasury. Under action 23 of the Negotiable Instruments Law (Act 2031):
When a signature is forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no right to retain the
instruments, or to give a discharge thereof against any party thereto, can be acquired
through or under such signature unless the party against whom it is sought to
enforce such right is precluded from setting up the forgery or want of authority.
It is clear from the provision that where the signature on a negotiable instrument if forged, the
negotiation of the check is without force or effect. But does this mean that the existence of one
forged signature therein will render void all the other negotiations of the check with respect to the
other parties whose signature are genuine?
In the case of Beam vs. Farrel, 135 Iowa 670, 113 N.W. 590, where a check has several
indorsements on it, it was held that it is only the negotiation based on the forged or unauthorized
signature which is inoperative. Applying this principle to the case before Us, it can be safely
concluded that it is only the negotiation predicated on the forged indorsement that should be
declared inoperative. This means that the negotiation of the check in question from Martin Lorenzo,
the original payee, to Ramon R. Lorenzo, the second indorser, should be declared of no affect, but
the negotiation of the aforesaid check from Ramon R. Lorenzo to Adelaida Dominguez, the third
indorser, and from Adelaida Dominguez to the defendant-appellant who did not know of the forgery,
should be considered valid and enforceable, barring any claim of forgery.
What happens then, if, after the drawee bank has paid the amount of the check to the holder thereof,
it was discovered that the signature of the payee was forged? Can the drawee bank recover from the
one who encashed the check?
In the case of State v. Broadway Mut. Bank, 282 S.W. 196, 197, it was held that the drawee of a
check can recover from the holder the money paid to him on a forged instrument. It is not supposed
to be its duty to ascertain whether the signatures of the payee or indorsers are genuine or not. This
is because the indorser is supposed to warrant to the drawee that the signatures of the payee and
previous indorsers are genuine, warranty not extending only to holders in due course. One who
purchases a check or draft is bound to satisfy himself that the paper is genuine and that by indorsing
it or presenting it for payment or putting it into circulation before presentation he impliedly asserts
that he has performed his duty and the drawee who has paid the forged check, without actual
negligence on his part, may recover the money paid from such negligent purchasers. In such cases
the recovery is permitted because although the drawee was in a way negligent in failing to detect the
forgery, yet if the encasher of the check had performed his duty, the forgery would in all probability,
have been detected and the fraud defeated. The reason for allowing the drawee bank to recover
from the encasher is:
Every one with even the least experience in business knows that no business man
would accept a check in exchange for money or goods unless he is satisfied that the
check is genuine. He accepts it only because he has proof that it is genuine, or
because he has sufficient confidence in the honesty and financial responsibility of the
person who vouches for it. If he is deceived he has suffered a loss of his cash or
goods through his own mistake. His own credulity or recklessness, or misplaced

confidence was the sole cause of the loss. Why should he be permitted to shift the
loss due to his own fault in assuming the risk, upon the drawee, simply because of
the accidental circumstance that the drawee afterwards failed to detect the forgery
when the check was presented? 8
Similarly, in the case before Us, the defendant-appellant, upon receiving the check in question from
Adelaida Dominguez, was duty-bound to ascertain whether the check in question was genuine
before presenting it to plaintiff Bank for payment. Her failure to do so makes her liable for the loss
and the plaintiff Bank may recover from her the money she received for the check. As reasoned out
above, had she performed the duty of ascertaining the genuineness of the check, in all probability
the forgery would have been detected and the fraud defeated.
In our jurisdiction We have a case of similar import. 9 The Great Eastern Life Insurance Company
drew its check for P2000.00 on the Hongkong and Shanghai Banking Corporation payable to the
order of Lazaro Melicor. A certain E. M. Maasin fraudulently obtained the check and forged the
signature of Melicor, as an indorser, and then personally indorsed and presented the check to the
Philippine National Bank where the amount of the check was placed to his (Maasin's) credit. On the
next day, the Philippine National Bank indorsed the cheek to the Hongkong and Shanghai Banking
Corporation which paid it and charged the amount of the check to the insurance company. The Court
held that the Hongkong and Shanghai Banking Corporation was liable to the insurance company for
the amount of the check and that the Philippine National Bank was in turn liable to the Hongkong
and Shanghai Banking Corporation. Said the Court:
Where a check is drawn payable to the order of one person and is presented to a
bank by another and purports upon its face to have been duly indorsed by the payee
of the check, it is the duty of the bank to know that the check was duly indorsed by
the original payee, and where the bank pays the amount of the check to a third
person, who has forged the signature of the payee, the loss falls upon the bank who
cashed the check, and its only remedy is against the person to whom it paid the
money.
With the foregoing doctrine We are to concede that the plaintiff Bank should suffer the loss when it
paid the amount of the check in question to defendant-appellant, but it has the remedy to recover
from the latter the amount it paid to her. Although the defendant-appellant to whom the plaintiff Bank
paid the check was not proven to be the author of the supposed forgery, yet as last indorser of the
check, she has warranted that she has good title to it 10 even if in fact she did not have it because the
payee of the check was already dead 11 years before the check was issued. The fact that
immediately after receiving title cash proceeds of the check in question in the amount of P1,246.08
from the plaintiff Bank, defendant-appellant immediately turned over said amount to Adelaida
Dominguez (Third-Party defendant and the Fourth-Party plaintiff) who in turn handed the amount to
Justina Tinio on the same date would not exempt her from liability because by doing so, she acted
as an accommodation party in the check for which she is also liable under Section 29 of the
Negotiable Instruments Law (Act 2031), thus: .An accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the
purpose of lending his name to some other person. Such a person is liable on the instrument to a
holder for value, notwithstanding such holder at the time of taking the instrument knew him to be
only an accommodation party.

IN VIEW OF THE FOREGOING, the judgment appealed from is hereby affirmed in toto with costs
against defendant-appellant.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-41764 December 19, 1980
NEW PACIFIC TIMBER & SUPPLY COMPANY, INC., petitioner,
vs.
HON. ALBERTO V. SENERIS, RICARDO A. TONG and EX-OFFICIO SHERIFF HAKIM S.
ABDULWAHID,respondents.

CONCEPCION JR., J.:

A petition for certiorari with preliminary injunction to annul and/or modify the order of the Court of
First Instance of Zamboanga City (Branch ii) dated August 28, 1975 denying petitioner's ExParte Motion for Issuance of Certificate Of Satisfaction Of Judgment.
Herein petitioner is the defendant in a complaint for collection of a sum of money filed by the private
respondent. 1On July 19, 1974, a compromise judgment was rendered by the respondent Judge in
accordance with an amicable settlement entered into by the parties the terms and conditions of
which, are as follows:
(1) That defendant will pay to the plaintiff the amount of Fifty Four Thousand Five
Hundred Pesos (P54,500.00) at 6% interest per annum to be reckoned from August
25, 1972;

(2) That defendant will pay to the plaintiff the amount of Six Thousand Pesos
(P6,000.00) as attorney's fees for which P5,000.00 had been acknowledged received
by the plaintiff under Consolidated Bank and Trust Corporation Check No. 16-135022
amounting to P5,000.00 leaving a balance of One Thousand Pesos (P1,000.00);
(3) That the entire amount of P54,500.00 plus interest, plus the balance of P1,000.00
for attorney's fees will be paid by defendant to the plaintiff within five months from
today, July 19, 1974; and
(4) Failure one the part of the defendant to comply with any of the above-conditions,
a writ of execution may be issued by this Court for the satisfaction of the obligation. 2
For failure of the petitioner to comply with his judgment obligation, the respondent Judge, upon
motion of the private respondent, issued an order for the issuance of a writ of execution on
December 21, 1974. Accordingly, writ of execution was issued for the amount of P63,130.00
pursuant to which, the Ex-Officio Sheriff levied upon the following personal properties of the
petitioner, to wit:
(1) Unit American Lathe 24
(1) Unit American Lathe 18 Cracker Wheeler
(1) Unit Rockford Shaper 24
and set the auction sale thereof on January 15, 1975. However, prior to January 15, 1975, petitioner
deposited with the Clerk of Court, Court of First Instance, Zamboanga City, in his capacity as ExOfficio Sheriff of Zamboanga City, the sum of P63,130.00 for the payment of the judgment obligation,
consisting of the following:
1. P50.000.00 in Cashier's Check No. S-314361 dated January 3, 1975 of the
Equitable Banking Corporation; and
2. P13,130.00 incash. 3
In a letter dated January 14, 1975, to the Ex-Officio Sheriff, 4 private respondent through counsel,
refused to accept the check as well as the cash deposit. In the 'same letter, private respondent
requested the scheduled auction sale on January 15, 1975 to proceed if the petitioner cannot
produce the cash. However, the scheduled auction sale at 10:00 a.m. on January 15, 1975 was
postponed to 3:00 o'clock p.m. of the same day due to further attempts to settle the case. Again, the
scheduled auction sale that afternoon did not push through because of a last ditch attempt to
convince the private respondent to accept the check. The auction sale was then postponed on the
following day, January 16, 1975 at 10:00 o'clock a.m. 5 At about 9:15 a.m., on January 16, 1975, a
certain Mr. Taedo representing the petitioner appeared in the office of the Ex-Officio Sheriff and the
latter reminded Mr. Taedo that the auction sale would proceed at 10:00 o'clock. At 10:00 a.m., Mr.
Taedo and Mr. Librado, both representing the petitioner requested the Ex-Officio Sheriff to give
them fifteen minutes within which to contract their lawyer which request was granted. After Mr.
Taedo and Mr. Librado failed to return, counsel for private respondent insisted that the sale must
proceed and the Ex-Officio Sheriff proceeded with the auction sale. 6 In the course of the
proceedings, Deputy Sheriff Castro sold the levied properties item by item to the private respondent

as the highest bidder in the amount of P50,000.00. As a result thereof, the Ex-Officio Sheriff declared
a deficiency of P13,130.00. 7 Thereafter, on January 16, 1975, the Ex-Officio Sheriff issued a
"Sheriff's Certificate of Sale" in favor of the private respondent, Ricardo Tong, married to Pascuala
Tong for the total amount of P50,000.00 only. 8Subsequently, on January 17, 1975, petitioner filed
an ex-parte motion for issuance of certificate of satisfaction of judgment. This motion was denied by
the respondent Judge in his order dated August 28, 1975. In view thereof, petitioner now questions
said order by way of the present petition alleging in the main that said respondent Judge capriciously
and whimsically abused his discretion in not granting the motion for issuance of certificate of
satisfaction of judgment for the following reasons: (1) that there was already a full satisfaction of the
judgment before the auction sale was conducted with the deposit made to the Ex-Officio Sheriff in
the amount of P63,000.00 consisting of P50,000.00 in Cashier's Check and P13,130.00 in cash; and
(2) that the auction sale was invalid for lack of proper notice to the petitioner and its counsel when
the Ex-Officio Sheriff postponed the sale from June 15, 1975 to January 16, 1976 contrary to Section
24, Rule 39 of the Rules of Court. On November 10, 1975, the Court issued a temporary restraining
order enjoining the respondent Ex-OfficioSheriff from delivering the personal properties subject of
the petition to Ricardo A. Tong in view of the issuance of the "Sheriff Certificate of Sale."
We find the petition to be impressed with merit.
The main issue to be resolved in this instance is as to whether or not the private respondent can
validly refuse acceptance of the payment of the judgment obligation made by the petitioner
consisting of P50,000.00 in Cashier's Check and P13,130.00 in cash which it deposited with the ExOfficio Sheriff before the date of the scheduled auction sale. In upholding private respondent's claim
that he has the right to refuse payment by means of a check, the respondent Judge cited the
following:
Section 63 of the Central Bank Act:
Sec. 63. Legal Character. Checks representing deposit money do not have legal
tender power and their acceptance in payment of debts, both public and private, is at
the option of the creditor, Provided, however, that a check which has been cleared
and credited to the account of the creditor shall be equivalent to a delivery to the
creditor in cash in an amount equal to the amount credited to his account.
Article 1249 of the New Civil Code:
Art. 1249. The payment of debts in money shall be made in the currency
stipulated, and if it is not possible to deliver such currency, then in the currency which
is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other
mercantile documents shall produce the effect of payment only when they have been
cashed, or when through the fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in
abeyance.

Likewise, the respondent Judge sustained the contention of the private respondent that he has the
right to refuse payment of the amount of P13,130.00 in cash because the said amount is less than
the judgment obligation, citing the following Article of the New Civil Code:
Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot be
compelled partially to receive the presentations in which the obligation consists.
Neither may the debtor be required to make partial payment.
However, when the debt is in part liquidated and in part unliquidated, the creditor
may demand and the debtor may effect the payment of the former without waiting for
the liquidation of the latter.
It is to be emphasized in this connection that the check deposited by the petitioner in the amount of
P50,000.00 is not an ordinary check but a Cashier's Check of the Equitable Banking Corporation, a
bank of good standing and reputation. As testified to by the Ex-Officio Sheriff with whom it has been
deposited, it is a certified crossed check.9 It is a well-known and accepted practice in the business
sector that a Cashier's Check is deemed as cash. Moreover, since the said check had been certified
by the drawee bank, by the certification, the funds represented by the check are transferred from the
credit of the maker to that of the payee or holder, and for all intents and purposes, the latter
becomes the depositor of the drawee bank, with rights and duties of one in such situation. 10 Where
a check is certified by the bank on which it is drawn, the certification is equivalent to
acceptance. 11 Said certification "implies that the check is drawn upon sufficient funds in the hands of
the drawee, that they have been set apart for its satisfaction, and that they shall be so applied
whenever the check is presented for payment. It is an understanding that the check is good then,
and shall continue good, and this agreement is as binding on the bank as its notes in circulation, a
certificate of deposit payable to the order of the depositor, or any other obligation it can assume. The
object of certifying a check, as regards both parties, is to enable the holder to use it as
money." 12 When the holder procures the check to be certified, "the check operates as an
assignment of a part of the funds to the creditors." 13 Hence, the exception to the rule enunciated
under Section 63 of the Central Bank Act to the effect "that a check which has been cleared and
credited to the account of the creditor shall be equivalent to a delivery to the creditor in cash in an
amount equal to the amount credited to his account" shall apply in this case. Considering that the
whole amount deposited by the petitioner consisting of Cashier's Check of P50,000.00 and
P13,130.00 in cash covers the judgment obligation of P63,000.00 as mentioned in the writ of
execution, then, We see no valid reason for the private respondent to have refused acceptance of
the payment of the obligation in his favor. The auction sale, therefore, was uncalled for. Furthermore,
it appears that on January 17, 1975, the Cashier's Check was even withdrawn by the petitioner and
replaced with cash in the corresponding amount of P50,000.00 on January 27, 1975 pursuant to an
agreement entered into by the parties at the instance of the respondent Judge. However, the private
respondent still refused to receive the same. Obviously, the private respondent is more interested in
the levied properties than in the mere satisfaction of the judgment obligation. Thus, petitioner's
motion for the issuance of a certificate of satisfaction of judgment is clearly meritorious and the
respondent Judge gravely abused his discretion in not granting the same under the circumstances.
In view of the conclusion reached in this instance, We find no more need to discuss the ground
relied in the petition.
It is also contended by the private respondent that Appeal and not a special civil action for certiorari
is the proper remedy in this case, and that since the period to appeal from the decision of the

respondent Judge has already expired, then, the present petition has been filed out of time. The
contention is untenable. The decision of the respondent Judge in Civil Case No. 250 (166) has long
become final and executory and so, the same is not being questioned herein. The subject of the
petition at bar as having been issued in grave abuse of discretion is the order dated August 28, 1975
of the respondent Judge which was merely issued in execution of the said decision. Thus, even
granting that appeal is open to the petitioner, the same is not an adequate and speedy remedy for
the respondent Judge had already issued a writ of execution. 14
WHEREFORE, in view of all the foregoing, judgment is hereby rendered:
1. Declaring as null and void the order of the respondent Judge dated August 28, 1975;
2. Declaring as null and void the auction sale conducted on January 16, 1975 and the certificate of
sale issued pursuant thereto;
3. Ordering the private respondent to accept the sum of P63,130.00 under deposit as payment of the
judgment obligation in his favor;
4. Ordering the respondent Judge and respondent Ex-Officio Sheriff to release the levied properties
to the herein petitioner.
The temporary restraining order issued is hereby made permanent.
Costs against the private respondent.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-18657

August 23, 1922

THE GREAT EASTERN LIFE INSURANCE CO., plaintiff-appellant,

vs.
HONGKONG & SHANGHAI BANKING CORPORATION and PHILIPPINE NATIONAL
BANK, defendants-appellees.
Camus and Delgado for appellant.
Fisher and DeWitt and A. M. Opisso for Hongkong and Shanghai Bank.
Roman J. Lacson for Philippine National Bank.

STATEMENT
The plaintiff is an insurance corporation, and the defendants are banking corporations, and each is
duly licensed to do its respective business in the Philippines Islands.
May 3, 1920, the plaintiff drew its check for P2,000 on the Hongkong and Shanghai Banking
Corporation with whom it had an account, payable to the order of Lazaro Melicor. E. M. Maasim
fraudulently obtained possession of the check, forged Melicor's signature, as an endorser, and then
personally endorsed and presented it to the Philippine National Bank where the amount of the check
was placed to his credit. After having paid the check, and on the next day, the Philippine national
Bank endorsed the check to the Hongkong and Shanghai Banking Corporation which paid it and
charged the amount of the check to the account of the plaintiff. In the ordinary course of business,
the Hongkong Shanghai Banking Corporation rendered a bank statement to the plaintiff showing that
the amount of the check was charged to its account, and no objection was then made to the
statement. About four months after the check was charged to the account of the plaintiff, it
developed that Lazaro Melicor, to whom the check was made payable, had never received it, and
that his signature, as an endorser, was forged by Maasim, who presented and deposited it to his
private account in the Philippine National Bank. With this knowledge , the plaintiff promptly made a
demand upon the Hongkong and Shanghai Banking Corporation that it should be given credit for the
amount of the forged check, which the bank refused to do, and the plaintiff commenced this action to
recover the P2,000 which was paid on the forged check. On the petition of the Shanghai Bank, the
Philippine National Bank was made defendant. The Shanghai Bank denies any liability, but prays
that, if a judgment should be rendered against it, in turn, it should have like judgment against the
Philippine National Bank which denies all liability to either party.
Upon the issues being joined, a trial was had and judgment was rendered against the plaintiff and in
favor of the defendants, from which the plaintiff appeals, claiming that the court erred in dismissing
the case, notwithstanding its finding of fact, and in not rendering a judgment in its favor, as prayed
for in its complaint.

JOHNS, J.:
There is no dispute about any of the findings of fact made by the trial court, and the plaintiff relies
upon them for a reversal. Among other things, the trial court says:
Who is responsible for the refund to the drawer of the amount of the check drawn and
payable to order, when its value was collected by a third person by means of forgery of the
signature of the payee? Is it the drawee or the last indorser, who ignored the forgery at the
time of making the payment, or the forger?
To lower court found that Melicor's name was forged to the check. "So that the person to whose
order the check was issued did not receive the money, which was collected by E. M. Maasim," and
then says:
Now then, the National Bank should not be held responsible for the payment of made to
Maasim in good faith of the amount of the check, because the indorsement of Maasim is
unquestionable and his signature perfectly genuine, and the bank was not obliged to identify
the signature of the former indorser. Neither could the Hongkong and Shanghai Banking
Corporation be held responsible in making payment in good faith to the National Bank,

because the latter is a holder in due course of the check in question. In other words, the two
defendant banks can not be held civilly responsible for the consequences of the falsification
or forgery of the signature of Lazaro Melicor, the National Bank having had no notice of said
forgery in making payment to Maasim, nor the Hongkong bank in making payment to
National Bank. Neither bank incurred in any responsibility arising from that crime, nor was
either of the said banks by subsequent acts, guilty of negligence or fault.
This was fundamental error.
Plaintiff's check was drawn on Shanghai Bank payable to the order of Melicor. In other words, the
plaintiff authorized and directed the Shanghai Bank to pay Melicor, or his order, P2,000. It did not
authorize or direct the bank to pay the check to any other person than Melicor, or his order, and the
testimony is undisputed that Melicor never did part with his title or endorse the check, and never
received any of its proceeds. Neither is the plaintiff estopped or bound by the banks statement,
which was made to it by the Shanghai Bank. This is not a case where the plaintiff's own signature
was forged to one of it checks. In such a case, the plaintiff would have known of the forgery, and it
would have been its duty to have promptly notified the bank of any forged signature, and any failure
on its part would have released bank from any liability. That is not this case. Here, the forgery was
that of Melicor, who was the payee of the check, and the legal presumption is that the bank would
not honor the check without the genuine endorsement of Melicor. In other words, when the plaintiff
received it banks statement, it had a right to assume that Melicor had personally endorsed the
check, and that, otherwise, the bank would not have paid it.
Section 23 of Act No. 2031, known as the Negotiable Instruments Law, says:
When a signature is forged or made without the authority of the person whose signature it
purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a
discharge therefor, or to enforce payment thereof against any party thereto, can be acquired
through or under such signature, unless the party against whom it is sought to enforce such
right is precluded from setting up the forgery or want of authority.
That section is square in point.
The money was on deposit in the Shanghai Bank, and it had no legal right to pay it out to anyone
except the plaintiff or its order. Here, the plaintiff ordered the Shanghai Bank to pay the P2,000 to
Melicor, and the money was actually paid to Maasim and was never paid to Melicor, and he never
paid to Melicor, and he never personally endorsed the check, or authorized any one to endorse it for
him, and the alleged endorsement was a forgery. Hence, upon the undisputed facts, it must follow
that the Shanghai Bank has no defense to this action.
It is admitted that the Philippine National Bank cashed the check upon a forged signature, and
placed the money to the credit of Maasim, who was a forger. That the Philippine National Bank then
endorsed the check and forwarded it to the Shanghai Bank by whom it was paid. The Philippine
National Bank had no license or authority to pay the money to Maasim or anyone else upon a forge
signature. It was its legal duty to know that Melicor's endorsment was genuine before cashing the
check. Its remedy is against Maasim to whom it paid the money.
The judgment of the lower court is reversed, and one will be entered here in favor of the plaintiff and
against the Hongkong and Shanghai Banking Corporation for the P2,000, with interest thereon from
November 8, 1920 at the rate of 6 per cent per annum, and the costs of this action, and a
corresponding judgment will be entered in favor of the Hongkong Shanghai Banking Corporation

against the Philippine National Bank for the same amount, together with the amount of its costs in
this action. So ordered.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-33549 January 31, 1978
BANCO ATLANTICO, petitioner,
vs.
AUDITOR GENERAL, respondent.
Juan G. Collas, Jr., and Luis Ma. Guerrero for petitioner.
Solicitor General Estelito P. Mendoza Assistant Solicitor General Rosalio A. de Leon and Solicitor
Eulogio Raquel-Santos for respondent.

FERNANDEZ, J:
This is an appeal from the decision of the Auditor General contained in a letter dated April 22, 1971
addressed to the counsel of the petitioner, Banco Atlantico, stating that, ... for want of legal basis,
this Office cannot snow in audit the payment of the said claim of Banco Atlantico against the
Philippine Embassy in Madrid, Spain." 1
The record discloses that the petitioner is a commercial Bank doing business in Madrid, Spain; that
on October 31, i968, Virginia Boncan, then the Finance Officer of the Philippine Embassy in Madrid,
Spain, negotiated with Banco Atlantico a Philippine Embassy check signed by Luis M. Gonzales, its
ambassador and by said Virginia Boncan as Finance Officer, dated October 31, 1968 in the sum of
US$10,109.10 payable to Azucena Pace and drawn against the Philippine National Bank branch in
New York, U.S.A.; that the check was endorsed by Azucena Pace and Virginia Boncan; that the
petitioner, without clearing the check with the drawn bank in New York, U.S.A., paid the full amount
of US$10,109.10 to Virginia Boncan; that on November 2, 1968, Virginia Boncan negotiated by
endorsement with the petitioner another embassy check signed by Luis M. Gonzales as ambassador
and by her as finance officer in the sum of US$35,000.75 dated November 2, 1968 payable to
Virginia Boncan and drawn against the Philippine National Bank branch in New York, U.S.A.; that the
petitioner paid the full amount of the check to Virginia Boncan without clearing said check with the
drawn bank, that on November 5, 1968, Virginia Boncan negotiated by endorsement with petitioner
another embassy check signed by Ambassador Luis M. Gonzales and by Finance Officer Virginia
Boncan in the sum of US$90,000.00 dated November 5, 1968 payable to Virginia Boncan and drawn
against the Philippine National Bank in New York, U.S.A.; that the petitioner paid the full amount of
the aforementioned check of US$90,000.00 to Virginia Boncan without clearing said check with the
drawn bank; that upon presentment for acceptance and payment of the aforementioned checks by
Banco Atlantico through its collecting bank in New York, U.S.A. to the drawn bank, the Philippine
National Bank branch in U.S.A., said drawee bank dishonored the checks by non-acceptance
allegedly on the ground that the drawer had ordered payments to be stopped; that upon receipt of
the notice of the dishonor, the collecting bank of the petitioner in New York, U.S.A. sent individual
notices of protest with respect to the checks in question to the Philippine Embassy in Madrid, Spain
and to Virginia Boncan as endorser payee that Virginia Boncan and the Philippine Embassy in
Madrid, Spain refused to pay the petitioner the amounts of the aforementioned checks. 2
The petitioner, Banco Atlantico, filed the corresponding money claim with the Auditor General.
In denying the claim of the petitioner for the amounts of the three checks in question, the respondent
Auditor General concurred in the following views expressed by Ambassador Luis M. Gonzales in his
second endorsement dated November 13, 1970:
1) Counsel for Claimant alleges that the "Embassy of the Republic of the Philippines
maintained a checking account with Claimant who honored and cashed checks
drawn by the Embassy against its depository bank, the Philippine National Bank
branch in New York, U.S.A." This claim is erroneous. The Embassy never maintained
any checking account with Banco Atlantico at any time in the past. Only the individual
staff members of the Embassy, including Miss Virginia Boncan, in their personal and
private capacities, maintained accounts with said bank.

2) Counsel for claimant alleges that the three checks for the amount of
US$10,109.10, US$35,075.00 and US$90,000.00 were honored and full amount of
the aforementioned checks paid to Miss Boncan in the ordinary course of its banking
transactions. While the aforementioned checks of the Embassy may have appeared
valid, payment to Miss Boncan in her capacity as endorser and payee of the checks
without clearing them first with the drawee bank is definitely not in accordance with
normal or ordinary banking practice, especially so in this case where the drawee
bank was a foreign bank, and the amounts involved were quite large. The normal
procedure would have been for the Banco Atlantico to clear the three cheeks
concerned with the drawee bank before paying Miss Boncan.
From our investigation we have gathered enough proof that Miss Boncan had very
special relations with the employees and chiefs of the claimant bank's foreign
department. This personal relationship that existed between Miss Boncan and said
employees and officers was one thing and ordinary banking transactions were
something else. Because of this special relationship, the bank took a risk and
sacrificed normal banking procedures by cashing the aforementioned checks without
prior clearance from the drawee bank.
3) Counsel for claimant says that Banco Atlantico has every right to recover from the
Embassy as drawer of the checks because it is a holder in due course. Basis for the
claim is Section 61 of the Negotiable Instruments Law, to wit:
SEC. 61. Liability of drawer The drawer by drawing the instrument
admits the existence of the payee and his then capacity to endorse
and engages that on the due presentment the instrument will be
accepted or paid, or both, according to its tenor and that if it be
dishonored, and the n proceedings on dishonor be duly taken, he will
pay the amount thereof to the holder, or to any subsequent indorser
who may be compelled to pay it. But the drawer may insert in the
instrument an express stipulation negativing or limiting his own
liability to the holder.
It is erroneous for claimant bank's Counsel to single out this particular provision
because the interpretation thereof would be out of context. All the other related
provisions of said law must be interpreted together, and it would then be doubtful if
Banco Atlantico could qualify as a holder in due course.
4) As regards the checks for US$10,109.10 and US$35,075.00 Miss. Boncan had
altered them by fraudulently increasing the amounts for which said cheeks were
issued, and claimant bank failed to protect itself by cashing them without first clearing
them with the drawer bank. When claimant bank gave Miss Boncan special treatment
as a privileged client in disregard of the elementary principles of prudence that
should attend banking transactions, they should stand to suffer the loss that was due
to their own negligence.
Further proof of the special relationship between claimant bank and Miss Boncan
was the leniency of the bank towards her when it accepted for deposit to Miss
Boncan's dollar account an Embassy check for US$75.00 payable to Mr. Antonio P.

Villamor without his indorsement. Such leniency on the part of the bank could even
lead to the suspicion that there was collusion between the bank and Miss Boncan A
photocopy of this check is enclose for ease of reference.
In the particular case of the check for US$90,000.00 we can demonstrate that
claimant bank likewise has no ewe at all. Section 61 of the Negotiable instruments
Law can only be availed of by holders in due course and Banco Atlantico cannot be
considered as one under the definition of Section 52 of the N.I.L., to wit:
SEC. 52. What constitutes a holder in due course A holder in due course is a
holder who has taken the instrument under the following conditions:
a. That it is complete and regular on its face;
b. That he became the holder of it before it was overdue, and without notice that it
has been previously dishonored, if such was the fact;
c. That he took it in good faith and for value;
d. That at the time it was negotiated to him he had no notice of infirmity in the
instrument or defect in the title of the person negotiating it.
All four conditions enumerated under this section must concur before a holder can be
considered as a holder in due course. The absence or failure to comply with any of
the conditions set forth under this section will make one's title to the instrument
defective.
The check for US$90,000.00 was a demand note. When Miss Boncan the payee of
this check, negotiated the same by depositing it in her account, at the game time
informing the bank in writing (copy of her letter is enclosed for ease of reference) that
it be not presented for collection until a later date, Banco Atlantico through its agent
teller or cashier should have been put on guard that there was something wrong with
the check. The fact that the amount involved was quite big and it was the payee
herself who made the request that the same not be presented for collection until a
fixed date in the future was proof of a glaring infirmity or defect in the instrument. It
loudly proclaims, "Take me at your risk." The interest of the payee was the immediate
punishment of the check of which she was the beneficiary and not the deferment of
the presentment for collection of the same to the drawee bank. This being the case,
Banco Atlantico was not a holder in due course as defined by Section 52 of the
N.I.L., because it was obvious that it had knowledge of the infirmity or defect of the
cheek. The fact that the check was honored by claimant bank was proof not only of
their gross negligence but a further manifestation of the special treatment they were
according Miss Boncan. 3
According to the petitioner, the issues at bar are the follow:
1. Was there a forgery committed on the three (3) checks as contemplated by See.
23 of the Negotiable Instruments Law (NIL) as to bar petitioner from enforcing
collection from the drawer-Philippine Embassy in Madrid, Spain? And, if there was

such a forgery, is the drawer precluded from setting up forgery or want of authority of
Miss Boncan? and,
2. Do the payments of the aforecited checks without clearing them first with the
drawee bank constitute an actual notice of a defective title in the endorser thereof
and/or an assumption of risk by the petitioner as to defeat collection thereon? 4
The record shows that the chock dated October 31, 1968 and payable to Azucena Pace was
intended to be issued for the sum of US$109.10 for the payment of said payee's salary as consular
clerk in the Philippine Embassy in Madrid for the second half of October, 1968 as shown in the
Embassy's General Payroll. 5 It also appears that the check dated November 2, 1968 was to be
issued for the amount of US$75.00 in reimbursement of Virginia Boncan's living quarters allowance
for November 1968 as shown in Cash Voucher No. MA-132/69. 6 There is also a showing that on
November 8, 1968, Virginia Boncan cashed with the petitioner a check for US$90,000.00 dated
November 5, 1968 drawn on the Philippine National Bank branch at New York City, and although
said check was payable on demand, Virginia Boncan asked that the same be not presented for
collection until a later date. 7
The petitioner paid the amounts of the three (3) checks in question to Virginia Boncan without
previously clearing the said checks with the drawee bank, Philippine National Bank, New York. This
is contrary to normal or ordinary banking practice specially so where the drawee bank is a foreign
bank and the amounts involved were large. The drawer of the aforementioned checks was not even
a client of the petitioner. There is a showing that Virginia Boncan enjoyed special treatment from the
employees and chiefs of the petitioner's foreign department. It was probably because of this special
relation. ship that the petitioner, in of the elementary principle that should attend banking
transactions, cashed the three (3) checks in question without prior clearances from the drawee bank.
In view of the foregoing, the Philippine Embassy in Madrid, as drawer of the three (3) checks in
question, cannot be held liable. It is apparent that the said three (3) checks were fraudulently altered
by Virginia Boncan as to their amounts and, therefore, wholly inoperative. 8 No right of payment
thereof against any party thereto could have been acquired by the petitioner.
WHEREFORE, the decision of the Auditor General denying the claim of the petitioner for payment of
the three (3) checks, Annex "C", Annex "D", and Annex "E" of the petition, is hereby affirmed, without
pronouncement as to costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. Nos. L-55243-44 March 15, 1982

PHILIPPINE NATIONAL BANK and JOSE P. PANLILIO (In his personal capacity and as (former)
Manager of the PNB Branch, San Fernando, Pampanga), petitioners,
vs.
THE HONORABLE COURT OF APPEALS and VICTORIANO SIONGCO, respondents.

BARREDO, J.:
Petition for review of the split (4-1) decision of the Court of Appeals in CA-G.R. Nos. 47554-R and
47555-R,Victoriano Siongco vs. Jose P. Panlilio affirming the resolution of the trial court which
reversed upon motion for reconsideration of herein respondent Victoriano Siongco its joint decision
in two cases: (1) a special civil action of mandamus filed by Siongco to compel the petitioner
Philippine National Bank "to pay him his deposit of P8,100.14" (Civil Case No. 2808, Court of First
Instance of Pampanga) and (2) an ordinary civil action, Civil Case No. 2811 of the same court, filed,
on the other hand, by the herein petitioner Philippine National Bank praying for judgment to be
rendered sentencing defendant Siongco to pay P15,349.86, plus interests, etc.; the original of said
joint decision dismissed the mandamus case and granted the prayer of PNB in the ordinary civil
action, but in the reconsideration, both judgments were reversed. Incidentally, it should be
mentioned that Siongco filed a third-party complaint against Antonio Buendia, cashier of the PNB,
Pampanga Branch.
According to the Court of Appeals, the aforesaid cases arose from the following facts:
The interrelated facts of these cases which are not disputed show that Victoriano
Siongco is a businessman based in San Nicolas, San Fernando, Pampanga. He
maintained current accounts with the Philippine National Bank in San Fernando,
Pampanga, and with Philippine Banking Corporation (the rightful name of the other
Bank is Philippine Bank of Commerce) in Ylaya, Manila, from May of 1963 to
December of 1964. Victoriano Siongco had sales representatives in different parts of
the country who send him telegraphic transfers through the Philippine National Bank,
(t.s.n., March 7, 1967, pp. 2728, 30-35; Exhibits N, N-1 to N-31, Folder of Exhibits,
pp. 144-175). From May to December, 1963, Victoriano Siongco drew thirteen
checks with a total value of P23,450.00 against his current account with the
Philippine Banking Corporation (again this should read Philippine Bank of
Commerce) in Ylaya, Manila. These checks were encashed at the Philippine National
Bank in San Fernando, Pampanga with the prior approval of appellant Antonio
Buendia, the Cashier of the Philippine National Bank in San Fernando. Upon
encashment of the checks, the same were stamped "paid and non-negotiable" (t.s.n.,
June 24, 1969, pp. 4, 6). However, the value of the thirteen checks were not debited
against appellee's current account with the Philippine Banking Corporation (this
should be Philippine Bank of Commerce) in Ylaya, Manila. This matter came to light
only in 1965 in the course of the audit of the open accounts of the Philippine National
Bank (t.s.n., June 19, 1968, pp. 12, 23). Consequently, in a letter of June 15, 1965
(Exhibit 1, also Exhibit "Q" Folder of Exhibits, p. 234) Jose P. Panlilio, manager of the
Philippine National Bank in San Fernando, Pampanga, demanded the payment of
the equivalent amount of the thirteen checks. The following day Siongco denied the
claim of the Philippine National Bank and refused to comply with its demand (Exhibit
'Q-l', also Exhibit '2', Ibid., p. 235). For this reason, Siongco's current account with the

Philippine National Bank in San Fernando was debited in the amount of P8,100.14
as partial settlement of the amount of the 13 checks (Exhibit 'Q-4', also Exhibit '3',
Exhibit 'Q-5', also Exhibit '4', Ibid., pp. 237-238). (Pp. 52-53, Record.)
More details will be stated anon in connection with the communications exchanged between the
PNB and Siongco. In the meanwhile, it may already be added at this point that apart from debiting
Siongco's account in the amount of P8,100.14, the PNB demanded from Siongco the payment of the
balance of P15,349.86 of the total amounts it had paid Siongco in encashing his 13 checks whose
whereabouts no one could account for.
To state the nature of the controversy before Us more briefly, pursuant to what appears to have been
a practice carried out for quite a time, Siongco, a merchant or businessman with rather substantial
transactions, used to be allowed to encash with the San Fernando Branch of the Philippine National
Bank checks of other banks to be later on collected by the PNB from the corresponding respective
banks. Obviously, the same was some kind of special accommodation arrangement accorded by
PNB to some of its clients. In the instant case, what are involved are 13 checks of the Philippine
Bank of Commerce, Ylaya Branch, Manila, where Siongco had a current account, encashed in the
manner just stated at various dates between May, 1963 and January, 1964. Sometime in May, 1965,
it was discovered that none of said thirteen checks were debited by the Philippine Bank of
Commerce, against the account of Siongco, much less credited in favor of the PNB for the simple
reason that the same were not received by said bank. Soon enough PNB, acting through its
Pampanga manager Jose Panlilio, demanded payment of said checks from Siongco. In fact, the
PNB immediately debited the account of Siongco with it in the amount of P8,100.14 and then filed
the complaint, after continued refusal of Siongco to pay, for the recovery of the balance of
P15,349.86. Siongco, on his part, had jumped the gun ahead and filed the mandamus case to
compel PNB to pay him the debited P8,100.14. There is absolutely no question, and it is admitted by
Siongco, that he actually received from PNB, Pampanga Branch, thru the aforementioned manner of
encashment of his 13 Philippine Bank of Commerce checks the full amount of P23,450.00. Similarly
undisputed is the fact that not a centavo of said P23,450.00 has ever been paid or credited to PNB
by the Philippine Bank of Commerce since the corresponding checks never reached the latter.
Thus, the crux question of the instant controversy We have to resolve is, did the Court of Appeals err
in absolving Siongco from any liability therefor to the PNB?
The majority of four Justices found for Siongco that inasmuch as it is undisputed that the checks
were delivered by Siongco to the teller of PNB who encashed them with the approval of the Cashier,
Antonio Buendia, and hence, were all in PNB's possession, their consequent loss or subsequently
unknown whereabouts within the period from May, 1963 to January, 1964, should be accounted for
by PNB, and failing in this, it should not make Siongco responsible therefor and is not entitled to
collect the total amount thereof from him. Justice Carolina C. Grio-Aquino, however, opined
otherwise and held that the several varying and inconsistent theories Siongco pursued before and
after the controversy reached the court leave no room for doubt that no matter whatever happened
to said checks, the fact that Siongco does not deny PNB has not been paid the amounts
corresponding thereto made him indebted to PNB.
While in a sense the decision of the Court of Appeals, even if it is a split one, is based on a
conclusion of fact, which as a rule this Court has no authority to review, much less disregard, We are
of the considered opinion that the considerations in the original decision of the trial court and the
dissenting opinion of Justice Grio-Aquino reveal manifest and obvious failure of the majority of

circumstances that makes of the case at bar one within the known exceptions wherein We can
inquire into the milieu of the appellate court's factual conclusions.
The majority in the appellate court preferred to believe Siongco's theory that sometime after he had
encashed the checks in question with the PNB teller, he redeemed the same from the cashier
Antonio Buendia who advised him to tear them immediately in order that they may not be further
negotiated by anybody else. As Justice Grio-Aquino pointedly observes, this theory of Siongco
surfaced only later and is evidently an afterthought. Indeed, it was denied by Buendia. Earlier, in
answer to Panlilio's first letter of demand, Siongco pretended he knew nothing about how the checks
were lost. That is strike one against him, for its being unbelievable, for if he had really redeemed
them, he would certainly not have made reference to their possible loss. Strikes two and three, with
no hit, thus putting him out, are commendably analyzed in the well-reasoned dissent of Justice
Grio-Aquino, thus:
I believe that the first decision of the trial court dismissing Siongco's mandamus
action (Civil Case No. 2808) and allowing the claim of the PNB in the collection suit
against him (Civil Case No. 2811) is the correct decision, not the second decision on
Siongco's motion for reconsideration. Consequently, I vote to set aside the second
decision and reinstate the first.
I disagree with the finding that Siongco redeemed his 13 checks from the PNB
cashier, Antonio Buendia, and that the checks were returned to him upon such
redemption.
The record discloses that the "redemption and return of the checks" theory was
formulated by Siongco only on June 23, 1965 after the Bank had debited his account,
but that theory, as the pleadings show, did not gel completely until the trial of the
case. Before the trial, Siongco wavered between pretending that he knew nothing
about the loss of the checks and his later allegation that the checks were redeemed,
returned, and destroyed by him.
Thus, in his counsel's letter to the Bank dated June 16, 1965 in answer to the Bank's
demand letter of June 15, 1965, (pp. 50-53, Rec. on Appeal), Siongco said nothing
about having redeemed the checks or repaid the Bank. He only protested that he
knew nothing about the loss of the checks. He alleged that:
Concerning the checks ... which were never received by your Manila
office ... his (Siongco) only participation is in the issuance of the
aforesaid checks and their presentation to your bank for
payment. How the checks were lost, he has no Idea whatsoever (p.
50, Rec. on Appeal.)
This allegation was reiterated in Siongco's petition for mandamus (Civil Case No.
2808) against the PNB branch manager, Jose P. Panlilio, as follows:
c. The checks cashed by him with the PNB, San Fernando, Pampanga branch thru
its cashier, Mr. Antonio Buendia, were immediately paid in cash upon receipt of said
telegraphic transfers and thatthe checks were returned to him. (p. 7, Rec. on Appeal.)

However, in his Answer dated August 26, 1965, to the Bank's complaint (for
collection) in Civil Case No. 2811, We find the contradictory allegations that the
checks "were returned" to him by the Cashier and that he "had no Idea" how they
were allegedly lost.
10. That out of the foregoing checks, only the thirteen (13) are
allegedly lost, but in truth and in fact they were returned by the
cashier of the plaintiff bank, Mr. Antonio Buendia, to the defendant
and the proceeds thereof were demanded to be paid in case by said
cashier from the defendant ... (p. 72, Rec. on Appeal.)
4. ... the defendant declined and refused (to give a statement)
because he had no Idea how the irregularity leading to the alleged
loss of said checks. (p. 70, Rec. on Appeal.)
If the checks were returned to him by Buendia, then why did he claim that "he had no
Idea" as to how they were lost?
Then, almost ten months later, in his third-party complaint against Antonio Buendia,
dated June 26, 1966, he executed a somersault. He alleged that the checks "were
never returned" to him and that he 'had nothing to do with their loss.
(d) That after the payment of the same cash received by the thirdparty plaintiff from said third-party defendant, the former was required
to pay back the same amount but that the checks involved were
never returned by the latter to the former with the advice that said
checks be destroyed as they had no longer any value. (p. 99, Rec. on
Appeal)
9. That in the loss of said checks, the third-party plaintiff had nothing
to do and that the third- party defendant alone is responsible. (p. 99,
Rec. on Appeal)
Prior to the trial of Civil Case No. 2811, he reverted to his previous plea 'that he paid
back the cash amounts involved to the third-party defendant and the latter
returned the checks to the former' ... (p. 111, Rec. on Appeal.)
At the trial, he testified that he redeemed, each of the checks "in cash" a few days
after encashing them, and that he tore up each check upon advice of Buendia
"because if it would be lost, it could be cashed by the person who may find it." (p. 4748 tsn March 7, 1967).
In the light of the above inconsistent and contradictory allegations of Siongco, it was
error for the trial court to find (upon motion for reconsideration) that he repaid the
Bank. For, as the trial court had pointed out in its first decision, Siongco's purely parol
evidence on his alleged redemption of the checks was unconvincing. Not a single
one of the 13 checks was produced by him. Not a single receipt from the Bank, or
Buendia, to prove his alleged payment. (pp. 157-158, Rec. on Appeal.)

Siongco's allegation that he redeemed the checks from Buendia, that they were
returned to him by Buendia who advised him to tear them up, was vehemently
denied by the latter. Buendia testified that the checks were sent to the PNB's Manila
office for collection from Siongco's bank, the PBC. Siongco's allegation, that the
checks were returned to him, was refuted by the check remittance slips (Exhs. 3 to
13, Third-Party Defendant) all of which were prepared on the same day or the next
day after the checks were issued by Siongco and encashed at the PNB. The check
remittance slips prove that the 13 checks were indeed remitted to the PNB Manila
office for collection or presentment to the PBC.
Whether the checks were purloined in the Bank's branch office, or in transit to
Manila, or in the Manila office, We can only speculate upon. It is certain however,
that only Siongco benefited from their loss or disappearance because they were not
debited from his PBC account. It is significant that he himself admitted that the
checks found their way back to him without having been collected from the drawee
bank, PBC.
The supposed "redemption" of the checks by Siongco from Buendia was a highly
irregular procedure,hence, not credible. It was contrary to normal banking practice
which requires that the checks should be presented to the drawee bank (PBC) for
collection. It was rebutted by Buendia's testimony and by the check remittance slips
(Exhs. 3 to 13) showing that the checks were sent to the PNB-Manila for collection.
The presumption is that the regular banking procedure and the ordinary course of
business had been followed (Sec- 5, subpars. (p) and (q) Rule 13, Rules of Court).
That presumption was not overturned by Siongco's unreliable, uncorroborated and
self-serving parol testimony.
The encashment of Siongco's out-of-town (PBC) checks with the PNB, San
Fernando branch, was irregular and suspicious. Since he had a current account in
the PNB San Fernando branch, he could simply have drawn checks on that account,
instead of issuing checks against his PBC account in Manila and encashing them at
the PNB branch in San Fernando, The 13 checks were not for big amounts. They
ranged from Pl,000 to P3,000. They were issued and presented to the PNB San
Fernando branch at intervals of one to two weeks. If Siongco had funds in his PNB
account, he should have drawn on that account instead of issuing checks against his
PBC account.
Siongco himself explained that he opened two checking accounts, one in Manila and
one is San Fernando, Pampanga, so that he could issue checks to his creditors or
suppliers in either place without having to pay service charges for the collection of his
checks. It was therefore irregular and, as the Bank euphemistically observed,
suspicious, that he did exactly what he wanted to avoid: he issued out-of-town (PBC)
checks for encashment in the PNB at San Fernando, Pampanga.
Why the bank cashier, Buendia, approved the encashment of Siongco's out-of-town
PBC checks instead of requiring him to deposit them in his PNB account and/or issue
a PNB check, is certainly mysterious. For, if Siongco did not have enough funds in
his PNB account, prudence would dictate that Bank should not encash his PBC
checks, without first clearing them. On the other hand, if his funds in the PBC were

sufficient. then he should have drawn on them instead of from PBC account in
Manila.
While it appears that Siongco was accorded "special treatment" by the PNB cashier
Buendia, the fact is that it was Siongco, not Buendia, who received from the PNB
that P23,450.00 face value of the 13 checks which the PNB failed to collect from the
PBC, hence, Siongco should repay that amount to the PNB.
The partial compensation or set-off of Siongco's current account balance of
P8,100.14 at the PNB, against his obligation of P23,450.00 to said bank, was lawful,
for bank deposits in fixed and current accounts are not true deposits but simple loans
creating the relationship of debtor and creditor between the bank and its depositor,
hence, when they are creditors and debtors of each other, the debts may be set off
one against the other (Arts. 1980 and 1278, Civil Code; Tian Tiong Tick v. American
Apothecaries 65 Phil. 414; Hilado v. De la Costa, 83 Phil. 471).
The resolution decision of the trial court dated May 4, 1970 should be set aside.
Siongco's action for mandamus (Civil Case No. 2808) should be dismissed. In Civil
Case No. 2811, judgment should be rendered in favor of the PNB ordering Siongco
to pay it the sum of P15,349.86 (which is the unpaid balance of Siongco's obligation
of P23,450.00 to the Bank after a partial set off against his current account deposit of
P8,100.14 in said Bank), with legal rate of interest from June 22, 1965 until fully paid,
plus P1,500.00 as attorney's fees, and costs. The counterclaims, as well as the thirdparty complaint of Siongco against Buendia, should be dismissed. Costs against the
appellee. (Pp. 56-62, Record)
And also in the reasoning of the trial court in its original decision (more plausible than in its reversal
resolution) as follows:
But of course, there is not much here to discuss or need be discussed for a factual
predicate to this judicial approach or determination as to which side the pivotal issue
as above defined should be resolved, it being that
1) Mr. Victoriano Siongco does not deny that the disputed amount of
P23,450.00 truly represents the total equivalent value of the thirteen
(13) PBC checks he had drawn and encashed with the PNBPampanga Branch;
2) He does not neither deny that the aforesaid amount of P23,450.00
had actually been paid by, and received by him from the said PNBPampanga Branch
3) He likewise does not dispute that the thirteen (13) PBC checks he
so encashed never reached the Manila Head Office of the payor
PNB-Pampanga Branch and therefore, were never presented for
payment to the PBC-drawee bank; and

4) Neither does he dispute that the oft-repeated P23,450.00 had

never been debited against his deposit accounts with the said drawee
(PBC bank).
However, with the apparent and in view of defeating the claim for recovery against
him by the PNB for and in behalf of its Pampanga Branch and at the same time, of
obtaining the relief of mandamus he is seeking against the Branch Manager of the
said PNB-Pampanga Branch, Mr. Victoriano Siongco theorizes and tries to show to
the Court by his evidence that he redeemed those thirteen (13) PBC checks that
only a few days after encashing each of said checks he used to redeem the same in
cash out of the telegraphic transfers he every now and then, during that period,
received his different peddlers; that he paid the redemption money value of each of
said checks to the PNB-Pampanga Branch Cashier, third-party defendant Mr. Antonio
Buendia; that Mr. Buendia in turn, returned to him each and all the checks as
redeemed and which he thereafter tore upon the former's (Mr. Buendia's) advice (gist
of testimony on this point of Mr. Siongco as noted by the Court). And to induce belief
in his foregoing assertions, the said Mr. Siongco even offered in evidence bunches of
documents marked as exhibits A to U inclusive, and concomitants thereof. Thus
categorically, Mr. Victoriano Siongco has chosen to pass the bell to Mr. Antonio
Buendia whom he brought in the case (Civil Case No. 2811) as a third-party
defendant, instead of to stand firm in his struggle for it against the PNB he is
principally fighting with.
Mr. Antonio Buendia on the other hand, in meeting the issues as raised against him
by Mr. Victoriano Siongco in the latter's third-party complaint testified in essence that
all the checks Mr. Siongco had encashed thru him at the bank (PNB-Pampanga
Branch) were forwarded to the Manila Head Office by means of remittance slips; that
none of said checks were dishonored and consequently returned by the Manila
Office so that there can be no reason why Mr. Siongco would pay back or redeemed
any of said checks; that whenever a teller pays a check presented for encashment,
such teller would immediately stamp the word Paid and Non-negotiable' on that
check, hence he (Mr. Buendia) would not much less have advised Mr. Siongco to
tear any check the latter had allegedly redeemed and received back, simply because
(as the reasoning of Mr. Buendia tends) a previously encashed check, even without
being torn to pieces, cannot possibly be encashed again although it may fall into
other people's hands (t.s.n. p. 5, June 24, 1969).
Without going any farther into the presentation in detail of the evidence respectively
presented by the parties-litigants in these cases, it can now readily be seen that the
final determination of the already simplified issue as defined earlier can be made to
rest further on the resolution of a far simplier question of whether or not Mr.
Victoriano Siongco's allegation of redemption deserves favorable consideration in
point of law.
On this score, therefore, this Court poses this last, but decisive question: Did Mr.
Siongco actually redeem, just as he claims he did, the thirteen (13) PBC checks in
question from the PNB-Pampanga Branch with which the same had been encashed?
To this query, it may be said in answer that this parol evidence says so. And he might
have testified truly so also. However, sadly to state, such is not what his numerous

documents conclusively show, or at least, even tend to show. The Court does not
expect to find in said Mr. Siongco's evidence even one of the 13 cheeks which he
allegedly received back after having supposedly paid the equivalent amount or face
value thereof, because right in his pleading he made it clear that he tore said checks
upon return of the same to him by the Cashier of the PNB-Pampanga Branch and
upon said Cashier's advice. But of course it expects to come across sort of a receipt
for the equivalent amount of even just one, if not for some or all of those checks in
question, issued by the Bank Cashier with whom Mr. Siongco allegedly made the
redemption, or by any other personnel of the Bank duly authorized to receive and
receipt for such redemption. But above all, the Court expects to find sufficient
showing that the supposed redemption amounts went right into the funds of the Bank
funds with which the checks thus redeemed had previously been converted into
cash for otherwise, say, if such amounts were pocketed by one for purely private
reason, no matter how honest the intention is on the part of the redemptionist, the
payment cannot be considered a redemption at all. However, no such receipt, nor
such showing could be found from among the numerous documents submitted by
said Mr. Siongco in support of his theory or contention. For this reason, his cause
must fall. And since, per his own admissions he received the P23,450.00 equivalent
amount of the 13 PBC checks he encashed with the PNB-Pampanga Branch, but
that said amount was never debited against his deposit account with his depositorydrawee (PBC) bank, it is here but right and just to state that said Mr. Siongco is
under legal obligation to refund the same to the PNB-Pampanga Branch. And upon
this premise, it appearing also that he is a depositor of said PNB-Pampanga Branch,
his relationship with the latter as of the date the right of refund had arisen had
ceased to be that of a mere depositor-depository or trustor and trustee, but converted
into one of creditor-debtor to each and of one another. This considering then, the
application of the law on compensation for a set off of obligation is proper (Pp. 154159, CA Record on Appeal).
Above all, as We see it, the long and short of this controversy boils down to the fundamental legal
and equitable proposition that no one should enrich himself at the expense of another. Siongco
admits he received P23,450.00 from PNB. His uncorroborated explanation of how he returned to or
paid PNB has been shown to be shaky, inconsistent, contrary to ordinary banking practices and,
therefore, patently unbelievable.
It would somehow appear, indeed, that because the encashment of the checks in question was
made with the approval of Buendia, as a sort of accommodation to Siongco, the burden of
responsibility should fall either on Buendia or Siongco, depending on what can only be speculated to
be special arrangements between them. Thus Siongco's third-party complaint against Buendia. But
again, as against Siongco's uncorroborated varying versions, Buendia's categorical denial of the
theory of redemption, corroborated by the transmittal slips, the genuineness and accuracy of which
have not been put in issue, We are more inclined to believe the majority in the Court of Appeals
departed from the usual course of fact finding in this respect when it upheld Siongco. It is Our
considered opinion that inasmuch as the findings in the majority opinion and judgment of the Court
of Appeals are not in accord with what reasonable men would readily agree are the correct
inferences from the evidence extant in the record, (Luna v. Linatoc, 74 Phil. 15) the same may be, as
they should be, reversed.
IN VIEW OF ALL THE FOREGOING, judgment is hereby rendered reversing the decision of the
Court of Appeals, and the first judgment of the trial court reading thus:

WHEREFORE, in view of all the foregoing considerations, finding the petition for
mandamus (Civil Case No. 2808) to be without a concrete legal base, its denial is
hereby ordered. However, the counter-claim for damages therein laid by the
respondent cannot be entertained because the grounds relied upon therefor do not fit
exactly into the circumstances which surrounded the institution of the case. No
special pronouncement as to its costs therefore, is hereby made.
On the other hand, finding the preponderance of evidence in the action for recovery
(Civil Case No. 2811) to be in favor of the complaint and against the defendant,
judgment is hereby rendered ordering the latter to pay unto the former the amount of
P15,349.86, representing the remaining unpaid balance on his (defendant's)
obligation of P23,450.00 (his current deposit of P8,100.14 having already been
applied thereto by way of set off) with legal rate of interest thereon per annum, until
the same is fully paid; the sum of P1,500.00 as and for attorney's fees; and the cost
of this suit in the amount as may, by virtue hereof, be assessed.
Meanwhile, the third-party complaint filed in this same (Civil case No. 2811) is hereby
ordered dismissed for not having been fully substantiated, but the counterclaim
thereto interposed cannot likewise be favorably considered for lack of showing in the
evidence that the inclusion of the counter-claimant in the case was occasioned by
complainant's malicious intent.
SO ORDERED. ( annex "A", pp. 161-162, Record on Appeal.)
is hereby adopted and made the judgment of this Court, with costs against Siongco in all instances.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-53194 March 14, 1988
PHILIPPINE NATIONAL BANK petitioner,
vs.
HON. ROMULO S. QUIMPO, Presiding Judge, Court of First Instance of Rizal, Branch XIV, and
FRANCISCO S. GOZON II, respondents.

GANCAYCO, J.:
On July 3, 1973, Francisco S. Gozon II, who was a depositor of the Caloocan City Branch of the
Philippine National Bank, went to the bank in his car accompanied by his friend Ernesto Santos
whom he left in the car while he transacted business in the bank. When Santos saw that Gozon left
his check book he took a check therefrom, filled it up for the amount of P5,000.00, forged the
signature of Gozon, and thereafter he encashed the check in the bank on the same day. The
account of Gozon was debited the said amount. Upon receipt of the statement of account from the
bank, Gozon asked that the said amount of P5,000.00 should be returned to his account as his
signature on the check was forged but the bank refused.
Upon complaint of private respondent on February 1, 1974 Ernesto Santos was apprehended by the
police authorities and upon investigation he admitted that he stole the check of Gozon, forged his
signature and encashed the same with the Bank.
Hence Gozon filed the complaint for recovery of the amount of P5,000.00, plus interest, damages,
attorney's fees and costs against the bank in the Court of First Instance of Rizal. After the issues

were joined and the trial on the merits ensued, a decision was rendered on February 4, 1980, the
dispositive part of which reads as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff. The defendant is
hereby condemned to return to plaintiff the amount of P5,000.00 which it had
unlawfully withheld from the latter, with interest at the legal rate from September 22,
1972 until the amount is fully delivered. The defendant is further condemned to pay
plaintiff the sum of P2,000.00 as attorney's fees and to pay the costs of this suit.
Not satisfied therewith, the bank now filed this petition for review on certiorari in this Court raising the
sole legal issue that
THE ACT OF RESPONDENT FRANCISCO GOZON, II IN PUTTING HIS CHECK
BOOK CONTAINING THE CHECK IN QUESTION INTO THE HANDS OF ERNESTO
SANTOS WAS INDEED THE PROXIMATE CAUSE OF THE LOSS, THEREBY
PRECLUDING HIM FROM SETTING UP THE DEFENSE OF FORGERY OR WANT
0F AUTHORITY UNDER SECTION 23 OF THE NEGOTIABLE INSTRUMENTS
LAW, ACT NO. 3201
The petition is devoid of merit.
This Court reproduces with approval the disquisition of the court a quo as follows:
A bank is bound to know the signatures of its customers; and if it pays a forged
check, it must be considered as making the payment out of its own funds, and cannot
ordinarily change the amount so paid to the account of the depositor whose name
was forged' (San Carlos Milling Co. vs. Bank of the P.I., 59 Phil. 59).
This rule is absolutely necessary to the circulation of drafts and checks, and is based
upon the presumed negligence of the drawee in failing to meet its obligation to know
the signature of its correspondent. ... There is nothing inequitable in such a rule. If
the paper comes to the drawee in the regular course of business, and he, having the
opportunity ascertaining its character, pronounces it to be valid and pays it, it is not
only a question of payment under mistake, but payment in neglect of duty which the
commercial law places upon him, and the result of his negligence must rest upon him
(12 ALR 1901, citing many cases found in I Agbayani, supra).
Defendant, however, interposed the defense that it exercised diligence in accordance
with the accepted norms of banking practice when it accepted and paid Exhibit "A". It
presented evidence that the check had to pass scrutiny by a signature verifier as well
as an officer of the bank.
A comparison of the signature (Exhibit "A-l") on the forged check (Exhibit "A") with
plaintiffs exemplar signatures (Exhibits "5-N" and "5-B") found in the PNB Form 35-A
would immediately show the negligence of the employees of the defendant bank.
Even a not too careful comparison would immediately arrest one's attention and
direct it to the graceful lines of plaintiffs exemplar signatures found in Exhibits "5-A"
and "5-B". The formation of the first letter "F" in the exemplars, which could be
regarded as artistic, is completely different from the way the same letter is formed in

Exhibit "A-l". That alone should have alerted a more careful and prudent signature
verifier.
The prime duty of a bank is to ascertain the genuineness of the signature of the drawer or the
depositor on the check being encashed. 1 It is expected to use reasonable business prudence in
accepting and cashing a check presented to it.
In this case the findings of facts of the court a quo are conclusive. The trial court found that a
comparison of the signature on the forged check and the sample signatures of private respondent
show marked differences as the graceful lines in the sample signature which is completely different
from those of the signature on the forged check. Indeed the NBI handwriting expert Estelita Santiago
Agnes whom the trial court considered to be an "unbiased scientific expert" indicated the marked
differences between the signature of private respondent on the sample signatures and the
questioned signature. Notwithstanding the testimony of Col. Fernandez, witness for petitioner,
advancing the opinion that the questioned signature appears to be genuine, the trial court by merely
examining the pictorial report presented by said witness, found a marked difference in the second "c"
in Francisco as written on the questioned signature as compared to the sample signatures, and the
separation between the "s" and the "c" in the questioned signature while they are connected in the
sample signatures. 2
Obviously, petitioner was negligent in encashing said forged check without carefully examining the
signature which shows marked variation from the genuine signature of private respondent.
In reference to the allegation of the petitioner that it is the negligence of private respondent that is
the cause of the loss which he suffered, the trial court held:
The act of plaintiff in leaving his checkbook in the car while he went out for a short
while can not be considered negligence sufficient to excuse the defendant bank from
its own negligence. It should be home in mind that when defendant left his car,
Ernesto Santos, a long time classmate and friend remained in the same. Defendant
could not have been expected to know that the said Ernesto Santos would remove a
check from his checkbook. Defendant had trust in his classmate and friend. He had
no reason to suspect that the latter would breach that trust .
We agree.
Private respondent trustee Ernesto Santos as a classmate and a friend. He brought him along in his
car to the bank and he left his personal belongings in the car. Santos however removed and stole a
check from his cheek book without the knowledge and consent of private respondent. No doubt
private respondent cannot be considered negligent under the circumstances of the case.
WHEREFORE, the petition is DISMISSED for lack of merit with costs against petitioner.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-37467

December 11, 1933

SAN CARLOS MILLING CO., LTD., plaintiff-appellant,

vs.
BANK OF THE PHILIPPINE ISLANDS and CHINA BANKING CORPORATION, defendantsappellees.
Gibbs and McDonough and Roman Ozaeta for appellant.
Araneta, De Joya, Zaragosa and Araneta for appellee Bank of the Philippine Islands.
Marcelo Nubla and Guevara, Francisco and Recto for appellee China Banking Corporation.

HULL, J.:
Plaintiff corporation, organized under the laws of the Territory of Hawaii, is authorized to engaged in
business in the Philippine Islands, and maintains its main office in these Islands in the City of Manila.
The business in the Philippine Islands was in the hands of Alfred D. Cooper, its agent under general
power of attorney with authority of substitution. The principal employee in the Manila office was one

Joseph L. Wilson, to whom had been given a general power of attorney but without power of
substitution. In 1926 Cooper, desiring to go on vacation, gave a general power of attorney to
Newland Baldwin and at the same time revoked the power of Wilson relative to the dealings with the
Bank of the Philippine Islands, one of the banks in Manila in which plaintiff maintained a deposit.
About a year thereafter Wilson, conspiring together with one Alfredo Dolores, a messenger-clerk in
plaintiff's Manila office, sent a cable gram in code to the company in Honolulu requesting a
telegraphic transfer to the China Banking Corporation of Manila of $100,00. The money was
transferred by cable, and upon its receipt the China Banking Corporation, likewise a bank in which
plaintiff maintained a deposit, sent an exchange contract to plaintiff corporation offering the sum of
P201,000, which was then the current rate of exchange. On this contract was forged the name of
Newland Baldwin and typed on the body of the contract was a note:lawphil.net
Please send us certified check in our favor when transfer is received.
A manager's check on the China Banking Corporation for P201,000 payable to San Carlos Milling
Company or order was receipted for by Dolores. On the same date, September 28, 1927, the
manger's check was deposited with the Bank of the Philippine Islands by the following endorsement:
For deposit only with Bank of the Philippine Islands, to credit of account of San Carlos Milling
Co., Ltd.
By (Sgd.) NEWLAND BALDWIN
For Agent
The endorsement to which the name of Newland Baldwin was affixed was spurious.
The Bank of the Philippine Islands thereupon credited the current account of plaintiff in the sum of
P201,000 and passed the cashier's check in the ordinary course of business through the clearing
house, where it was paid by the China Banking Corporation.
On the same day the cashier of the Bank of the Philippine Islands received a letter, purporting to be
signed by Newland Baldwin, directing that P200,000 in bills of various denominations, named in the
letter, be packed for shipment and delivery the next day. The next day, Dolores witnessed the
counting and packing of the money, and shortly afterwards returned with the check for the sum of
P200,000, purporting to be signed by Newland Baldwin as agent.
Plaintiff had frequently withdrawn currency for shipment to its mill from the Bank of the Philippine
Islands but never in so large an amount, and according to the record, never under the sole
supervision of Dolores as the representative of plaintiff.
Before delivering the money, the bank asked Dolores for P1 to cover the cost of packing the money,
and he left the bank and shortly afterwards returned with another check for P1, purporting to be
signed by Newland Baldwin. Whereupon the money was turned over to Dolores, who took it to
plaintiff's office, where he turned the money over to Wilson and received as his share, P10,000.
Shortly thereafter the crime was discovered, and upon the defendant bank refusing to credit plaintiff
with the amount withdrawn by the two forged checks of P200,000 and P1, suit was brought against
the Bank of the Philippine Islands, and finally on the suggestion of the defendant bank, an amended

complaint was filed by plaintiff against both the Bank of the Philippine Islands and the China Banking
Corporation.
At the trial the China Banking Corporation contended that they had drawn a check to the credit of the
plaintiff company, that the check had been endorsed for deposit, and that as the prior endorsement
had in law been guaranteed by the Bank of the Philippine Islands, when they presented the cashier's
check to it for payment, the China Banking Corporation was absolved even if the endorsement of
Newland Baldwin on the check was a forgery.
The Bank of the Philippine Islands presented many special defenses, but in the main their
contentions were that they had been guilty of no negligence, that they had dealt with the accredited
representatives of the company in the due course of business, and that the loss was due to the
dishonesty of plaintiff's employees and the negligence of plaintiff's general agent.
In plaintiff's Manila office, besides the general agent, Wilson, and Dolores, most of the time there
was employed a woman stenographer and cashier. The agent did not keep in his personal
possession either the code-book or the blank checks of either the Bank of the Philippine Islands or
the China Banking Corporation. Baldwin was authorized to draw checks on either of the
depositaries. Wilson could draw checks in the name of the plaintiff on the China Banking
Corporation.
After trial in which much testimony was taken, the trial court held that the deposit of P201,000 in the
Bank of the Philippine Islands being the result of a forged endorsement, the relation of depositor and
banker did not exist, but the bank was only a gratuitous bailee; that the Bank of the Philippine
Islands acted in good faith in the ordinary course of its business, was not guilty of negligence, and
therefore under article 1902 of the Civil Code which should control the case, plaintiff could not
recover; and that as the cause of loss was the criminal actions of Wilson and Dolores, employees of
plaintiff, and as Newland Baldwin, the agent, had not exercised adequate supervision over plaintiff's
Manila office, therefore plaintiff was guilty of negligence, which ground would likewise defeat
recovery.
From the decision of the trial court absolving the defendants, plaintiff brings this appeal and makes
nine assignments of error which we do not deem it necessary to discuss in detail.
There is a mild assertion on the part of the defendant bank that the disputed signatures of Newland
Baldwin were genuine and that he had been in the habit of signing checks in blank and turning the
checks so signed over to Wilson.
The proof as to the falsity of the questioned signatures of Baldwin places the matter beyond
reasonable doubt, nor is it believed that Baldwin signed checks in blank and turned them over to
Wilson.
As to the China Banking Corporation, it will be seen that it drew its check payable to the order of
plaintiff and delivered it to plaintiff's agent who was authorized to receive it. A bank that cashes a
check must know to whom it pays. In connection with the cashier's check, this duty was therefore
upon the Bank of the Philippine Islands, and the China Banking Corporation was not bound to
inspect and verify all endorsements of the check, even if some of them were also those of depositors
in that bank. It had a right to rely upon the endorsement of the Bank of the Philippine Islands when it
gave the latter bank credit for its own cashier's check. Even if we would treat the China Banking

Corporation's cashier's check the same as the check of a depositor and attempt to apply the
doctrines of the Great Eastern Life Insurance Co. vs. Hongkong & Shanghai Banking Corporation
and National Bank (43 Phil., 678), and hold the China Banking Corporation indebted to plaintiff, we
would at the same time have to hold that the Bank of the Philippine Islands was indebted to the
China Banking Corporation in the same amount. As, however, the money was in fact paid to plaintiff
corporation, we must hold that the China Banking Corporation is indebted neither to plaintiff nor to
the Bank of the Philippine Islands, and the judgment of the lower court far as it absolves the China
Banking Corporation from responsibility is affirmed.
Returning to the relation between plaintiff and the Bank of the Philippine Islands, we will now
consider the effect of the deposit of P201,000. It must be noted that this was not a presenting of the
check for cash payment but for deposit only. It is a matter of general knowledge that most
endorsements for deposit only, are informal. Most are by means of a rubber stamp. The bank would
have been justified in accepting the check for deposit even with only a typed endorsement. It
accepted the check and duly credited plaintiff's account with the amount on the face of the check.
Plaintiff was not harmed by the transaction as the only result was the removal of that sum of money
from a bank from which Wilson could have drawn it out in his own name to a bank where Wilson
would not have authority to draw checks and where funds could only be drawn out by the check of
Baldwin.
Plaintiff in its letter of December 23, 1928, to the Bank of the Philippine Islands said in part:
". . . we now leave to demand that you pay over to us the entire amount of said manager's
check of two hundred one thousand (P201,000) pesos, together with interest thereon at the
agreed rate of 3 per cent per annum on daily balances of our credit in account current with
your bank to this date. In the event of your refusal to pay, we shall claim interest at the legal
rate of 6 per cent from and after the date of this demand inasmuch as we desire to withdraw
and make use of the money." Such language might well be treated as a ratification of the
deposit.
The contention of the bank that it was a gratuitous bailee is without merit. In the first place, it is
absolutely contrary to what the bank did. It did not take it up as a separate account but it transferred
the credit to plaintiff's current account as a depositor of that bank. Furthermore, banks are not
gratuitous bailees of the funds deposited with them by their customers. Banks are run for gain, and
they solicit deposits in order that they can use the money for that very purpose. In this case the
action was neither gratuitous nor was it a bailment.
On the other hand, we cannot agree with the theory of plaintiff that the Bank of the Philippine Islands
was an intermeddling bank. In the many cases cited by plaintiff where the bank that cashed the
forged endorsement was held as an intermeddler, in none was the claimant a regular depositor of
the bank, nor in any of the cases cited, was the endorsement for deposit only. It is therefore clear
that the relation of plaintiff with the Bank of the Philippine Islands in regard to this item of P201,000
was that of depositor and banker, creditor and debtor.
We now come to consider the legal effect of payment by the bank to Dolores of the sum of
P201,000, on two checks on which the name of Baldwin was forged as drawer. As above stated, the
fact that these signatures were forged is beyond question. It is an elementary principle both of
banking and of the Negotiable Instruments Law that

A bank is bound to know the signatures of its customers; and if it pays a forged check, it
must be considered as making the payment out of its own funds, and cannot ordinarily
charge the amount so paid to the account of the depositor whose name was forged. (7 C.J.,
683.)
There is no act of the plaintiff that led the Bank of the Philippine Islands astray. If it was in fact lulled
into a false sense of security, it was by the effrontery of Dolores, the messenger to whom it entrusted
this large sum of money.
The bank paid out its money because it relied upon the genuineness of the purported signatures of
Baldwin. These, they never questioned at the time its employees should have used care. In fact,
even today the bank represents that it has a relief that they are genuine signatures.
The signatures to the check being forged, under section 23 of the Negotiable Instruments Law they
are not a charge against plaintiff nor are the checks of any value to the defendant.
It must therefore be held that the proximate cause of loss was due to the negligence of the Bank of
the Philippine Islands in honoring and cashing the two forged checks.
The judgment absolving the Bank of the Philippine Islands must therefore be reversed, and a
judgment entered in favor of plaintiff-appellant and against the Bank of the Philippine Islands,
defendant-appellee, for the sum of P200,001, with legal interest thereon from December 23,1928,
until payment, together with costs in both instances. So ordered.
Malcolm, Villa-Real, Vickers, and Imperial, JJ., concur

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 158262

July 21, 2008

SPS. PEDRO AND FLORENCIA VIOLAGO, Petitioners,

vs.
BA FINANCE CORPORATION and AVELINO VIOLAGO, Respondents.
DECISION
VELASCO, JR., J.:
This is a Petition for Review on Certiorari of the August 20, 2002 Decision1 and May 15, 2003
Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 48489 entitled BA Finance Corporation,
Plaintiff-Appellee v. Sps. Pedro and Florencia Violago, Defendants and Third Party Plaintiffs-

Appellants v. Avelino Violago, Third Party Defendant-Appellant. Petitioners-spouses Pedro and

Florencia Violago pray for the reversal of the appellate courts ruling which held them liable to
respondent BA Finance Corporation (BA Finance) under a promissory note and a chattel mortgage.
Petitioners likewise pray that respondent Avelino Violago be adjudged directly liable to BA Finance.
The Facts
Sometime in 1983, Avelino Violago, President of Violago Motor Sales Corporation (VMSC), offered
to sell a car to his cousin, Pedro F. Violago, and the latters wife, Florencia. Avelino explained that he
needed to sell a vehicle to increase the sales quota of VMSC, and that the spouses would just have
to pay a down payment of PhP 60,500 while the balance would be financed by respondent BA
Finance. The spouses would pay the monthly installments to BA Finance while Avelino would take
care of the documentation and approval of financing of the car. Under these terms, the spouses then
agreed to purchase a Toyota Cressida Model 1983 from VMSC.3
On August 4, 1983, the spouses and Avelino signed a promissory note under which they bound
themselves to pay jointly and severally to the order of VMSC the amount of PhP 209,601 in 36
monthly installments of PhP 5,822.25 a month, the first installment to be due and payable on
September 16, 1983. Avelino prepared a Disclosure Statement of Loan/Credit Transportation which
showed the net purchase price of the vehicle, down payment, balance, and finance charges. VMSC
then issued a sales invoice in favor of the spouses with a detailed description of the Toyota Cressida
car. In turn, the spouses executed a chattel mortgage over the car in favor of VMSC as security for
the amount of PhP 209,601. VMSC, through Avelino, endorsed the promissory note to BA
Finance without recourse. After receiving the amount of PhP 209,601, VMSC executed a Deed of
Assignment of its rights and interests under the promissory note and chattel mortgage in favor of BA
Finance. Meanwhile, the spouses remitted the amount of PhP 60,500 to VMSC through Avelino. 4
The sales invoice was filed with the Land Transportation Office (LTO)-Baliwag Branch, which issued
Certificate of Registration No. 0137032 in the name of Pedro on August 8, 1983. The spouses were
unaware that the same car had already been sold in 1982 to Esmeraldo Violago, another cousin of
Avelino, and registered in Esmeraldos name by the LTO-San Rafael Branch. Despite the spouses
demand for the car and Avelinos repeated assurances, there was no delivery of the vehicle. Since
VMSC failed to deliver the car, Pedro did not pay any monthly amortization to BA Finance. 5
On March 1, 1984, BA Finance filed with the Regional Trial Court (RTC), Branch 116 in Pasay City a
complaint for Replevin with Damages against the spouses. The complaint, docketed as Civil Case
No. 1628-P, prayed for the delivery of the vehicle in favor of BA Finance or, if delivery cannot be
effected, for the payment of PhP 199,049.41 plus penalty at the rate of 3% per month from February
15, 1984 until fully paid. BA Finance also asked for the payment of attorneys fees, liquidated
damages, replevin bond premium, expenses in the seizure of the vehicle, and costs of suit. The RTC
issued an Order of Replevin on March 28, 1984. The Violago spouses, as defendants a quo, were
declared in default for failing to file an answer. Eventually, the RTC rendered on December 3, 1984 a
decision in favor of BA Finance. A writ of execution was thereafter issued on January 11, 1985,
followed by an alias writ of execution.6
In the meantime, Esmeraldo conveyed the vehicle to Jose V. Olvido who was then issued Certificate
of Registration No. 0014830-4 by the LTO-Cebu City Branch on April 29, 1985. On May 8, 1987,
Jose executed a Chattel Mortgage over the vehicle in favor of Generoso Lopez as security for a loan
covered by a promissory note in the amount of PhP 260,664. This promissory note was later
endorsed to BA Finance, Cebu City branch.7

On August 21, 1989, the spouses Violago filed a Motion for Reconsideration and Motion to Quash
Writ of Execution on the basis of lack of a valid service of summons on them, among other reasons.
The RTC denied the motions; hence, the spouses filed a petition for certiorari under Rule 65 before
the CA, docketed as CA G.R. No. 2002-SP. On May 31, 1991, the CA nullified the RTCs order. This
CA decision became final and executory.
On January 28, 1992, the spouses filed their Answer before the RTC, alleging the following: they
never received the vehicle from VMSC; the vehicle was previously sold to Esmeraldo; BA Finance
was not a holder in due course under Section 59 of the Negotiable Instruments Law (NIL); and the
recourse of BA Finance should be against VMSC. On February 25, 1995, the Violago spouses, with
prior leave of court, filed a Third Party Complaint against Avelino praying that he be held liable to
them in the event that they be held liable to BA Finance, as well as for damages. VMSC was not
impleaded as third party defendant. In his Motion to Dismiss and Answer, Avelino contended that he
was not a party to the transaction personally, but VMSC. Avelinos motion was denied and the third
party complaint against him was entertained by the trial court. Subsequently, the spouses belabored
to prove that they affixed their signatures on the promissory note and chattel mortgage in favor of
VMSC in blank.8
The RTC rendered a Decision on March 5, 1994, finding for BA Finance but against the Violago
spouses. The RTC, however, declared that they are entitled to be indemnified by Avelino. The
dispositive portion of the RTCs decision reads:
WHEREFORE, defendant-[third]-party plaintiffs spouses Pedro F. Violago and Florencia R. Violago
are ordered to deliver to plaintiff BA Finance Corporation, at its principal office the BAFC Building,
Gamboa St., Legaspi Village, Makati, Metro Manila the Toyota Cressida car, model 1983, bearing
Engine No. 21R-02854117, and with Serial No. RX60-804614, covered by the deed of chattel
mortgage dated August 4, 1983; or if such delivery cannot be made, to pay, jointly and severally, to
the plaintiff the sum of P198,003.06 together with the penalty [thereon] at three percent (3%) a
month, from March 1, 1984, until the amount is fully paid.
In either case, the defendant-third-party plaintiffs are required to pay, jointly and severally, to the
plaintiff a sum equivalent to twenty-five percent (25%) of P198,003.06 as attorneys fees, and
another amount also equivalent to twenty five percent (25%) of the said unpaid balance, as
liquidated damages. The defendant-third party-plaintiffs are also required to shoulder the litigation
expenses and costs.1awphil
As indemnification, third-party defendant Avelino Violago is ordered to deliver to defendants-thirdparty plaintiffs spouses Pedro F. Violago and Florencia R. Violago the aforedescribed motor vehicle;
or if such delivery is not possible, to pay to the said spouses the sum of P198,003.06, together with
the penalty thereon at three (3%) a month from March 1, 1984, until the amount is entirely paid.
In either case, the third-party defendant should pay to the defendant-third-party plaintiffs spouses a
sum equivalent to twenty-five percent (25%) of P198,003.06 as attorneys fees, and another sum
equivalent also to twenty-five percent (25%) of the said unpaid balance, as liquidated damages.
Third-party defendant Avelino Violago is further ordered to return to the third-party plaintiffs the sum
of P60,500.00 they paid to him as down payment for the car; and to pay them P15,000.00 as moral
damages; P10,000.00 as exemplary damages; and reimburse them for all the expenses and costs of
the suit.
The counterclaims of the defendants and third-party defendant, for lack of merit, are dismissed. 9

The Ruling of the CA

Petitioners-spouses and Avelino appealed to the CA. The spouses argued that the promissory note
is a negotiable instrument; hence, the trial court should have applied the NIL and not the Civil Code.
The spouses also asserted that since VMSC was not the owner of the vehicle at the time of sale, the
sale was null and void for the failure in the "cause or consideration" of the promissory note, which in
this case was the sale and delivery of the vehicle. The spouses also alleged that BA Finance was
not a holder in due course of the note since it knew, through its Cebu City branch, that the car was
never delivered to the spouses.10 On the other hand, Avelino prayed for the dismissal of the
complaint against him because he was not a party to the transaction, and for an order to the
spouses to pay him moral damages and costs of suit.
The appellate court ruled that the promissory note was a negotiable instrument and that BA Finance
was a holder in due course, applying Secs. 8, 24, and 52 of the NIL. The CA faulted petitioners for
failing to implead VMSC, the seller of the vehicle and creditor in the promissory note, as a party in
their Third Party Complaint. Citing Salas v. Court of Appeals,11 the appellate court reasoned that
since VMSC is an indispensable party, any judgment will not bind it or be enforced against it. The
absence of VMSC rendered the proceedings in the RTC and the judgment in the Third Party
Complaint "null and void, not only as to the absent party but also to the present parties, namely the
Defendants-Appellants (petitioners herein) and the Third-Party-Defendant-Appellant (Avelino
Violago)." The CA set aside the trial courts order holding Avelino liable for damages to the spouses
without prejudice to the action of the spouses against VMSC and Avelino in a separate action. 12
The dispositive portion of the August 20, 2002 CA Decision reads:
IN THE LIGHT OF ALL THE FOREGOING, the appeal of the Plaintiffs-Appellants is DISMISSED.
The appeal of the Third-Party-Defendant-Appellant is GRANTED. The Decision of the Court a quo is
AFFIRMED, with the modification that the Third-Party Complaint against the Third-Party-Defendantappellant is DISMISSED, without prejudice. The counterclaims of the Third-Party Defendant
Appellant against the Defendants-Appellants are DISMISSED, also without prejudice. 13
The spouses Violago sought but were denied reconsideration by the CA per its Resolution of May
15, 2003.
The Issues
Petitioners raise the following issues:
WHETHER OR NOT THE HOLDER OF AN INVALID NEGOTIABLE PROMISSORY NOTE
MAY BE CONSIDERED A HOLDER IN DUE COURSE
WHETHER OR NOT A CHATTEL MORTGAGE SHOULD BE CONSIDERED VALID
DESPITE VITIATION OF CONSENT OF, AND THE FRAUD COMMITTED ON, THE
MORTGAGORS BY AVELINO, AND THE CLEAR ABSENCE OF OBJECT CERTAIN
WHETHER OR NOT THE VEIL OF CORPORATE ENTITY MAY BE INVOKED AND
SUSTAINED DESPITE THE FRAUD AND DECEPTION OF AVELINO
The Courts Ruling

The ruling of the appellate court is set aside insofar as it dismissed, without prejudice, the third party
complaint of petitioners against Avelino thereby effectively absolving Avelino from any liability under
the third party complaint.
In addressing the threshold issue of whether BA Finance is a holder in due course of the promissory
note, we must determine whether the note is a negotiable instrument and, hence, covered by the
NIL. In their appeal to the CA, petitioners argued that the promissory note is a negotiable instrument
and that the provisions of the NIL, not the Civil Code, should be applied. In the present petition,
however, petitioners claim that Article 1318 of the Civil Code 14 should be applied since their consent
was vitiated by fraud, and, thus, the promissory note does not carry any legal effect despite its
negotiation. Either way, the petitioners arguments deserve no merit.
The promissory note is clearly negotiable. The appellate court was correct in finding all the requisites
of a negotiable instrument present. The NIL provides:
Section 1. Form of Negotiable Instruments. An instrument to be negotiable must conform to the
following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.
The promissory note signed by petitioners reads:
209,601.00 Makati, Metro Manila, Philippines, August 4, 1983
For value received, I/we, jointly and severally, promise to pay to the order of VIOLAGO MOTOR
SALES CORPORATION, its office, the principal sum of TWO HUNDRED NINE THOUSAND SIX
HUNDRED ONE ONLY Pesos (P209,601.00), Philippines Currency, with interest at the rate
stipulated herein below, in installments as follows:
Thirty Six (36) successive monthly installments of P5,822.25, the first installment to be paid on 9-1683, and the succeeding monthly installments on the 16th day of each and every succeeding month
thereafter until the account is fully paid, provided that the penalty charge of three (3%) per cent per
month or a fraction thereof shall be added on each unpaid installment from maturity thereof until fully
paid.
xxxx
Notice of demand, presentment, dishonor and protest are hereby waived.
(Sgd.)
PEDRO F. VIOLAGO

(Sgd.)
FLORENCIA R. VIOLAGO

763 Constancia St., Sampaloc, Manila

(Address)

same
(Address)

(Sgd.)
Marivic Avaria

(Sgd.)
Jesus Tuazon

(WITNESS)

(WITNESS)

PAY TO THE ORDER OF BA FINANCE CORPORATION

WITHOUT RECOURSE
VIOLAGO MOTOR SALES CORPORATION
By: (Sgd.)
AVELINO A. VIOLAGO, Pres. 15
The promissory note clearly satisfies the requirements of a negotiable instrument under the NIL. It is
in writing; signed by the Violago spouses; has an unconditional promise to pay a certain amount, i.e.,
PhP 209,601, on specific dates in the future which could be determined from the terms of the note;
made payable to the order of VMSC; and names the drawees with certainty. The indorsement by
VMSC to BA Finance appears likewise to be valid and regular.
The more important issue now is whether or not BA Finance is a holder in due course. The resolution
of this issue will determine whether petitioners defense of fraud and nullity of the sale could validly
be raised against respondent corporation. Sec. 52 of the NIL provides:
Section 52. What constitutes a holder in due course.A holder in due course is a holder who has
taken the instrument under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice that it had been
previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.
The law presumes that a holder of a negotiable instrument is a holder thereof in due course.
case, the CA is correct in finding that BA Finance meets all the foregoing requisites:

16

In this

In the present recourse, on its face, (a) the "Promissory Note", Exhibit "A", is complete and
regular; (b) the "Promissory Note" was endorsed by the VMSC in favor of the Appellee; (c) the
Appellee, when it accepted the Note, acted in good faith and for value; (d) the Appellee was never
informed, before and at the time the "Promissory Note" was endorsed to the Appellee, that the
vehicle sold to the Defendants-Appellants was not delivered to the latter and that VMSC had already
previously sold the vehicle to Esmeraldo Violago. Although Jose Olvido mortgaged the vehicle to
Generoso Lopez, who assigned his rights to the BA Finance Corporation (Cebu Branch), the same
occurred only on May 8, 1987, much later than August 4, 1983, when VMSC assigned its rights over

the "Chattel Mortgage" by the Defendants-Appellants to the Appellee. Hence, Appellee was a
holder in due course.17
In the hands of one other than a holder in due course, a negotiable instrument is subject to the same
defenses as if it were non-negotiable.18 A holder in due course, however, holds the instrument free
from any defect of title of prior parties and from defenses available to prior parties among
themselves, and may enforce payment of the instrument for the full amount thereof. 19 Since BA
Finance is a holder in due course, petitioners cannot raise the defense of non-delivery of the object
and nullity of the sale against the corporation. The NIL considers every negotiable instrument prima
facie to have been issued for a valuable consideration.20 In Salas, we held that a party holding an
instrument may enforce payment of the instrument for the full amount thereof. As such, the maker
cannot set up the defense of nullity of the contract of sale. 21 Thus, petitioners are liable to
respondent corporation for the payment of the amount stated in the instrument.
From the third party complaint to the present petition, however, petitioners pray that the veil of
corporate fiction be set aside and Avelino be adjudged directly liable to BA Finance. Petitioners
likewise pray for damages for the fraud committed upon them.
In Concept Builders, Inc. v. NLRC, we held:
It is a fundamental principle of corporation law that a corporation is an entity separate and distinct
from its stockholders and from other corporations to which it may be connected. But, this separate
and distinct personality of a corporation is merely a fiction created by law for convenience and to
promote justice. So, when the notion of separate juridical personality is used to defeat public
convenience, justify wrong, protect fraud or defend crime, or is used as a device to defeat the labor
laws, this separate personality of the corporation may be disregarded or the veil of corporate fiction
pierced. This is true likewise when the corporation is merely an adjunct, a business conduit or an
alter ego of another corporation.
xxxx
The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as
follows:
1. Control, not mere majority or complete stock control, but complete domination, not only of
finances but of policy and business practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate mind, will or existence of
its own;
2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust
acts in contravention of plaintiffs legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of.22
This case meets the foregoing test. VMSC is a family-owned corporation of which Avelino was
president. Avelino committed fraud in selling the vehicle to petitioners, a vehicle that was previously
sold to Avelinos other cousin, Esmeraldo. Nowhere in the pleadings did Avelino refute the fact that
the vehicle in this case was already previously sold to Esmeraldo; he merely insisted that he cannot
be held liable because he was not a party to the transaction. The fact that Avelino and Pedro are

cousins, and that Avelino claimed to have a need to increase the sales quota, was likely among the
factors which motivated the spouses to buy the car. Avelino, knowing fully well that the vehicle was
already sold, and with abuse of his relationship with the spouses, still proceeded with the sale and
collected the down payment from petitioners. The trial court found that the vehicle was not delivered
to the spouses. Avelino clearly defrauded petitioners. His actions were the proximate cause of
petitioners loss. He cannot now hide behind the separate corporate personality of VMSC to escape
from liability for the amount adjudged by the trial court in favor of petitioners.
The fact that VMSC was not included as defendant in petitioners third party complaint does not
preclude recovery by petitioners from Avelino; neither would such non-inclusion constitute a bar to
the application of the piercing-of-the-corporate-veil doctrine. We suggested as much in Arcilla v.
Court of Appeals, an appellate proceeding involving petitioner Arcillas bid to avoid the adverse CA
decision on the argument that he is not personally liable for the amount adjudged since the same
constitutes a corporate liability which nevertheless cannot even be enforced against the corporation
which has not been impleaded as a party below. In that case, the Court found as well-taken the CAs
act of disregarding the separate juridical personality of the corporation and holding its president,
Arcilla, liable for the obligations incurred in the name of the corporation although it was not a party to
the collection suit before the trial court. An excerpt from Arcilla:
x x x In short, even if We are to assume arguendo that the obligation was incurred in the name of the
corporation, the petitioner [Arcilla] would still be personally liable therefor because for all legal intents
and purposes, he and the corporation are one and the same. Csar Marine Resources, Inc. is nothing
more than his business conduit and alter ego. The fiction of separate juridical personality conferred
upon such corporation by law should be disregarded. Significantly, petitioner does not seriously
challenge the [CAs] application of the doctrine which permits the piercing of the corporate veil and
the disregarding of the fiction of a separate juridical personality; this is because he knows only too
well that from the beginning, he merely used the corporation for his personal purposes. 23
WHEREFORE, the CAs August 20, 2002 Decision and May 15, 2003 Resolution in CA-G.R. CV No.
48489 areSET ASIDE insofar as they dismissed without prejudice the third party complaint of
petitioners-spouses Pedro and Florencia Violago against respondent Avelino Violago. The March 5,
1994 Decision of the RTC is REINSTATEDand AFFIRMED. Costs against Avelino Violago.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 166405

August 6, 2008

CLAUDE P. BAUTISTA, petitioner,

vs.
AUTO PLUS TRADERS, INCORPORATED and COURT OF APPEALS (Twenty-First
Division),respondents.

DECISION
QUISUMBING, J.:
This petition for review on certiorari assails the Decision1 dated August 10, 2004 of the Court of
Appeals in CA-G.R. CR No. 28464 and the Resolution2 dated October 29, 2004, which denied
petitioner's motion for reconsideration. The Court of Appeals affirmed the February 24, 2004
Decision and May 11, 2004 Order of the Regional Trial Court (RTC), Davao City, Branch 16, in
Criminal Case Nos. 52633-03 and 52634-03.
The antecedent facts are as follows:
Petitioner Claude P. Bautista, in his capacity as President and Presiding Officer of Cruiser Bus Lines
and Transport Corporation, purchased various spare parts from private respondent Auto Plus
Traders, Inc. and issued two postdated checks to cover his purchases. The checks were
subsequently dishonored. Private respondent then executed an affidavit-complaint for violation
ofBatas Pambansa Blg. 223 against petitioner. Consequently, two Informations for violation of BP
Blg. 22 were filed with the Municipal Trial Court in Cities (MTCC) of Davao City against the petitioner.
These were docketed as Criminal Case Nos. 102,004-B-2001 and 102,005-B-2001. The
Informations4 read:
Criminal Case No. 102,004-B-2001:
The undersigned accuses the above-named accused for violation of Batas
Pambansa Bilang 22, committed as follows:
That on or about December 15, 2000, in the City of Davao, Philippines, and within
the jurisdiction of this Honorable Court, the above-mentioned accused, knowing fully
well that he had no sufficient funds and/or credit with the drawee bank, wilfully,
unlawfully and feloniously issued and made out Rural Bank of Digos, Inc. Check No.
058832, dated December 15, 2000, in the amount of P151,200.00, in favor of Auto
Plus Traders, Inc., but when said check was presented to the drawee bank for
encashment, the same was dishonored for the reason "DRAWN AGAINST
INSUFFICIENT FUNDS" and despite notice of dishonor and demands upon said
accused to make good the check, accused failed and refused to make payment to
the damage and prejudice of herein complainant.
CONTRARY TO LAW.
Criminal Case No. 102,005-B-2001:
The undersigned accuses the above-named accused for violation of Batas
Pambansa Bilang 22, committed as follows:
That on or about October 30, 2000, in the City of Davao, Philippines, and within the
jurisdiction of this Honorable Court, the above-mentioned accused, knowing fully well
that he had no sufficient funds and/or credit with the drawee bank, wilfully, unlawfully
and feloniously issued and made out Rural Bank of Digos, Inc. Check No. 059049,
dated October 30, 2000, in the amount of P97,500.00, in favor of Auto Plus Traders,

[Inc.], but when said check was presented to the drawee bank for encashment, the
same was dishonored for the reason "DRAWN AGAINST INSUFFICIENT FUNDS"
and despite notice of dishonor and demands upon said accused to make good the
check, accused failed and refused to make payment, to the damage and prejudice of
herein complainant.
CONTRARY TO LAW.
Petitioner pleaded not guilty. Trial on the merits ensued. After the presentation of the prosecution's
evidence, petitioner filed a demurrer to evidence. On April 21, 2003, the MTCC granted the
demurrer, thus:
WHEREFORE, the demurrer to evidence is granted, premised on reasonable doubt as to the
guilt of the accused. Cruiser Bus Line[s] and Transport Corporation, through the accused is
directed to pay the complainant the sum of P248,700.00 representing the value of the two
checks, with interest at the rate of 12% per annum to be computed from the time of the filing
of these cases in Court, until the account is paid in full; ordering further Cruiser Bus Line[s]
and Transport Corporation, through the accused, to reimburse complainant the expense
representing filing fees amounting to P1,780.00 and costs of litigation which this Court
hereby fixed at P5,000.00.
SO ORDERED.5
Petitioner moved for partial reconsideration but his motion was denied. Thereafter, both parties
appealed to the RTC. On February 24, 2004, the trial court ruled:
WHEREFORE, the assailed Order dated April 21, 2003 is hereby MODIFIED to read as
follows: Accused is directed to pay and/or reimburse the complainant the following sums:
(1)P248,700.00 representing the value of the two checks, with interest at the rate of 12% per
annum to be computed from the time of the filing of these cases in Court, until the account is
paid in full; (2) P1,780.00 for filing fees and P5,000.00 as cost of litigation.
SO ORDERED.6
Petitioner moved for reconsideration, but his motion was denied on May 11, 2004. Petitioner
elevated the case to the Court of Appeals, which affirmed the February 24, 2004 Decision and May
11, 2004 Order of the RTC:
WHEREFORE, premises considered, the instant petition is DENIED. The assailed Decision
of the Regional Trial Court, Branch 16, Davao City, dated February 24, 2004 and its Order
dated May 11, 2004 are AFFIRMED.
SO ORDERED.7
Petitioner now comes before us, raising the sole issue of whether the Court of Appeals erred in
upholding the RTC's ruling that petitioner, as an officer of the corporation, is personally and civilly
liable to the private respondent for the value of the two checks. 8

Petitioner asserts that BP Blg. 22 merely pertains to the criminal liability of the accused and that the
corporation, which has a separate personality from its officers, is solely liable for the value of the two
checks.
Private respondent counters that petitioner should be held personally liable for both checks. Private
respondent alleged that petitioner issued two postdated checks: a personal check in his name for the
amount of P151,200 and a corporation check under the account of Cruiser Bus Lines and Transport
Corporation for the amount of P97,500. According to private respondent, petitioner, by issuing his
check to cover the obligation of the corporation, became an accommodation party. Under Section
299of the Negotiable Instruments Law, an accommodation party is liable on the instrument to a
holder for value. Private respondent adds that petitioner should also be liable for the value of the
corporation check because instituting another civil action against the corporation would result in
multiplicity of suits and delay.
At the outset, we note that private respondent's allegation that petitioner issued a personal check
disputes the factual findings of the MTCC. The MTCC found that the two checks belong to Cruiser
Bus Lines and Transport Corporation while the RTC found that one of the checks was a personal
check of the petitioner. Generally this Court, in a petition for review on certiorari under Rule 45 of the
Rules of Court, has no jurisdiction over questions of facts. But, considering that the findings of the
MTCC and the RTC are at variance,10 we are compelled to settle this issue.
A perusal of the two check return slips11 in conjunction with the Current Account Statements12 would
show that the check for P151,200 was drawn against the current account of Claude Bautista while
the check for P97,500 was drawn against the current account of Cruiser Bus Lines and Transport
Corporation. Hence, we sustain the factual finding of the RTC.
Nonetheless, we find the appellate court in error for affirming the decision of the RTC holding
petitioner liable for the value of the checks considering that petitioner was acquitted of the crime
charged and that the debts are clearly corporate debts for which only Cruiser Bus Lines and
Transport Corporation should be held liable.
Juridical entities have personalities separate and distinct from its officers and the persons
composing it.13 Generally, the stockholders and officers are not personally liable for the obligations of
the corporation except only when the veil of corporate fiction is being used as a cloak or cover for
fraud or illegality, or to work injustice.14 These situations, however, do not exist in this case. The
evidence shows that it is Cruiser Bus Lines and Transport Corporation that has obligations to Auto
Plus Traders, Inc. for tires. There is no agreement that petitioner shall be held liable for the
corporation's obligations in his personal capacity. Hence, he cannot be held liable for the value of the
two checks issued in payment for the corporation's obligation in the total amount of P248,700.
Likewise, contrary to private respondent's contentions, petitioner cannot be considered liable as an
accommodation party for Check No. 58832. Section 29 of the Negotiable Instruments Law defines
an accommodation party as a person "who has signed the instrument as maker, drawer, acceptor, or
indorser, without receiving value therefor, and for the purpose of lending his name to some other
person." As gleaned from the text, an accommodation party is one who meets all the three
requisites, viz: (1) he must be a party to the instrument, signing as maker, drawer, acceptor, or
indorser; (2) he must not receive value therefor; and (3) he must sign for the purpose of lending his
name or credit to some other person.15 An accommodation party lends his name to enable the
accommodated party to obtain credit or to raise money; he receives no part of the consideration for

the instrument but assumes liability to the other party/ies thereto. 16 The first two elements are
present here, however there is insufficient evidence presented in the instant case to show the
presence of the third requisite. All that the evidence shows is that petitioner signed Check No.
58832, which is drawn against his personal account. The said check, dated December 15, 2000,
corresponds to the value of 24 sets of tires received by Cruiser Bus Lines and Transport Corporation
on August 29, 2000.17 There is no showing of when petitioner issued the check and in what capacity.
In the absence of concrete evidence it cannot just be assumed that petitioner intended to lend his
name to the corporation. Hence, petitioner cannot be considered as an accommodation party.
Cruiser Bus Lines and Transport Corporation, however, remains liable for the checks especially
since there is no evidence that the debts covered by the subject checks have been paid.
WHEREFORE, the petition is GRANTED. The Decision dated August 10, 2004 and the Resolution
dated October 29, 2004 of the Court of Appeals in CA-G.R. CR No. 28464 are REVERSED and SET
ASIDE. Criminal Case Nos. 52633-03 and 52634-03 are DISMISSED, without prejudice to the right
of private respondent Auto Plus Traders, Inc., to file the proper civil action against Cruiser Bus Lines
and Transport Corporation for the value of the two checks.
No pronouncement as to costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 170325

September 26, 2008

PHILIPPINE NATIONAL BANK, Petitioner,

vs.
ERLANDO T. RODRIGUEZ and NORMA RODRIGUEZ, Respondents.
DECISION
REYES, R.T., J.:
WHEN the payee of the check is not intended to be the true recipient of its proceeds, is it payable to
order or bearer? What is the fictitious-payee rule and who is liable under it? Is there any exception?
These questions seek answers in this petition for review on certiorari of the Amended Decision 1 of
the Court of Appeals (CA) which affirmed with modification that of the Regional Trial Court (RTC). 2
The Facts
The facts as borne by the records are as follows:
Respondents-Spouses Erlando and Norma Rodriguez were clients of petitioner Philippine National
Bank (PNB), Amelia Avenue Branch, Cebu City. They maintained savings and demand/checking
accounts, namely, PNBig Demand Deposits (Checking/Current Account No. 810624-6 under the
account name Erlando and/or Norma Rodriguez), and PNBig Demand Deposit (Checking/Current
Account No. 810480-4 under the account name Erlando T. Rodriguez).
The spouses were engaged in the informal lending business. In line with their business, they had a
discounting3 arrangement with the Philnabank Employees Savings and Loan Association (PEMSLA),
an association of PNB employees. Naturally, PEMSLA was likewise a client of PNB Amelia Avenue
Branch. The association maintained current and savings accounts with petitioner bank.
PEMSLA regularly granted loans to its members. Spouses Rodriguez would rediscount the
postdated checks issued to members whenever the association was short of funds. As was
customary, the spouses would replace the postdated checks with their own checks issued in the
name of the members.
It was PEMSLAs policy not to approve applications for loans of members with outstanding debts. To
subvert this policy, some PEMSLA officers devised a scheme to obtain additional loans despite their
outstanding loan accounts. They took out loans in the names of unknowing members, without the
knowledge or consent of the latter. The PEMSLA checks issued for these loans were then given to
the spouses for rediscounting. The officers carried this out by forging the indorsement of the named
payees in the checks.

In return, the spouses issued their personal checks (Rodriguez checks) in the name of the members
and delivered the checks to an officer of PEMSLA. The PEMSLA checks, on the other hand, were
deposited by the spouses to their account.
Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its savings account without
any indorsement from the named payees. This was an irregular procedure made possible through
the facilitation of Edmundo Palermo, Jr., treasurer of PEMSLA and bank teller in the PNB Branch. It
appears that this became the usual practice for the parties.
For the period November 1998 to February 1999, the spouses issued sixty nine (69) checks, in the
total amount of P2,345,804.00. These were payable to forty seven (47) individual payees who were
all members of PEMSLA.4
Petitioner PNB eventually found out about these fraudulent acts. To put a stop to this scheme, PNB
closed the current account of PEMSLA. As a result, the PEMSLA checks deposited by the spouses
were returned or dishonored for the reason "Account Closed." The corresponding Rodriguez checks,
however, were deposited as usual to the PEMSLA savings account. The amounts were duly debited
from the Rodriguez account. Thus, because the PEMSLA checks given as payment were returned,
spouses Rodriguez incurred losses from the rediscounting transactions.
RTC Disposition
Alarmed over the unexpected turn of events, the spouses Rodriguez filed a civil complaint for
damages against PEMSLA, the Multi-Purpose Cooperative of Philnabankers (MCP), and petitioner
PNB. They sought to recover the value of their checks that were deposited to the PEMSLA savings
account amounting to P2,345,804.00. The spouses contended that because PNB credited the
checks to the PEMSLA account even without indorsements, PNB violated its contractual obligation
to them as depositors. PNB paid the wrong payees, hence, it should bear the loss.
PNB moved to dismiss the complaint on the ground of lack of cause of action. PNB argued that the
claim for damages should come from the payees of the checks, and not from spouses Rodriguez.
Since there was no demand from the said payees, the obligation should be considered as
discharged.
In an Order dated January 12, 2000, the RTC denied PNBs motion to dismiss.
In its Answer,5 PNB claimed it is not liable for the checks which it paid to the PEMSLA account
without any indorsement from the payees. The bank contended that spouses Rodriguez, the makers,
actually did not intend for the named payees to receive the proceeds of the checks. Consequently,
the payees were considered as "fictitious payees" as defined under the Negotiable Instruments Law
(NIL). Being checks made to fictitious payees which are bearer instruments, the checks were
negotiable by mere delivery. PNBs Answer included its cross-claim against its co-defendants
PEMSLA and the MCP, praying that in the event that judgment is rendered against the bank, the
cross-defendants should be ordered to reimburse PNB the amount it shall pay.
After trial, the RTC rendered judgment in favor of spouses Rodriguez (plaintiffs). It ruled that PNB
(defendant) is liable to return the value of the checks. All counterclaims and cross-claims were
dismissed. The dispositive portion of the RTC decision reads:
WHEREFORE, in view of the foregoing, the Court hereby renders judgment, as follows:

1. Defendant is hereby ordered to pay the plaintiffs the total amount of P2,345,804.00 or
reinstate or restore the amount of P775,337.00 in the PNBig Demand Deposit
Checking/Current Account No. 810480-4 of Erlando T. Rodriguez, and the amount
of P1,570,467.00 in the PNBig Demand Deposit, Checking/Current Account No. 810624-6 of
Erlando T. Rodriguez and/or Norma Rodriguez, plus legal rate of interest thereon to be
computed from the filing of this complaint until fully paid;
2. The defendant PNB is hereby ordered to pay the plaintiffs the following reasonable
amount of damages suffered by them taking into consideration the standing of the plaintiffs
being sugarcane planters, realtors, residential subdivision owners, and other businesses:
(a) Consequential damages, unearned income in the amount of P4,000,000.00, as a
result of their having incurred great dificulty (sic) especially in the residential
subdivision business, which was not pushed through and the contractor even
threatened to file a case against the plaintiffs;
(b) Moral damages in the amount of P1,000,000.00;
(c) Exemplary damages in the amount of P500,000.00;
(d) Attorneys fees in the amount of P150,000.00 considering that this case does not
involve very complicated issues; and for the
(e) Costs of suit.
3. Other claims and counterclaims are hereby dismissed. 6
CA Disposition
PNB appealed the decision of the trial court to the CA on the principal ground that the disputed
checks should be considered as payable to bearer and not to order.
In a Decision7 dated July 22, 2004, the CA reversed and set aside the RTC disposition. The CA
concluded that the checks were obviously meant by the spouses to be really paid to PEMSLA. The
court a quo declared:
We are not swayed by the contention of the plaintiffs-appellees (Spouses Rodriguez) that their cause
of action arose from the alleged breach of contract by the defendant-appellant (PNB) when it paid
the value of the checks to PEMSLA despite the checks being payable to order. Rather, we are more
convinced by the strong and credible evidence for the defendant-appellant with regard to the
plaintiffs-appellees and PEMSLAs business arrangement that the value of the rediscounted
checks of the plaintiffs-appellees would be deposited in PEMSLAs account for payment of the loans
it has approved in exchange for PEMSLAs checks with the full value of the said loans. This is the
only obvious explanation as to why all the disputed sixty-nine (69) checks were in the possession of
PEMSLAs errand boy for presentment to the defendant-appellant that led to this present
controversy. It also appears that the teller who accepted the said checks was PEMSLAs officer, and
that such was a regular practice by the parties until the defendant-appellant discovered the scam.
The logical conclusion, therefore, is that the checks were never meant to be paid to order, but
instead, to PEMSLA. We thus find no breach of contract on the part of the defendant-appellant.

According to plaintiff-appellee Erlando Rodriguez testimony, PEMSLA allegedly issued post-dated

checks to its qualified members who had applied for loans. However, because of PEMSLAs
insufficiency of funds, PEMSLA approached the plaintiffs-appellees for the latter to issue
rediscounted checks in favor of said applicant members. Based on the investigation of the
defendant-appellant, meanwhile, this arrangement allowed the plaintiffs-appellees to make a profit
by issuing rediscounted checks, while the officers of PEMSLA and other members would be able to
claim their loans, despite the fact that they were disqualified for one reason or another. They were
able to achieve this conspiracy by using other members who had loaned lesser amounts of money
or had not applied at all. x x x.8 (Emphasis added)
The CA found that the checks were bearer instruments, thus they do not require indorsement for
negotiation; and that spouses Rodriguez and PEMSLA conspired with each other to accomplish this
money-making scheme. The payees in the checks were "fictitious payees" because they were not
the intended payees at all.
The spouses Rodriguez moved for reconsideration. They argued, inter alia, that the checks on their
faces were unquestionably payable to order; and that PNB committed a breach of contract when it
paid the value of the checks to PEMSLA without indorsement from the payees. They also argued
that their cause of action is not only against PEMSLA but also against PNB to recover the value of
the checks.
On October 11, 2005, the CA reversed itself via an Amended Decision, the last paragraph and fallo
of which read:
In sum, we rule that the defendant-appellant PNB is liable to the plaintiffs-appellees Sps. Rodriguez
for the following:
1. Actual damages in the amount of P2,345,804 with interest at 6% per annum from 14 May
1999 until fully paid;
2. Moral damages in the amount of P200,000;
3. Attorneys fees in the amount of P100,000; and
4. Costs of suit.
WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by Us AFFIRMING
WITH MODIFICATION the assailed decision rendered in Civil Case No. 99-10892, as set forth in the
immediately next preceding paragraph hereof, and SETTING ASIDE Our original decision
promulgated in this case on 22 July 2004.
SO ORDERED.9
The CA ruled that the checks were payable to order. According to the appellate court, PNB failed to
present sufficient proof to defeat the claim of the spouses Rodriguez that they really intended the
checks to be received by the specified payees. Thus, PNB is liable for the value of the checks which
it paid to PEMSLA without indorsements from the named payees. The award for damages was
deemed appropriate in view of the failure of PNB to treat the Rodriguez account with the highest
degree of care considering the fiduciary nature of their relationship, which constrained respondents
to seek legal action.

Hence, the present recourse under Rule 45.

Issues
The issues may be compressed to whether the subject checks are payable to order or to bearer and
who bears the loss?
PNB argues anew that when the spouses Rodriguez issued the disputed checks, they did not intend
for the named payees to receive the proceeds. Thus, they are bearer instruments that could be
validly negotiated by mere delivery. Further, testimonial and documentary evidence presented during
trial amply proved that spouses Rodriguez and the officers of PEMSLA conspired with each other to
defraud the bank.
Our Ruling
Prefatorily, amendment of decisions is more acceptable than an erroneous judgment attaining finality
to the prejudice of innocent parties. A court discovering an erroneous judgment before it becomes
final may, motu proprio or upon motion of the parties, correct its judgment with the singular objective
of achieving justice for the litigants.10
However, a word of caution to lower courts, the CA in Cebu in this particular case, is in order. The
Court does not sanction careless disposition of cases by courts of justice. The highest degree of
diligence must go into the study of every controversy submitted for decision by litigants. Every issue
and factual detail must be closely scrutinized and analyzed, and all the applicable laws judiciously
studied, before the promulgation of every judgment by the court. Only in this manner will errors in
judgments be avoided.
Now to the core of the petition.
As a rule, when the payee is fictitious or not intended to be the true recipient of the proceeds, the
check is considered as a bearer instrument. A check is "a bill of exchange drawn on a bank payable
on demand."11 It is either an order or a bearer instrument. Sections 8 and 9 of the NIL states:
SEC. 8. When payable to order. The instrument is payable to order where it is drawn payable to
the order of a specified person or to him or his order. It may be drawn payable to the order of
(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.
Where the instrument is payable to order, the payee must be named or otherwise indicated therein
with reasonable certainty.

SEC. 9. When payable to bearer. The instrument is payable to bearer

(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or bearer; or
(c) When it is payable to the order of a fictitious or non-existing person, and such fact is
known to the person making it so payable; or
(d) When the name of the payee does not purport to be the name of any person; or
(e) Where the only or last indorsement is an indorsement in blank.12 (Underscoring supplied)
The distinction between bearer and order instruments lies in their manner of negotiation. Under
Section 30 of the NIL, an order instrument requires an indorsement from the payee or holder before
it may be validly negotiated. A bearer instrument, on the other hand, does not require an
indorsement to be validly negotiated. It is negotiable by mere delivery. The provision reads:
SEC. 30. What constitutes negotiation. An instrument is negotiated when it is transferred from one
person to another in such manner as to constitute the transferee the holder thereof. If payable to
bearer, it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the
holder completed by delivery.
A check that is payable to a specified payee is an order instrument. However, under Section 9(c) of
the NIL, a check payable to a specified payee may nevertheless be considered as a bearer
instrument if it is payable to the order of a fictitious or non-existing person, and such fact is known to
the person making it so payable. Thus, checks issued to "Prinsipe Abante" or "Si Malakas at si
Maganda," who are well-known characters in Philippine mythology, are bearer instruments because
the named payees are fictitious and non-existent.
We have yet to discuss a broader meaning of the term "fictitious" as used in the NIL. It is for this
reason that We look elsewhere for guidance. Court rulings in the United States are a logical starting
point since our law on negotiable instruments was directly lifted from the Uniform Negotiable
Instruments Law of the United States.13
A review of US jurisprudence yields that an actual, existing, and living payee may also be "fictitious"
if the maker of the check did not intend for the payee to in fact receive the proceeds of the check.
This usually occurs when the maker places a name of an existing payee on the check for
convenience or to cover up an illegal activity.14 Thus, a check made expressly payable to a nonfictitious and existing person is not necessarily an order instrument. If the payee is not the intended
recipient of the proceeds of the check, the payee is considered a "fictitious" payee and the check is a
bearer instrument.
In a fictitious-payee situation, the drawee bank is absolved from liability and the drawer bears the
loss. When faced with a check payable to a fictitious payee, it is treated as a bearer instrument that
can be negotiated by delivery. The underlying theory is that one cannot expect a fictitious payee to
negotiate the check by placing his indorsement thereon. And since the maker knew this limitation, he
must have intended for the instrument to be negotiated by mere delivery. Thus, in case of
controversy, the drawer of the check will bear the loss. This rule is justified for otherwise, it will be
most convenient for the maker who desires to escape payment of the check to always deny the

validity of the indorsement. This despite the fact that the fictitious payee was purposely named
without any intention that the payee should receive the proceeds of the check. 15
The fictitious-payee rule is best illustrated in Mueller & Martin v. Liberty Insurance Bank. 16 In the said
case, the corporation Mueller & Martin was defrauded by George L. Martin, one of its authorized
signatories. Martin drew seven checks payable to the German Savings Fund Company Building
Association (GSFCBA) amounting to $2,972.50 against the account of the corporation without
authority from the latter. Martin was also an officer of the GSFCBA but did not have signing authority.
At the back of the checks, Martin placed the rubber stamp of the GSFCBA and signed his own name
as indorsement. He then successfully drew the funds from Liberty Insurance Bank for his own
personal profit. When the corporation filed an action against the bank to recover the amount of the
checks, the claim was denied.
The US Supreme Court held in Mueller that when the person making the check so payable did not
intend for the specified payee to have any part in the transactions, the payee is considered as a
fictitious payee. The check is then considered as a bearer instrument to be validly negotiated by
mere delivery. Thus, the US Supreme Court held that Liberty Insurance Bank, as drawee, was
authorized to make payment to the bearer of the check, regardless of whether prior indorsements
were genuine or not.17
The more recent Getty Petroleum Corp. v. American Express Travel Related Services Company,
Inc.18 upheld the fictitious-payee rule. The rule protects the depositary bank and assigns the loss to
the drawer of the check who was in a better position to prevent the loss in the first place. Due care is
not even required from the drawee or depositary bank in accepting and paying the checks. The
effect is that a showing of negligence on the part of the depositary bank will not defeat the protection
that is derived from this rule.
However, there is a commercial bad faith exception to the fictitious-payee rule. A showing of
commercial bad faith on the part of the drawee bank, or any transferee of the check for that matter,
will work to strip it of this defense. The exception will cause it to bear the loss. Commercial bad faith
is present if the transferee of the check acts dishonestly, and is a party to the fraudulent scheme.
Said the US Supreme Court in Getty:
Consequently, a transferees lapse of wary vigilance, disregard of suspicious circumstances which
might have well induced a prudent banker to investigate and other permutations of negligence are
not relevant considerations under Section 3-405 x x x. Rather, there is a "commercial bad faith"
exception to UCC 3-405, applicable when the transferee "acts dishonestly where it has actual
knowledge of facts and circumstances that amount to bad faith, thus itself becoming a participant in
a fraudulent scheme. x x x Such a test finds support in the text of the Code, which omits a standard
of care requirement from UCC 3-405 but imposes on all parties an obligation to act with "honesty in
fact." x x x19 (Emphasis added)
Getty also laid the principle that the fictitious-payee rule extends protection even to non-bank
transferees of the checks.
In the case under review, the Rodriguez checks were payable to specified payees. It is unrefuted
that the 69 checks were payable to specific persons. Likewise, it is uncontroverted that the payees
were actual, existing, and living persons who were members of PEMSLA that had a rediscounting
arrangement with spouses Rodriguez.
What remains to be determined is if the payees, though existing persons, were "fictitious" in its
broader context.

For the fictitious-payee rule to be available as a defense, PNB must show that the makers did not
intend for the named payees to be part of the transaction involving the checks. At most, the banks
thesis shows that the payees did not have knowledge of the existence of the checks. This lack of
knowledge on the part of the payees, however, was not tantamount to a lack of intention on the part
of respondents-spouses that the payees would not receive the checks proceeds. Considering that
respondents-spouses were transacting with PEMSLA and not the individual payees, it is
understandable that they relied on the information given by the officers of PEMSLA that the payees
would be receiving the checks.
Verily, the subject checks are presumed order instruments. This is because, as found by both lower
courts, PNB failed to present sufficient evidence to defeat the claim of respondents-spouses that the
named payees were the intended recipients of the checks proceeds. The bank failed to satisfy a
requisite condition of a fictitious-payee situation that the maker of the check intended for the payee
to have no interest in the transaction.
Because of a failure to show that the payees were "fictitious" in its broader sense, the fictitiouspayee rule does not apply. Thus, the checks are to be deemed payable to order. Consequently, the
drawee bank bears the loss.20
PNB was remiss in its duty as the drawee bank. It does not dispute the fact that its teller or tellers
accepted the 69 checks for deposit to the PEMSLA account even without any indorsement from the
named payees. It bears stressing that order instruments can only be negotiated with a valid
indorsement.
A bank that regularly processes checks that are neither payable to the customer nor duly indorsed
by the payee is apparently grossly negligent in its operations.21 This Court has recognized the unique
public interest possessed by the banking industry and the need for the people to have full trust and
confidence in their banks.22 For this reason, banks are minded to treat their customers accounts with
utmost care, confidence, and honesty.23
In a checking transaction, the drawee bank has the duty to verify the genuineness of the signature of
the drawer and to pay the check strictly in accordance with the drawers instructions, i.e., to the
named payee in the check. It should charge to the drawers accounts only the payables authorized
by the latter. Otherwise, the drawee will be violating the instructions of the drawer and it shall be
liable for the amount charged to the drawers account. 24
In the case at bar, respondents-spouses were the banks depositors. The checks were drawn against
respondents-spouses accounts. PNB, as the drawee bank, had the responsibility to ascertain the
regularity of the indorsements, and the genuineness of the signatures on the checks before
accepting them for deposit. Lastly, PNB was obligated to pay the checks in strict accordance with the
instructions of the drawers. Petitioner miserably failed to discharge this burden.
The checks were presented to PNB for deposit by a representative of PEMSLA absent any type of
indorsement, forged or otherwise. The facts clearly show that the bank did not pay the checks in
strict accordance with the instructions of the drawers, respondents-spouses. Instead, it paid the
values of the checks not to the named payees or their order, but to PEMSLA, a third party to the
transaction between the drawers and the payees.alf-ITC
Moreover, PNB was negligent in the selection and supervision of its employees. The trustworthiness
of bank employees is indispensable to maintain the stability of the banking industry. Thus, banks are
enjoined to be extra vigilant in the management and supervision of their employees. In Bank of the
Philippine Islands v. Court of Appeals,25 this Court cautioned thus:

Banks handle daily transactions involving millions of pesos. By the very nature of their work the
degree of responsibility, care and trustworthiness expected of their employees and officials is far
greater than those of ordinary clerks and employees. For obvious reasons, the banks are expected
to exercise the highest degree of diligence in the selection and supervision of their employees. 26
PNBs tellers and officers, in violation of banking rules of procedure, permitted the invalid deposits of
checks to the PEMSLA account. Indeed, when it is the gross negligence of the bank employees that
caused the loss, the bank should be held liable.27
PNBs argument that there is no loss to compensate since no demand for payment has been made
by the payees must also fail. Damage was caused to respondents-spouses when the PEMSLA
checks they deposited were returned for the reason "Account Closed." These PEMSLA checks were
the corresponding payments to the Rodriguez checks. Since they could not encash the PEMSLA
checks, respondents-spouses were unable to collect payments for the amounts they had advanced.
A bank that has been remiss in its duty must suffer the consequences of its negligence. Being issued
to named payees, PNB was duty-bound by law and by banking rules and procedure to require that
the checks be properly indorsed before accepting them for deposit and payment. In fine, PNB should
be held liable for the amounts of the checks.
One Last Note
We note that the RTC failed to thresh out the merits of PNBs cross-claim against its co-defendants
PEMSLA and MPC. The records are bereft of any pleading filed by these two defendants in answer
to the complaint of respondents-spouses and cross-claim of PNB. The Rules expressly provide that
failure to file an answer is a ground for a declaration that defendant is in default. 28 Yet, the RTC failed
to sanction the failure of both PEMSLA and MPC to file responsive pleadings. Verily, the RTC
dismissal of PNBs cross-claim has no basis. Thus, this judgment shall be without prejudice to
whatever action the bank might take against its co-defendants in the trial court.
To PNBs credit, it became involved in the controversial transaction not of its own volition but due to
the actions of some of its employees. Considering that moral damages must be understood to be in
concept of grants, not punitive or corrective in nature, We resolve to reduce the award of moral
damages to P50,000.00.29
WHEREFORE, the appealed Amended Decision is AFFIRMED with the MODIFICATION that the
award for moral damages is reduced to P50,000.00, and that this is without prejudice to whatever
civil, criminal, or administrative action PNB might take against PEMSLA, MPC, and the employees
involved.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 179952

December 4, 2009

METROPOLITAN BANK AND TRUST COMPANY (formerly ASIANBANK

CORPORATION), Petitioner,
vs.
BA FINANCE CORPORATION and MALAYAN INSURANCE CO., INC., Respondents.
DECISION
CARPIO MORALES, J.:
Lamberto Bitanga (Bitanga) obtained from respondent BA Finance Corporation (BA Finance)
a P329,2801 loan to secure which, he mortgaged his car to respondent BA Finance.2 The mortgage
contained the following stipulation:
The MORTGAGOR covenants and agrees that he/it will cause the property(ies) hereinabove
mortgaged to be insured against loss or damage by accident, theft and fire for a period of one year
from date hereof with an insurance company or companies acceptable to the MORTGAGEE in an
amount not less than the outstanding balance of mortgage obligations and that he/it will make all
loss, if any, under such policy or policies, payable to the MORTGAGEE or its assigns as its interest
may appear x x x.3 (emphasis and underscoring supplied)
Bitanga thus had the mortgaged car insured by respondent Malayan Insurance Co., Inc. (Malayan
Insurance)4which issued a policy stipulating that, inter alia,
Loss, if any shall be payable to BA FINANCE CORP. as its interest may appear. It is hereby
expressly understood that this policy or any renewal thereof, shall not be cancelled without prior
notification and conformity by BA FINANCE CORPORATION.5 (emphasis and underscoring
supplied)
The car was stolen. On Bitangas claim, Malayan Insurance issued a check payable to the order of
"B.A. Finance Corporation and Lamberto Bitanga" for P224,500, drawn against China Banking
Corporation (China Bank). The check was crossed with the notation "For Deposit Payees Account
Only."6
Without the indorsement or authority of his co-payee BA Finance, Bitanga deposited the check to his
account with the Asianbank Corporation (Asianbank), now merged with herein petitioner
Metropolitan Bank and Trust Company (Metrobank). Bitanga subsequently withdrew the entire
proceeds of the check.
In the meantime, Bitangas loan became past due, but despite demands, he failed to settle it.
BA Finance eventually learned of the loss of the car and of Malayan Insurances issuance of a
crossed check payable to it and Bitanga, and of Bitangas depositing it in his account at Asianbank
and withdrawing the entire proceeds thereof.

BA Finance thereupon demanded the payment of the value of the check from Asianbank 7 but to no
avail, prompting it to file a complaint before the Regional Trial Court (RTC) of Makati for sum of
money and damagesagainst Asianbank and Bitanga,8 alleging that, inter alia, it is entitled to the
entire proceeds of the check.
In its Answer with Counterclaim,9 Asianbank alleged that BA Finance "instituted [the] complaint in
bad faith to coerce [it] into paying the whole amount of the CHECK knowing fully well that its rightful
claim, if any, is against Malayan [Insurance]."10
Asianbank thereafter filed a cross-claim against Bitanga,11 alleging that he fraudulently induced its
personnel to release to him the full amount of the check; and that on being later informed that the
entire amount of the check did not belong to Bitanga, it took steps to get in touch with him but he had
changed residence without leaving any forwarding address.12
And Asianbank filed a third-party complaint against Malayan Insurance,13 alleging that Malayan
Insurance was grossly negligent in issuing the check payable to both Bitanga and BA Finance and
delivering it to Bitanga without the consent of BA Finance. 14
Bitanga was declared in default in Asianbanks cross-claim. 15
Branch 137 of the Makati RTC, finding that Malayan Insurance was not privy to the contract between
BA Finance and Bitanga, and noting the claim of Malayan Insurance that it is its policy to issue
checks to both the insured and the financing company, held that Malayan Insurance cannot be
faulted for negligence for issuing the check payable to both BA Finance and Bitanga.
The trial court, holding that Asianbank was negligent in allowing Bitanga to deposit the check to his
account and to withdraw the proceeds thereof, without his co-payee BA Finance having either
indorsed it or authorized him to indorse it in its behalf,16 found Asianbank and Bitanga jointly and
severally liable to BA Finance following Section 41 of the Negotiable Instruments Law and
Associated Bank v. Court of Appeals.17
Thus the trial court disposed:
WHEREFORE, premises considered, judgment is hereby rendered ordering defendants Asian Bank
Corporation and Lamberto Bitanga:
1) To pay plaintiff jointly and severally the sum of P224,500.00 with interest thereon at the
rate of 12% from September 25, 1992 until fully paid;
2) To pay plaintiff the sum of P50,000.00 as exemplary damages; P20,000.00 as actual
damages; P30,000.00 as attorneys fee; and
3) To pay the costs of suit.
Asianbanks and Bitangas [sic] counterclaims are dismissed.
The third party complaint of defendant/third party plaintiff against third-party defendant Malayan
Insurance, Co., Inc. is hereby dismissed. Asianbank is ordered to pay Malayan attorneys fee of
P50,000.00 and a per appearance fee of P500.00.

On the cross-claim of defendant Asianbank, co-defendant Lamberto Bitanga is ordered to pay

the former the amounts the latter is ordered to pay the plaintiff in Nos. 1, 2 and 3 abovementioned.
SO ORDERED.18 (emphasis and underscoring supplied)
Before the Court of Appeals, Asianbank, in its Appellants Brief, submitted the following issues for
consideration:
3.01.1.1 Whether BA Finance has a cause of action against Asianbank.
3.01.1.2 Assuming that BA Finance has a valid cause of action, may it claim from Asianbank more
than one-half of the value of the check considering that it is a mere co-payee or joint payee of the
check?
3.01.1.3 Whether BA Finance is liable to Asianbank for actual and exemplary damages for wrongfully
bringing the case to court.
3.01.1.4 Whether Malayan is liable to Asianbank for reimbursement of any sum of money which this
Honorable Court may award to BA Finance in this case. 19 (underscoring supplied)
And it proffered the following arguments:
A. BA Finance has no cause of action against Asianbank as it has no legal right and title to
the check considering that the check was not delivered to BA Finance. Hence, BA Finance is
not a holder thereof under the Negotiable Instruments Law.
B. Asianbank, as collecting bank, is not liable to BA Finance as there was no privity of
contract between them.
C. Asianbank, as collecting bank, is not liable to BA Finance, considering that, as the
intermediary between the payee and the drawee Chinabank, it merely acted on the
instructions of drawee Chinabank to pay the amount of the check to Bitanga, hence, the
consequent damage to BA Finance was due to the negligence of Chinabank.
D. Malayans act of issuing and delivering the check solely to Bitanga in violation of the "loss
payee" clause in the Policy, is the proximate cause of the alleged damage to BA Finance.
E. Assuming Asianbank is liable, BA Finance can claim only his proportionate interest on the
check as it is a joint payee thereof.
F. Bitanga alone is liable for the amount to BA Finance on the ground of unjust enrichment or
solutio indebiti.
G. BA Finance is liable to pay Asianbank actual and exemplary damages.20 (underscoring
supplied)
The appellate court, "summarizing" the errors attributed to the trial court by Asianbank to be
"whetherBA Finance has a cause of action against [it] even if the subject check had not been
delivered toBA Finance by the issuer itself," held in the affirmative and accordingly affirmed the
trial courts decision but deleted the award ofP20,000 as actual damages.21

Hence, the present Petition for Review on Certiorari 22 filed by Metrobank (hereafter petitioner) to
which Asianbank was, as earlier stated, merged, faulting the appellate court
I. x x x in applying the case of Associated Bank v. Court of Appeals, in the absence of factual
similarity and of the legal relationships necessary for the application of the desirable shortcut
rule. x x x
II. x x x in not finding that x x x the general rule that the payee has no cause of action against
the collecting bank absent delivery to him must be applied.
III. x x x in finding that all the elements of a cause of action by BA Finance Corporation
against Asianbank Corporation are present.
IV. x x x in finding that Article 1208 of the Civil Code is not applicable.
V. x x x in awarding of exemplary damages even in the absence of moral, temperate,
liquidated or compensatory damages and a finding of fact that Asianbank acted in a wanton,
fraudulent, reckless, oppressive or malevolent manner.
xxxx
VII. x x x in dismissing Asianbanks counterclaim and Third Party complaint [against Malayan
Insurance].23(italics in the original; underscoring supplied)
Petitioner proffers the following arguments against the application of Associated Bank v. CA to the
case:
x x x [T]he rule established in the Associated Bank case has provided a speedier remedy for the
payee to recover from erring collecting banks despite the absence of delivery of the negotiable
instrument. However, the application of the rule demands careful consideration of the factual settings
and issues raised in the case x x x.
One of the relevant circumstances raised in Associated Bank is the existence of forgery or
unauthorized indorsement. x x x
xxxx
In the case at bar, Bitanga is authorized to indorse the check as the drawer names him as one of the
payees. Moreover, his signature is not a forgery nor has he or anyone forged the signature of the
representative of BA Finance Corporation. No unauthorized indorsement appears on the check.
xxxx
Absent the indispensable fact of forgery or unauthorized indorsement, the desirable shortcut rule
cannot be applied,24 (underscoring supplied)
The petition fails.
Section 41 of the Negotiable Instruments Law provides:

Where an instrument is payable to the order of two or more payees or indorsees who are not
partners, all must indorse unless the one indorsing has authority to indorse for the others. (emphasis
and underscoring supplied)
Bitanga alone endorsed the crossed check, and petitioner allowed the deposit and release of the
proceeds thereof, despite the absence of authority of Bitangas co-payee BA Finance to endorse it
on its behalf.25
Denying any irregularity in accepting the check, petitioner maintains that it followed normal banking
procedure. The testimony of Imelda Cruz, Asianbanks then accounting head, shows otherwise,
however, viz:
Q Now, could you be familiar with a particular policy of the bank with respect to checks with
joined (sic) payees?
A Yes, sir.
Q And what would be the particular policy of the bank regarding this transaction?
A The bank policy and procedure regarding the joint checks. Once it is deposited to a
single account, we are not accepting joint checks for single account, depositing to a
single account (sic).
Q What happened to the bank employee who allowed this particular transaction to occur?
A Once the branch personnel, the bank personnel (sic) accepted it, he is liable.
Q What do you mean by the branch personnel being held liable?
A Because since (sic) the bank policy, we are not supposed to accept joint checks to a
[single] account, so we mean that personnel would be held liable in the sense that
(sic) once it is withdrawn or encashed, it will not be allowed.
Q In your experience, have you encountered any bank employee who was subjected to
disciplinary action by not following bank policies?
A The one that happened in that case, since I really dont know who that personnel is, he is
no longer connected with the bank.
Q What about in general, do you know of any disciplinary action, Madam witness?
A Since theres a negligence on the part of the bank personnel, it will be a ground for
his separation [from] the bank.26 (emphasis, italics and underscoring supplied)
Admittedly, petitioner dismissed the employee who allowed the deposit of the check in Bitangas
account.
Petitioners argument that since there was neither forgery, nor unauthorized indorsement because
Bitanga was a co-payee in the subject check, the dictum in Associated Bank v. CA does not apply in
the present case fails. The payment of an instrument over a missing indorsement is the equivalent of

payment on a forged indorsement27 or an unauthorized indorsement in itself in the case of joint

payees.28
Clearly, petitioner, through its employee, was negligent when it allowed the deposit of the crossed
check, despite the lone endorsement of Bitanga, ostensibly ignoring the fact that the check did not, it
bears repeating, carry the indorsement of BA Finance. 29
As has been repeatedly emphasized, the banking business is imbued with public interest such that
the highest degree of diligence and highest standards of integrity and performance are expected of
banks in order to maintain the trust and confidence of the public in general in the banking
sector.30 Undoubtedly, BA Finance has a cause of action against petitioner.
Is petitioner liable to BA Finance for the full value of the check?
Petitioner, at all events, argue that its liability to BA Finance should only be one-half of the amount
covered by the check as there is no indication in the check that Bitanga and BA Finance are solidary
creditors to thus make them presumptively joint creditors under Articles 1207 and 1208 of the Civil
Code which respectively provide:
Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same
obligation does not imply that each one of the former has a right to demand, or that each one of the
latter is bound to render, entire compliance with the prestations. There is a solidary liability only
when the obligation expressly so states, or when the law or the nature of the obligation requires
solidarity.
Art. 1208. If from the law, or the nature or wording of the obligations to which the preceding article
refers to the contrary does not appear, the credit or debt shall be presumed to be divided into as
many equal shares as there are creditors or debtors, the debts or credits being considered distinct
from one another, subject to the Rules of Court governing the multiplicity of suits.
Petitioners argument is flawed.
The provisions of the Negotiable Instruments Law and underlying jurisprudential teachings on the
black-letter law provide definitive justification for petitioners full liability on the value of the check.
To be sure, a collecting bank, Asianbank in this case, where a check is deposited and which
indorses the check upon presentment with the drawee bank, is an indorser.[31] This is because in
indorsing a check to the drawee bank, a collecting bank stamps the back of the check with the
phrase "all prior endorsements and/or lack of endorsement guaranteed" 32 and, for all intents and
purposes, treats the check as a negotiable instrument, hence, assumes the warranty of an
indorser.33 Without Asianbanks warranty, the drawee bank (China Bank in this case) would not have
paid the value of the subject check.
Petitioner, as the collecting bank or last indorser, generally suffers the loss because it has the duty to
ascertain the genuineness of all prior indorsements considering that the act of presenting the check
for payment to the drawee is an assertion that the party making the presentment has done its duty to
ascertain the genuineness of prior indorsements.34
Accordingly, one who credits the proceeds of a check to the account of the indorsing payee is liable
in conversion to the non-indorsing payee for the entire amount of the check. 35

It bears noting that in petitioners cross-claim against Bitanga, the trial court ordered Bitanga to
return to petitioner the entire value of the check P224,500.00 with interest as well as damages
and cost of suit. Petitioner never questioned this aspect of the trial courts disposition, yet it now
prays for the modification of its liability to BA Finance to only one-half of said amount. To pander to
petitioners supplication would certainly amount to unjust enrichment at BA Finances expense.
Petitioners remedywhich is the reimbursement for the full amount of the check from the
perpetrator of the irregularity lies with Bitanga.
Articles 1207 and 1208 of the Civil Code cannot be applied to the present case as these are
completely irrelevant. The drawer, Malayan Insurance in this case, issued the check to answer for an
underlying contractual obligation (payment of insurance proceeds). The obligation is merely reflected
in the instrument and whether the payees would jointly share in the proceeds or not is beside the
point.
Moreover, granting petitioners appeal for partial liability would run counter to the existing principles
on the liabilities of parties on negotiable instruments, particularly on Section 68 of the Negotiable
Instruments Law which instructs that joint payees who indorse are deemed to indorse jointly and
severally.36 Recall that when the maker dishonors the instrument, the holder thereof can turn to
those secondarily liable the indorser for recovery.37And since the law explicitly mandates a
solidary liability on the part of the joint payees who indorse the instrument, the holder thereof
(assuming the check was further negotiated) can turn to either Bitanga or BA Finance for full
recompense.
Respecting petitioners challenge to the award by the appellate court of exemplary damages to BA
Finance, the same fails. Contrary to petitioners claim that no moral, temperate, liquidated or
compensatory damages were awarded by the trial court, 38 the RTC did in fact award compensatory
or actual damages of P224,500, the value of the check, plus interest thereon.
Petitioner argues, however, that assuming arguendo that compensatory damages had been
awarded, the same contravened Article 2232 of the Civil Code which provides that in contracts or
quasi-contracts, the court may award exemplary damages only if the defendant acted in a wanton,
fraudulent, reckless, oppressive, or malevolent manner. Since, so petitioner concludes, there was no
finding that it acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner,39 it is not
liable for exemplary damages.
The argument fails. To reiterate, petitioners liability is based not on contract or quasi-contract but
on quasi-delictsince there is no pre-existing contractual relation between the parties. 40 Article 2231 of
the Civil Code, which provides that in quasi-delict, exemplary damages may be granted if the
defendant acted with gross negligence, thus applies. For "gross negligence" implies a want or
absence of or failure to exercise even slight care or diligence, or the entire absence of
care,41 evincing a thoughtless disregard of consequences without exerting any effort to avoid them. 42
x x x The law allows the grant of exemplary damages to set an example for the public good. The
business of a bank is affected with public interest; thus it makes a sworn profession of diligence and
meticulousness in giving irreproachable service. For this reason, the bank should guard against in
injury attributable to negligence or bad faith on its part. The award of exemplary damages is proper
as a warning to [the petitioner] and all concerned not to recklessly disregard their obligation to
exercise the highest and strictest diligence in serving their depositors.43(Italics and underscoring
supplied)
As for the dismissal by the appellate court of petitioners third-party complaint against Malayan
Insurance, the same is well-taken. Petitioner based its third-party complaint on Malayan Insurances

alleged gross negligence in issuing the check payable to both BA Finance and Bitanga, despite the
stipulation in the mortgage and in the insurance policy that liability for loss shall be payable to BA
Finance.44 Malayan Insurance countered, however, that it
x x x paid the amount of P224,500 to BA Finance Corporation and Lamberto Bitanga in compliance
with the decision in the case of "Lamberto Bitanga versus Malayan Insurance Co., Inc., Civil Case
No. 88-2802, RTC-Makati Br. 132, and affirmed on appeal by the Supreme Court [3rd Division], G.R.
no. 101964, April 8, 1992 x x x.45 (underscoring supplied)
It is noted that Malayan Insurance, which stated that it was a matter of company policy to issue
checks in the name of the insured and the financing company, presented a witness to rebut its
supposed negligence. 46Perforce, it thus wrote a crossed check with joint payees so as to serve
warning that the check was issued for a definite purpose.47 Petitioner never ever disputed these
assertions.
The Court takes exception, however, to the appellate courts affirmance of the trial courts grant of
legal interest of 12% per annum on the value of the check. For the obligation in this case did not
arise out of a loan or forbearance of money, goods or credit. While Article 1980 of the Civil Code
provides that:
Fixed savings, and current deposits of money in banks and similar institutions shall be governed by
the provisions concerning simple loan,
said provision does not find application in this case since the nature of the relationship between BA
Finance and petitioner is one of agency whereby petitioner, as collecting bank, is to collect for BA
Finance the corresponding proceeds from the check.48 Not being a loan or forbearance of money,
the interest should be 6% per annum computed from the date of extrajudicial demand on September
25, 1992 until finality of judgment; and 12% per annum from finality of judgment until payment,
conformably with Eastern Shipping Lines, Inc. v. Court of Appeals.[49]
WHEREFORE, the Decision of the Court of Appeals dated May 18, 2007 is AFFIRMED with
MODIFICATION in that the rate of interest on the judgment obligation of P224,500 should be 6% per
annum, computed from the time of extrajudicial demand on September 25, 1992 until its full payment
before finality of judgment; thereafter, if the amount adjudged remains unpaid, the interest rate shall
be 12% per annum computed from the time the judgment becomes final and executory until fully
satisfied.
Costs against petitioner.

JAI-ALAI CORPORATION OF THE

PHILIPPINES, Petitioner, v. BANK OF THE PHILIPPINE
ISLAND, Respondent.
CASTRO, J.:
This is a petition by the Jai-Alai Corporation of the Philippines (hereinafter referred to as the
petitioner) for review of the decision of the Court of Appeals in C.A.-G.R. 34042-R dated June 25,
1968 in favor of the Bank of the Philippine Islands (hereinafter referred to as the respondent).
From April 2, 1959 to May 18, 1959, ten checks with a total face value of P8,030.58 were deposited
by the petitioner in its current account with the respondent bank. The particulars of these checks are
as follows:
1. Drawn by the Delta Engineering Service upon the Pacific Banking Corporation and payable to the
Inter-Island Gas Service Inc. or order:
Date Check Exhibit
Deposited Number Amount Number
4/2/59 B-352680 P500.00 18
4/20/59 A-156907 372.32 19
4/24/59 A-156924 397.82 20
5/4/59 B-364764 250.00 23
5/6/59 B-364775 250.00 24
2. Drawn by the Enrique Cortiz & Co. upon the Pacific Banking Corporation and payable to the InterIsland Gas Service, Inc. or bearer:
4/13/59 B-335063 P 2108.70 21
4/27/59 B-335072 P2210.94 22
3. Drawn by the Luzon Tinsmith & Company upon the China Banking Corporation and payable to the
Inter-Island Gas Service, Inc. or bearer:
5/18/59 VN430188 P940.80 25
4. Drawn by the Roxas Manufacturing, Inc. upon the Philippine National Bank and payable to the
Inter-Island Gas Service, Inc. order:
5/14/59 1860160 P 500.00 26
5/18/59 1860660 P 500.00 27
All the foregoing checks, which were acquired by the petitioner from one Antonio J. Ramirez, a sales
agent of the Inter-Island Gas and a regular bettor at jai-alai games, were, upon deposit, temporarily

credited to the petitioner's account in accordance with the clause printed on the deposit slips issued
by the respondent and which reads:
"Any credit allowed the depositor on the books of the Bank for checks or drafts hereby received for
deposit, is provisional only, until such time as the proceeds thereof, in current funds or solvent
credits, shall have been actually received by the Bank and the latter reserves to itself the right to
charge back the item to the account of its depositor, at any time before that event, regardless of
whether or not the item itself can be returned."
About the latter part of July 1959, after Ramirez had resigned from the Inter-Island Gas and after the
checks had been submitted to inter-bank clearing, the Inter-Island Gas discovered that all the
indorsements made on the checks purportedly by its cashiers, Santiago Amplayo and Vicenta Mucor
(who were merely authorized to deposit checks issued payable to the said company) as well as the
rubber stamp impression thereon reading "Inter-Island Gas Service, Inc.," were forgeries. In due
time, the Inter-Island Gas advised the petitioner, the respondent, the drawers and the drawee-banks
of the said checks about the forgeries, and filed a criminal complaint against Ramirez with the Office
of the City Fiscal of Manila. 1
The respondent's cashier, Ramon Sarthou, upon receipt of the latter of Inter-Island Gas dated
August 31, 1959, called up the petitioner's cashier, Manuel Garcia, and advised the latter that in view
of the circumstances he would debit the value of the checks against the petitioner's account as soon
as they were returned by the respective drawee-banks.
Meanwhile, the drawers of the checks, having been notified of the forgeries, demanded
reimbursement to their respective accounts from the drawee-banks, which in turn demanded from
the respondent, as collecting bank, the return of the amounts they had paid on account thereof.
When the drawee-banks returned the checks to the respondent, the latter paid their value which the
former in turn paid to the Inter-Island Gas. The respondent, for its part, debited the petitioner's
current account and forwarded to the latter the checks containing the forged indorsements, which
the petitioner, however, refused to accept.
On October 8, 1959 the petitioner drew against its current account with the respondent a check for
P135,000 payable to the order of the Mariano Olondriz y Cia. in payment of certain shares of stock.
The check was, however, dishonored by the respondent as its records showed that as of October 8,
1959 the current account of the petitioner, after netting out the value of the checks P8,030.58) with
the forged indorsements, had a balance of only P128,257.65.
The petitioner then filed a complaint against the respondent with the Court of First Instance of
Manila, which was however dismissed by the trial court after due trial, and as well by the Court of
Appeals, on appeal.
Hence, the present recourse.
The issues posed by the petitioner in the instant petition may be briefly stated as follows:
(a) Whether the respondent had the right to debit the petitioner's current account in the amount
corresponding to the total value of the checks in question after more than three months had elapsed
from the date their value was credited to the petitioner's account:(b) Whether the respondent is
estopped from claiming that the amount of P8,030.58, representing the total value of the checks with
the forged indorsements, had not been properly credited to the petitioner's account, since the same
had already been paid by the drawee-banks and received in due course by the respondent; and(c)
On the assumption that the respondent had improperly debited the petitioner's current account,
whether the latter is entitled to damages.

These three issues interlock and will be resolved jointly.

In our opinion, the respondent acted within legal bounds when it debited the petitioner's account.
When the petitioner deposited the checks with the respondent, the nature of the relationship created
at that stage was one of agency, that is, the bank was to collect from the drawees of the checks the
corresponding proceeds. It is true that the respondent had already collected the proceeds of the
checks when it debited the petitioner's account, so that following the rule in Gullas vs. Philippine
National Bank 2 it might be argued that the relationship between the parties had become that of
creditor and debtor as to preclude the respondent from using the petitioner's funds to make
payments not authorized by the latter. It is our view nonetheless that no creditor-debtor relationship
was created between the parties.
Section 23 of the Negotiable Instruments Law (Act 2031) states that 3
"When a signature is forged or made without the authority of the person whose signature it purports
to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or
to enforce payment thereof against any party thereto, can be acquired through or under such
signature, unless the party against whom it is sought to enforce such right is precluded from setting
up the forgery or want of authority."
Since under the foregoing provision, a forged signature in a negotiable instrument is wholly
inoperative and no right to discharge it or enforce its payment can be acquired through or under the
forged signature except against a party who cannot invoke the forgery, it stands to reason, upon the
facts of record, that the respondent, as a collecting bank which indorsed the checks to the draweebanks for clearing, should be liable to the latter for reimbursement, for, as found by the court a quo
and by the appellate court, the indorsements on the checks had been forged prior to their delivery to
the petitioner. In legal contemplation, therefore, the payments made by the drawee-banks to the
respondent on account of the said checks were ineffective; and, such being the case, the
relationship of creditor and debtor between the petitioner and the respondent had not been validly
effected, the checks not having been properly and legitimately converted into cash. 4
In Great Eastern Life Ins. Co. vs. Hongkong & Shanghai Bank, 5 the Court ruled that it is the
obligation of the collecting bank to reimburse the drawee-bank the value of the checks subsequently
found to contain the forged indorsement of the payee. The reason is that the bank with which the
check was deposited has no right to pay the sum stated therein to the forger "or anyone else upon a
forged signature." "It was its duty to know," said the Court, "that [the payee's] endorsement was
genuine before cashing the check." The petitioner must in turn shoulder the loss of the amounts
which the respondent; as its collecting agent, had to reimburse to the drawee-banks.
We do not consider material for the purposes of the case at bar that more than three months had
elapsed since the proceeds of the checks in question were collected by the respondent. The record
shows that the respondent had acted promptly after being informed that the indorsements on the
checks were forged. Moreover, having received the checks merely for collection and deposit, the
respondent cannot he expected to know or ascertain the genuineness of all prior indorsements on
the said checks. Indeed, having itself indorsed them to the respondent in accordance with the rules
and practices of commercial banks, of which the Court takes due cognizance, the petitioner is
deemed to have given the warranty prescribed in Section 66 of the Negotiable Instruments Law that
every single one of those checks "is genuine and in all respects what it purports to be.".
The petitioner was, moreover, grossly recreant in accepting the checks in question from Ramirez. It
could not have escaped the attention of the petitioner that the payee of all the checks was a
corporation the Inter-Island Gas Service, Inc. Yet, the petitioner cashed these checks to a mere

individual who was admittedly a habitue at its jai-alai games without making any inquiry as to his
authority to exchange checks belonging to the payee-corporation. In Insular Drug Co. vs. National 6
the Court made the pronouncement that.
". . . The right of an agent to indorse commercial paper is a very responsible power and will not be
lightly inferred. A salesman with authority to collect money belonging to his principal does not have
the implied authority to indorse checks received in payment. Any person taking checks made
payable to a corporation, which can act only by agents, does so at his peril, and must abide by the
consequences if the agent who indorses the same is without authority." (underscoring supplied)
It must be noted further that three of the checks in question are crossed checks, namely, exhs. 21,
25 and 27, which may only be deposited, but not encashed; yet, the petitioner negligently accepted
them for cash. That two of the crossed checks, namely, exhs. 21 and 25, are bearer instruments
would not, in our view, exculpate the petitioner from liability with respect to them. The fact that they
are bearer checks and at the same time crossed checks should have aroused the petitioner's
suspicion as to the title of Ramirez over them and his authority to cash them (apparently to purchase
jai-alai tickets from the petitioner), it appearing on their face that a corporate entity the Inter Island
Gas Service, Inc. was the payee thereof and Ramirez delivered the said checks to the petitioner
ostensibly on the strength of the payee's cashiers' indorsements.
At all events, under Section 67 of the Negotiable Instruments Law, "Where a person places his
indorsement on an instrument negotiable by delivery he incurs all the liability of an indorser," and
under Section 66 of the same statute a general indorser warrants that the instrument "is genuine and
in all respects what it purports to be." Considering that the petitioner indorsed the said checks when
it deposited them with the respondent, the petitioner as an indorser guaranteed the genuineness of
all prior indorsements thereon. The respondent which relied upon the petitioner's warranty should
not be held liable for the resulting loss. This conclusion applied similarly to exh. 22 which is an
uncrossed bearer instrument, for under Section 65 of the Negotiable Instrument Law. "Every person
negotiating an instrument by delivery . . . warrants (a) That the instrument is genuine and in all
respects what it purports to be." Under that same section this warranty "extends in favor of no holder
other than the immediate transferee," which, in the case at bar, would be the respondent.
The provision in the deposit slip issued by the respondent which stipulates that it "reserves to itself
the right to charge back the item to the account of its depositor," at any time before "current funds or
solvent credits shall have been actually received by the Bank," would not materially affect the
conclusion we have reached. That stipulation prescribes that there must be an actual receipt by the
bank of current funds or solvent credits; but as we have earlier indicated the transfer by the draweebanks of funds to the respondent on account of the checks in question was ineffectual because
made under the mistaken and valid assumption that the indorsements of the payee thereon were
genuine. Under article 2154 of the New Civil Code "If something is received when there is no right to
demand it and it was unduly delivered through mistake, the obligation to return it arises." There was,
therefore, in contemplation of law, no valid payment of money made by the drawee-banks to the
respondent on account of the questioned checks.
ACCORDINGLY, the judgment of the Court of Appeals is affirmed, at petitioner's cost.