NEGOTIABLE INSTRUMENTS LAW

Atty. Zarah Villanueva-Castro

Set 2 Cases: Negotiation and Holders
12.
13.
14.
15.
16.
17.
18.
19.
20.

Sesbreo vs. CA, 222 SCRA 466;

Consolidated Plywood Inc. vs. IFC Leasing 149 SCRA 448
De la Victoria vs. Hon. Burgos, 245 SCRA 374;
Development Bank of Rizal vs. Sima Wei, 219 SCRA 736
Metropol (Bacolod) Financing vs. Sambok Motors Co., et al., 120 SCRA 864);
Gempesaw vs. CA, 218 SCRA 622
De Ocampo vs. Gatchalian, 03 SCRA 596;
Yang vs. CA, G.R. No. 138074, August 15, 2003;
Mesina vs. IAC, 145 SCRA 497

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 89252 May 24, 1993

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

FELICIANO, J.:
On 9 February 1981, petitioner Raul Sesbreo made a money market placement in the amount of
P300,000.00 with the Philippine Underwriters Finance Corporation ("Philfinance"), Cebu Branch; the
placement, with a term of thirty-two (32) days, would mature on 13 March 1981, Philfinance, also on
9 February 1981, issued the following documents to petitioner:
(a) the Certificate of Confirmation of Sale, "without recourse," No. 20496 of one (1)
Delta Motors Corporation Promissory Note ("DMC PN") No. 2731 for a term of 32
days at 17.0% per annum;
(b) the Certificate of securities Delivery Receipt No. 16587 indicating the sale of DMC
PN No. 2731 to petitioner, with the notation that the said security was in
custodianship of Pilipinas Bank, as per Denominated Custodian Receipt ("DCR") No.
10805 dated 9 February 1981; and
(c) post-dated checks payable on 13 March 1981 (i.e., the maturity date of
petitioner's investment), with petitioner as payee, Philfinance as drawer, and Insular
Bank of Asia and America as drawee, in the total amount of P304,533.33.
On 13 March 1981, petitioner sought to encash the postdated checks issued by Philfinance.
However, the checks were dishonored for having been drawn against insufficient funds.
On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued by private
respondent Pilipinas Bank ("Pilipinas"). It reads as follows:
PILIPINAS BANK
Makati Stock Exchange Bldg.,
Ayala Avenue, Makati,
Metro Manila

TO Raul Sesbreo

DENOMINATED CUSTODIAN RECEIPT

This confirms that as a duly Custodian Bank, and upon instruction of PHILIPPINE
UNDERWRITES FINANCE CORPORATION, we have in our custody the following
securities to you [sic] the extent herein indicated.
SERIAL MAT. FACE ISSUED REGISTERED AMOUNT
NUMBER DATE VALUE BY HOLDER PAYEE
2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33
UNDERWRITERS
FINANCE CORP.
We further certify that these securities may be inspected by you or your duly
authorized representative at any time during regular banking hours.
Upon your written instructions we shall undertake physical delivery of the above
securities fully assigned to you should this Denominated Custodianship Receipt
remain outstanding in your favor thirty (30) days after its maturity.

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On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private respondent Pilipinas, Makati
Branch, and handed her a demand letter informing the bank that his placement with Philfinance in
the amount reflected in the DCR No. 10805 had remained unpaid and outstanding, and that he in
effect was asking for the physical delivery of the underlying promissory note. Petitioner then
examined the original of the DMC PN No. 2731 and found: that the security had been issued on 10
April 1980; that it would mature on 6 April 1981; that it had a face value of P2,300,833.33, with the
Philfinance as "payee" and private respondent Delta Motors Corporation ("Delta") as "maker;" and
that on face of the promissory note was stamped "NON NEGOTIABLE." Pilipinas did not deliver the
Note, nor any certificate of participation in respect thereof, to petitioner.
Petitioner later made similar demand letters, dated 3 July 1981 and 3 August 1981, 2 again asking
private respondent Pilipinas for physical delivery of the original of DMC PN No. 2731. Pilipinas
allegedly referred all of petitioner's demand letters to Philfinance for written instructions, as has been
supposedly agreed upon in "Securities Custodianship Agreement" between Pilipinas and
Philfinance. Philfinance did not provide the appropriate instructions; Pilipinas never released DMC
PN No. 2731, nor any other instrument in respect thereof, to petitioner.
Petitioner also made a written demand on 14 July 1981 3 upon private respondent Delta for the
partial satisfaction of DMC PN No. 2731, explaining that Philfinance, as payee thereof, had assigned
to him said Note to the extent of P307,933.33. Delta, however, denied any liability to petitioner on
the promissory note, and explained in turn that it had previously agreed with Philfinance to offset its
DMC PN No. 2731 (along with DMC PN No. 2730) against Philfinance PN No. 143-A issued in favor
of Delta.
In the meantime, Philfinance, on 18 June 1981, was placed under the joint management of the
Securities and exchange commission ("SEC") and the Central Bank. Pilipinas delivered to the SEC
DMC PN No. 2731, which to date apparently remains in the custody of the SEC. 4
As petitioner had failed to collect his investment and interest thereon, he filed on 28 September 1982
an action for damages with the Regional Trial Court ("RTC") of Cebu City, Branch 21, against private
respondents Delta and Pilipinas. 5 The trial court, in a decision dated 5 August 1987, dismissed the
complaint and counterclaims for lack of merit and for lack of cause of action, with costs against
petitioner.
Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In a Decision dated
21 March 1989, the Court of Appeals denied the appeal and held: 6
Be that as it may, from the evidence on record, if there is anyone that appears liable
for the travails of plaintiff-appellant, it is Philfinance. As correctly observed by the trial
court:
This act of Philfinance in accepting the investment of plaintiff and
charging it against DMC PN No. 2731 when its entire face value was
already obligated or earmarked for set-off or compensation is difficult

to comprehend and may have been motivated with bad faith.

Philfinance, therefore, is solely and legally obligated to return the
investment of plaintiff, together with its earnings, and to answer all the
damages plaintiff has suffered incident thereto. Unfortunately for
plaintiff, Philfinance was not impleaded as one of the defendants in
this case at bar; hence, this Court is without jurisdiction to pronounce
judgement against it. (p. 11, Decision)
WHEREFORE, finding no reversible error in the decision appealed from, the same is
hereby affirmed in toto. Cost against plaintiff-appellant.
Petitioner moved for reconsideration of the above Decision, without success.
Hence, this Petition for Review on Certiorari.
After consideration of the allegations contained and issues raised in the pleadings, the Court
resolved to give due course to the petition and required the parties to file their respective
memoranda. 7
Petitioner reiterates the assignment of errors he directed at the trial court decision, and contends
that respondent court of Appeals gravely erred: (i) in concluding that he cannot recover from private
respondent Delta his assigned portion of DMC PN No. 2731; (ii) in failing to hold private respondent
Pilipinas solidarily liable on the DMC PN No. 2731 in view of the provisions stipulated in DCR No.
10805 issued in favor r of petitioner, and (iii) in refusing to pierce the veil of corporate entity between
Philfinance, and private respondents Delta and Pilipinas, considering that the three (3) entities
belong to the "Silverio Group of Companies" under the leadership of Mr. Ricardo Silverio, Sr. 8
There are at least two (2) sets of relationships which we need to address: firstly, the relationship of
petitioner vis-a-visDelta; secondly, the relationship of petitioner in respect of Pilipinas. Actually, of
course, there is a third relationship that is of critical importance: the relationship of petitioner and
Philfinance. However, since Philfinance has not been impleaded in this case, neither the trial court
nor the Court of Appeals acquired jurisdiction over the person of Philfinance. It is, consequently, not
necessary for present purposes to deal with this third relationship, except to the extent it necessarily
impinges upon or intersects the first and second relationships.
I.
We consider first the relationship between petitioner and Delta.
The Court of appeals in effect held that petitioner acquired no rights vis-a-vis Delta in respect of the
Delta promissory note (DMC PN No. 2731) which Philfinance sold "without recourse" to petitioner, to
the extent of P304,533.33. The Court of Appeals said on this point:
Nor could plaintiff-appellant have acquired any right over DMC PN No. 2731 as the
same is "non-negotiable" as stamped on its face (Exhibit "6"), negotiation being
defined as the transfer of an instrument from one person to another so as to
constitute the transferee the holder of the instrument (Sec. 30, Negotiable
Instruments Law). A person not a holder cannot sue on the instrument in his own
name and cannot demand or receive payment (Section 51, id.) 9

Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that the Note had been
validly transferred, in part to him by assignment and that as a result of such transfer, Delta as
debtor-maker of the Note, was obligated to pay petitioner the portion of that Note assigned to him by
the payee Philfinance.
Delta, however, disputes petitioner's contention and argues:
(1) that DMC PN No. 2731 was not intended to be negotiated or otherwise
transferred by Philfinance as manifested by the word "non-negotiable" stamp across
the face of the Note 10 and because maker Delta and payee Philfinance intended that
this Note would be offset against the outstanding obligation of Philfinance
represented by Philfinance PN No. 143-A issued to Delta as payee;
(2) that the assignment of DMC PN No. 2731 by Philfinance was without Delta's
consent, if not against its instructions; and
(3) assuming (arguendo only) that the partial assignment in favor of petitioner was
valid, petitioner took the Note subject to the defenses available to Delta, in particular,
the offsetting of DMC PN No. 2731 against Philfinance PN No. 143-A. 11
We consider Delta's arguments seriatim.
Firstly, it is important to bear in mind that the negotiation of a negotiable instrument must be
distinguished from theassignment or transfer of an instrument whether that be negotiable or nonnegotiable. Only an instrument qualifying as a negotiable instrument under the relevant statute may
be negotiated either by indorsement thereof coupled with delivery, or by delivery alone where the
negotiable instrument is in bearer form. A negotiable instrument may, however, instead of being
negotiated, also be assigned or transferred. The legal consequences of negotiation as distinguished
from assignment of a negotiable instrument are, of course, different. A non-negotiable instrument
may, obviously, not be negotiated; but it may be assigned or transferred, absent an express
prohibition against assignment or transfer written in the face of the instrument:
The words "not negotiable," stamped on the face of the bill of lading, did not destroy
its assignability, but the sole effect was to exempt the bill from the statutory
provisions relative thereto, and a bill, though not negotiable, may be transferred by
assignment; the assignee taking subject to the equities between the original
parties. 12 (Emphasis added)
DMC PN No. 2731, while marked "non-negotiable," was not at the same time stamped "nontransferable" or "non-assignable." It contained no stipulation which prohibited Philfinance from
assigning or transferring, in whole or in part, that Note.
Delta adduced the "Letter of Agreement" which it had entered into with Philfinance and which should
be quoted in full:
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Philippine Underwriters Finance Corp.
Benavidez St., Makati,
Metro Manila.
Attention: Mr. Alfredo O. Banaria
SVP-Treasurer
GENTLEMEN:
This refers to our outstanding placement of P4,601,666.67 as evidenced by your
Promissory Note No. 143-A, dated April 10, 1980, to mature on April 6, 1981.
As agreed upon, we enclose our non-negotiable Promissory Note No. 2730 and 2731
for P2,000,000.00 each, dated April 10, 1980, to be offsetted [sic] against your PN
No. 143-A upon co-terminal maturity.
Please deliver the proceeds of our PNs to our representative, Mr. Eric Castillo.
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We find nothing in his "Letter of Agreement" which can be reasonably construed as a prohibition
upon Philfinance assigning or transferring all or part of DMC PN No. 2731, before the maturity
thereof. It is scarcely necessary to add that, even had this "Letter of Agreement" set forth an explicit
prohibition of transfer upon Philfinance, such a prohibition cannot be invoked against an assignee or
transferee of the Note who parted with valuable consideration in good faith and without notice of
such prohibition. It is not disputed that petitioner was such an assignee or transferee. Our conclusion
on this point is reinforced by the fact that what Philfinance and Delta were doing by their exchange of
their promissory notes was this: Delta invested, by making a money market placement with
Philfinance, approximately P4,600,000.00 on 10 April 1980; but promptly, on the same day,

borrowed back the bulk of that placement, i.e., P4,000,000.00, by issuing its two (2) promissory
notes: DMC PN No. 2730 and DMC PN No. 2731, both also dated 10 April 1980. Thus, Philfinance
was left with not P4,600,000.00 but only P600,000.00 in cash and the two (2) Delta promissory
notes.
Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN No. 2731 had been
effected without the consent of Delta, we note that such consent was not necessary for the validity
and enforceability of the assignment in favor of petitioner. 14 Delta's argument that Philfinance's sale
or assignment of part of its rights to DMC PN No. 2731 constituted conventional subrogation, which
required its (Delta's) consent, is quite mistaken. Conventional subrogation, which in the first place is
never lightly inferred, 15 must be clearly established by the unequivocal terms of the substituting
obligation or by the evident incompatibility of the new and old obligations on every point. 16 Nothing
of the sort is present in the instant case.
It is in fact difficult to be impressed with Delta's complaint, since it released its DMC PN No. 2731 to
Philfinance, an entity engaged in the business of buying and selling debt instruments and other
securities, and more generally, in money market transactions. In Perez v. Court of Appeals, 17 the
Court, speaking through Mme. Justice Herrera, made the following important statement:
There is another aspect to this case. What is involved here is a money market
transaction. As defined by Lawrence Smith "the money market is a market dealing in
standardized short-term credit instruments (involving large amounts) where lenders
and borrowers do not deal directly with each other but through a middle manor a
dealer in the open market." It involves "commercial papers" which are instruments
"evidencing indebtness of any person or entity. . ., which are issued, endorsed, sold
or transferred or in any manner conveyed to another person or entity, with or without
recourse". The fundamental function of the money market device in its operation is to
match and bring together in a most impersonal manner both the "fund users" and the
"fund suppliers." The money market is an "impersonal market", free from personal
considerations. "The market mechanism is intended to provide quick mobility of
money and securities."
The impersonal character of the money market device overlooks the individuals or
entities concerned.The issuer of a commercial paper in the money market
necessarily knows in advance that it would be expenditiously transacted and
transferred to any investor/lender without need of notice to said issuer. In practice, no
notification is given to the borrower or issuer of commercial paper of the sale or
transfer to the investor.
xxx xxx xxx
There is need to individuate a money market transaction, a relatively novel institution
in the Philippine commercial scene. It has been intended to facilitate the flow and
acquisition of capital on an impersonal basis. And as specifically required by
Presidential Decree No. 678, the investing public must be given adequate and
effective protection in availing of the credit of a borrower in the commercial paper
market.18 (Citations omitted; emphasis supplied)
We turn to Delta's arguments concerning alleged compensation or offsetting between DMC PN No.
2731 and Philfinance PN No. 143-A. It is important to note that at the time Philfinance sold part of its
rights under DMC PN No. 2731 to petitioner on 9 February 1981, no compensation had as yet taken

place and indeed none could have taken place. The essential requirements of compensation are
listed in the Civil Code as follows:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other;
(2) That both debts consists in a sum of money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts are due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by
third persons and communicated in due time to the debtor. (Emphasis supplied)
On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due. This was
explicitly recognized by Delta in its 10 April 1980 "Letter of Agreement" with Philfinance, where Delta
acknowledged that the relevant promissory notes were "to be offsetted (sic) against [Philfinance] PN
No. 143-A upon co-terminal maturity."
As noted, the assignment to petitioner was made on 9 February 1981 or from forty-nine (49) days
before the "co-terminal maturity" date, that is to say, before any compensation had taken place.
Further, the assignment to petitioner would have prevented compensation had taken place between
Philfinance and Delta, to the extent of P304,533.33, because upon execution of the assignment in
favor of petitioner, Philfinance and Delta would have ceased to be creditors and debtors of each
other in their own right to the extent of the amount assigned by Philfinance to petitioner. Thus, we
conclude that the assignment effected by Philfinance in favor of petitioner was a valid one and that
petitioner accordingly became owner of DMC PN No. 2731 to the extent of the portion thereof
assigned to him.
The record shows, however, that petitioner notified Delta of the fact of the assignment to him only on
14 July 1981, 19that is, after the maturity not only of the money market placement made by petitioner
but also of both DMC PN No. 2731 and Philfinance PN No. 143-A. In other words, petitioner notified
Delta of his rights as assignee after compensation had taken place by operation of law because the
offsetting instruments had both reached maturity. It is a firmly settled doctrine that the rights of an
assignee are not any greater that the rights of the assignor, since the assignee is merely substituted
in the place of the assignor 20 and that the assignee acquires his rights subject to the equities i.e.,
the defenses which the debtor could have set up against the original assignor before notice of the
assignment was given to the debtor. Article 1285 of the Civil Code provides that:
Art. 1285. The debtor who has consented to the assignment of rights made by a
creditor in favor of a third person, cannot set up against the assignee the
compensation which would pertain to him against the assignor, unless the assignor
was notified by the debtor at the time he gave his consent, that he reserved his right
to the compensation.

If the creditor communicated the cession to him but the debtor did not
consent thereto, the latter may set up the compensation of debts previous to the
cession, but not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he may set up the
compensation of all credits prior to the same and also later ones until he
had knowledge of the assignment. (Emphasis supplied)
Article 1626 of the same code states that: "the debtor who, before having knowledge of the
assignment, pays his creditor shall be released from the obligation." In Sison v. Yap-Tico, 21 the
Court explained that:
[n]o man is bound to remain a debtor; he may pay to him with whom he contacted to
pay; and if he pay before notice that his debt has been assigned, the law holds him
exonerated, for the reason that it is the duty of the person who has acquired a title by
transfer to demand payment of the debt, to give his debt or notice. 22
At the time that Delta was first put to notice of the assignment in petitioner's favor on 14 July 1981,
DMC PN No. 2731 had already been discharged by compensation. Since the assignor Philfinance
could not have then compelled payment anew by Delta of DMC PN No. 2731, petitioner, as assignee
of Philfinance, is similarly disabled from collecting from Delta the portion of the Note assigned to him.
It bears some emphasis that petitioner could have notified Delta of the assignment or sale was
effected on 9 February 1981. He could have notified Delta as soon as his money market placement
matured on 13 March 1981 without payment thereof being made by Philfinance; at that time,
compensation had yet to set in and discharge DMC PN No. 2731. Again petitioner could have
notified Delta on 26 March 1981 when petitioner received from Philfinance the Denominated
Custodianship Receipt ("DCR") No. 10805 issued by private respondent Pilipinas in favor of
petitioner. Petitioner could, in fine, have notified Delta at any time before the maturity date of DMC
PN No. 2731. Because petitioner failed to do so, and because the record is bare of any indication
that Philfinance had itself notified Delta of the assignment to petitioner, the Court is compelled to
uphold the defense of compensation raised by private respondent Delta. Of course, Philfinance
remains liable to petitioner under the terms of the assignment made by Philfinance to petitioner.
II.
We turn now to the relationship between petitioner and private respondent Pilipinas. Petitioner
contends that Pilipinas became solidarily liable with Philfinance and Delta when Pilipinas issued
DCR No. 10805 with the following words:
Upon your written instruction, we [Pilipinas] shall undertake physical delivery of the
above securities fully assigned to you . 23
The Court is not persuaded. We find nothing in the DCR that establishes an obligation on the part of
Pilipinas to pay petitioner the amount of P307,933.33 nor any assumption of liability in solidum with
Philfinance and Delta under DMC PN No. 2731. We read the DCR as a confirmation on the part of
Pilipinas that:
(1) it has in its custody, as duly constituted custodian bank, DMC PN No. 2731 of a
certain face value, to mature on 6 April 1981 and payable to the order of Philfinance;

(2) Pilipinas was, from and after said date of the assignment by Philfinance to
petitioner (9 February 1981), holding that Note on behalf and for the benefit of
petitioner, at least to the extent it had been assigned to petitioner by payee
Philfinance; 24
(3) petitioner may inspect the Note either "personally or by authorized
representative", at any time during regular bank hours; and
(4) upon written instructions of petitioner, Pilipinas would physically deliver the DMC
PN No. 2731 (or a participation therein to the extent of P307,933.33) "should this
Denominated Custodianship receipt remain outstanding in [petitioner's] favor thirty
(30) days after its maturity."
Thus, we find nothing written in printers ink on the DCR which could reasonably be read as
converting Pilipinas into an obligor under the terms of DMC PN No. 2731 assigned to petitioner,
either upon maturity thereof or any other time. We note that both in his complaint and in his
testimony before the trial court, petitioner referred merely to the obligation of private respondent
Pilipinas to effect the physical delivery to him of DMC PN No. 2731. 25 Accordingly, petitioner's
theory that Pilipinas had assumed a solidary obligation to pay the amount represented by a portion
of the Note assigned to him by Philfinance, appears to be a new theory constructed only after the
trial court had ruled against him. The solidary liability that petitioner seeks to impute Pilipinas cannot,
however, be lightly inferred. Under article 1207 of the Civil Code, "there is a solidary liability only
when the law or the nature of the obligation requires solidarity," The record here exhibits no express
assumption of solidary liability vis-a-vis petitioner, on the part of Pilipinas. Petitioner has not pointed
to us to any law which imposed such liability upon Pilipinas nor has petitioner argued that the very
nature of the custodianship assumed by private respondent Pilipinas necessarily implies solidary
liability under the securities, custody of which was taken by Pilipinas. Accordingly, we are unable to
hold Pilipinas solidarily liable with Philfinance and private respondent Delta under DMC PN No.
2731.
We do not, however, mean to suggest that Pilipinas has no responsibility and liability in respect of
petitioner under the terms of the DCR. To the contrary, we find, after prolonged analysis and
deliberation, that private respondent Pilipinas had breached its undertaking under the DCR to
petitioner Sesbreo.
We believe and so hold that a contract of deposit was constituted by the act of Philfinance in
designating Pilipinas as custodian or depositary bank. The depositor was initially Philfinance; the
obligation of the depository was owed, however, to petitioner Sesbreo as beneficiary of the
custodianship or depository agreement. We do not consider that this is a simple case of a
stipulation pour autri. The custodianship or depositary agreement was established as an integral part
of the money market transaction entered into by petitioner with Philfinance. Petitioner bought a
portion of DMC PN No. 2731; Philfinance as assignor-vendor deposited that Note with Pilipinas in
order that the thing sold would be placed outside the control of the vendor. Indeed, the constituting
of the depositary or custodianship agreement was equivalent to constructive delivery of the Note (to
the extent it had been sold or assigned to petitioner) to petitioner. It will be seen that custodianship
agreements are designed to facilitate transactions in the money market by providing a basis for
confidence on the part of the investors or placers that the instruments bought by them are effectively
taken out of the pocket, as it were, of the vendors and placed safely beyond their reach, that those
instruments will be there available to the placers of funds should they have need of them. The
depositary in a contract of deposit is obliged to return the security or the thing deposited upon
demand of the depositor (or, in the presented case, of the beneficiary) of the contract, even though a
term for such return may have been established in the said contract. 26 Accordingly, any stipulation in

the contract of deposit or custodianship that runs counter to the fundamental purpose of that
agreement or which was not brought to the notice of and accepted by the placer-beneficiary, cannot
be enforced as against such beneficiary-placer.
We believe that the position taken above is supported by considerations of public policy. If there is
any party that needs the equalizing protection of the law in money market transactions, it is the
members of the general public whom place their savings in such market for the purpose of
generating interest revenues. 27 The custodian bank, if it is not related either in terms of equity
ownership or management control to the borrower of the funds, or the commercial paper dealer, is
normally a preferred or traditional banker of such borrower or dealer (here, Philfinance). The
custodian bank would have every incentive to protect the interest of its client the borrower or dealer
as against the placer of funds. The providers of such funds must be safeguarded from the impact of
stipulations privately made between the borrowers or dealers and the custodian banks, and
disclosed to fund-providers only after trouble has erupted.
In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the security deposited
with it when petitioner first demanded physical delivery thereof on 2 April 1981. We must again note,
in this connection, that on 2 April 1981, DMC PN No. 2731 had not yet matured and therefore,
compensation or offsetting against Philfinance PN No. 143-A had not yet taken place. Instead of
complying with the demand of the petitioner, Pilipinas purported to require and await the instructions
of Philfinance, in obvious contravention of its undertaking under the DCR to effect physical delivery
of the Note upon receipt of "written instructions" from petitioner Sesbreo. The ostensible term
written into the DCR (i.e., "should this [DCR] remain outstanding in your favor thirty [30] days after its
maturity") was not a defense against petitioner's demand for physical surrender of the Note on at
least three grounds: firstly, such term was never brought to the attention of petitioner Sesbreo at
the time the money market placement with Philfinance was made; secondly, such term runs counter
to the very purpose of the custodianship or depositary agreement as an integral part of a money
market transaction; and thirdly, it is inconsistent with the provisions of Article 1988 of the Civil Code
noted above. Indeed, in principle, petitioner became entitled to demand physical delivery of the Note
held by Pilipinas as soon as petitioner's money market placement matured on 13 March 1981
without payment from Philfinance.
We conclude, therefore, that private respondent Pilipinas must respond to petitioner for damages
sustained by arising out of its breach of duty. By failing to deliver the Note to the petitioner as
depositor-beneficiary of the thing deposited, Pilipinas effectively and unlawfully deprived petitioner of
the Note deposited with it. Whether or not Pilipinas itself benefitted from such conversion or unlawful
deprivation inflicted upon petitioner, is of no moment for present purposes.Prima facie, the damages
suffered by petitioner consisted of P304,533.33, the portion of the DMC PN No. 2731 assigned to
petitioner but lost by him by reason of discharge of the Note by compensation, plus legal interest of
six percent (6%) per annum containing from 14 March 1981.
The conclusion we have reached is, of course, without prejudice to such right of reimbursement as
Pilipinas may havevis-a-vis Philfinance.
III.
The third principal contention of petitioner that Philfinance and private respondents Delta and
Pilipinas should be treated as one corporate entity need not detain us for long.
In the first place, as already noted, jurisdiction over the person of Philfinance was never acquired
either by the trial court nor by the respondent Court of Appeals. Petitioner similarly did not seek to
implead Philfinance in the Petition before us.

Secondly, it is not disputed that Philfinance and private respondents Delta and Pilipinas have been
organized as separate corporate entities. Petitioner asks us to pierce their separate corporate
entities, but has been able only to cite the presence of a common Director Mr. Ricardo Silverio,
Sr., sitting on the Board of Directors of all three (3) companies. Petitioner has neither alleged nor
proved that one or another of the three (3) concededly related companies used the other two (2) as
mere alter egos or that the corporate affairs of the other two (2) were administered and managed for
the benefit of one. There is simply not enough evidence of record to justify disregarding the separate
corporate personalities of delta and Pilipinas and to hold them liable for any assumed or
undetermined liability of Philfinance to petitioner. 28
WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of Appeals in C.A.G.R. CV No. 15195 dated 21 march 1989 and 17 July 1989, respectively, are hereby MODIFIED and
SET ASIDE, to the extent that such Decision and Resolution had dismissed petitioner's complaint
against Pilipinas Bank. Private respondent Pilipinas bank is hereby ORDERED to indemnify
petitioner for damages in the amount of P304,533.33, plus legal interest thereon at the rate of six
percent (6%) per annum counted from 2 April 1981. As so modified, the Decision and Resolution of
the Court of Appeals are hereby AFFIRMED. No pronouncement as to costs.
SO ORDERED.
Bidin, Davide, Jr., Romero and Melo, JJ., concur.
# Footnotes
1 Exhibit "C", Folder of Exhibits, p. 3; TSN, 14 June 1983, p. 41.
2 Records, p. 441; Plaintiff's Memorandum, p. 3.
3 Id., p. 451; Plaintiff's Memorandum, p. 13.
4 TSN, 14 June 1983, p. 35.
5 Petitioner explained that he did not implead Philfinance as party defendant
because the latter was under rehabilitation by the Securities and Exchange
Commission (TSN of the Pre-trial Conference, pp. 6 and 30; dated 04 March 1983).
6 Court of Appeals' Decision, p. 8; Rollo, p. 90.
7 Private respondent Delta adopted as its own the Memorandum filed by private
respondent Pilipinas (Rollo, pp. 269-73).
8 Rollo, p. 6; Petition, p. 5.
9 Id., p. 88.
10 TSN, 17 August 1983, p. 36.
11 Records, pp. 36-37.
12 National Bank of Bristol v. Bartolome & O.R. Co., 59 A. 134, 138. See also, in this
connection, Consolidated Plywood v. IFC Leasing, 149 SCRA 449 (1987).

13 Exhibit "3," Records, p. 240.

14 National Investment and Development Corporation v. De Los Angeles, 40 SCRA
487 (1971); Bastida v. Dy Buncio & Co., 93 Phil. 195 (1953). See also Articles 1285
and 1625, Civil Code.
15 Article 1300, Civil Code.
16 Article 1292, id.
17 127 SCRA 636 (1984).
18 127 SCRA at 645-646.
19 Records, p, 451; Plaintiff's Memorandum, p. 13.
20 Gonzales v. Land Bank of the Philippines, 183 SCRA 520 (1990); Philippine
National bank v. General Acceptance and Finance Corp., 161 SCRA 449 (1988);
National Investment and Development Corporation v. De los Angeles, 40 SCRA 489
(1971); Montinola v. Philippine National Bank, 88 Phil. 178 (1951); National
Exchange Company, Ltd. v. Ramos, 51 Phil. 310 (1927); Sison v. Yap-Tico, 37 Phil.
584 (1918).
21 37 Phil. 584 (1918).
22 37 Phil. at 589. See also Rodriguez v. Court of Appeals, 207 SCRA 553, 559
(1992). See, generally, Philippine National Bank v. General Acceptance and Finance
Corp., 161 SCRA 449, 457 (1988).
23 Petitioner's Memorandum, p. 12; Rollo, p. 221.
24 The DCR specified the amount of P307,933.33 as the extent to which DMC PN
No. 2731 pertained to petitioner Raul Sesbreo. This amount probably refers to the
placement of P300,000.00 by petitioner plus interest from 9 February 1981 until the
maturity date of DMC PN No. 2731, i.e., 6 April 1981.
25 Complaint, pp. 2-3; Rollo, pp. 23-24; TSN of 11 April 1983, p. 51; TSN, 9 October
1986, pp. 15-16. See also Minutes of the Pre-trial Conference, dated 04 March 1983,
p. 9.
26 Article 1988, Civil Code.
27 See, in this connection, the second and third "whereas" clauses of P.D. No. 678,
dated 2 April 1975.
28 Pabalan v. National Labor Relations Commission, 184 SCRA 495 (1990); Del
Rosario v. National Labor Relations Commission, 187 SCRA 777 (1990); Remo, Jr.
v. Intermediate Appellate Court, 172 SCRA 405 (1989).

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 72593 April 30, 1987
CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and RODOLFO T.
VERGARA, petitioners,
vs.
IFC LEASING AND ACCEPTANCE CORPORATION, respondent.
Carpio, Villaraza & Cruz Law Offices for petitioners.
Europa, Dacanay & Tolentino for respondent.

GUTIERREZ, JR., J.:

This is a petition for certiorari under Rule 45 of the Rules of Court which assails on questions of law
a decision of the Intermediate Appellate Court in AC-G.R. CV No. 68609 dated July 17, 1985, as
well as its resolution dated October 17, 1985, denying the motion for reconsideration.
The antecedent facts culled from the petition are as follows:
The petitioner is a corporation engaged in the logging business. It had for its program of logging
activities for the year 1978 the opening of additional roads, and simultaneous logging operations
along the route of said roads, in its logging concession area at Baganga, Manay, and Caraga, Davao
Oriental. For this purpose, it needed two (2) additional units of tractors.
Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf & Pacific Company of Manila,
through its sister company and marketing arm, Industrial Products Marketing (the "seller-assignor"),
a corporation dealing in tractors and other heavy equipment business, offered to sell to petitionercorporation two (2) "Used" Allis Crawler Tractors, one (1) an HDD-21-B and the other an HDD-16-B.
In order to ascertain the extent of work to which the tractors were to be exposed, (t.s.n., May 28,
1980, p. 44) and to determine the capability of the "Used" tractors being offered, petitionercorporation requested the seller-assignor to inspect the job site. After conducting said inspection, the
seller-assignor assured petitioner-corporation that the "Used" Allis Crawler Tractors which were
being offered were fit for the job, and gave the corresponding warranty of ninety (90) days
performance of the machines and availability of parts. (t.s.n., May 28, 1980, pp. 59-66).
With said assurance and warranty, and relying on the seller-assignor's skill and judgment, petitionercorporation through petitioners Wee and Vergara, president and vice- president, respectively,
agreed to purchase on installment said two (2) units of "Used" Allis Crawler Tractors. It also paid the
down payment of Two Hundred Ten Thousand Pesos (P210,000.00).

On April 5, 1978, the seller-assignor issued the sales invoice for the two 2) units of tractors (Exh. "3A"). At the same time, the deed of sale with chattel mortgage with promissory note was executed
(Exh. "2").
Simultaneously with the execution of the deed of sale with chattel mortgage with promissory note,
the seller-assignor, by means of a deed of assignment (E exh. " 1 "), assigned its rights and interest
in the chattel mortgage in favor of the respondent.
Immediately thereafter, the seller-assignor delivered said two (2) units of "Used" tractors to the
petitioner-corporation's job site and as agreed, the seller-assignor stationed its own mechanics to
supervise the operations of the machines.
Barely fourteen (14) days had elapsed after their delivery when one of the tractors broke down and
after another nine (9) days, the other tractor likewise broke down (t.s.n., May 28, 1980, pp. 68-69).
On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the seller-assignor of the fact that
the tractors broke down and requested for the seller-assignor's usual prompt attention under the
warranty (E exh. " 5 ").
In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit "5," the seller-assignor
sent to the job site its mechanics to conduct the necessary repairs (Exhs. "6," "6-A," "6-B," 16 C,"
"16-C-1," "6-D," and "6-E"), but the tractors did not come out to be what they should be after the
repairs were undertaken because the units were no longer serviceable (t. s. n., May 28, 1980, p. 78).
Because of the breaking down of the tractors, the road building and simultaneous logging operations
of petitioner-corporation were delayed and petitioner Vergara advised the seller-assignor that the
payments of the installments as listed in the promissory note would likewise be delayed until the
seller-assignor completely fulfills its obligation under its warranty (t.s.n, May 28, 1980, p. 79).
Since the tractors were no longer serviceable, on April 7, 1979, petitioner Wee asked the sellerassignor to pull out the units and have them reconditioned, and thereafter to offer them for sale. The
proceeds were to be given to the respondent and the excess, if any, to be divided between the
seller-assignor and petitioner-corporation which offered to bear one-half (1/2) of the reconditioning
cost (E exh. " 7 ").
No response to this letter, Exhibit "7," was received by the petitioner-corporation and despite several
follow-up calls, the seller-assignor did nothing with regard to the request, until the complaint in this
case was filed by the respondent against the petitioners, the corporation, Wee, and Vergara.
The complaint was filed by the respondent against the petitioners for the recovery of the principal
sum of One Million Ninety Three Thousand Seven Hundred Eighty Nine Pesos & 71/100
(P1,093,789.71), accrued interest of One Hundred Fifty One Thousand Six Hundred Eighteen Pesos
& 86/100 (P151,618.86) as of August 15, 1979, accruing interest thereafter at the rate of twelve
(12%) percent per annum, attorney's fees of Two Hundred Forty Nine Thousand Eighty One Pesos
& 71/100 (P249,081.7 1) and costs of suit.
The petitioners filed their amended answer praying for the dismissal of the complaint and asking the
trial court to order the respondent to pay the petitioners damages in an amount at the sound
discretion of the court, Twenty Thousand Pesos (P20,000.00) as and for attorney's fees, and Five
Thousand Pesos (P5,000.00) for expenses of litigation. The petitioners likewise prayed for such
other and further relief as would be just under the premises.

In a decision dated April 20, 1981, the trial court rendered the following judgment:
WHEREFORE, judgment is hereby rendered:
1. ordering defendants to pay jointly and severally in their official and personal
capacities the principal sum of ONE MILLION NINETY THREE THOUSAND SEVEN
HUNDRED NINETY EIGHT PESOS & 71/100 (P1,093,798.71) with accrued interest
of ONE HUNDRED FIFTY ONE THOUSAND SIX HUNDRED EIGHTEEN PESOS &
86/100 (P151,618.,86) as of August 15, 1979 and accruing interest thereafter at the
rate of 12% per annum;
2. ordering defendants to pay jointly and severally attorney's fees equivalent to ten
percent (10%) of the principal and to pay the costs of the suit.
Defendants' counterclaim is disallowed. (pp. 45-46, Rollo)
On June 8, 1981, the trial court issued an order denying the motion for reconsideration filed by the
petitioners.
Thus, the petitioners appealed to the Intermediate Appellate Court and assigned therein the
following errors:
I
THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER ATLANTIC GULF AND
PACIFIC COMPANY OF MANILA DID NOT APPROVE DEFENDANTS-APPELLANTS CLAIM OF
WARRANTY.
II
THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF- APPELLEE IS A HOLDER IN
DUE COURSE OF THE PROMISSORY NOTE AND SUED UNDER SAID NOTE AS HOLDER
THEREOF IN DUE COURSE.
On July 17, 1985, the Intermediate Appellate Court issued the challenged decision affirming in
toto the decision of the trial court. The pertinent portions of the decision are as follows:
xxx xxx xxx
From the evidence presented by the parties on the issue of warranty, We are of the
considered opinion that aside from the fact that no provision of warranty appears or
is provided in the Deed of Sale of the tractors and even admitting that in a contract of
sale unless a contrary intention appears, there is an implied warranty, the defense of
breach of warranty, if there is any, as in this case, does not lie in favor of the
appellants and against the plaintiff-appellee who is the assignee of the promissory
note and a holder of the same in due course. Warranty lies in this case only between
Industrial Products Marketing and Consolidated Plywood Industries, Inc. The plaintiffappellant herein upon application by appellant corporation granted financing for the
purchase of the questioned units of Fiat-Allis Crawler,Tractors.
xxx xxx xxx

Holding that breach of warranty if any, is not a defense available to appellants either
to withdraw from the contract and/or demand a proportionate reduction of the price
with damages in either case (Art. 1567, New Civil Code). We now come to the issue
as to whether the plaintiff-appellee is a holder in due course of the promissory note.
To begin with, it is beyond arguments that the plaintiff-appellee is a financing
corporation engaged in financing and receivable discounting extending credit
facilities to consumers and industrial, commercial or agricultural enterprises by
discounting or factoring commercial papers or accounts receivable duly authorized
pursuant to R.A. 5980 otherwise known as the Financing Act.
A study of the questioned promissory note reveals that it is a negotiable instrument
which was discounted or sold to the IFC Leasing and Acceptance Corporation for
P800,000.00 (Exh. "A") considering the following. it is in writing and signed by the
maker; it contains an unconditional promise to pay a certain sum of money payable
at a fixed or determinable future time; it is payable to order (Sec. 1, NIL); the
promissory note was negotiated when it was transferred and delivered by IPM to the
appellee and duly endorsed to the latter (Sec. 30, NIL); it was taken in the conditions
that the note was complete and regular upon its face before the same was overdue
and without notice, that it had been previously dishonored and that the note is in
good faith and for value without notice of any infirmity or defect in the title of IPM
(Sec. 52, NIL); that IFC Leasing and Acceptance Corporation held the instrument
free from any defect of title of prior parties and free from defenses available to prior
parties among themselves and may enforce payment of the instrument for the full
amount thereof against all parties liable thereon (Sec. 57, NIL); the appellants
engaged that they would pay the note according to its tenor, and admit the existence
of the payee IPM and its capacity to endorse (Sec. 60, NIL).
In view of the essential elements found in the questioned promissory note, We opine
that the same is legally and conclusively enforceable against the defendantsappellants.
WHEREFORE, finding the decision appealed from according to law and evidence,
We find the appeal without merit and thus affirm the decision in toto. With costs
against the appellants. (pp. 50-55, Rollo)
The petitioners' motion for reconsideration of the decision of July 17, 1985 was denied by the
Intermediate Appellate Court in its resolution dated October 17, 1985, a copy of which was received
by the petitioners on October 21, 1985.
Hence, this petition was filed on the following grounds:
I.
ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A NEGOTIABLE INSTRUMENT AS
DEFINED UNDER THE LAW SINCE IT IS NEITHER PAYABLE TO ORDER NOR TO BEARER.
II
THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS A MERE ASSIGNEE
OF THE SUBJECT PROMISSORY NOTE.

III.
SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE INSTRUMENT AND THE
TRANSFER OF RIGHTS WAS THROUGH A MERE ASSIGNMENT, THE PETITIONERS MAY
RAISE AGAINST THE RESPONDENT ALL DEFENSES THAT ARE AVAILABLE TO IT AS
AGAINST THE SELLER- ASSIGNOR, INDUSTRIAL PRODUCTS MARKETING.
IV.
THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE PROMISSORY NOTE
BECAUSE:
A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY UNDER THE LAW;
B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE SELLER-ASSIGNOR OF
THE PROMISSORY NOTE.
V.
THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER- ASSIGNOR IN FAVOR OF
THE RESPONDENT DOES NOT CHANGE THE NATURE OF THE TRANSACTION FROM BEING
A SALE ON INSTALLMENTS TO A PURE LOAN.
VI.
THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN EVIDENCE IN ANY COURT
BECAUSE THE REQUISITE DOCUMENTARY STAMPS HAVE NOT BEEN AFFIXED THEREON
OR CANCELLED.
The petitioners prayed that judgment be rendered setting aside the decision dated July 17, 1985, as
well as the resolution dated October 17, 1985 and dismissing the complaint but granting petitioners'
counterclaims before the court of origin.
On the other hand, the respondent corporation in its comment to the petition filed on February 20,
1986, contended that the petition was filed out of time; that the promissory note is a negotiable
instrument and respondent a holder in due course; that respondent is not liable for any breach of
warranty; and finally, that the promissory note is admissible in evidence.
The core issue herein is whether or not the promissory note in question is a negotiable instrument so
as to bar completely all the available defenses of the petitioner against the respondent-assignee.
Preliminarily, it must be established at the outset that we consider the instant petition to have been
filed on time because the petitioners' motion for reconsideration actually raised new issues. It
cannot, therefore, be considered pro- formal.
The petition is impressed with merit.
First, there is no question that the seller-assignor breached its express 90-day warranty because the
findings of the trial court, adopted by the respondent appellate court, that "14 days after delivery, the
first tractor broke down and 9 days, thereafter, the second tractor became inoperable" are sustained
by the records. The petitioner was clearly a victim of a warranty not honored by the maker.

The Civil Code provides that:

ART. 1561. The vendor shall be responsible for warranty against the hidden defects
which the thing sold may have, should they render it unfit for the use for which it is
intended, or should they diminish its fitness for such use to such an extent that, had
the vendee been aware thereof, he would not have acquired it or would have given a
lower price for it; but said vendor shall not be answerable for patent defects or those
which may be visible, or for those which are not visible if the vendee is an expert
who, by reason of his trade or profession, should have known them.
ART. 1562. In a sale of goods, there is an implied warranty or condition as to the
quality or fitness of the goods, as follows:
(1) Where the buyer, expressly or by implication makes known to the seller the
particular purpose for which the goods are acquired, and it appears that the buyer
relies on the sellers skill or judge judgment (whether he be the grower or
manufacturer or not), there is an implied warranty that the goods shall be reasonably
fit for such purpose;
xxx xxx xxx
ART. 1564. An implied warranty or condition as to the quality or fitness for a
particular purpose may be annexed by the usage of trade.
xxx xxx xxx
ART. 1566. The vendor is responsible to the vendee for any hidden faults or defects
in the thing sold even though he was not aware thereof.
This provision shall not apply if the contrary has been stipulated, and the vendor was
not aware of the hidden faults or defects in the thing sold. (Emphasis supplied).
It is patent then, that the seller-assignor is liable for its breach of warranty against the petitioner. This
liability as a general rule, extends to the corporation to whom it assigned its rights and interests
unless the assignee is a holder in due course of the promissory note in question, assuming the note
is negotiable, in which case the latter's rights are based on the negotiable instrument and assuming
further that the petitioner's defenses may not prevail against it.
Secondly, it likewise cannot be denied that as soon as the tractors broke down, the petitionercorporation notified the seller-assignor's sister company, AG & P, about the breakdown based on the
seller-assignor's express 90-day warranty, with which the latter complied by sending its mechanics.
However, due to the seller-assignor's delay and its failure to comply with its warranty, the tractors
became totally unserviceable and useless for the purpose for which they were purchased.
Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its contract with the sellerassignor.
Articles 1191 and 1567 of the Civil Code provide that:
ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the
obligation with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.
xxx xxx xxx
ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and 1566, the vendee
may elect between withdrawing from the contract and demanding a proportionate
reduction of the price, with damages in either case. (Emphasis supplied)
Petitioner, having unilaterally and extrajudicially rescinded its contract with the seller-assignor,
necessarily can no longer sue the seller-assignor except by way of counterclaim if the sellerassignor sues it because of the rescission.
In the case of the University of the Philippines v. De los Angeles (35 SCRA 102) we held:
In other words, the party who deems the contract violated may consider it resolved or
rescinded, and act accordingly, without previous court action, but it proceeds at its
own risk. For it is only the final judgment of the corresponding court that will
conclusively and finally settle whether the action taken was or was not correct in law.
But the law definitely does not require that the contracting party who believes itself
injured must first file suit and wait for adjudgement before taking extrajudicial steps to
protect its interest. Otherwise, the party injured by the other's breach will have to
passively sit and watch its damages accumulate during the pendency of the suit until
the final judgment of rescission is rendered when the law itself requires that he
should exercise due diligence to minimize its own damages (Civil Code, Article
2203). (Emphasis supplied)
Going back to the core issue, we rule that the promissory note in question is not a negotiable
instrument.
The pertinent portion of the note is as follows:
FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the
INDUSTRIAL PRODUCTS MARKETING, the sum of ONE MILLION NINETY THREE
THOUSAND SEVEN HUNDRED EIGHTY NINE PESOS & 71/100 only (P
1,093,789.71), Philippine Currency, the said principal sum, to be payable in 24
monthly installments starting July 15, 1978 and every 15th of the month thereafter
until fully paid. ...
Considering that paragraph (d), Section 1 of the Negotiable Instruments Law requires that a
promissory note "must be payable to order or bearer, " it cannot be denied that the promissory note
in question is not a negotiable instrument.
The instrument in order to be considered negotiablility-i.e. must contain the so-called
'words of negotiable, must be payable to 'order' or 'bearer'. These words serve as an
expression of consent that the instrument may be transferred. This consent is
indispensable since a maker assumes greater risk under a negotiable instrument
than under a non-negotiable one. ...
xxx xxx xxx

When instrument is payable to order.

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. . . .
xxx xxx xxx
These are the only two ways by which an instrument may be made payable to order.
There must always be a specified person named in the instrument. It means that the
bill or note is to be paid to the person designated in the instrument or to any person
to whom he has indorsed and delivered the same. Without the words "or order" or"to
the order of, "the instrument is payable only to the person designated therein and is
therefore non-negotiable. Any subsequent purchaser thereof will not enjoy the
advantages of being a holder of a negotiable instrument but will merely "step into the
shoes" of the person designated in the instrument and will thus be open to all
defenses available against the latter." (Campos and Campos, Notes and Selected
Cases on Negotiable Instruments Law, Third Edition, page 38). (Emphasis supplied)
Therefore, considering that the subject promissory note is not a negotiable instrument, it follows that
the respondent can never be a holder in due course but remains a mere assignee of the note in
question. Thus, the petitioner may raise against the respondent all defenses available to it as against
the seller-assignor Industrial Products Marketing.
This being so, there was no need for the petitioner to implied the seller-assignor when it was sued by
the respondent-assignee because the petitioner's defenses apply to both or either of either of
them. Actually, the records show that even the respondent itself admitted to being a mere assignee
of the promissory note in question, to wit:
ATTY. PALACA:
Did we get it right from the counsel that what is being assigned is the
Deed of Sale with Chattel Mortgage with the promissory note which is
as testified to by the witness was indorsed? (Counsel for Plaintiff
nodding his head.) Then we have no further questions on cross,
COURT:
You confirm his manifestation? You are nodding your head? Do you
confirm that?
ATTY. ILAGAN:
The Deed of Sale cannot be assigned. A deed of sale is a transaction
between two persons; what is assigned are rights, the rights of the
mortgagee were assigned to the IFC Leasing & Acceptance
Corporation.
COURT:
He puts it in a simple way as one-deed of sale and chattel mortgage
were assigned; . . . you want to make a distinction, one is an

assignment of mortgage right and the other one is indorsement of the

promissory note. What counsel for defendants wants is that you
stipulate that it is contained in one single transaction?
ATTY. ILAGAN:
We stipulate it is one single transaction. (pp. 27-29, TSN., February
13, 1980).
Secondly, even conceding for purposes of discussion that the promissory note in question is a
negotiable instrument, the respondent cannot be a holder in due course for a more significant
reason.
The evidence presented in the instant case shows that prior to the sale on installment of the tractors,
there was an arrangement between the seller-assignor, Industrial Products Marketing, and the
respondent whereby the latter would pay the seller-assignor the entire purchase price and the sellerassignor, in turn, would assign its rights to the respondent which acquired the right to collect the
price from the buyer, herein petitioner Consolidated Plywood Industries, Inc.
A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory Note, the Deed of
Assignment and the Disclosure of Loan/Credit Transaction shows that said documents evidencing
the sale on installment of the tractors were all executed on the same day by and among the buyer,
which is herein petitioner Consolidated Plywood Industries, Inc.; the seller-assignor which is the
Industrial Products Marketing; and the assignee-financing company, which is the respondent.
Therefore, the respondent had actual knowledge of the fact that the seller-assignor's right to collect
the purchase price was not unconditional, and that it was subject to the condition that the tractors sold were not defective. The respondent knew that when the tractors turned out to be defective, it
would be subject to the defense of failure of consideration and cannot recover the purchase price
from the petitioners. Even assuming for the sake of argument that the promissory note is negotiable,
the respondent, which took the same with actual knowledge of the foregoing facts so that its action
in taking the instrument amounted to bad faith, is not a holder in due course. As such, the
respondent is subject to all defenses which the petitioners may raise against the seller-assignor. Any
other interpretation would be most inequitous to the unfortunate buyer who is not only saddled with
two useless tractors but must also face a lawsuit from the assignee for the entire purchase price and
all its incidents without being able to raise valid defenses available as against the assignor.
Lastly, the respondent failed to present any evidence to prove that it had no knowledge of any fact,
which would justify its act of taking the promissory note as not amounting to bad faith.
Sections 52 and 56 of the Negotiable Instruments Law provide that: negotiating it.
xxx xxx xxx
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:
xxx xxx xxx
xxx xxx xxx
(c) That he took it in good faith and for value

(d) That the time it was negotiated by him he had no notice of any infirmity in the
instrument of deffect in the title of the person negotiating it
xxx xxx xxx
SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. To constitute notice of
an infirmity in the instrument or defect in the title of the person negotiating the same,
the person to whom it is negotiated must have had actual knowledge of the infirmity
or defect, or knowledge of such facts that his action in taking the instrument amounts
to bad faith. (Emphasis supplied)
We subscribe to the view of Campos and Campos that a financing company is not a holder in good
faith as to the buyer, to wit:
In installment sales, the buyer usually issues a note payable to the seller to cover the
purchase price. Many times, in pursuance of a previous arrangement with the seller,
a finance company pays the full price and the note is indorsed to it, subrogating it to
the right to collect the price from the buyer, with interest. With the increasing
frequency of installment buying in this country, it is most probable that the tendency
of the courts in the United States to protect the buyer against the finance company
will , the finance company will be subject to the defense of failure of consideration
and cannot recover the purchase price from the buyer. As against the argument that
such a rule would seriously affect "a certain mode of transacting business adopted
throughout the State," a court in one case stated:
It may be that our holding here will require some changes in business
methods and will impose a greater burden on the finance companies.
We think the buyer-Mr. & Mrs. General Public-should have some
protection somewhere along the line. We believe the finance
company is better able to bear the risk of the dealer's insolvency than
the buyer and in a far better position to protect his interests against
unscrupulous and insolvent dealers. . . .
If this opinion imposes great burdens on finance companies it is a
potent argument in favor of a rule which win afford public protection to
the general buying public against unscrupulous dealers in personal
property. . . . (Mutual Finance Co. v. Martin, 63 So. 2d 649, 44 ALR
2d 1 [1953]) (Campos and Campos, Notes and Selected Cases on
Negotiable Instruments Law, Third Edition, p. 128).
In the case of Commercial Credit Corporation v. Orange Country Machine Works (34 Cal. 2d 766)
involving similar facts, it was held that in a very real sense, the finance company was a moving force
in the transaction from its very inception and acted as a party to it. When a finance company actively
participates in a transaction of this type from its inception, it cannot be regarded as a holder in due
course of the note given in the transaction.
In like manner, therefore, even assuming that the subject promissory note is negotiable, the
respondent, a financing company which actively participated in the sale on installment of the subject
two Allis Crawler tractors, cannot be regarded as a holder in due course of said note. It follows that
the respondent's rights under the promissory note involved in this case are subject to all defenses
that the petitioners have against the seller-assignor, Industrial Products Marketing. For Section 58 of

the Negotiable Instruments Law provides that "in the hands of any holder other than a holder in due
course, a negotiable instrument is subject to the same defenses as if it were non-negotiable. ... "
Prescinding from the foregoing and setting aside other peripheral issues, we find that both the trial
and respondent appellate court erred in holding the promissory note in question to be negotiable.
Such a ruling does not only violate the law and applicable jurisprudence, but would result in unjust
enrichment on the part of both the assigner- assignor and respondent assignee at the expense of
the petitioner-corporation which rightfully rescinded an inequitable contract. We note, however, that
since the seller-assignor has not been impleaded herein, there is no obstacle for the respondent to
file a civil Suit and litigate its claims against the seller- assignor in the rather unlikely possibility that it
so desires,
WHEREFORE, in view of the foregoing, the decision of the respondent appellate court dated July
17, 1985, as well as its resolution dated October 17, 1986, are hereby ANNULLED and SET ASIDE.
The complaint against the petitioner before the trial court is DISMISSED.
SO ORDERED.
Fernan, Paras, Padilla, Bidin and Cortes, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 111190 June 27, 1995

LORETO D. DE LA VICTORIA, as City Fiscal of Mandaue City and in his personal capacity as
garnishee,petitioner,
vs.
HON. JOSE P. BURGOS, Presiding Judge, RTC, Br. XVII, Cebu City, and RAUL H.
SESBREO, respondents.

BELLOSILLO, J.:
RAUL H. SESBREO filed a complaint for damages against Assistant City Fiscals Bienvenido N.
Mabanto, Jr., and Dario D. Rama, Jr., before the Regional Trial Court of Cebu City. After trial
judgment was rendered ordering the defendants to pay P11,000.00 to the plaintiff, private
respondent herein. The decision having become final and executory, on motion of the latter, the trial
court ordered its execution. This order was questioned by the defendants before the Court of
Appeals. However, on 15 January 1992 a writ of execution was issued.
On 4 February 1992 a notice of garnishment was served on petitioner Loreto D. de la Victoria as City
Fiscal of Mandaue City where defendant Mabanto, Jr., was then detailed. The notice directed
petitioner not to disburse, transfer, release or convey to any other person except to the deputy sheriff
concerned the salary checks or other checks, monies, or cash due or belonging to Mabanto, Jr.,
under penalty of law. 1 On 10 March 1992 private respondent filed a motion before the trial court for
examination of the garnishees.
On 25 May 1992 the petition pending before the Court of Appeals was dismissed. Thus the trial
court, finding no more legal obstacle to act on the motion for examination of the garnishees, directed
petitioner on 4 November 1992 to submit his report showing the amount of the garnished salaries of
Mabanto, Jr., within fifteen (15) days from receipt 2 taking into consideration the provisions of Sec.
12, pars. (f) and (i), Rule 39 of the Rules of Court.
On 24 November 1992 private respondent filed a motion to require petitioner to explain why he
should not be cited in contempt of court for failing to comply with the order of 4 November 1992.
On the other hand, on 19 January 1993 petitioner moved to quash the notice of garnishment
claiming that he was not in possession of any money, funds, credit, property or anything of value
belonging to Mabanto, Jr., except his salary and RATA checks, but that said checks were not yet
properties of Mabanto, Jr., until delivered to him. He further claimed that, as such, they were still
public funds which could not be subject to garnishment.
On 9 March 1993 the trial court denied both motions and ordered petitioner to immediately comply
with its order of 4 November 1992. 3 It opined that the checks of Mabanto, Jr., had already been

released through petitioner by the Department of Justice duly signed by the officer concerned. Upon
service of the writ of garnishment, petitioner as custodian of the checks was under obligation to hold
them for the judgment creditor. Petitioner became a virtual party to, or a forced intervenor in, the
case and the trial court thereby acquired jurisdiction to bind him to its orders and processes with a
view to the complete satisfaction of the judgment. Additionally, there was no sufficient reason for
petitioner to hold the checks because they were no longer government funds and presumably
delivered to the payee, conformably with the last sentence of Sec. 16 of the Negotiable Instruments
Law.
With regard to the contempt charge, the trial court was not morally convinced of petitioner's guilt.
For, while his explanation suffered from procedural infirmities nevertheless he took pains in
enlightening the court by sending a written explanation dated 22 July 1992 requesting for the lifting
of the notice of garnishment on the ground that the notice should have been sent to the Finance
Officer of the Department of Justice. Petitioner insists that he had no authority to segregate a portion
of the salary of Mabanto, Jr. The explanation however was not submitted to the trial court for action
since the stenographic reporter failed to attach it to the record. 4
On 20 April 1993 the motion for reconsideration was denied. The trial court explained that it was not
the duty of the garnishee to inquire or judge for himself whether the issuance of the order of
execution, writ of execution and notice of garnishment was justified. His only duty was to turn over
the garnished checks to the trial court which issued the order of execution. 5
Petitioner raises the following relevant issues: (1) whether a check still in the hands of the maker or
its duly authorized representative is owned by the payee before physical delivery to the latter: and,
(2) whether the salary check of a government official or employee funded with public funds can be
subject to garnishment.
Petitioner reiterates his position that the salary checks were not owned by Mabanto, Jr., because
they were not yet delivered to him, and that petitioner as garnishee has no legal obligation to hold
and deliver them to the trial court to be applied to Mabanto, Jr.'s judgment debt. The thesis of
petitioner is that the salary checks still formed part of public funds and therefore beyond the reach of
garnishment proceedings.
Petitioner has well argued his case.
Garnishment is considered as a species of attachment for reaching credits belonging to the
judgment debtor owing to him from a stranger to the litigation. 6 Emphasis is laid on the phrase
"belonging to the judgment debtor" since it is the focal point in resolving the issues raised.
As Assistant City Fiscal, the source of the salary of Mabanto, Jr., is public funds. He receives his
compensation in the form of checks from the Department of Justice through petitioner as City Fiscal
of Mandaue City and head of office. Under Sec. 16 of the Negotiable Instruments Law, every
contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for
the purpose of giving effect thereto. As ordinarily understood, delivery means the transfer of the
possession of the instrument by the maker or drawer with intent to transfer title to the payee and
recognize him as the holder thereof. 7
According to the trial court, the checks of Mabanto, Jr., were already released by the Department of
Justice duly signed by the officer concerned through petitioner and upon service of the writ of
garnishment by the sheriff petitioner was under obligation to hold them for the judgment creditor. It
recognized the role of petitioner ascustodian of the checks. At the same time however it considered
the checks as no longer government funds and presumed delivered to the payee based on the last

sentence of Sec. 16 of the Negotiable Instruments Law which states: "And where the instrument is
no longer in the possession of a party whose signature appears thereon, a valid and intentional
delivery by him is presumed." Yet, the presumption is not conclusive because the last portion of the
provision says "until the contrary is proved." However this phrase was deleted by the trial court for no
apparent reason. Proof to the contrary is its own finding that the checks were in the custody of
petitioner. Inasmuch as said checks had not yet been delivered to Mabanto, Jr., they did not belong
to him and still had the character of public funds. In Tiro v. Hontanosas 8 we ruled that
The salary check of a government officer or employee such as a teacher does not
belong to him before it is physically delivered to him. Until that time the check
belongs to the government. Accordingly, before there is actual delivery of the check,
the payee has no power over it; he cannot assign it without the consent of the
Government.
As a necessary consequence of being public fund, the checks may not be garnished to satisfy the
judgment. 9 The rationale behind this doctrine is obvious consideration of public policy. The Court
succinctly stated in Commissioner of Public Highways v. San Diego 10 that
The functions and public services rendered by the State cannot be allowed to be
paralyzed or disrupted by the diversion of public funds from their legitimate and
specific objects, as appropriated by law.
In denying petitioner's motion for reconsideration, the trial court expressed the additional
ratiocination that it was not the duty of the garnishee to inquire or judge for himself whether the
issuance of the order of execution, the writ of execution, and the notice of garnishment was justified,
citing our ruling in Philippine Commercial Industrial Bank v. Court of Appeals. 11 Our precise ruling in
that case was that "[I]t is not incumbent upon the garnishee to inquire or to judge for itself whether or
not the order for the advance execution of a judgment is valid." But that is invoking only the general
rule. We have also established therein the compelling reasons, as exceptions thereto, which were
not taken into account by the trial court, e.g., a defect on the face of the writ or actual knowledge by
the garnishee of lack of entitlement on the part of the garnisher. It is worth to note that the ruling
referred to the validity of advance execution of judgments, but a careful scrutiny of that case and
similar cases reveals that it was applicable to a notice of garnishment as well. In the case at bench,
it was incumbent upon petitioner to inquire into the validity of the notice of garnishment as he had
actual knowledge of the non-entitlement of private respondent to the checks in question.
Consequently, we find no difficulty concluding that the trial court exceeded its jurisdiction in issuing
the notice of garnishment concerning the salary checks of Mabanto, Jr., in the possession of
petitioner.
WHEREFORE, the petition is GRANTED. The orders of 9 March 1993 and 20 April 1993 of the
Regional Trial Court of Cebu City, Br. 17, subject of the petition are SET ASIDE. The notice of
garnishment served on petitioner dated 3 February 1992 is ordered DISCHARGED.
SO ORDERED.
Quiason and Kapunan, JJ., concur.

Separate Opinions

DAVIDE, JR., J., concurring and dissenting:

This Court may take judicial notice of the fact that checks for salaries of employees of various
Departments all over the country are prepared in Manila not at the end of the payroll period, but days
before it to ensure that they reach the employees concerned not later than the end of the payroll
period. As to the employees in the provinces or cities, the checks are sent through the heads of the
corresponding offices of the Departments. Thus, in the case of Prosecutors and Assistant
Prosecutors of the Department of Justice, the checks are sent through the Provincial Prosecutors or
City Prosecutors, as the case may be, who shall then deliver the checks to the payees.
Involved in the instant case are the salary and RATA checks of then Assistant City Fiscal Bienvenido
Mabanto, Jr., who was detailed in the Office of the City Fiscal (now Prosecutor) of Mandaue City.
Conformably with the aforesaid practice, these checks were sent to Mabanto thru the petitioner who
was then the City Fiscal of Mandaue City.
The ponencia failed to indicate the payroll period covered by the salary check and the month to
which the RATA check corresponds.
I respectfully submit that if these salary and RATA checks corresponded, respectively, to a payroll
period and to a month which had already lapsed at the time the notice of garnishment was served,
the garnishment would be valid, as the checks would then cease to be property of the Government
and would become property of Mabanto. Upon the expiration of such period and month, the sums
indicated therein were deemed automatically segregated from the budgetary allocations for the
Department of Justice under the General Appropriations Act.
It must be recalled that the public policy against execution, attachment, or garnishment is directed to
public funds.
Thus, in the case of Director of the Bureau of Commerce and Industry vs. Concepcion 1 where the
core issue was whether or not the salary due from the Government to a public officer or employee
can, by garnishment, be seized before being paid to him and appropriated to the payment of his
judgment debts, this Court held:
A rule, which has never been seriously questioned, is that money in the hands of
public officers, although it may be due government employees, is not liable to the
creditors of these employees in the process of garnishment. One reason is, that the
State, by virtue of its sovereignty, may not be sued in its own courts except by
express authorization by the Legislature, and to subject its officers to garnishment
would be to permit indirectly what is prohibited directly. Another reason is that
moneys sought to be garnished, as long as they remain in the hands of the
disbursing officer of the Government, belong to the latter, although the defendant in
garnishment may be entitled to a specific portion thereof. And still another reason
which covers both of the foregoing is that every consideration of public policy forbids
it.
The United States Supreme Court, in the leading case of Buchanan vs. Alexander
([1846], 4 How., 19), in speaking of the right of creditors of seamen, by process of

attachment, to divert the public money from its legitimate and appropriate object,
said:
To state such a principle is to refute it. No government can sanction
it. At all times it would be found embarrassing, and under some
circumstances it might be fatal to the public service. . . . So long as
money remains in the hands of a disbursing officer, it is as much the
money of the United States, as if it had not been drawn from the
treasury. Until paid over by the agent of the government to the person
entitled to it, the fund cannot, in any legal sense, be considered a part
of his effects." (See, further, 12 R.C.L., p. 841; Keene vs. Smith
[1904], 44 Ore., 525; Wild vs. Ferguson [1871], 23 La. Ann., 752;
Bank of Tennessee vs. Dibrell [1855], 3 Sneed [Tenn.], 379).
(emphasis supplied)
The authorities cited in the ponencia are inapplicable. Garnished or levied on therein were public
funds, to wit: (a) the pump irrigation trust fund deposited with the Philippine National Bank (PNB) in
the account of the Irrigation Service Unit in Republic vs. Palacio; 2 (b) the deposits of the National
Media Production Center in Traders Royal Bank vs. Intermediate Appellate Court; 3 and (c) the
deposits of the Bureau of Public Highways with the PNB under a current account, which may be
expended only for their legitimate object as authorized by the corresponding legislative appropriation
in Commissioner of Public Highways vs. Diego. 4
Neither is Tiro vs. Hontanosas 5 squarely in point. The said case involved the validity of Circular No.
21, series of 1969, issued by the Director of Public Schools which directed that "henceforth no
cashier or disbursing officer shall pay to attorneys-in-fact or other persons who may be authorized
under a power of attorney or other forms of authority to collect the salary of an employee, except
when the persons so designated and authorized is an immediate member of the family of the
employee concerned, and in all other cases except upon proper authorization of the Assistant
Executive Secretary for Legal and Administrative Matters, with the recommendation of the Financial
Assistant." Private respondent Zafra Financing Enterprise, which had extended loans to public
school teachers in Cebu City and obtained from the latter promissory notes and special powers of
attorney authorizing it to take and collect their salary checks from the Division Office in Cebu City of
the Bureau of Public Schools, sought, inter alia, to nullify the Circular. It is clear that the teachers
had in fact assigned to or waived in favor of Zafra their future salaries which were still public funds.
That assignment or waiver was contrary to public policy.
I would therefore vote to grant the petition only if the salary and RATA checks garnished
corresponds to an unexpired payroll period and RATA month, respectively.
Padilla, J., concurs.

Separate Opinions
DAVIDE, JR., J., concurring and dissenting:
This Court may take judicial notice of the fact that checks for salaries of employees of various
Departments all over the country are prepared in Manila not at the end of the payroll period, but days
before it to ensure that they reach the employees concerned not later than the end of the payroll
period. As to the employees in the provinces or cities, the checks are sent through the heads of the

corresponding offices of the Departments. Thus, in the case of Prosecutors and Assistant
Prosecutors of the Department of Justice, the checks are sent through the Provincial Prosecutors or
City Prosecutors, as the case may be, who shall then deliver the checks to the payees.
Involved in the instant case are the salary and RATA checks of then Assistant City Fiscal Bienvenido
Mabanto, Jr., who was detailed in the Office of the City Fiscal (now Prosecutor) of Mandaue City.
Conformably with the aforesaid practice, these checks were sent to Mabanto thru the petitioner who
was then the City Fiscal of Mandaue City.
The ponencia failed to indicate the payroll period covered by the salary check and the month to
which the RATA check corresponds.
I respectfully submit that if these salary and RATA checks corresponded, respectively, to a payroll
period and to a month which had already lapsed at the time the notice of garnishment was served,
the garnishment would be valid, as the checks would then cease to be property of the Government
and would become property of Mabanto. Upon the expiration of such period and month, the sums
indicated therein were deemed automatically segregated from the budgetary allocations for the
Department of Justice under the General Appropriations Act.
It must be recalled that the public policy against execution, attachment, or garnishment is directed to
public funds.
Thus, in the case of Director of the Bureau of Commerce and Industry vs. Concepcion 1 where the
core issue was whether or not the salary due from the Government to a public officer or employee
can, by garnishment, be seized before being paid to him and appropriated to the payment of his
judgment debts, this Court held:
A rule, which has never been seriously questioned, is that money in the hands of
public officers, although it may be due government employees, is not liable to the
creditors of these employees in the process of garnishment. One reason is, that the
State, by virtue of its sovereignty, may not be sued in its own courts except by
express authorization by the Legislature, and to subject its officers to garnishment
would be to permit indirectly what is prohibited directly. Another reason is that
moneys sought to be garnished, as long as they remain in the hands of the
disbursing officer of the Government, belong to the latter, although the defendant in
garnishment may be entitled to a specific portion thereof. And still another reason
which covers both of the foregoing is that every consideration of public policy forbids
it.
The United States Supreme Court, in the leading case of Buchanan vs. Alexander
([1846], 4 How., 19), in speaking of the right of creditors of seamen, by process of
attachment, to divert the public money from its legitimate and appropriate object,
said:
To state such a principle is to refute it. No government can sanction
it. At all times it would be found embarrassing, and under some
circumstances it might be fatal to the public service. . . . So long as
money remains in the hands of a disbursing officer, it is as much the
money of the United States, as if it had not been drawn from the
treasury. Until paid over by the agent of the government to the person
entitled to it, the fund cannot, in any legal sense, be considered a part
of his effects." (See, further, 12 R.C.L., p. 841; Keene vs. Smith

[1904], 44 Ore., 525; Wild vs. Ferguson [1871], 23 La. Ann., 752;
Bank of Tennessee vs. Dibrell [1855], 3 Sneed [Tenn.], 379).
(emphasis supplied)
The authorities cited in the ponencia are inapplicable. Garnished or levied on therein were public
funds, to wit: (a) the pump irrigation trust fund deposited with the Philippine National Bank (PNB) in
the account of the Irrigation Service Unit in Republic vs. Palacio; 2 (b) the deposits of the National
Media Production Center in Traders Royal Bank vs. Intermediate Appellate Court; 3 and (c) the
deposits of the Bureau of Public Highways with the PNB under a current account, which may be
expended only for their legitimate object as authorized by the corresponding legislative appropriation
in Commissioner of Public Highways vs. Diego. 4
Neither is Tiro vs. Hontanosas 5 squarely in point. The said case involved the validity of Circular No.
21, series of 1969, issued by the Director of Public Schools which directed that "henceforth no
cashier or disbursing officer shall pay to attorneys-in-fact or other persons who may be authorized
under a power of attorney or other forms of authority to collect the salary of an employee, except
when the persons so designated and authorized is an immediate member of the family of the
employee concerned, and in all other cases except upon proper authorization of the Assistant
Executive Secretary for Legal and Administrative Matters, with the recommendation of the Financial
Assistant." Private respondent Zafra Financing Enterprise, which had extended loans to public
school teachers in Cebu City and obtained from the latter promissory notes and special powers of
attorney authorizing it to take and collect their salary checks from the Division Office in Cebu City of
the Bureau of Public Schools, sought, inter alia, to nullify the Circular. It is clear that the teachers
had in fact assigned to or waived in favor of Zafra their future salaries which were still public funds.
That assignment or waiver was contrary to public policy.
I would therefore vote to grant the petition only if the salary and RATA checks garnished
corresponds to an unexpired payroll period and RATA month, respectively.
Padilla, J., concurs.
Footnotes
1 Rollo, p. 12.
2 Id., p. 18.
3 Id., p. 115.
4 Id., p. 114.
5 Id., p. 129.
6 Engineering Construction, Inc. v. National Power Corporation, No. L-34589, 29
June 1988, 163 SCRA 9; Rizal Commercial Banking Corporation v. de Castro, No. L34548, 29 November 1988, 168 SCRA 49; Sec. 8, Rule 57 of the Rules of Court.
7 Hector S. de Leon, The Law on Negotiable Instruments, 1989 Ed., p. 48; People v.
Yabut, Jr., No. L-42902, 29 April 1977, 76 SCRA 624.
8 No. L-32312, 25 November 1983, 125 SCRA 697.

9 Republic v. Palacio, No. L-20322, 29 May 1968, 23 SCRA 899; Director of the
Bureau of Commerce and Industry v. Concepcion, 43 Phil. 384 (1922); Traders
Royal Bank v. IAC, G.R. No. 68514, 17 December 1990, 192 SCRA 305.
10 No. L-30098, 18 February 1970, 31 SCRA 616.
11 G.R. No. 84526, 28 January 1991, 193 SCRA 452.
DAVIDE, JR., J., concurring and dissenting:
1 43 Phil. 384 [1922].
2 23 SCRA 899 [1968].
3 192 SCRA 305 [1990].
4 31 SCRA 616 [1970].
5 125 SCRA 697 [1983].

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 85419 March 9, 1993

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

CAMPOS, JR., J.:

On July 6, 1986, the Development Bank of Rizal (petitioner Bank for brevity) filed a complaint for a
sum of money against respondents Sima Wei and/or Lee Kian Huat, Mary Cheng Uy, Samson Tung,
Asian Industrial Plastic Corporation (Plastic Corporation for short) and the Producers Bank of the
Philippines, on two causes of action:
(1) To enforce payment of the balance of P1,032,450.02 on a promissory note
executed by respondent Sima Wei on June 9, 1983; and
(2) To enforce payment of two checks executed by Sima Wei, payable to petitioner,
and drawn against the China Banking Corporation, to pay the balance due on the
promissory note.
Except for Lee Kian Huat, defendants filed their separate Motions to Dismiss alleging a common
ground that the complaint states no cause of action. The trial court granted the defendants' Motions
to Dismiss. The Court of Appeals affirmed this decision, * to which the petitioner Bank, represented
by its Legal Liquidator, filed this Petition for Review by Certiorari, assigning the following as the
alleged errors of the Court of Appeals: 1
(1) THE COURT OF APPEALS ERRED IN HOLDING THAT THE PLAINTIFFPETITIONER HAS NO CAUSE OF ACTION AGAINST DEFENDANTSRESPONDENTS HEREIN.

(2) THE COURT OF APPEALS ERRED IN HOLDING THAT SECTION 13, RULE 3
OF THE REVISED RULES OF COURT ON ALTERNATIVE DEFENDANTS IS NOT
APPLICABLE TO HEREIN DEFENDANTS-RESPONDENTS.
The antecedent facts of this case are as follows:
In consideration for a loan extended by petitioner Bank to respondent Sima Wei, the latter executed
and delivered to the former a promissory note, engaging to pay the petitioner Bank or order the
amount of P1,820,000.00 on or before June 24, 1983 with interest at 32% per annum. Sima Wei
made partial payments on the note, leaving a balance of P1,032,450.02. On November 18, 1983,
Sima Wei issued two crossed checks payable to petitioner Bank drawn against China Banking
Corporation, bearing respectively the serial numbers 384934, for the amount of P550,000.00 and
384935, for the amount of P500,000.00. The said checks were allegedly issued in full settlement of
the drawer's account evidenced by the promissory note. These two checks were not delivered to the
petitioner-payee or to any of its authorized representatives. For reasons not shown, these checks
came into the possession of respondent Lee Kian Huat, who deposited the checks without the
petitioner-payee's indorsement (forged or otherwise) to the account of respondent Plastic
Corporation, at the Balintawak branch, Caloocan City, of the Producers Bank. Cheng Uy, Branch
Manager of the Balintawak branch of Producers Bank, relying on the assurance of respondent
Samson Tung, President of Plastic Corporation, that the transaction was legal and regular,
instructed the cashier of Producers Bank to accept the checks for deposit and to credit them to the
account of said Plastic Corporation, inspite of the fact that the checks were crossed and payable to
petitioner Bank and bore no indorsement of the latter. Hence, petitioner filed the complaint as
aforestated.
The main issue before Us is whether petitioner Bank has a cause of action against any or all of the
defendants, in the alternative or otherwise.
A cause of action is defined as an act or omission of one party in violation of the legal right or rights
of another. The essential elements are: (1) legal right of the plaintiff; (2) correlative obligation of the
defendant; and (3) an act or omission of the defendant in violation of said legal right. 2
The normal parties to a check are the drawer, the payee and the drawee bank. Courts have long
recognized the business custom of using printed checks where blanks are provided for the date of
issuance, the name of the payee, the amount payable and the drawer's signature. All the drawer has
to do when he wishes to issue a check is to properly fill up the blanks and sign it. However, the mere
fact that he has done these does not give rise to any liability on his part, until and unless the check is
delivered to the payee or his representative. A negotiable instrument, of which a check is, is not only
a written evidence of a contract right but is also a species of property. Just as a deed to a piece of
land must be delivered in order to convey title to the grantee, so must a negotiable instrument be
delivered to the payee in order to evidence its existence as a binding contract. Section 16 of the
Negotiable Instruments Law, which governs checks, provides in part:
Every contract on a negotiable instrument is incomplete and revocable until delivery
of the instrument for the purpose of giving effect thereto. . . .
Thus, the payee of a negotiable instrument acquires no interest with respect thereto until its delivery
to him. 3Delivery of an instrument means transfer of possession, actual or constructive, from one
person to another. 4 Without the initial delivery of the instrument from the drawer to the payee, there
can be no liability on the instrument. Moreover, such delivery must be intended to give effect to the
instrument.

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

# Footnotes
* CA G.R. CV No. 11980 dated October 12, 1988. Penned by Associate Justice
Venancio D. Aldecoa, Jr. with Associate Justices Ricardo P. Tensuan and Luis L.
Victor, concurring.
1 Petition, p. 7; Rollo, p. 20.
2 Caseas vs. Rosales, et al., 19 SCRA 462 (1967); Remitere, et al. vs. Vda. de
Yulo, et al., 16 SCRA 251 (1966).
3 In re Martens' Estate, 226 Iowa 162, 283 N.W. 885 (1939); Shriver vs. Danby, 113
A. 612 (1921).
4 Negotiable Instruments Law, Sec. 191, par. 6.
5 Ganzon vs. Court of Appeals, 161 SCRA 646 (1988). See also 1 M. MORAN,
COMMENTS ON THE RULES OF COURT 715 (1957 ed.), citing San Agustin vs.
Barrios, 68 Phil. 475 (1939), Toribio vs. Decasa, 55 Phil. 461 (1930), American
Express Co. vs. Natividad, 46 Phil. 207 (1924), Agoncillo vs. Javier, 38 Phil. 424
(1918).
6 CIVIL CODE, Art. 1249, par. 2.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-39641 February 28, 1983
METROPOL (BACOLOD) FINANCING & INVESTMENT CORPORATION, plaintiff-appellee,
vs.
SAMBOK MOTORS COMPANY and NG SAMBOK SONS MOTORS CO., LTD., defendantsappellants.
Rizal Quimpo & Cornelio P. Revena for plaintiff-appellee.
Diosdado Garingalao for defendants-appellants.

DE CASTRO, J.:
The former Court of Appeals, by its resolution dated October 16, 1974 certified this case to this
Court the issue issued therein being one purely of law.
On April 15, 1969 Dr. Javier Villaruel executed a promissory note in favor of Ng Sambok Sons
Motors Co., Ltd., in the amount of P15,939.00 payable in twelve (12) equal monthly installments,
beginning May 18, 1969, with interest at the rate of one percent per month. It is further provided that
in case on non-payment of any of the installments, the total principal sum then remaining unpaid
shall become due and payable with an additional interest equal to twenty-five percent of the total
amount due.
On the same date, Sambok Motors Company (hereinafter referred to as Sambok), a sister company
of Ng Sambok Sons Motors Co., Ltd., and under the same management as the former, negotiated
and indorsed the note in favor of plaintiff Metropol Financing & Investment Corporation with the
following indorsement:
Pay to the order of Metropol Bacolod Financing & Investment Corporation with
recourse. Notice of Demand; Dishonor; Protest; and Presentment are hereby waived.
SAMBOK MOTORS CO. (BACOLOD)
By:
RODOLFO G. NONILLO Asst. General Manager
The maker, Dr. Villaruel defaulted in the payment of his installments when they became due, so on
October 30, 1969 plaintiff formally presented the promissory note for payment to the maker. Dr.
Villaruel failed to pay the promissory note as demanded, hence plaintiff notified Sambok as indorsee
of said note of the fact that the same has been dishonored and demanded payment.

Sambok failed to pay, so on November 26, 1969 plaintiff filed a complaint for collection of a sum of
money before the Court of First Instance of Iloilo, Branch I. Sambok did not deny its liability but
contended that it could not be obliged to pay until after its co-defendant Dr. Villaruel has been
declared insolvent.
During the pendency of the case in the trial court, defendant Dr. Villaruel died, hence, on October
24, 1972 the lower court, on motion, dismissed the case against Dr. Villaruel pursuant to Section 21,
Rule 3 of the Rules of Court. 1
On plaintiff's motion for summary judgment, the trial court rendered its decision dated September 12,
1973, the dispositive portion of which reads as follows:
WHEREFORE, judgment is rendered:
(a) Ordering Sambok Motors Company to pay to the plaintiff the sum of P15,939.00
plus the legal rate of interest from October 30, 1969;
(b) Ordering same defendant to pay to plaintiff the sum equivalent to 25% of
P15,939.00 plus interest thereon until fully paid; and
(c) To pay the cost of suit.
Not satisfied with the decision, the present appeal was instituted, appellant Sambok raising a lone
assignment of error as follows:
The trial court erred in not dismissing the complaint by finding defendant appellant
Sambok Motors Company as assignor and a qualified indorsee of the subject
promissory note and in not holding it as only secondarily liable thereof.
Appellant Sambok argues that by adding the words "with recourse" in the indorsement of the note, it
becomes a qualified indorser that being a qualified indorser, it does not warrant that if said note is
dishonored by the maker on presentment, it will pay the amount to the holder; that it only warrants
the following pursuant to Section 65 of the Negotiable Instruments Law: (a) that the instrument is
genuine and in all respects what it purports to be; (b) that he has a good title to it; (c) that all prior
parties had capacity to contract; (d) that he has no knowledge of any fact which would impair the
validity of the instrument or render it valueless.
The appeal is without merit.
A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may
be made by adding to the indorser's signature the words "without recourse" or any words of similar
import. 2 Such an indorsement relieves the indorser of the general obligation to pay if the instrument
is dishonored but not of the liability arising from warranties on the instrument as provided in Section
65 of the Negotiable Instruments Law already mentioned herein. However, appellant Sambok
indorsed the note "with recourse" and even waived the notice of demand, dishonor, protest and
presentment.
"Recourse" means resort to a person who is secondarily liable after the default of the person who is
primarily liable. 3 Appellant, by indorsing the note "with recourse" does not make itself a qualified
indorser but a general indorser who is secondarily liable, because by such indorsement, it agreed
that if Dr. Villaruel fails to pay the note, plaintiff-appellee can go after said appellant. The effect of

such indorsement is that the note was indorsed without qualification. A person who indorses without
qualification engages that on due presentment, the note shall be accepted or paid, or both as the
case may be, and that if it be dishonored, he will pay the amount thereof to the holder. 4 Appellant
Sambok's intention of indorsing the note without qualification is made even more apparent by the
fact that the notice of demand, dishonor, protest and presentment were an waived. The words added
by said appellant do not limit his liability, but rather confirm his obligation as a general indorser.
Lastly, the lower court did not err in not declaring appellant as only secondarily liable because after
an instrument is dishonored by non-payment, the person secondarily liable thereon ceases to be
such and becomes a principal debtor. 5 His liabiliy becomes the same as that of the original
obligor. 6 Consequently, the holder need not even proceed against the maker before suing the
indorser.
WHEREFORE, the decision of the lower court is hereby affirmed. No costs.
SO ORDERED.
Makasiar (Chairman), Concepcion, Jr., Guerrero and Escolin, JJ., concur.
Aquino, J., is on leave.

Separate Opinions

ABAD SANTOS, J., concurring:

I concur and wish to add the observation that the appeal could have been treated as a petition for
review under R.A. 5440 and dismissed by minute resolution.

Separate Opinions
ABAD SANTOS, J., concurring:
I concur and wish to add the observation that the appeal could have been treated as a petition for
review under R.A. 5440 and dismissed by minute resolution.
Footnotes
1 Sec. 21. Where claim does not survive.When the action is for recovery of money,
debt or interest thereon, and the defendant dies before final judgment in the Court of

First Instance, it shall be dismissed to be prosecuted in the manner especially

provided in these rules.
2 Section 38, The Negotiable Instruments Law.
3 Ogden, The Law of Negotiable Instruments, p. 200 citing Industrial Bank and Trust
Company vs. Hesselberg, 195 S.W. (2d) 470.
4 Ang Tiong vs. Ting, 22 SCRA 715.
5 Pittsburg Westmoreland Coal Co. vs. Kerr, 115 N.E.
6 American Bank vs. Macondray & Co., 4 Phil. 695.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 92244 February 9, 1993

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

CAMPOS, JR., J.:

From the adverse decision * of the Court of Appeals (CA-G.R. CV No. 16447), petitioner, Natividad
Gempesaw, appealed to this Court in a Petition for Review, on the issue of the right of the drawer to
recover from the drawee bank who pays a check with a forged indorsement of the payee, debiting
the same against the drawer's account.
The records show that on January 23, 1985, petitioner filed a Complaint against the private
respondent Philippine Bank of Communications (respondent drawee Bank) for recovery of the
money value of eighty-two (82) checks charged against the petitioner's account with the respondent
drawee Bank on the ground that the payees' indorsements were forgeries. The Regional Trial Court,
Branch CXXVIII of Caloocan City, which tried the case, rendered a decision on November 17, 1987
dismissing the complaint as well as the respondent drawee Bank's counterclaim. On appeal, the
Court of Appeals in a decision rendered on February 22, 1990, affirmed the decision of the RTC on
two grounds, namely (1) that the plaintiff's (petitioner herein) gross negligence in issuing the checks
was the proximate cause of the loss and (2) assuming that the bank was also negligent, the loss
must nevertheless be borne by the party whose negligence was the proximate cause of the loss. On
March 5, 1990, the petitioner filed this petition under Rule 45 of the Rules of Court setting forth the
following as the alleged errors of the respondent Court: 1
I
THE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE
NEGLIGENCE OF THE DRAWER IS THE PROXIMATE CAUSE OF THE
RESULTING INJURY TO THE DRAWEE BANK, AND THE DRAWER IS
PRECLUDED FROM SETTING UP THE FORGERY OR WANT OF AUTHORITY.
II

THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT FINDING AND

RULING THAT IT IS THE GROSS AND INEXCUSABLE NEGLIGENCE AND
FRAUDULENT ACTS OF THE OFFICIALS AND EMPLOYEES OF THE
RESPONDENT BANK IN FORGING THE SIGNATURE OF THE PAYEES AND THE
WRONG AND/OR ILLEGAL PAYMENTS MADE TO PERSONS, OTHER THAN TO
THE INTENDED PAYEES SPECIFIED IN THE CHECKS, IS THE DIRECT AND
PROXIMATE CAUSE OF THE DAMAGE TO PETITIONER WHOSE SAVING (SIC)
ACCOUNT WAS DEBITED.
III
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT ORDERING
THE RESPONDENT BANK TO RESTORE OR RE-CREDIT THE CHECKING
ACCOUNT OF THE PETITIONER IN THE CALOOCAN CITY BRANCH BY THE
VALUE OF THE EIGHTY-TWO (82) CHECKS WHICH IS IN THE AMOUNT OF
P1,208,606.89 WITH LEGAL INTEREST.
From the records, the relevant facts are as follows:
Petitioner Natividad O. Gempesaw (petitioner) owns and operates four grocery stores located at
Rizal Avenue Extension and at Second Avenue, Caloocan City. Among these groceries are D.G.
Shopper's Mart and D.G. Whole Sale Mart. Petitioner maintains a checking account numbered 1300038-1 with the Caloocan City Branch of the respondent drawee Bank. To facilitate payment of
debts to her suppliers, petitioner draws checks against her checking account with the respondent
bank as drawee. Her customary practice of issuing checks in payment of her suppliers was as
follows: the checks were prepared and filled up as to all material particulars by her trusted
bookkeeper, Alicia Galang, an employee for more than eight (8) years. After the bookkeeper
prepared the checks, the completed checks were submitted to the petitioner for her signature,
together with the corresponding invoice receipts which indicate the correct obligations due and
payable to her suppliers. Petitioner signed each and every check without bothering to verify the
accuracy of the checks against the corresponding invoices because she reposed full and implicit
trust and confidence on her bookkeeper. The issuance and delivery of the checks to the payees
named therein were left to the bookkeeper. Petitioner admitted that she did not make any verification
as to whether or not the checks were delivered to their respective payees. Although the respondent
drawee Bank notified her of all checks presented to and paid by the bank, petitioner did not verify he
correctness of the returned checks, much less check if the payees actually received the checks in
payment for the supplies she received. In the course of her business operations covering a period of
two years, petitioner issued, following her usual practice stated above, a total of eighty-two (82)
checks in favor of several suppliers. These checks were all presented by the indorsees as holders
thereof to, and honored by, the respondent drawee Bank. Respondent drawee Bank correspondingly
debited the amounts thereof against petitioner's checking account numbered 30-00038-1. Most of
the aforementioned checks were for amounts in excess of her actual obligations to the various
payees as shown in their corresponding invoices. To mention a few:
. . . 1) in Check No. 621127, dated June 27, 1984 in the amount of P11,895.23 in
favor of Kawsek Inc. (Exh. A-60), appellant's actual obligation to said payee was only
P895.33 (Exh. A-83); (2) in Check No. 652282 issued on September 18, 1984 in
favor of Senson Enterprises in the amount of P11,041.20 (Exh. A-67) appellant's
actual obligation to said payee was only P1,041.20 (Exh. 7); (3) in Check No. 589092
dated April 7, 1984 for the amount of P11,672.47 in favor of Marchem (Exh. A-61)
appellant's obligation was only P1,672.47 (Exh. B); (4) in Check No. 620450 dated
May 10, 1984 in favor of Knotberry for P11,677.10 (Exh. A-31) her actual obligation

was only P677.10 (Exhs. C and C-1); (5) in Check No. 651862 dated August 9, 1984
in favor of Malinta Exchange Mart for P11,107.16 (Exh. A-62), her obligation was
only P1,107.16 (Exh. D-2); (6) in Check No. 651863 dated August 11, 1984 in favor
of Grocer's International Food Corp. in the amount of P11,335.60 (Exh. A-66), her
obligation was only P1,335.60 (Exh. E and E-1); (7) in Check No. 589019 dated
March 17, 1984 in favor of Sophy Products in the amount of P11,648.00 (Exh. A-78),
her obligation was only P648.00 (Exh. G); (8) in Check No. 589028 dated March 10,
1984 for the amount of P11,520.00 in favor of the Yakult Philippines (Exh. A-73), the
latter's invoice was only P520.00 (Exh. H-2); (9) in Check No. 62033 dated May 23,
1984 in the amount of P11,504.00 in favor of Monde Denmark Biscuit (Exh. A-34),
her obligation was only P504.00 (Exhs. I-1 and I-2). 2
Practically, all the checks issued and honored by the respondent drawee bank were crossed
checks. 3 Aside from the daily notice given to the petitioner by the respondent drawee Bank, the
latter also furnished her with a monthly statement of her transactions, attaching thereto all the
cancelled checks she had issued and which were debited against her current account. It was only
after the lapse of more two (2) years that petitioner found out about the fraudulent manipulations of
her bookkeeper.
All the eighty-two (82) checks with forged signatures of the payees were brought to Ernest L. Boon,
Chief Accountant of respondent drawee Bank at the Buendia branch, who, without authority therefor,
accepted them all for deposit at the Buendia branch to the credit and/or in the accounts of Alfredo Y.
Romero and Benito Lam. Ernest L. Boon was a very close friend of Alfredo Y. Romero. Sixty-three
(63) out of the eighty-two (82) checks were deposited in Savings Account No. 00844-5 of Alfredo Y.
Romero at the respondent drawee Bank's Buendia branch, and four (4) checks in his Savings
Account No. 32-81-9 at its Ongpin branch. The rest of the checks were deposited in Account No.
0443-4, under the name of Benito Lam at the Elcao branch of the respondent drawee Bank.
About thirty (30) of the payees whose names were specifically written on the checks testified that
they did not receive nor even see the subject checks and that the indorsements appearing at the
back of the checks were not theirs.
The team of auditors from the main office of the respondent drawee Bank which conducted periodic
inspection of the branches' operations failed to discover, check or stop the unauthorized acts of
Ernest L. Boon. Under the rules of the respondent drawee Bank, only a Branch Manager and no
other official of the respondent drawee bank, may accept a second indorsement on a check for
deposit. In the case at bar, all the deposit slips of the eighty-two (82) checks in question were
initialed and/or approved for deposit by Ernest L. Boon. The Branch Managers of the Ongpin and
Elcao branches accepted the deposits made in the Buendia branch and credited the accounts of
Alfredo Y. Romero and Benito Lam in their respective branches.
On November 7, 1984, petitioner made a written demand on respondent drawee Bank to credit her
account with the money value of the eighty-two (82) checks totalling P1,208.606.89 for having been
wrongfully charged against her account. Respondent drawee Bank refused to grant petitioner's
demand. On January 23, 1985, petitioner filed the complaint with the Regional Trial Court.
This is not a suit by the party whose signature was forged on a check drawn against the drawee
bank. The payees are not parties to the case. Rather, it is the drawer, whose signature is genuine,
who instituted this action to recover from the drawee bank the money value of eighty-two (82)
checks paid out by the drawee bank to holders of those checks where the indorsements of the
payees were forged. How and by whom the forgeries were committed are not established on the
record, but the respective payees admitted that they did not receive those checks and therefore

never indorsed the same. The applicable law is the Negotiable Instruments Law 4(heretofore referred
to as the NIL). Section 23 of the NIL provides:
When a signature is forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce payment thereof against any
party thereto, can be acquired through or under such signature, unless the party
against whom it is sought to enforce such right is precluded from setting up the
forgery or want of authority.
Under the aforecited provision, forgery is a real or absolute defense by the party whose
signature is forged. A party whose signature to an instrument was forged was never a party
and never gave his consent to the contract which gave rise to the instrument. Since his
signature does not appear in the instrument, he cannot be held liable thereon by anyone, not
even by a holder in due course. Thus, if a person's signature is forged as a maker of a
promissory note, he cannot be made to pay because he never made the promise to pay. Or
where a person's signature as a drawer of a check is forged, the drawee bank cannot charge
the amount thereof against the drawer's account because he never gave the bank the order
to pay. And said section does not refer only to the forged signature of the maker of a
promissory note and of the drawer of a check. It covers also a forged indorsement, i.e., the
forged signature of the payee or indorsee of a note or check. Since under said provision a
forged signature is "wholly inoperative", no one can gain title to the instrument through such
forged indorsement. Such an indorsement prevents any subsequent party from acquiring any
right as against any party whose name appears prior to the forgery. Although rights may
exist between and among parties subsequent to the forged indorsement, not one of them
can acquire rights against parties prior to the forgery. Such forged indorsement cuts off the
rights of all subsequent parties as against parties prior to the forgery. However, the law
makes an exception to these rules where a party is precluded from setting up forgery as a
defense.
As a matter of practical significance, problems arising from forged indorsements of checks may
generally be broken into two types of cases: (1) where forgery was accomplished by a person not
associated with the drawer for example a mail robbery; and (2) where the indorsement was
forged by an agent of the drawer. This difference in situations would determine the effect of the
drawer's negligence with respect to forged indorsements. While there is no duty resting on the
depositor to look for forged indorsements on his cancelled checks in contrast to a duty imposed
upon him to look for forgeries of his own name, a depositor is under a duty to set up an accounting
system and a business procedure as are reasonably calculated to prevent or render difficult the
forgery of indorsements, particularly by the depositor's own employees. And if the drawer (depositor)
learns that a check drawn by him has been paid under a forged indorsement, the drawer is under
duty promptly to report such fact to the drawee bank. 5 For his negligence or failure either to discover
or to report promptly the fact of such forgery to the drawee, the drawer loses his right against the
drawee who has debited his account under a forged indorsement. 6 In other words, he is precluded
from using forgery as a basis for his claim for re-crediting of his account.
In the case at bar, petitioner admitted that the checks were filled up and completed by her trusted
employee, Alicia Galang, and were given to her for her signature. Her signing the checks made the
negotiable instrument complete. Prior to signing the checks, there was no valid contract yet.
Every contract on a negotiable instrument is incomplete and revocable until delivery of the
instrument to the payee for the purpose of giving effect thereto. 7 The first delivery of the instrument,
complete in form, to the payee who takes it as a holder, is called issuance of the

instrument. 8 Without the initial delivery of the instrument from the drawer of the check to the payee,
there can be no valid and binding contract and no liability on the instrument.
Petitioner completed the checks by signing them as drawer and thereafter authorized her employee
Alicia Galang to deliver the eighty-two (82) checks to their respective payees. Instead of issuing the
checks to the payees as named in the checks, Alicia Galang delivered them to the Chief Accountant
of the Buendia branch of the respondent drawee Bank, a certain Ernest L. Boon. It was established
that the signatures of the payees as first indorsers were forged. The record fails to show the identity
of the party who made the forged signatures. The checks were then indorsed for the second time
with the names of Alfredo Y. Romero and Benito Lam, and were deposited in the latter's accounts as
earlier noted. The second indorsements were all genuine signatures of the alleged holders. All the
eighty-two (82) checks bearing the forged indorsements of the payees and the genuine second
indorsements of Alfredo Y. Romero and Benito Lam were accepted for deposit at the Buendia
branch of respondent drawee Bank to the credit of their respective savings accounts in the Buendia,
Ongpin and Elcao branches of the same bank. The total amount of P1,208,606.89, represented by
eighty-two (82) checks, were credited and paid out by respondent drawee Bank to Alfredo Y.
Romero and Benito Lam, and debited against petitioner's checking account No. 13-00038-1,
Caloocan branch.
As a rule, a drawee bank who has paid a check on which an indorsement has been forged cannot
charge the drawer's account for the amount of said check. An exception to this rule is where the
drawer is guilty of such negligence which causes the bank to honor such a check or checks. If a
check is stolen from the payee, it is quite obvious that the drawer cannot possibly discover the
forged indorsement by mere examination of his cancelled check. This accounts for the rule that
although a depositor owes a duty to his drawee bank to examine his cancelled checks for forgery of
his own signature, he has no similar duty as to forged indorsements. A different situation arises
where the indorsement was forged by an employee or agent of the drawer, or done with the active
participation of the latter. Most of the cases involving forgery by an agent or employee deal with the
payee's indorsement. The drawer and the payee often time shave business relations of long
standing. The continued occurrence of business transactions of the same nature provides the
opportunity for the agent/employee to commit the fraud after having developed familiarity with the
signatures of the parties. However, sooner or later, some leak will show on the drawer's books. It will
then be just a question of time until the fraud is discovered. This is specially true when the agent
perpetrates a series of forgeries as in the case at bar.
The negligence of a depositor which will prevent recovery of an unauthorized payment is based on
failure of the depositor to act as a prudent businessman would under the circumstances. In the case
at bar, the petitioner relied implicitly upon the honesty and loyalty of her bookkeeper, and did not
even verify the accuracy of amounts of the checks she signed against the invoices attached thereto.
Furthermore, although she regularly received her bank statements, she apparently did not carefully
examine the same nor the check stubs and the returned checks, and did not compare them with the
same invoices. Otherwise, she could have easily discovered the discrepancies between the checks
and the documents serving as bases for the checks. With such discovery, the subsequent forgeries
would not have been accomplished. It was not until two years after the bookkeeper commenced her
fraudulent scheme that petitioner discovered that eighty-two (82) checks were wrongfully charged to
her account, at which she notified the respondent drawee bank.
It is highly improbable that in a period of two years, not one of Petitioner's suppliers complained of
non-payment. Assuming that even one single complaint had been made, petitioner would have been
duty-bound, as far as the respondent drawee Bank was concerned, to make an adequate
investigation on the matter. Had this been done, the discrepancies would have been discovered,
sooner or later. Petitioner's failure to make such adequate inquiry constituted negligence which
resulted in the bank's honoring of the subsequent checks with forged indorsements. On the other

hand, since the record mentions nothing about such a complaint, the possibility exists that the
checks in question covered inexistent sales. But even in such a case, considering the length of a
period of two (2) years, it is hard to believe that petitioner did not know or realize that she was
paying more than she should for the supplies she was actually getting. A depositor may not sit idly
by, after knowledge has come to her that her funds seem to be disappearing or that there may be a
leak in her business, and refrain from taking the steps that a careful and prudent businessman would
take in such circumstances and if taken, would result in stopping the continuance of the fraudulent
scheme. If she fails to take steps, the facts may establish her negligence, and in that event, she
would be estopped from recovering from the bank. 9
One thing is clear from the records that the petitioner failed to examine her records with
reasonable diligence whether before she signed the checks or after receiving her bank statements.
Had the petitioner examined her records more carefully, particularly the invoice receipts, cancelled
checks, check book stubs, and had she compared the sums written as amounts payable in the
eighty-two (82) checks with the pertinent sales invoices, she would have easily discovered that in
some checks, the amounts did not tally with those appearing in the sales invoices. Had she noticed
these discrepancies, she should not have signed those checks, and should have conducted an
inquiry as to the reason for the irregular entries. Likewise had petitioner been more vigilant in going
over her current account by taking careful note of the daily reports made by respondent drawee
Bank in her issued checks, or at least made random scrutiny of cancelled checks returned by
respondent drawee Bank at the close of each month, she could have easily discovered the fraud
being perpetrated by Alicia Galang, and could have reported the matter to the respondent drawee
Bank. The respondent drawee Bank then could have taken immediate steps to prevent further
commission of such fraud. Thus, petitioner's negligence was the proximate cause of her loss. And
since it was her negligence which caused the respondent drawee Bank to honor the forged checks
or prevented it from recovering the amount it had already paid on the checks, petitioner cannot now
complain should the bank refuse to recredit her account with the amount of such checks. 10 Under
Section 23 of the NIL, she is now precluded from using the forgery to prevent the bank's debiting of
her account.
The doctrine in the case of Great Eastern Life Insurance Co. vs. Hongkong & Shanghai Bank 11 is
not applicable to the case at bar because in said case, the check was fraudulently taken and the
signature of the payee was forged not by an agent or employee of the drawer. The drawer was not
found to be negligent in the handling of its business affairs and the theft of the check by a total
stranger was not attributable to negligence of the drawer; neither was the forging of the payee's
indorsement due to the drawer's negligence. Since the drawer was not negligent, the drawee was
duty-bound to restore to the drawer's account the amount theretofore paid under the check with a
forged payee's indorsement because the drawee did not pay as ordered by the drawer.
Petitioner argues that respondent drawee Bank should not have honored the checks because they
were crossed checks. Issuing a crossed check imposes no legal obligation on the drawee not to
honor such a check. It is more of a warning to the holder that the check cannot be presented to the
drawee bank for payment in cash. Instead, the check can only be deposited with the payee's bank
which in turn must present it for payment against the drawee bank in the course of normal banking
transactions between banks. The crossed check cannot be presented for payment but it can only be
deposited and the drawee bank may only pay to another bank in the payee's or indorser's account.
Petitioner likewise contends that banking rules prohibit the drawee bank from having checks with
more than one indorsement. The banking rule banning acceptance of checks for deposit or cash
payment with more than one indorsement unless cleared by some bank officials does not invalidate
the instrument; neither does it invalidate the negotiation or transfer of the said check. In effect, this
rule destroys the negotiability of bills/checks by limiting their negotiation by indorsement of only the

payee. Under the NIL, the only kind of indorsement which stops the further negotiation of an
instrument is a restrictive indorsement which prohibits the further negotiation thereof.
Sec. 36. When indorsement restrictive. An indorsement is restrictive which either
(a) Prohibits further negotiation of the instrument; or
xxx xxx xxx
In this kind of restrictive indorsement, the prohibition to transfer or negotiate must be written in
express words at the back of the instrument, so that any subsequent party may be forewarned that
ceases to be negotiable. However, the restrictive indorsee acquires the right to receive payment and
bring any action thereon as any indorser, but he can no longer transfer his rights as such indorsee
where the form of the indorsement does not authorize him to do so. 12
Although the holder of a check cannot compel a drawee bank to honor it because there is no privity
between them, as far as the drawer-depositor is concerned, such bank may not legally refuse to
honor a negotiable bill of exchange or a check drawn against it with more than one indorsement if
there is nothing irregular with the bill or check and the drawer has sufficient funds. The drawee
cannot be compelled to accept or pay the check by the drawer or any holder because as a drawee,
he incurs no liability on the check unless he accepts it. But the drawee will make itself liable to a suit
for damages at the instance of the drawer for wrongful dishonor of the bill or check.
Thus, it is clear that under the NIL, petitioner is precluded from raising the defense of forgery by
reason of her gross negligence. But under Section 196 of the NIL, any case not provided for in the
Act shall be governed by the provisions of existing legislation. Under the laws of quasi-delict, she
cannot point to the negligence of the respondent drawee Bank in the selection and supervision of its
employees as being the cause of the loss because negligence is the proximate cause thereof and
under Article 2179 of the Civil Code, she may not be awarded damages. However, under Article
1170 of the same Code the respondent drawee Bank may be held liable for damages. The article
provides
Those who in the performance of their obligations are guilty of fraud, negligence or
delay, and those who in any manner contravene the tenor thereof, are liable for
damages.
There is no question that there is a contractual relation between petitioner as depositor (obligee) and
the respondent drawee bank as the obligor. In the performance of its obligation, the drawee bank is
bound by its internal banking rules and regulations which form part of any contract it enters into with
any of its depositors. When it violated its internal rules that second endorsements are not to be
accepted without the approval of its branch managers and it did accept the same upon the mere
approval of Boon, a chief accountant, it contravened the tenor of its obligation at the very least, if it
were not actually guilty of fraud or negligence.
Furthermore, the fact that the respondent drawee Bank did not discover the irregularity with respect
to the acceptance of checks with second indorsement for deposit even without the approval of the
branch manager despite periodic inspection conducted by a team of auditors from the main office
constitutes negligence on the part of the bank in carrying out its obligations to its depositors. Article
1173 provides

The fault or negligence of the obligor consists in the omission of that diligence which
is required by the nature of the obligation and corresponds with the circumstance of
the persons, of the time and of the place. . . .
We hold that banking business is so impressed with public interest where the trust and confidence of
the public in general is of paramount importance such that the appropriate standard of diligence
must be a high degree of diligence, if not the utmost diligence. Surely, respondent drawee Bank
cannot claim it exercised such a degree of diligence that is required of it. There is no way We can
allow it now to escape liability for such negligence. Its liability as obligor is not merely vicarious but
primary wherein the defense of exercise of due diligence in the selection and supervision of its
employees is of no moment.
Premises considered, respondent drawee Bank is adjudged liable to share the loss with the
petitioner on a fifty-fifty ratio in accordance with Article 172 which provides:
Responsibility arising from negligence in the performance of every kind of obligation
is also demandable, but such liability may be regulated by the courts according to the
circumstances.
With the foregoing provisions of the Civil Code being relied upon, it is being made clear that the
decision to hold the drawee bank liable is based on law and substantial justice and not on mere
equity. And although the case was brought before the court not on breach of contractual obligations,
the courts are not precluded from applying to the circumstances of the case the laws pertinent
thereto. Thus, the fact that petitioner's negligence was found to be the proximate cause of her loss
does not preclude her from recovering damages. The reason why the decision dealt on a discussion
on proximate cause is due to the error pointed out by petitioner as allegedly committed by the
respondent court. And in breaches of contract under Article 1173, due diligence on the part of the
defendant is not a defense.
PREMISES CONSIDERED, the case is hereby ordered REMANDED to the trial court for the
reception of evidence to determine the exact amount of loss suffered by the petitioner, considering
that she partly benefited from the issuance of the questioned checks since the obligation for which
she issued them were apparently extinguished, such that only the excess amount over and above
the total of these actual obligations must be considered as loss of which one half must be paid by
respondent drawee bank to herein petitioner.
SO ORDERED.
Narvasa, C.J., Feliciano, Regalado and Nocon, JJ., concur.

# Footnotes
* Penned by Associate Justice Celso L. Magsino, Associate Justices Nathanael P.
De Pano, Jr. and Cezar D. Francisco, concurring.
1 Rollo, p.11.
2 Rollo, pp. 20-21; CA Decision, pp. 2-3. See Notes 2-6 thereof.

3 A crossed check is defined as a check crossed with two (2) lines, between which
are either the name of a bank or the words "and company," in full or abbreviated. In
the former case, the banker on whom it is drawn must not pay the money for the
check to any other than the banker named; in the latter case, he must not pay it to
any other than a banker. Black's Law Dictionary 301 (4th Ed.), citing 2 Steph. Comm.
118, note C; 7 Exch. 389; [1903] A.C. 240; Farmers' Bank v. Johnson, King & Co.,
134 Ga. 486, 68 S.E. 65, 30 L.R.A., N.S. 697.
4 Act No. 2031, enacted on February 3, 1911.
5 Britton, Bills and Notes, Sec. 143, pp. 663-664.
6 City of New York vs. Bronx County Trust Co., 261 N.Y. 64, 184 N.E. 495 (1933);
Detroit Piston Ring Co. vs. Wayne County & Home Savings Bank, 252 Mich. 163,
233 N.W. 185 (1930); C.E. Erickson Co. vs. Iowa Nat. Bank 211 Iowa 495, 230 N.W.
342 (1930).
7 NIL, Sec. 16.
8 Ibid., Sec. 191, par. 10.
9 Detroit Piston Ring Co. vs. Wayne County & Home Savings Bank, supra, note 3.
10 Defiance Lumber Co. vs. Bank of California, N.A., 180 Wash. 533, 41 P. 2d 135
(1935); National Surety Co. vs. President and Directors of Manhattan Co., et al., 252
N.Y. 247, 169 N.E. 372 (1929); Erickson Co. vs. Iowa National Bank, supra, note 3.
11 43 Phil. 678 (1922).
12 NIL, Sec. 37.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-15126

November 30, 1961

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

vs.
ANITA GATCHALIAN, ET AL., defendants-appellants.
Vicente Formoso, Jr. for plaintiff-appellee.
Reyes and Pangalagan for defendants-appellants.
LABRADOR, J.:
Appeal from a judgment of the Court of First Instance of Manila, Hon. Conrado M. Velasquez,
presiding, sentencing the defendants to pay the plaintiff the sum of P600, with legal interest from
September 10, 1953 until paid, and to pay the costs.
The action is for the recovery of the value of a check for P600 payable to the plaintiff and drawn by
defendant Anita C. Gatchalian. The complaint sets forth the check and alleges that plaintiff received
it in payment of the indebtedness of one Matilde Gonzales; that upon receipt of said check, plaintiff
gave Matilde Gonzales P158.25, the difference between the face value of the check and Matilde
Gonzales' indebtedness. The defendants admit the execution of the check but they allege in their
answer, as affirmative defense, that it was issued subject to a condition, which was not fulfilled, and
that plaintiff was guilty of gross negligence in not taking steps to protect itself.
At the time of the trial, the parties submitted a stipulation of facts, which reads as follows:
Plaintiff and defendants through their respective undersigned attorney's respectfully submit
the following Agreed Stipulation of Facts;
First. That on or about 8 September 1953, in the evening, defendant Anita C. Gatchalian
who was then interested in looking for a car for the use of her husband and the family, was
shown and offered a car by Manuel Gonzales who was accompanied by Emil Fajardo, the
latter being personally known to defendant Anita C. Gatchalian;
Second. That Manuel Gonzales represented to defend Anita C. Gatchalian that he was
duly authorized by the owner of the car, Ocampo Clinic, to look for a buyer of said car and to
negotiate for and accomplish said sale, but which facts were not known to plaintiff;
Third. That defendant Anita C. Gatchalian, finding the price of the car quoted by Manuel
Gonzales to her satisfaction, requested Manuel Gonzales to bring the car the day following
together with the certificate of registration of the car, so that her husband would be able to
see same; that on this request of defendant Anita C. Gatchalian, Manuel Gonzales advised
her that the owner of the car will not be willing to give the certificate of registration unless
there is a showing that the party interested in the purchase of said car is ready and willing to
make such purchase and that for this purpose Manuel Gonzales requested defendant Anita
C. Gatchalian to give him (Manuel Gonzales) a check which will be shown to the owner as

evidence of buyer's good faith in the intention to purchase the said car, the said check to be
for safekeeping only of Manuel Gonzales and to be returned to defendant Anita C.
Gatchalian the following day when Manuel Gonzales brings the car and the certificate of
registration, but which facts were not known to plaintiff;
Fourth. That relying on these representations of Manuel Gonzales and with his assurance
that said check will be only for safekeeping and which will be returned to said defendant the
following day when the car and its certificate of registration will be brought by Manuel
Gonzales to defendants, but which facts were not known to plaintiff, defendant Anita C.
Gatchalian drew and issued a check, Exh. "B"; that Manuel Gonzales executed and issued a
receipt for said check, Exh. "1";
Fifth. That on the failure of Manuel Gonzales to appear the day following and on his failure
to bring the car and its certificate of registration and to return the check, Exh. "B", on the
following day as previously agreed upon, defendant Anita C. Gatchalian issued a "Stop
Payment Order" on the check, Exh. "3", with the drawee bank. Said "Stop Payment Order"
was issued without previous notice on plaintiff not being know to defendant, Anita C.
Gatchalian and who furthermore had no reason to know check was given to plaintiff;
Sixth. That defendants, both or either of them, did not know personally Manuel Gonzales
or any member of his family at any time prior to September 1953, but that defendant Hipolito
Gatchalian is personally acquainted with V. R. de Ocampo;
Seventh. That defendants, both or either of them, had no arrangements or agreement with
the Ocampo Clinic at any time prior to, on or after 9 September 1953 for the hospitalization
of the wife of Manuel Gonzales and neither or both of said defendants had assumed,
expressly or impliedly, with the Ocampo Clinic, the obligation of Manuel Gonzales or his wife
for the hospitalization of the latter;
Eight. That defendants, both or either of them, had no obligation or liability, directly or
indirectly with the Ocampo Clinic before, or on 9 September 1953;
Ninth. That Manuel Gonzales having received the check Exh. "B" from defendant Anita C.
Gatchalian under the representations and conditions herein above specified, delivered the
same to the Ocampo Clinic, in payment of the fees and expenses arising from the
hospitalization of his wife;
Tenth. That plaintiff for and in consideration of fees and expenses of hospitalization and
the release of the wife of Manuel Gonzales from its hospital, accepted said check, applying
P441.75 (Exhibit "A") thereof to payment of said fees and expenses and delivering to Manuel
Gonzales the amount of P158.25 (as per receipt, Exhibit "D") representing the balance on
the amount of the said check, Exh. "B";
Eleventh. That the acts of acceptance of the check and application of its proceeds in the
manner specified above were made without previous inquiry by plaintiff from defendants:
Twelfth. That plaintiff filed or caused to be filed with the Office of the City Fiscal of Manila,
a complaint for estafa against Manuel Gonzales based on and arising from the acts of said
Manuel Gonzales in paying his obligations with plaintiff and receiving the cash balance of the
check, Exh. "B" and that said complaint was subsequently dropped;

Thirteenth. That the exhibits mentioned in this stipulation and the other exhibits submitted
previously, be considered as parts of this stipulation, without necessity of formally offering
them in evidence;
WHEREFORE, it is most respectfully prayed that this agreed stipulation of facts be admitted
and that the parties hereto be given fifteen days from today within which to submit
simultaneously their memorandum to discuss the issues of law arising from the facts,
reserving to either party the right to submit reply memorandum, if necessary, within ten days
from receipt of their main memoranda. (pp. 21-25, Defendant's Record on Appeal).
No other evidence was submitted and upon said stipulation the court rendered the judgment already
alluded above.
In their appeal defendants-appellants contend that the check is not a negotiable instrument, under
the facts and circumstances stated in the stipulation of facts, and that plaintiff is not a holder in due
course. In support of the first contention, it is argued that defendant Gatchalian had no intention to
transfer her property in the instrument as it was for safekeeping merely and, therefore, there was no
delivery required by law (Section 16, Negotiable Instruments Law); that assuming for the sake of
argument that delivery was not for safekeeping merely, delivery was conditional and the condition
was not fulfilled.
In support of the contention that plaintiff-appellee is not a holder in due course, the appellant argues
that plaintiff-appellee cannot be a holder in due course because there was no negotiation prior to
plaintiff-appellee's acquiring the possession of the check; that a holder in due course presupposes a
prior party from whose hands negotiation proceeded, and in the case at bar, plaintiff-appellee is the
payee, the maker and the payee being original parties. It is also claimed that the plaintiff-appellee is
not a holder in due course because it acquired the check with notice of defect in the title of the
holder, Manuel Gonzales, and because under the circumstances stated in the stipulation of facts
there were circumstances that brought suspicion about Gonzales' possession and negotiation, which
circumstances should have placed the plaintiff-appellee under the duty, to inquire into the title of the
holder. The circumstances are as follows:
The check is not a personal check of Manuel Gonzales. (Paragraph Ninth, Stipulation of
Facts). Plaintiff could have inquired why a person would use the check of another to pay his
own debt. Furthermore, plaintiff had the "means of knowledge" inasmuch as defendant
Hipolito Gatchalian is personally acquainted with V. R. de Ocampo (Paragraph Sixth,
Stipulation of Facts.).
The maker Anita C. Gatchalian is a complete stranger to Manuel Gonzales and Dr. V. R. de
Ocampo (Paragraph Sixth, Stipulation of Facts).
The maker is not in any manner obligated to Ocampo Clinic nor to Manuel Gonzales. (Par. 7,
Stipulation of Facts.)
The check could not have been intended to pay the hospital fees which amounted only to
P441.75. The check is in the amount of P600.00, which is in excess of the amount due
plaintiff. (Par. 10, Stipulation of Facts).
It was necessary for plaintiff to give Manuel Gonzales change in the sum P158.25 (Par. 10,
Stipulation of Facts). Since Manuel Gonzales is the party obliged to pay, plaintiff should have
been more cautious and wary in accepting a piece of paper and disbursing cold cash.

The check is payable to bearer. Hence, any person who holds it should have been subjected
to inquiries. EVEN IN A BANK, CHECKS ARE NOT CASHED WITHOUT INQUIRY FROM
THE BEARER. The same inquiries should have been made by plaintiff. (Defendantsappellants' brief, pp. 52-53)
Answering the first contention of appellant, counsel for plaintiff-appellee argues that in accordance
with the best authority on the Negotiable Instruments Law, plaintiff-appellee may be considered as a
holder in due course, citing Brannan's Negotiable Instruments Law, 6th edition, page 252. On this
issue Brannan holds that a payee may be a holder in due course and says that to this effect is the
greater weight of authority, thus:
Whether the payee may be a holder in due course under the N. I. L., as he was at common
law, is a question upon which the courts are in serious conflict. There can be no doubt that a
proper interpretation of the act read as a whole leads to the conclusion that a payee may be
a holder in due course under any circumstance in which he meets the requirements of Sec.
52.
The argument of Professor Brannan in an earlier edition of this work has never been
successfully answered and is here repeated.
Section 191 defines "holder" as the payee or indorsee of a bill or note, who is in possession
of it, or the bearer thereof. Sec. 52 defendants defines a holder in due course as "a holder
who has taken the instrument under the following conditions: 1. That it is complete and
regular on its face. 2. That he became the holder of it before it was overdue, and without
notice that it had been previously dishonored, if such was the fact. 3. That he took it in good
faith and for value. 4. That at the time it was negotiated to him he had no notice of any
infirmity in the instrument or defect in the title of the person negotiating it."
Since "holder", as defined in sec. 191, includes a payee who is in possession the word
holder in the first clause of sec. 52 and in the second subsection may be replaced by the
definition in sec. 191 so as to read "a holder in due course is a payee or indorsee who is in
possession," etc. (Brannan's on Negotiable Instruments Law, 6th ed., p. 543).
The first argument of the defendants-appellants, therefore, depends upon whether or not the
plaintiff-appellee is a holder in due course. If it is such a holder in due course, it is immaterial that it
was the payee and an immediate party to the instrument.
The other contention of the plaintiff is that there has been no negotiation of the instrument, because
the drawer did not deliver the instrument to Manuel Gonzales with the intention of negotiating the
same, or for the purpose of giving effect thereto, for as the stipulation of facts declares the check
was to remain in the possession Manuel Gonzales, and was not to be negotiated, but was to serve
merely as evidence of good faith of defendants in their desire to purchase the car being sold to
them. Admitting that such was the intention of the drawer of the check when she delivered it to
Manuel Gonzales, it was no fault of the plaintiff-appellee drawee if Manuel Gonzales delivered the
check or negotiated it. As the check was payable to the plaintiff-appellee, and was entrusted to
Manuel Gonzales by Gatchalian, the delivery to Manuel Gonzales was a delivery by the drawer to
his own agent; in other words, Manuel Gonzales was the agent of the drawer Anita Gatchalian
insofar as the possession of the check is concerned. So, when the agent of drawer Manuel
Gonzales negotiated the check with the intention of getting its value from plaintiff-appellee,
negotiation took place through no fault of the plaintiff-appellee, unless it can be shown that the
plaintiff-appellee should be considered as having notice of the defect in the possession of the holder
Manuel Gonzales. Our resolution of this issue leads us to a consideration of the last question

presented by the appellants, i.e., whether the plaintiff-appellee may be considered as a holder in due
course.
Section 52, Negotiable Instruments Law, defines holder in due course, thus:
A holder in due course is a holder who has taken the instrument under the following
conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice that it had been
previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.
The stipulation of facts expressly states that plaintiff-appellee was not aware of the circumstances
under which the check was delivered to Manuel Gonzales, but we agree with the defendantsappellants that the circumstances indicated by them in their briefs, such as the fact that appellants
had no obligation or liability to the Ocampo Clinic; that the amount of the check did not correspond
exactly with the obligation of Matilde Gonzales to Dr. V. R. de Ocampo; and that the check had two
parallel lines in the upper left hand corner, which practice means that the check could only be
deposited but may not be converted into cash all these circumstances should have put the
plaintiff-appellee to inquiry as to the why and wherefore of the possession of the check by Manuel
Gonzales, and why he used it to pay Matilde's account. It was payee's duty to ascertain from the
holder Manuel Gonzales what the nature of the latter's title to the check was or the nature of his
possession. Having failed in this respect, we must declare that plaintiff-appellee was guilty of gross
neglect in not finding out the nature of the title and possession of Manuel Gonzales, amounting to
legal absence of good faith, and it may not be considered as a holder of the check in good faith. To
such effect is the consensus of authority.
In order to show that the defendant had "knowledge of such facts that his action in taking the
instrument amounted to bad faith," it is not necessary to prove that the defendant knew the
exact fraud that was practiced upon the plaintiff by the defendant's assignor, it being
sufficient to show that the defendant had notice that there was something wrong about his
assignor's acquisition of title, although he did not have notice of the particular wrong that was
committed. Paika v. Perry, 225 Mass. 563, 114 N.E. 830.
It is sufficient that the buyer of a note had notice or knowledge that the note was in some
way tainted with fraud. It is not necessary that he should know the particulars or even the
nature of the fraud, since all that is required is knowledge of such facts that his action in
taking the note amounted bad faith. Ozark Motor Co. v. Horton (Mo. App.), 196 S.W. 395.
Accord. Davis v. First Nat. Bank, 26 Ariz. 621, 229 Pac. 391.
Liberty bonds stolen from the plaintiff were brought by the thief, a boy fifteen years old, less
than five feet tall, immature in appearance and bearing on his face the stamp a degenerate,
to the defendants' clerk for sale. The boy stated that they belonged to his mother. The
defendants paid the boy for the bonds without any further inquiry. Held, the plaintiff could
recover the value of the bonds. The term 'bad faith' does not necessarily involve furtive
motives, but means bad faith in a commercial sense. The manner in which the defendants

conducted their Liberty Loan department provided an easy way for thieves to dispose of their
plunder. It was a case of "no questions asked." Although gross negligence does not of itself
constitute bad faith, it is evidence from which bad faith may be inferred. The circumstances
thrust the duty upon the defendants to make further inquiries and they had no right to shut
their eyes deliberately to obvious facts. Morris v. Muir, 111 Misc. Rep. 739, 181 N.Y. Supp.
913, affd. in memo., 191 App. Div. 947, 181 N.Y. Supp. 945." (pp. 640-642, Brannan's
Negotiable Instruments Law, 6th ed.).
The above considerations would seem sufficient to justify our ruling that plaintiff-appellee should not
be allowed to recover the value of the check. Let us now examine the express provisions of the
Negotiable Instruments Law pertinent to the matter to find if our ruling conforms thereto. Section 52
(c) provides that a holder in due course is one who takes the instrument "in good faith and for value;"
Section 59, "that every holder is deemed prima facie to be a holder in due course;" and Section 52
(d), that in order that one may be a holder in due course it is necessary that "at the time the
instrument was negotiated to him "he had no notice of any . . . defect in the title of the person
negotiating it;" and lastly Section 59, that every holder is deemed prima facieto be a holder in due
course.
In the case at bar the rule that a possessor of the instrument is prima faciea holder in due course
does not apply because there was a defect in the title of the holder (Manuel Gonzales), because the
instrument is not payable to him or to bearer. On the other hand, the stipulation of facts indicated by
the appellants in their brief, like the fact that the drawer had no account with the payee; that the
holder did not show or tell the payee why he had the check in his possession and why he was using
it for the payment of his own personal account show that holder's title was defective or suspicious,
to say the least. As holder's title was defective or suspicious, it cannot be stated that the payee
acquired the check without knowledge of said defect in holder's title, and for this reason the
presumption that it is a holder in due course or that it acquired the instrument in good faith does not
exist. And having presented no evidence that it acquired the check in good faith, it (payee) cannot be
considered as a holder in due course. In other words, under the circumstances of the case, instead
of the presumption that payee was a holder in good faith, the fact is that it acquired possession of
the instrument under circumstances that should have put it to inquiry as to the title of the holder who
negotiated the check to it. The burden was, therefore, placed upon it to show that notwithstanding
the suspicious circumstances, it acquired the check in actual good faith.
The rule applicable to the case at bar is that described in the case of Howard National Bank v.
Wilson, et al., 96 Vt. 438, 120 At. 889, 894, where the Supreme Court of Vermont made the following
disquisition:
Prior to the Negotiable Instruments Act, two distinct lines of cases had developed in this
country. The first had its origin in Gill v. Cubitt, 3 B. & C. 466, 10 E. L. 215, where the rule
was distinctly laid down by the court of King's Bench that the purchaser of negotiable paper
must exercise reasonable prudence and caution, and that, if the circumstances were such as
ought to have excited the suspicion of a prudent and careful man, and he made no inquiry,
he did not stand in the legal position of a bona fide holder. The rule was adopted by the
courts of this country generally and seem to have become a fixed rule in the law of
negotiable paper. Later in Goodman v. Harvey, 4 A. & E. 870, 31 E. C. L. 381, the English
court abandoned its former position and adopted the rule that nothing short of actual bad
faith or fraud in the purchaser would deprive him of the character of a bona fide purchaser
and let in defenses existing between prior parties, that no circumstances of suspicion merely,
or want of proper caution in the purchaser, would have this effect, and that even gross
negligence would have no effect, except as evidence tending to establish bad faith or fraud.
Some of the American courts adhered to the earlier rule, while others followed the change
inaugurated in Goodman v. Harvey. The question was before this court in Roth v. Colvin, 32

Vt. 125, and, on full consideration of the question, a rule was adopted in harmony with that
announced in Gill v. Cubitt, which has been adhered to in subsequent cases, including those
cited above. Stated briefly, one line of cases including our own had adopted the test of the
reasonably prudent man and the other that of actual good faith. It would seem that it was the
intent of the Negotiable Instruments Act to harmonize this disagreement by adopting the
latter test. That such is the view generally accepted by the courts appears from a recent
review of the cases concerning what constitutes notice of defect. Brannan on Neg. Ins. Law,
187-201. To effectuate the general purpose of the act to make uniform the Negotiable
Instruments Law of those states which should enact it, we are constrained to hold (contrary
to the rule adopted in our former decisions) that negligence on the part of the plaintiff, or
suspicious circumstances sufficient to put a prudent man on inquiry, will not of themselves
prevent a recovery, but are to be considered merely as evidence bearing on the question of
bad faith. See G. L. 3113, 3172, where such a course is required in construing other uniform
acts.
It comes to this then: When the case has taken such shape that the plaintiff is called upon to
prove himself a holder in due course to be entitled to recover, he is required to establish the
conditions entitling him to standing as such, including good faith in taking the instrument. It
devolves upon him to disclose the facts and circumstances attending the transfer, from which
good or bad faith in the transaction may be inferred.
In the case at bar as the payee acquired the check under circumstances which should have put it to
inquiry, why the holder had the check and used it to pay his own personal account, the duty
devolved upon it, plaintiff-appellee, to prove that it actually acquired said check in good faith. The
stipulation of facts contains no statement of such good faith, hence we are forced to the conclusion
that plaintiff payee has not proved that it acquired the check in good faith and may not be deemed a
holder in due course thereof.
For the foregoing considerations, the decision appealed from should be, as it is hereby, reversed,
and the defendants are absolved from the complaint. With costs against plaintiff-appellee.
Padilla, Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon and De Leon,
JJ., concur.
Bengzon, C.J., concurs in the result.

SECOND DIVISION

[G.R. No. 138074. August 15, 2003]

CELY YANG, petitioner, vs. HON. COURT OF APPEALS, PHILIPPINE COMMERCIAL

INTERNATIONAL BANK, FAR EAST BANK & TRUST CO.,EQUITABLE BANKING
CORPORATION, PREM CHANDIRAMANI and FERNANDO DAVID, respondents.
DECISION
QUISUMBING, J.:
For review on certiorari is the decision[1] of the Court of Appeals, dated March 25, 1999, in CAG.R. CV No. 52398, which affirmed with modification the joint decision of the Regional Trial Court
(RTC) of Pasay City, Branch 117, dated July 4, 1995, in Civil Cases Nos. 5479[2] and 5492.[3] The
trial court dismissed the complaint against herein respondents Far East Bank & Trust Company
(FEBTC), Equitable Banking Corporation (Equitable), and Philippine Commercial International Bank
(PCIB) and ruled in favor of respondent Fernando David as to the proceeds of the two cashiers
checks, including the earnings thereof pendente lite. Petitioner Cely Yang was ordered to pay David
moral damages of P100,000.00 and attorneys fees also in the amount of P100,000.00.
The facts of this case are not disputed, to wit:
On or before December 22, 1987, petitioner Cely Yang and private respondent Prem
Chandiramani entered into an agreement whereby the latter was to give Yang a PCIB managers
check in the amount of P4.2 million in exchange for two (2) of Yangs managers checks, each in the
amount of P2.087 million, both payable to the order of private respondent Fernando David. Yang
and Chandiramani agreed that the difference of P26,000.00 in the exchange would be their profit to
be divided equally between them.
Yang and Chandiramani also further agreed that the former would secure from FEBTC a dollar
draft in the amount of US$200,000.00, payable to PCIB FCDU Account No. 4195-01165-2, which
Chandiramani would exchange for another dollar draft in the same amount to be issued by Hang
Seng Bank Ltd. of Hong Kong.
Accordingly, on December 22, 1987, Yang procured the following:
a) Equitable Cashiers Check No. CCPS 14-009467 in the sum of P2,087,000.00, dated December 22,
1987, payable to the order of Fernando David;
b) FEBTC Cashiers Check No. 287078, in the amount of P2,087,000.00, dated December 22, 1987,
likewise payable to the order of Fernando David; and
c) FEBTC Dollar Draft No. 4771, drawn on Chemical Bank, New York, in the amount of
US$200,000.00, dated December 22, 1987, payable to PCIB FCDU Account No. 419501165-2.
At about one oclock in the afternoon of the same day, Yang gave the aforementioned cashiers
checks and dollar drafts to her business associate, Albert Liong, to be delivered to Chandiramani by
Liongs messenger, Danilo Ranigo. Ranigo was to meet Chandiramani at Philippine Trust Bank,

Ayala Avenue, Makati City, Metro Manila where he would turn over Yangs cashiers checks and
dollar draft to Chandiramani who, in turn, would deliver to Ranigo a PCIB managers check in the
sum of P4.2 million and a Hang Seng Bank dollar draft for US$200,000.00 in exchange.
Chandiramani did not appear at the rendezvous and Ranigo allegedly lost the two cashiers
checks and the dollar draft bought by petitioner. Ranigo reported the alleged loss of the checks and
the dollar draft to Liong at half past four in the afternoon of December 22, 1987. Liong, in turn,
informed Yang, and the loss was then reported to the police.
It transpired, however, that the checks and the dollar draft were not lost, for Chandiramani was
able to get hold of said instruments, without delivering the exchange consideration consisting of the
PCIB managers check and the Hang Seng Bank dollar draft.
At three oclock in the afternoon or some two (2) hours after Chandiramani and Ranigo were to
meet in Makati City, Chandiramani delivered to respondent Fernando David at China Banking
Corporation branch in San Fernando City, Pampanga, the following: (a) FEBTC Cashiers Check No.
287078, dated December 22, 1987, in the sum of P2.087 million; and (b) Equitable Cashiers Check
No. CCPS 14-009467, dated December 22, 1987, also in the amount of P2.087 million. In exchange,
Chandiramani got US$360,000.00 from David, which Chandiramani deposited in the savings
account of his wife, Pushpa Chandiramani; and his mother, Rani Reynandas, who held FCDU
Account No. 124 with the United Coconut Planters Bank branch in Greenhills, San Juan, Metro
Manila. Chandiramani also deposited FEBTC Dollar Draft No. 4771, dated December 22, 1987,
drawn upon the Chemical Bank, New York for US$200,000.00 in PCIB FCDU Account No. 419501165-2 on the same date.
Meanwhile, Yang requested FEBTC and Equitable to stop payment on the instruments she
believed to be lost. Both banks complied with her request, but upon the representation of PCIB,
FEBTC subsequently lifted the stop payment order on FEBTC Dollar Draft No. 4771, thus enabling
the holder of PCIB FCDU Account No. 4195-01165-2 to receive the amount of US$200,000.00.
On December 28, 1987, herein petitioner Yang lodged a Complaint[4] for injunction and
damages against Equitable, Chandiramani, and David, with prayer for a temporary restraining order,
with the Regional Trial Court of Pasay City. The Complaint was docketed as Civil Case No. 5479.
The Complaint was subsequently amended to include a prayer for Equitable to return to Yang the
amount of P2.087 million, with interest thereon until fully paid.[5]
On January 12, 1988, Yang filed a separate case for injunction and damages, with prayer for a
writ of preliminary injunction against FEBTC, PCIB, Chandiramani and David, with the RTC of Pasay
City, docketed as Civil Case No. 5492. This complaint was later amended to include a prayer that
defendants therein return to Yang the amount of P2.087 million, the value of FEBTC Dollar Draft No.
4771, with interest at 18% annually until fully paid.[6]
On February 9, 1988, upon the filing of a bond by Yang, the trial court issued a writ of
preliminary injunction in Civil Case No. 5479. A writ of preliminary injunction was subsequently
issued in Civil Case No. 5492 also.
Meanwhile, herein respondent David moved for dismissal of the cases against him and for
reconsideration of the Orders granting the writ of preliminary injunction, but these motions were
denied. David then elevated the matter to the Court of Appeals in a special civil action for certiorari
docketed as CA-G.R. SP No. 14843, which was dismissed by the appellate court.
As Civil Cases Nos. 5479 and 5492 arose from the same set of facts, the two cases were
consolidated. The trial court then conducted pre-trial and trial of the two cases, but the proceedings
had to be suspended after a fire gutted the Pasay City Hall and destroyed the records of the courts.

After the records were reconstituted, the proceedings resumed and the parties agreed that the
money in dispute be invested in Treasury Bills to be awarded in favor of the prevailing side. It was
also agreed by the parties to limit the issues at the trial to the following:
1. Who, between David and Yang, is legally entitled to the proceeds of Equitable Banking
Corporation (EBC) Cashiers Check No. CCPS 14-009467 in the sum of P2,087,000.00
dated December 22, 1987, and Far East Bank and Trust Company (FEBTC) Cashiers
Check No. 287078 in the sum of P2,087,000.00 dated December 22, 1987, together
with the earnings derived therefrom pendente lite?
2. Are the defendants FEBTC and PCIB solidarily liable to Yang for having allowed the
encashment of FEBTC Dollar Draft No. 4771, in the sum of US$200,000.00 plus interest
thereon despite the stop payment order of Cely Yang?[7]
On July 4, 1995, the trial court handed down its decision in Civil Cases Nos. 5479 and 5492, to
wit:
WHEREFORE, the Court renders judgment in favor of defendant Fernando David against the plaintiff Cely
Yang and declaring the former entitled to the proceeds of the two (2) cashiers checks, together with the
earnings derived therefrom pendente lite; ordering the plaintiff to pay the defendant Fernando David moral
damages in the amount of P100,000.00; attorneys fees in the amount of P100,000.00 and to pay the costs. The
complaint against Far East Bank and Trust Company (FEBTC), Philippine Commercial International Bank
(PCIB) and Equitable Banking Corporation (EBC) is dismissed. The decision is without prejudice to whatever
action plaintiff Cely Yang will file against defendant Prem Chandiramani for reimbursement of the amounts
received by him from defendant Fernando David.
SO ORDERED.[8]
In finding for David, the trial court ratiocinated:
The evidence shows that defendant David was a holder in due course for the reason that the cashiers checks
were complete on their face when they were negotiated to him. They were not yet overdue when he became the
holder thereof and he had no notice that said checks were previously dishonored; he took the cashiers checks in
good faith and for value. He parted some $200,000.00 for the two (2) cashiers checks which were given to
defendant Chandiramani; he had also no notice of any infirmity in the cashiers checks or defect in the title of
the drawer. As a matter of fact, he asked the manager of the China Banking Corporation to inquire as to the
genuineness of the cashiers checks (tsn, February 5, 1988, p. 21, September 20, 1991, pp. 13-14). Another
proof that defendant David is a holder in due course is the fact that the stop payment order on [the] FEBTC
cashiers check was lifted upon his inquiry at the head office (tsn, September 20, 1991, pp. 24-25). The
apparent reason for lifting the stop payment order was because of the fact that FEBTC realized that the checks
were not actually lost but indeed reached the payee defendant David.[9]
Yang then moved for reconsideration of the RTC judgment, but the trial court denied her motion
in its Order of September 20, 1995.
In the belief that the trial court misunderstood the concept of a holder in due course and
misapprehended the factual milieu, Yang seasonably filed an appeal with the Court of Appeals,
docketed as CA-G.R. CV No. 52398.
On March 25, 1999, the appellate court decided CA-G.R. CV No. 52398 in this wise:
WHEREFORE, this court AFFIRMS the judgment of the lower court with modification and
hereby orders the plaintiff-appellant to pay defendant-appellant PCIB the amount of Twenty-Five
Thousand Pesos (P25,000.00).

SO ORDERED.[10]
In affirming the trial courts judgment with respect to herein respondent David, the appellate
court found that:
In this case, defendant-appellee had taken the necessary precautions to verify, through his bank, China
Banking Corporation, the genuineness of whether (sic) the cashiers checks he received from Chandiramani. As
no stop payment order was made yet (at) the time of the inquiry, defendant-appellee had no notice of what had
transpired earlier between the plaintiff-appellant and Chandiramani. All he knew was that the checks were
issued to Chandiramani with whom he was he had (sic) a transaction. Further on, David received the checks in
question in due course because Chandiramani, who at the time the checks were delivered to David, was acting
as Yangs agent.
David had no notice, real or constructive, cogent for him to make further inquiry as to any infirmity in the
instrument(s) and defect of title of the holder. To mandate that each holder inquire about every aspect on how
the instrument came about will unduly impede commercial transactions, Although negotiable instruments do
not constitute legal tender, they often take the place of money as a means of payment.
The mere fact that David and Chandiramani knew one another for a long time is not sufficient to establish that
they connived with each other to defraud Yang. There was no concrete proof presented by Yang to support her
theory.[11]
The appellate court awarded P25,000.00 in attorneys fees to PCIB as it found the action filed by
Yang against said bank to be clearly unfounded and baseless. Since PCIB was compelled to litigate
to protect itself, then it was entitled under Article 2208[12] of the Civil Code to attorneys fees and
litigation expenses.
Hence, the instant recourse wherein petitioner submits the following issues for resolution:
a - WHETHER THE CHECKS WERE ISSUED TO PREM CHANDIRAMANI BY PETITIONER;
b - WHETHER THE ALLEGED TRANSACTION BETWEEN PREM CHANDIRAMANI AND
FERNANDO DAVID IS LEGITIMATE OR A SCHEME BY BOTH PRIVATE
RESPONDENTS TO SWINDLE PETITIONER;
c - WHETHER FERNANDO DAVID GAVE PREM CHANDIRAMANI US$360,000.00 OR JUST
A FRACTION OF THE AMOUNT REPRESENTING HIS SHARE OF THE LOOT;
d - WHETHER PRIVATE RESPONDENTS FERNANDO DAVID AND PCIB ARE ENTITLED
TO DAMAGES AND ATTORNEYS FEES.[13]
At the outset, we must stress that this is a petition for review under Rule 45 of the 1997 Rules of
Civil Procedure. It is basic that in petitions for review under Rule 45, the jurisdiction of this Court is
limited to reviewing questions of law, questions of fact are not entertained absent a showing that the
factual findings complained of are totally devoid of support in the record or are glaringly
erroneous.[14] Given the facts in the instant case, despite petitioners formulation, we find that the
following are the pertinent issues to be resolved:
a) Whether the Court of Appeals erred in holding herein respondent Fernando David to be a holder
in due course; and

b) Whether the appellate court committed a reversible error in awarding damages and attorneys fees
to David and PCIB.
On the first issue, petitioner Yang contends that private respondent Fernando David is not a
holder in due course of the checks in question. While it is true that he was named the payee thereof,
David failed to inquire from Chandiramani about how the latter acquired possession of said checks.
Given his failure to do so, it cannot be said that David was unaware of any defect or infirmity in the
title of Chandiramani to the checks at the time of their negotiation. Moreover, inasmuch as the
checks were crossed, then David should have, pursuant to our ruling in Bataan Cigar & Cigarette
Factory, Inc. v. Court of Appeals, G.R. No. 93048, March 3, 1994, 230 SCRA 643, been put on
guard that the checks were issued for a definite purpose and accordingly, made inquiries to
determine if he received the checks pursuant to that purpose. His failure to do so negates the finding
in the proceedings below that he was a holder in due course.
Finally, the petitioner argues that there is no showing whatsoever that David gave
Chandiramani any consideration of value in exchange for the aforementioned checks.
Private respondent Fernando David counters that the evidence on record shows that when he
received the checks, he verified their genuineness with his bank, and only after said verification did
he deposit them. David stresses that he had no notice of previous dishonor or any infirmity that
would have aroused his suspicions, the instruments being complete and regular upon their face.
David stresses that the checks in question were cashiers checks. From the very nature of cashiers
checks, it is highly unlikely that he would have suspected that something was amiss. David also
stresses negotiable instruments are presumed to have been issued for valuable consideration, and
he who alleges otherwise must controvert the presumption with sufficient evidence. The petitioner
failed to discharge this burden, according to David. He points out that the checks were delivered to
him as the payee, and he took them as holder and payee thereof. Clearly, he concludes, he should
be deemed to be their holder in due course.
We shall now resolve the first issue.
Every holder of a negotiable instrument is deemed prima facie a holder in due course. However,
this presumption arises only in favor of a person who is a holder as defined in Section 191 of the
Negotiable Instruments Law,[15] meaning a payee or indorsee of a bill or note, who is in possession
of it, or the bearer thereof.
In the present case, it is not disputed that David was the payee of the checks in question. The
weight of authority sustains the view that a payee may be a holder in due course.[16]Hence, the
presumption that he is a prima facie holder in due course applies in his favor. However, said
presumption may be rebutted. Hence, what is vital to the resolution of this issue is whether David
took possession of the checks under the conditions provided for in Section 52[17] of the Negotiable
Instruments Law. All the requisites provided for in Section 52 must concur in Davids case, otherwise
he cannot be deemed a holder in due course.
We find that the petitioners challenge to Davids status as a holder in due course hinges on two
arguments: (1) the lack of proof to show that David tendered any valuable consideration for the
disputed checks; and (2) Davids failure to inquire from Chandiramani as to how the latter acquired
possession of the checks, thus resulting in Davids intentional ignorance tantamount to bad faith. In
sum, petitioner posits that the last two requisites of Section 52 are missing, thereby preventing David
from being considered a holder in due course. Unfortunately for the petitioner, her arguments on this
score are less than meritorious and far from persuasive.
First, with respect to consideration, Section 24[18] of the Negotiable Instruments Law creates a
presumption that every party to an instrument acquired the same for a consideration[19] or for
value.[20] Thus, the law itself creates a presumption in Davids favor that he gave valuable
consideration for the checks in question. In alleging otherwise, the petitioner has the onus to prove

that David got hold of the checks absent said consideration. In other words, the petitioner must
present convincing evidence to overthrow the presumption. Our scrutiny of the records, however,
shows that the petitioner failed to discharge her burden of proof. The petitioners averment that David
did not give valuable consideration when he took possession of the checks is unsupported, devoid of
any concrete proof to sustain it. Note that both the trial court and the appellate court found that David
did not receive the checks gratis, but instead gave Chandiramani US$360,000.00 as consideration
for the said instruments. Factual findings of the Court of Appeals are conclusive on the parties and
not reviewable by this Court; they carry great weight when the factual findings of the trial court are
affirmed by the appellate court.[21]
Second, petitioner fails to point any circumstance which should have put David on inquiry as to
the why and wherefore of the possession of the checks by Chandiramani. David was not privy to the
transaction between petitioner and Chandiramani. Instead, Chandiramani and David had a separate
dealing in which it was precisely Chandiramanis duty to deliver the checks to David as payee. The
evidence shows that Chandiramani performed said task to the letter. Petitioner admits that David
took the step of asking the manager of his bank to verify from FEBTC and Equitable as to the
genuineness of the checks and only accepted the same after being assured that there was nothing
wrong with said checks. At that time, David was not aware of any stop payment order. Under these
circumstances, David thus had no obligation to ascertain from Chandiramani what the nature of the
latters title to the checks was, if any, or the nature of his possession. Thus, we cannot hold him guilty
of gross neglect amounting to legal absence of good faith, absent any showing that there was
something amiss about Chandiramanis acquisition or possession of the checks. David did not close
his eyes deliberately to the nature or the particulars of a fraud allegedly committed by Chandiramani
upon the petitioner, absent any knowledge on his part that the action in taking the instruments
amounted to bad faith.[22]
Belatedly, and we say belatedly since petitioner did not raise this matter in the proceedings
below, petitioner now claims that David should have been put on alert as the instruments in question
were crossed checks. Pursuant to Bataan Cigar & Cigarette Factory, Inc. v. Court of Appeals, David
should at least have inquired as to whether he was acquiring said checks for the purpose for which
they were issued, according to petitioners submission.
Petitioners reliance on the Bataan Cigar case, however, is misplaced. The facts in the present
case are not on all fours with Bataan Cigar. In the latter case, the crossed checks were negotiated
and sold at a discount by the payee, while in the instant case, the payee did not negotiate further the
checks in question but promptly deposited them in his bank account.
The Negotiable Instruments Law is silent with respect to crossed checks, although the Code of
Commerce[23] makes reference to such instruments. Nonetheless, this Court has taken judicial
cognizance of the practice that a check with two parallel lines in the upper left hand corner means
that it could only be deposited and not converted into cash.[24] The effects of crossing a check, thus,
relates to the mode of payment, meaning that the drawer had intended the check for deposit only by
the rightful person, i.e., the payee named therein. In Bataan Cigar, the rediscounting of the check by
the payee knowingly violated the avowed intention of crossing the check. Thus, in accepting the
cross checks and paying cash for them, despite the warning of the crossing, the subsequent holder
could not be considered in good faith and thus, not a holder in due course. Our ruling in Bataan
Cigar reiterates that in De Ocampo & Co. v. Gatchalian.[25]
The factual circumstances in De Ocampo and in Bataan Cigar are not present in this case. For
here, there is no dispute that the crossed checks were delivered and duly deposited by David, the
payee named therein, in his bank account. In other words, the purpose behind the crossing of the
checks was satisfied by the payee.
Proceeding to the issue of damages, petitioner merely argues that respondents David and PCIB
are not entitled to damages, attorneys fees, and costs of suit as both acted in bad faith towards her,
as shown by her version of the facts which gave rise to the instant case.

Respondent David counters that he was maliciously and unceremoniously dragged into this suit
for reasons which have nothing to do with him at all, but which arose from petitioners failure to
receive her share of the profit promised her by Chandiramani. Moreover, in filing this suit which has
lasted for over a decade now, the petitioner deprived David of the rightful enjoyment of the two
checks, to which he is entitled, under the law, compelled him to hire the services of counsel to
vindicate his rights, and subjected him to social humiliation and besmirched reputation, thus harming
his standing as a person of good repute in the business community of Pampanga. David thus
contends that it is but proper that moral damages, attorneys fees, and costs of suit be awarded him.
For its part, respondent PCIB stresses that it was established by both the trial court and the
appellate court that it was needlessly dragged into this case. Hence, no error was committed by the
appellate court in declaring PCIB entitled to attorneys fees as it was compelled to litigate to protect
itself.
We have thoroughly perused the records of this case and find no reason to disagree with the
finding of the trial court, as affirmed by the appellate court, that:
[D]efendant David is entitled to [the] award of moral damages as he has been needlessly and unceremoniously
dragged into this case which should have been brought only between the plaintiff and defendant
Chandiramani.[26]
A careful reading of the findings of facts made by both the trial court and appellate court clearly
shows that the petitioner, in including David as a party in these proceedings, is barking up the wrong
tree. It is apparent from the factual findings that David had no dealings with the petitioner and was
not privy to the agreement of the latter with Chandiramani. Moreover, any loss which the petitioner
incurred was apparently due to the acts or omissions of Chandiramani, and hence, her recourse
should have been against him and not against David. By needlessly dragging David into this case all
because he and Chandiramani knew each other, the petitioner not only unduly delayed David from
obtaining the value of the checks, but also caused him anxiety and injured his business reputation
while waiting for its outcome. Recall that under Article 2217[27] of the Civil Code, moral damages
include mental anguish, serious anxiety, besmirched reputation, wounded feelings, social
humiliation, and similar injury. Hence, we find the award of moral damages to be in order.
The appellate court likewise found that like David, PCIB was dragged into this case on
unfounded and baseless grounds. Both were thus compelled to litigate to protect their interests,
which makes an award of attorneys fees justified under Article 2208 (2)[28] of the Civil Code. Hence,
we rule that the award of attorneys fees to David and PCIB was proper.
WHEREFORE, the instant petition is DENIED. The assailed decision of the Court of Appeals,
dated March 25, 1999, in CA-G.R. CV No. 52398 is AFFIRMED. Costs against the petitioner.
SO ORDERED.
Bellosillo, (Chairman), Austria-Martinez, and Tinga, JJ., concur.
Callejo, Sr., J., on leave.

[1]

Penned by Associate Justice Bernardo P. Abesamis with Associate Justices Jainal D. Rasul and
Conchita Carpio Morales (now a member of this Court) concurring. See Rollo, pp. 95-108.

[2]

The case is entitled Cely Yang v. Equitable Banking Corporation, Prem Chandiramani, and
Fernando David. See Rollo, pp. 38-41.

[3]

Entitled Cely Yang v. Far East Bank & Trust Company, Philippine Commercial and International
Bank, Prem Chandiramani, and Fernando David. See Rollo, pp. 42-46.

[4]

Records, Vol. I, pp. 1-4.

[5]

Id. at 8.

[6]

Id. at 141.

[7]

Rollo, p. 84.

[8]

CA Rollo, p. 131.

[9]

Id. at 195-196.

[10]

Id. at 462.

[11]

Id. at 456.

[12]

ART. 2208. In the absence of stipulation, attorneys fees and expenses of litigation, other than
judicial costs, cannot be recovered, except:

When exemplary damages are awarded;

When the defendants act or omission has compelled the plaintiff to litigate with third persons or to
incur expenses to protect his interest;
In criminal cases of malicious prosecution against the plaintiff;
In case of a clearly unfounded civil action or proceeding against the plaintiff;
Where the defendant acted in gross and evident bad faith in refusing the plaintiffs plainly valid, just,
and demandable claim;
In actions for legal support;
In actions for the recovery of wages of household helpers, laborers, and skilled workers;
In actions for indemnity under workmens compensation and employers liability laws;
In a separate civil action to recover civil liability arising from a crime;
When at least double judicial costs are awarded;
In any other case where the court deems it just and equitable that attorneys fees and expenses of
litigation should be recovered.
In all cases, the attorneys fees and expenses of litigation must be reasonable.
[13]

Rollo, p. 230.

[14]

Producers Bank of the Phil. v. Court of Appeals, 417 Phil. 646, 656 (2001).

[15]

Fossum v. Fernandez Hermanos, 44 Phil. 713, 716 (1923).

[16]

Merchants National Bank v. Smith, 59 Mont. 280, 196 P. 523, 15 ALR 430; Boston Steel & Iron
Co. v. Steur, 183 Mass. 140, 66 NE 646.

[17]

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:

That it is complete and regular upon its face;

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;
That he took it in good faith and for value;
That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect
of the title of the person negotiating it.
[18]

SEC. 24. Presumption of consideration. Every negotiable instrument is deemed prima facie to
have been issued for valuable consideration; and every person whose signature appears
thereon to have become a party thereto, for value.

[19]

SEC. 25. Value; What constitutes. Value is any consideration sufficient to support a simple
contract. An antecedent or pre-existing debt constitutes value, and is deemed such whether
the instrument is payable on demand or at a future date.

[20]

SEC. 191. Definitions and meaning of terms. In this Act, unless the context otherwise requires:

xxx
Value means valuable consideration.
[21]

See Fernandez v. Fernandez, 416 Phil. 322, 337 (2001).

[22]

See Ozark Motor Co. v. Horton, 196 SW 395. See also Davis v. First National Bank, 26 Ariz. 621,
229 P. 391.

[23]

ART. 541. The maker or any legal holder of a check shall be entitled to indicate therein that it be
paid to a certain banker or institution, which he shall do by writing across the face the name
of said banker or institution, or only the words and company.

[24]

State Investment House v. IAC, G.R. No. 72764, 13 July 1989, 175 SCRA 310, 315.

[25]

13 Phil. 574 (1961). We held that under the following circumstances: (1) the drawer had no
account with the payee; (2) the check was crossed; (3) the crossed check was used to pay
an obligation which did not correspond to the amount of the check; and (4) the holder did not
show or tell the payee why he had the check in his possession and why he was using to pay
his personal account, then the payee had the duty to ascertain from the holder what the
nature of the latters title to the check was or the nature of his possession.

[26]

CA Rollo, p. 130.

[27]

ART. 2217. Moral damages include physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation and similar injury.
Though incapable of pecuniary computation, moral damages may be recovered if they are
the proximate result of the defendants wrongful act or omission.

[28]

See note 12.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 70145 November 13, 1986
MARCELO A. MESINA, petitioner,
vs.
THE HONORABLE INTERMEDIATE APPELLATE COURT, HON. ARSENIO M. GONONG, in his
capacity as Judge of Regional Trial Court Manila (Branch VIII), JOSE GO, and ALBERT
UY, respondents.

PARAS, J.:
This is an appeal by certiorari from the decision of the then Intermediate Appellate Court (IAC for
short), now the Court of Appeals (CA) in AC-G.R. S.P. 04710, dated Jan. 22, 1985, which dismissed
the petition for certiorari and prohibition filed by Marcelo A. Mesina against the trial court in Civil
Case No. 84-22515. Said case (an Interpleader) was filed by Associated Bank against Jose Go and
Marcelo A. Mesina regarding their conflicting claims over Associated Bank Cashier's Check No.
011302 for P800,000.00, dated December 29, 1983.
Briefly, the facts and statement of the case are as follows:
Respondent Jose Go, on December 29, 1983, purchased from Associated Bank Cashier's Check
No. 011302 for P800,000.00. Unfortunately, Jose Go left said check on the top of the desk of the
bank manager when he left the bank. The bank manager entrusted the check for safekeeping to a
bank official, a certain Albert Uy, who had then a visitor in the person of Alexander Lim. Uy had to
answer a phone call on a nearby telephone after which he proceeded to the men's room. When he
returned to his desk, his visitor Lim was already gone. When Jose Go inquired for his cashier's
check from Albert Uy, the check was not in his folder and nowhere to be found. The latter advised
Jose Go to go to the bank to accomplish a "STOP PAYMENT" order, which suggestion Jose Go
immediately followed. He also executed an affidavit of loss. Albert Uy went to the police to report the
loss of the check, pointing to the person of Alexander Lim as the one who could shed light on it.
The records of the police show that Associated Bank received the lost check for clearing on
December 31, 1983, coming from Prudential Bank, Escolta Branch. The check was immediately
dishonored by Associated Bank by sending it back to Prudential Bank, with the words "Payment
Stopped" stamped on it. However, the same was again returned to Associated Bank on January 4,
1984 and for the second time it was dishonored. Several days later, respondent Associated Bank
received a letter, dated January 9, 1984, from a certain Atty. Lorenzo Navarro demanding payment
on the cashier's check in question, which was being held by his client. He however refused to reveal
the name of his client and threatened to sue, if payment is not made. Respondent bank, in its letter,
dated January 20, 1984, replied saying the check belonged to Jose Go who lost it in the bank and is
laying claim to it.
On February 1, 1984, police sent a letter to the Manager of the Prudential Bank, Escolta Branch,
requesting assistance in Identifying the person who tried to encash the check but said bank refused
saying that it had to protect its client's interest and the Identity could only be revealed with the

client's conformity. Unsure of what to do on the matter, respondent Associated Bank on February 2,
1984 filed an action for Interpleader naming as respondent, Jose Go and one John Doe, Atty.
Navarro's then unnamed client. On even date, respondent bank received summons and copy of the
complaint for damages of a certain Marcelo A. Mesina from the Regional Trial Court (RTC) of
Caloocan City filed on January 23, 1984 bearing the number C-11139. Respondent bank moved to
amend its complaint, having been notified for the first time of the name of Atty. Navarro's client and
substituted Marcelo A. Mesina for John Doe. Simultaneously, respondent bank, thru representative
Albert Uy, informed Cpl. Gimao of the Western Police District that the lost check of Jose Go is in the
possession of Marcelo Mesina, herein petitioner. When Cpl. Gimao went to Marcelo Mesina to ask
how he came to possess the check, he said it was paid to him by Alexander Lim in a "certain
transaction" but refused to elucidate further. An information for theft (Annex J) was instituted against
Alexander Lim and the corresponding warrant for his arrest was issued (Annex 6-A) which up to the
date of the filing of this instant petition remains unserved because of Alexander Lim's successful
evation thereof.
Meanwhile, Jose Go filed his answer on February 24, 1984 in the Interpleader Case and moved to
participate as intervenor in the complain for damages. Albert Uy filed a motion of intervention and
answer in the complaint for Interpleader. On the Scheduled date of pretrial conference inthe
interpleader case, it was disclosed that the "John Doe" impleaded as one of the defendants is
actually petitioner Marcelo A. Mesina. Petitioner instead of filing his answer to the complaint in the
interpleader filed on May 17, 1984 an Omnibus Motion to Dismiss Ex Abudante Cautela alleging lack
of jurisdiction in view of the absence of an order to litigate, failure to state a cause of action and lack
of personality to sue. Respondent bank in the other civil case (CC-11139) for damages moved to
dismiss suit in view of the existence already of the Interpleader case.
The trial court in the interpleader case issued an order dated July 13, 1984, denying the motion to
dismiss of petitioner Mesina and ruling that respondent bank's complaint sufficiently pleaded a cause
of action for itnerpleader. Petitioner filed his motion for reconsideration which was denied by the trial
court on September 26, 1984. Upon motion for respondent Jose Go dated October 31, 1984,
respondent judge issued an order on November 6, 1984, declaring petitioner in default since his
period to answer has already expirecd and set the ex-parte presentation of respondent bank's
evidence on November 7, 1984.
Petitioner Mesina filed a petition for certioari with preliminary injunction with IAC to set aside 1) order
of respondent court denying his omnibus Motion to Dismiss 2) order of 3) the order of default against
him.
On January 22, 1985, IAC rendered its decision dimissing the petition for certiorari. Petitioner
Mesina filed his Motion for Reconsideration which was also denied by the same court in its
resolution dated February 18, 1985.
Meanwhile, on same date (February 18, 1985), the trial court in Civil Case #84-22515 (Interpleader)
rendered a decisio, the dispositive portion reading as follows:
WHEREFORE, in view of the foregoing, judgment is hereby rendered ordering
plaintiff Associate Bank to replace Cashier's Check No. 011302 in favor of Jose Go
or its cas equivalent with legal rate of itnerest from date of complaint, and with costs
of suit against the latter.
SO ORDERED.

On March 29, 1985, the trial court in Civil Case No. C-11139, for damages, issued an
order, the pertinent portion of which states:
The records of this case show that on August 20, 1984 proceedings in this case was
(were) ordered suspended because the main issue in Civil Case No. 84-22515 and in
this instant case are the same which is: who between Marcelo Mesina and Jose Go
is entitled to payment of Associated Bank's Cashier's Check No. CC-011302? Said
issue having been resolved already in Civil casde No. 84-22515, really this instant
case has become moot and academic.
WHEREFORE, in view of the foregoing, the motion sholud be as it is hereby granted
and this case is ordered dismissed.
In view of the foregoing ruling no more action should be taken on the "Motion For
Reconsideration (of the order admitting the Intervention)" dated June 21, 1984 as
well as the Motion For Reconsideration dated September 10, 1984.
SO ORDERED.
Petitioner now comes to Us, alleging that:
1. IAC erred in ruling that a cashier's check can be countermanded even in the hands of a holder in
due course.
2. IAC erred in countenancing the filing and maintenance of an interpleader suit by a party who had
earlier been sued on the same claim.
3. IAC erred in upholding the trial court's order declaring petitioner as in default when there was no
proper order for him to plead in the interpleader complaint.
4. IAC went beyond the scope of its certiorari jurisdiction by making findings of facts in advance of
trial.
Petitioner now interposes the following prayer:
1. Reverse the decision of the IAC, dated January 22, 1985 and set aside the February 18, 1985
resolution denying the Motion for Reconsideration.
2. Annul the orders of respondent Judge of RTC Manila giving due course to the interpleader suit
and declaring petitioner in default.
Petitioner's allegations hold no water. Theories and examples advanced by petitioner on causes and
effects of a cashier's check such as 1) it cannot be countermanded in the hands of a holder in due
course and 2) a cashier's check is a bill of exchange drawn by the bank against itself-are general
principles which cannot be aptly applied to the case at bar, without considering other things.
Petitioner failed to substantiate his claim that he is a holder in due course and for consideration or
value as shown by the established facts of the case. Admittedly, petitioner became the holder of the
cashier's check as endorsed by Alexander Lim who stole the check. He refused to say how and why
it was passed to him. He had therefore notice of the defect of his title over the check from the start.
The holder of a cashier's check who is not a holder in due course cannot enforce such check against
the issuing bank which dishonors the same. If a payee of a cashier's check obtained it from the

issuing bank by fraud, or if there is some other reason why the payee is not entitled to collect the
check, the respondent bank would, of course, have the right to refuse payment of the check when
presented by the payee, since respondent bank was aware of the facts surrounding the loss of the
check in question. Moreover, there is no similarity in the cases cited by petitioner since respondent
bank did not issue the cashier's check in payment of its obligation. Jose Go bought it from
respondent bank for purposes of transferring his funds from respondent bank to another bank near
his establishment realizing that carrying money in this form is safer than if it were in cash. The check
was Jose Go's property when it was misplaced or stolen, hence he stopped its payment. At the
outset, respondent bank knew it was Jose Go's check and no one else since Go had not paid or
indorsed it to anyone. The bank was therefore liable to nobody on the check but Jose Go. The bank
had no intention to issue it to petitioner but only to buyer Jose Go. When payment on it was
therefore stopped, respondent bank was not the one who did it but Jose Go, the owner of the check.
Respondent bank could not be drawer and drawee for clearly, Jose Go owns the money it
represents and he is therefore the drawer and the drawee in the same manner as if he has a current
account and he issued a check against it; and from the moment said cashier's check was lost and/or
stolen no one outside of Jose Go can be termed a holder in due course because Jose Go had not
indorsed it in due course. The check in question suffers from the infirmity of not having been properly
negotiated and for value by respondent Jose Go who as already been said is the real owner of said
instrument.
In his second assignment of error, petitioner stubbornly insists that there is no showing of conflicting
claims and interpleader is out of the question. There is enough evidence to establish the contrary.
Considering the aforementioned facts and circumstances, respondent bank merely took the
necessary precaution not to make a mistake as to whom to pay and therefore interpleader was its
proper remedy. It has been shown that the interpleader suit was filed by respondent bank because
petitioner and Jose Go were both laying their claims on the check, petitioner asking payment thereon
and Jose Go as the purchaser or owner. The allegation of petitioner that respondent bank had
effectively relieved itself of its primary liability under the check by simply filing a complaint for
interpleader is belied by the willingness of respondent bank to issue a certificate of time deposit in
the amount of P800,000 representing the cashier's check in question in the name of the Clerk of
Court of Manila to be awarded to whoever wig be found by the court as validly entitled to it. Said
validity will depend on the strength of the parties' respective rights and titles thereto. Bank filed the
interpleader suit not because petitioner sued it but because petitioner is laying claim to the same
check that Go is claiming. On the very day that the bank instituted the case in interpleader, it was not
aware of any suit for damages filed by petitioner against it as supported by the fact that the
interpleader case was first entitled Associated Bank vs. Jose Go and John Doe, but later on
changed to Marcelo A. Mesina for John Doe when his name became known to respondent bank.
In his third assignment of error, petitioner assails the then respondent IAC in upholding the trial
court's order declaring petitioner in default when there was no proper order for him to plead in the
interpleader case. Again, such contention is untenable. The trial court issued an order, compelling
petitioner and respondent Jose Go to file their Answers setting forth their respective claims.
Subsequently, a Pre-Trial Conference was set with notice to parties to submit position papers.
Petitioner argues in his memorandum that this order requiring petitioner to file his answer was issued
without jurisdiction alleging that since he is presumably a holder in due course and for value, how
can he be compelled to litigate against Jose Go who is not even a party to the check? Such
argument is trite and ridiculous if we have to consider that neither his name or Jose Go's name
appears on the check. Following such line of argument, petitioner is not a party to the check either
and therefore has no valid claim to the Check. Furthermore, the Order of the trial court requiring the
parties to file their answers is to all intents and purposes an order to interplead, substantially and
essentially and therefore in compliance with the provisions of Rule 63 of the Rules of Court. What
else is the purpose of a law suit but to litigate?

The records of the case show that respondent bank had to resort to details in support of its action for
Interpleader. Before it resorted to Interpleader, respondent bank took an precautionary and
necessary measures to bring out the truth. On the other hand, petitioner concealed the
circumstances known to him and now that private respondent bank brought these circumstances out
in court (which eventually rendered its decision in the light of these facts), petitioner charges it with
"gratuitous excursions into these non-issues." Respondent IAC cannot rule on whether respondent
RTC committed an abuse of discretion or not, without being apprised of the facts and reasons why
respondent Associated Bank instituted the Interpleader case. Both parties were given an opportunity
to present their sides. Petitioner chose to withhold substantial facts. Respondents were not forbidden
to present their side-this is the purpose of the Comment of respondent to the petition. IAC decided
the question by considering both the facts submitted by petitioner and those given by respondents.
IAC did not act therefore beyond the scope of the remedy sought in the petition.
WHEREFORE, finding that the instant petition is merely dilatory, the same is hereby denied and the
assailed orders of the respondent court are hereby AFFIRMED in toto.
SO ORDERED.
Feria (Chairman), Fernan, Alampay and Gutierrez, Jr., JJ., concur.