G.R. No.
L-22405 June 30, 1971 view thereof, the amount it represented had been deducted from
PHILIPPINE EDUCATION CO., INC., plaintiff-appellant,
vs.
MAURICIO A. SORIANO, ET AL., defendant-appellees.
DIZON, J.:
An appeal from a decision of the Court of First Instance of Manila
dismissing the complaint filed by the Philippine Education Co., Inc.
against Mauricio A. Soriano, Enrico Palomar and Rafael Contreras.
On April 18, 1958 Enrique Montinola sought to purchase from the
Manila Post Office ten (10) money orders of P200.00 each payable
to E.P. Montinola withaddress at Lucena, Quezon. After the postal
teller had made out money ordersnumbered 124685, 124687-
124695, Montinola offered to pay for them with a private checks
were not generally accepted in payment of money orders, the teller
advised him to see the Chief of the Money Order Division, but
instead of doing so, Montinola managed to leave building with his
own check and the ten(10) money orders without the knowledge of
the teller.
On the same date, April 18, 1958, upon discovery of the
disappearance of the unpaid money orders, an urgent message was
sent to all postmasters, and the following day notice was likewise
served upon all banks, instructing them not to pay anyone of the
money orders aforesaid if presented for payment. The Bank of
America received a copy of said notice three days later.
On April 23, 1958 one of the above-mentioned money orders
numbered 124688 was received by appellant as part of its sales
receipts. The following day it deposited the same with the Bank of
America, and one day thereafter the latter cleared it with the
Bureau of Posts and received from the latter its face value of
P200.00.
On September 27, 1961, appellee Mauricio A. Soriano, Chief of the
Money Order Division of the Manila Post Office, acting for and in
behalf of his co-appellee, Postmaster Enrico Palomar, notified the
Bank of America that money order No. 124688 attached to his
letter had been found to have been irregularly issued and that, in
the bank's clearing account. For its part, on August 2 of the same
year, the Bank of America debited appellant's account with the
same amount and gave it advice thereof by means of a debit
memo.
On October 12, 1961 appellant requested the Postmaster General
to reconsider the action taken by his office deducting the sum of
P200.00 from the clearing account of the Bank of America, but his
request was denied. So was appellant's subsequent request that
the matter be referred to the Secretary of Justice for advice.
Thereafter, appellant elevated the matter to the Secretary of Public
Works and Communications, but the latter sustained the actions
taken by the postal officers.
In connection with the events set forth above, Montinola was
charged with theft in the Court of First Instance of Manila (Criminal
Case No. 43866) but after trial he was acquitted on the ground of
reasonable doubt.
On January 8, 1962 appellant filed an action against appellees in
the Municipal Court of Manila praying for judgment as follows:
WHEREFORE, plaintiff prays that after hearing defendants be
ordered:
(a) To countermand the notice given to the Bank of America on
September 27, 1961, deducting from the said Bank's clearing
account the sum of P200.00 represented by postal money order No.
124688, or in the alternative indemnify the plaintiff in the same
amount with interest at 8-% per annum from September 27,
1961, which is the rate of interest being paid by plaintiff on its
overdraft account;
(b) To pay to the plaintiff out of their own personal funds, jointly
and severally, actual and moral damages in the amount of
P1,000.00 or in such amount as will be proved and/or determined
by this Honorable Court: exemplary damages in the amount of
P1,000.00, attorney's fees of P1,000.00, and the costs of action.
Plaintiff also prays for such other and further relief as may be
deemed just and equitable.
On November 17, 1962, after the parties had submitted the
stipulation of facts reproduced at pages 12 to 15 of the Record on
Appeal, the above-named court rendered judgment as follows:
WHEREFORE, judgment is hereby rendered, ordering the
defendants to countermand the notice given to the Bank of
America on September 27, 1961, deducting from said Bank's
clearing account the sum of P200.00 representing the amount of
postal money order No. 124688, or in the alternative, to indemnify
the plaintiff in the said sum of P200.00 with interest thereon at the
rate of 8-% per annum from September 27, 1961 until fully paid;
without any pronouncement as to cost and attorney's fees.
The case was appealed to the Court of First Instance of Manila
where, after the parties had resubmitted the same stipulation of
facts, the appealed decision dismissing the complaint, with costs,
was rendered.
The first, second and fifth assignments of error discussed in
appellant's brief are related to the other and will therefore be
discussed jointly. They raise this main issue: that the postal money
order in question is a negotiable instrument; that its nature as such
is not in anyway affected by the letter dated October 26, 1948
signed by the Director of Posts and addressed to all banks with a
clearing account with the Post Office, and that money orders, once
issued, create a contractual relationship of debtor and creditor,
respectively, between the government, on the one hand, and the
remitters payees or endorses, on the other.
It is not disputed that our postal statutes were patterned after
statutes in force in the United States. For this reason, ours are
generally construed in accordance with the construction given in
the United States to their own postal statutes, in the absence of
any special reason justifying a departure from this policy or
practice. The weight of authority in the United States is that postal
money orders are not negotiable instruments (Bolognesi vs. U.S.
189 Fed. 395; U.S. vs. Stock Drawers National Bank, 30 Fed. 912),
the reason behind this rule being that, in establishing and operating
a postal money order system, the government is not engaging in
commercial transactions but merely exercises a governmental
power for the public benefit.
It is to be noted in this connection that some of the restrictions
imposed upon money orders by postal laws and regulations are
inconsistent with the character of negotiable instruments. For
instance, such laws and regulations usually provide for not more
than one endorsement; payment of money orders may be withheld
under a variety of circumstances (49 C.J. 1153).
Of particular application to the postal money order in question are
the conditions laid down in the letter of the Director of Posts of
October 26, 1948 (Exhibit 3) to the Bank of America for the
redemption of postal money orders received by it from its
depositors. Among others, the condition is imposed that "in cases
of adverse claim, the money order or money orders involved will be
returned to you (the bank) and the, corresponding amount will have
to be refunded to the Postmaster, Manila, who reserves the right to
deduct the value thereof from any amount due you if such step is
deemed necessary." The conditions thus imposed in order to enable
the bank to continue enjoying the facilities theretofore enjoyed by
its depositors, were accepted by the Bank of America. The latter is
therefore bound by them. That it is so is clearly referred from the
fact that, upon receiving advice that the amount represented by
the money order in question had been deducted from its clearing
account with the Manila Post Office, it did not file any protest
against such action.
Moreover, not being a party to the understanding existing between
the postal officers, on the one hand, and the Bank of America, on
the other, appellant has no right to assail the terms and conditions
thereof on the ground that the letter setting forth the terms and
conditions aforesaid is void because it was not issued by a
Department Head in accordance with Sec. 79 (B) of the Revised
Administrative Code. In reality, however, said legal provision does
not apply to the letter in question because it does not provide for a
department regulation but merely sets down certain conditions
upon the privilege granted to the Bank of Amrica to accept and pay
postal money orders presented for payment at the Manila Post
Office. Such being the case, it is clear that the Director of Posts had
ample authority to issue it pursuant to Sec. 1190 of the Revised
Administrative Code.
In view of the foregoing, We do not find it necessary to resolve the
issues raised in the third and fourth assignments of error.
WHEREFORE, the appealed decision being in accordance with law,
the same is hereby affirmed with costs.
Concepcion, C.J., Reyes, J.B.L., Makalintal, Zaldivar, Fernando,
Teehankee, Barredo and Villamor, JJ., concur.
Castro and Makasiar, JJ., took no part.
G.R. No. 97753 August 10, 1992
CALTEX (PHILIPPINES), INC., petitioner,
vs.
COURT OF APPEALS and SECURITY BANK AND TRUST
COMPANY, respondents.
REGALADO, J.:
This petition for review on certiorari impugns and seeks the
reversal of the decision promulgated by respondent court on March
8, 1991 in CA-G.R. CV No. 23615 1 affirming with modifications, the
earlier decision of the Regional Trial Court of Manila, Branch
XLII, 2 which dismissed the complaint filed therein by herein
petitioner against respondent bank.
The undisputed background of this case, as found by the court a
quo and adopted by respondent court, appears of record:
1. On various dates, defendant, a commercial banking
institution, through its Sucat Branch issued 280 certificates
of time deposit (CTDs) in favor of one Angel dela Cruz who
deposited with herein defendant the aggregate amount of
P1,120,000.00, as follows: (Joint Partial Stipulation of Facts
and Statement of Issues, Original Records, p. 207;
Defendant's Exhibits 1 to 280);
CTD CTD
Dates Serial Nos. Quantity Amount
22 Feb. 82 90101 to 90120 20 P80,000
26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000
Total 280 P1,120,000
===== ========
2. Angel dela Cruz delivered the said certificates of time
(CTDs) to herein plaintiff in connection with his purchased of
fuel products from the latter (Original Record, p. 208).
3. Sometime in March 1982, Angel dela Cruz informed Mr.
Timoteo Tiangco, the Sucat Branch Manger, that he lost all
the certificates of time deposit in dispute. Mr. Tiangco
advised said depositor to execute and submit a notarized
Affidavit of Loss, as required by defendant bank's procedure,
if he desired replacement of said lost CTDs (TSN, February 9,
1987, pp. 48-50).
4. On March 18, 1982, Angel dela Cruz executed and
delivered to defendant bank the required Affidavit of Loss
(Defendant's Exhibit 281). On the basis of said affidavit of
loss, 280 replacement CTDs were issued in favor of said
depositor (Defendant's Exhibits 282-561).
5. On March 25, 1982, Angel dela Cruz negotiated and
obtained a loan from defendant bank in the amount of Eight
Hundred Seventy Five Thousand Pesos (P875,000.00). On
the same date, said depositor executed a notarized Deed of
Assignment of Time Deposit (Exhibit 562) which stated,
among others, that he (de la Cruz) surrenders to defendant
bank "full control of the indicated time deposits from and
after date" of the assignment and further authorizes said
bank to pre-terminate, set-off and "apply the said time
deposits to the payment of whatever amount or amounts
may be due" on the loan upon its maturity (TSN, February 9,
1987, pp. 60-62).
6. Sometime in November, 1982, Mr. Aranas, Credit Manager
of plaintiff Caltex (Phils.) Inc., went to the defendant bank's
Sucat branch and presented for verification the CTDs
declared lost by Angel dela Cruz alleging that the same were
delivered to herein plaintiff "as security for purchases made
with Caltex Philippines, Inc." by said depositor (TSN,
February 9, 1987, pp. 54-68).
7. On November 26, 1982, defendant received a letter
(Defendant's Exhibit 563) from herein plaintiff formally
informing it of its possession of the CTDs in question and of
its decision to pre-terminate the same.
8. On December 8, 1982, plaintiff was requested by herein
defendant to furnish the former "a copy of the document
evidencing the guarantee agreement with Mr. Angel dela
Cruz" as well as "the details of Mr. Angel dela Cruz"
obligation against which plaintiff proposed to apply the time
deposits (Defendant's Exhibit 564).
9. No copy of the requested documents was furnished herein
defendant.
10. Accordingly, defendant bank rejected the plaintiff's
demand and claim for payment of the value of the CTDs in a
letter dated February 7, 1983 (Defendant's Exhibit 566).
11. In April 1983, the loan of Angel dela Cruz with the
defendant bank matured and fell due and on August 5,
1983, the latter set-off and applied the time deposits in
question to the payment of the matured loan (TSN, February
9, 1987, pp. 130-131).
12. In view of the foregoing, plaintiff filed the instant
complaint, praying that defendant bank be ordered to pay it
the aggregate value of the certificates of time deposit of
P1,120,000.00 plus accrued interest and compounded
interest therein at 16% per annum, moral and exemplary
damages as well as attorney's fees.
After trial, the court a quo rendered its decision dismissing
the instant complaint. 3
On appeal, as earlier stated, respondent court affirmed the lower
court's dismissal of the complaint, hence this petition wherein
petitioner faults respondent court in ruling (1) that the subject
certificates of deposit are non-negotiable despite being clearly
negotiable instruments; (2) that petitioner did not become a holder
in due course of the said certificates of deposit; and (3) in
disregarding the pertinent provisions of the Code of Commerce
relating to lost instruments payable to bearer. 4
The instant petition is bereft of merit.
A sample text of the certificates of time deposit is reproduced
below to provide a better understanding of the issues involved in
this recourse.
SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____
This is to Certify that B E A R E R has deposited in
this Bank the sum of PESOS: FOUR THOUSAND
ONLY, SECURITY BANK SUCAT OFFICE P4,000 & 00
CTS Pesos, Philippine Currency, repayable to said
depositor 731 days. after date, upon presentation
and surrender of this certificate, with interest at
the rate of 16% per cent per annum.
(Sgd. Illegible) (Sgd. Illegible)
 AUTHORIZED SIGNATURES 5
testified in open court that the depositor reffered to in the CTDs is
no other than Mr. Angel de la Cruz.
Respondent court ruled that the CTDs in question are non-
negotiable instruments, nationalizing as follows: xxx xxx xxx

. . . While it may be true that the word "bearer" appears Atty. Calida:
rather boldly in the CTDs issued, it is important to note that
after the word "BEARER" stamped on the space provided q In other words Mr. Witness, you are
supposedly for the name of the depositor, the words "has saying that per books of the bank, the
deposited" a certain amount follows. The document further depositor referred (sic) in these
provides that the amount deposited shall be "repayable to certificates states that it was Angel
said depositor" on the period indicated. Therefore, the text dela Cruz?
of the instrument(s) themselves manifest with clarity that
they are payable, not to whoever purports to be the witness:
"bearer" but only to the specified person indicated therein,
the depositor. In effect, the appellee bank acknowledges its
depositor Angel dela Cruz as the person who made the a Yes, your Honor, and we have the
deposit and further engages itself to pay said depositor the record to show that Angel dela Cruz
amount indicated thereon at the stipulated date. 6 was the one who cause (sic) the
amount.
We disagree with these findings and conclusions, and hereby hold
that the CTDs in question are negotiable instruments. Section 1 Act Atty. Calida:
No. 2031, otherwise known as the Negotiable Instruments Law,
enumerates the requisites for an instrument to become q And no other person or entity or
negotiable, viz: company, Mr. Witness?

(a) It must be in writing and signed by the maker or drawer; witness:

(b) Must contain an unconditional promise or order to pay a a None, your Honor. 7

sum certain in money;

xxx xxx xxx
(c) Must be payable on demand, or at a fixed or
determinable future time; Atty. Calida:

(d) Must be payable to order or to bearer; and q Mr. Witness, who is the depositor
identified in all of these certificates of
(e) Where the instrument is addressed to a drawee, he must time deposit insofar as the bank is
be named or otherwise indicated therein with reasonable concerned?
certainty.
witness:
The CTDs in question undoubtedly meet the requirements of the
law for negotiability. The parties' bone of contention is with regard a Angel dela Cruz is the depositor. 8
to requisite (d) set forth above. It is noted that Mr. Timoteo P.
Tiangco, Security Bank's Branch Manager way back in 1982, xxx xxx xxx
On this score, the accepted rule is that the negotiability or non-
negotiability of an instrument is determined from the writing, that
is, from the face of the instrument itself. 9 In the construction of a
bill or note, the intention of the parties is to control, if it can be
legally ascertained. 10 While the writing may be read in the light of
surrounding circumstances in order to more perfectly understand
the intent and meaning of the parties, yet as they have constituted
the writing to be the only outward and visible expression of their
meaning, no other words are to be added to it or substituted in its
stead. The duty of the court in such case is to ascertain, not what
the parties may have secretly intended as contradistinguished from
what their words express, but what is the meaning of the words
they have used. What the parties meant must be determined by
what they said. 11
Contrary to what respondent court held, the CTDs are negotiable
instruments. The documents provide that the amounts deposited
shall be repayable to the depositor. And who, according to the
document, is the depositor? It is the "bearer." The documents do
not say that the depositor is Angel de la Cruz and that the amounts
deposited are repayable specifically to him. Rather, the amounts
are to be repayable to the bearer of the documents or, for that
matter, whosoever may be the bearer at the time of presentment.
If it was really the intention of respondent bank to pay the amount
to Angel de la Cruz only, it could have with facility so expressed
that fact in clear and categorical terms in the documents, instead
of having the word "BEARER" stamped on the space provided for
the name of the depositor in each CTD. On the wordings of the
documents, therefore, the amounts deposited are repayable to
whoever may be the bearer thereof. Thus, petitioner's aforesaid
witness merely declared that Angel de la Cruz is the depositor
"insofar as the bank is concerned," but obviously other parties not
privy to the transaction between them would not be in a position to
know that the depositor is not the bearer stated in the CTDs.
Hence, the situation would require any party dealing with the CTDs
to go behind the plain import of what is written thereon to unravel
the agreement of the parties thereto through facts aliunde. This
need for resort to extrinsic evidence is what is sought to be avoided
by the Negotiable Instruments Law and calls for the application of
the elementary rule that the interpretation of obscure words or
stipulations in a contract shall not favor the party who caused the
obscurity. 12
The next query is whether petitioner can rightfully recover on the
CTDs. This time, the answer is in the negative. The records reveal
that Angel de la Cruz, whom petitioner chose not to implead in this
suit for reasons of its own, delivered the CTDs amounting to
P1,120,000.00 to petitioner without informing respondent bank
thereof at any time. Unfortunately for petitioner, although the CTDs
are bearer instruments, a valid negotiation thereof for the true
purpose and agreement between it and De la Cruz, as ultimately
ascertained, requires both delivery and indorsement. For, although
petitioner seeks to deflect this fact, the CTDs were in reality
delivered to it as a security for De la Cruz' purchases of its fuel
products. Any doubt as to whether the CTDs were delivered as
payment for the fuel products or as a security has been dissipated
and resolved in favor of the latter by petitioner's own authorized
and responsible representative himself.
In a letter dated November 26, 1982 addressed to respondent
Security Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . .
These certificates of deposit were negotiated to us by Mr. Angel
dela Cruz to guarantee his purchases of fuel products" (Emphasis
ours.) 13 This admission is conclusive upon petitioner, its
protestations notwithstanding. Under the doctrine of estoppel, an
admission or representation is rendered conclusive upon the person
making it, and cannot be denied or disproved as against the person
relying thereon. 14 A party may not go back on his own acts and
representations to the prejudice of the other party who relied upon
them. 15 In the law of evidence, whenever a party has, by his own
declaration, act, or omission, intentionally and deliberately led
another to believe a particular thing true, and to act upon such
belief, he cannot, in any litigation arising out of such declaration,
act, or omission, be permitted to falsify it. 16
If it were true that the CTDs were delivered as payment and not as
security, petitioner's credit manager could have easily said so,
instead of using the words "to guarantee" in the letter aforequoted.
Besides, when respondent bank, as defendant in the court below,
moved for a bill of particularity therein 17 praying, among others,
that petitioner, as plaintiff, be required to aver with sufficient
definiteness or particularity (a) the due date or dates ofpayment of
the alleged indebtedness of Angel de la Cruz to plaintiff and (b)
whether or not it issued a receipt showing that the CTDs were
delivered to it by De la Cruz as payment of the latter's alleged
indebtedness to it, plaintiff corporation opposed the motion. 18 Had
it produced the receipt prayed for, it could have proved, if such
truly was the fact, that the CTDs were delivered as payment and
not as security. Having opposed the motion, petitioner now labors
under the presumption that evidence willfully suppressed would be
adverse if produced. 19
Under the foregoing circumstances, this disquisition in Intergrated
Realty Corporation, et al. vs. Philippine National Bank, et al. 20 is
apropos:
. . . Adverting again to the Court's pronouncements
in Lopez, supra, we quote therefrom:
The character of the transaction between the parties
is to be determined by their intention, regardless of
what language was used or what the form of the
transfer was. If it was intended to secure the
payment of money, it must be construed as a pledge;
but if there was some other intention, it is not a
pledge. However, even though a transfer, if regarded
by itself, appears to have been absolute, its object
and character might still be qualified and explained
by contemporaneous writing declaring it to have
been a deposit of the property as collateral security.
It has been said that a transfer of property by the
debtor to a creditor, even if sufficient on its face to
make an absolute conveyance, should be treated as
a pledge if the debt continues in inexistence and is
not discharged by the transfer, and that accordingly
the use of the terms ordinarily importing conveyance
of absolute ownership will not be given that effect in
such a transaction if they are also commonly used in
pledges and mortgages and therefore do not
unqualifiedly indicate a transfer of absolute
ownership, in the absence of clear and unambiguous
language or other circumstances excluding an intent
to pledge.
Petitioner's insistence that the CTDs were negotiated to it begs the
question. Under the Negotiable Instruments Law, an instrument is
negotiated when it is transferred from one person to another in
such a manner as to constitute the transferee the holder
thereof, 21 and a holder may be the payee or indorsee of a bill or
note, who is in possession of it, or the bearer thereof. 22 In the
present case, however, there was no negotiation in the sense of a
transfer of the legal title to the CTDs in favor of petitioner in which
situation, for obvious reasons, mere delivery of the bearer CTDs
would have sufficed. Here, the delivery thereof only as security for
the purchases of Angel de la Cruz (and we even disregard the fact
that the amount involved was not disclosed) could at the most
constitute petitioner only as a holder for value by reason of his lien.
Accordingly, a negotiation for such purpose cannot be effected by
mere delivery of the instrument since, necessarily, the terms
thereof and the subsequent disposition of such security, in the
event of non-payment of the principal obligation, must be
contractually provided for.
The pertinent law on this point is that where the holder has a lien
on the instrument arising from contract, he is deemed a holder for
value to the extent of his lien. 23 As such holder of collateral
security, he would be a pledgee but the requirements therefor and
the effects thereof, not being provided for by the Negotiable
Instruments Law, shall be governed by the Civil Code provisions on
pledge of incorporeal rights, 24 which inceptively provide:
Art. 2095. Incorporeal rights, evidenced by negotiable
instruments, . . . may also be pledged. The instrument
proving the right pledged shall be delivered to the creditor,
and if negotiable, must be indorsed.
Art. 2096. A pledge shall not take effect against third
persons if a description of the thing pledged and the
date of the pledge do not appear in a public
instrument.
Aside from the fact that the CTDs were only delivered but not
indorsed, the factual findings of respondent court quoted at the
start of this opinion show that petitioner failed to produce any
document evidencing any contract of pledge or guarantee
agreement between it and Angel de la Cruz. 25 Consequently, the
mere delivery of the CTDs did not legally vest in petitioner any right
effective against and binding upon respondent bank. The
requirement under Article 2096 aforementioned is not a mere rule
of adjective law prescribing the mode whereby proof may be made
of the date of a pledge contract, but a rule of substantive law
prescribing a condition without which the execution of a pledge
contract cannot affect third persons adversely. 26
On the other hand, the assignment of the CTDs made by Angel de
la Cruz in favor of respondent bank was embodied in a public
instrument. 27 With regard to this other mode of transfer, the Civil
Code specifically declares:
 Art. 1625. An assignment of credit, right or action shall
produce no effect as against third persons, unless it appears
in a public instrument, or the instrument is recorded in the
Registry of Property in case the assignment involves real
property.
Respondent bank duly complied with this statutory requirement.
Contrarily, petitioner, whether as purchaser, assignee or lien holder
of the CTDs, neither proved the amount of its credit or the extent of
its lien nor the execution of any public instrument which could
affect or bind private respondent. Necessarily, therefore, as
between petitioner and respondent bank, the latter has definitely
the better right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into
the question of whether or not private respondent observed the
requirements of the law in the case of lost negotiable instruments
and the issuance of replacement certificates therefor, on the
ground that petitioner failed to raised that issue in the lower
court. 28
On this matter, we uphold respondent court's finding that the
aspect of alleged negligence of private respondent was not
included in the stipulation of the parties and in the statement of
issues submitted by them to the trial court. 29 The issues agreed
upon by them for resolution in this case are:
1. Whether or not the CTDs as worded are negotiable
instruments.
2. Whether or not defendant could legally apply the amount
covered by the CTDs against the depositor's loan by virtue
of the assignment (Annex "C").
3. Whether or not there was legal compensation or set off
involving the amount covered by the CTDs and the
depositor's outstanding account with defendant, if any.
4. Whether or not plaintiff could compel defendant to
preterminate the CTDs before the maturity date provided
therein.
5. Whether or not plaintiff is entitled to the proceeds of the
CTDs.
6. Whether or not the parties can recover damages,
attorney's fees and litigation expenses from each other.
As respondent court correctly observed, with appropriate citation of
some doctrinal authorities, the foregoing enumeration does not
include the issue of negligence on the part of respondent bank. An
issue raised for the first time on appeal and not raised timely in the
proceedings in the lower court is barred by estoppel. 30 Questions
raised on appeal must be within the issues framed by the parties
and, consequently, issues not raised in the trial court cannot be
raised for the first time on appeal. 31
Pre-trial is primarily intended to make certain that all issues
necessary to the disposition of a case are properly raised. Thus, to
obviate the element of surprise, parties are expected to disclose at
a pre-trial conference all issues of law and fact which they intend to
raise at the trial, except such as may involve privileged or
impeaching matters. The determination of issues at a pre-trial
conference bars the consideration of other questions on appeal.32
To accept petitioner's suggestion that respondent bank's supposed
negligence may be considered encompassed by the issues on its
right to preterminate and receive the proceeds of the CTDs would
be tantamount to saying that petitioner could raise on appeal any
issue. We agree with private respondent that the broad ultimate
issue of petitioner's entitlement to the proceeds of the questioned
certificates can be premised on a multitude of other legal reasons
and causes of action, of which respondent bank's supposed
negligence is only one. Hence, petitioner's submission, if accepted,
would render a pre-trial delimitation of issues a useless exercise. 33
Still, even assuming arguendo that said issue of negligence was
raised in the court below, petitioner still cannot have the odds in its
favor. A close scrutiny of the provisions of the Code of Commerce
laying down the rules to be followed in case of lost instruments
payable to bearer, which it invokes, will reveal that said provisions,
even assuming their applicability to the CTDs in the case at bar, are
merely permissive and not mandatory. The very first article cited by
petitioner speaks for itself.
Art 548. The dispossessed owner, no matter for what cause
it may be, may apply to the judge or court of competent
jurisdiction, asking that the principal, interest or dividends
due or about to become due, be not paid a third person, as
 well as in order to prevent the ownership of the instrument
that a duplicate be issued him. (Emphasis ours.)

xxx xxx xxx

The use of the word "may" in said provision shows that it is not
mandatory but discretionary on the part of the "dispossessed
owner" to apply to the judge or court of competent jurisdiction for
the issuance of a duplicate of the lost instrument. Where the
provision reads "may," this word shows that it is not mandatory but
discretional. 34 The word "may" is usually permissive, not
mandatory. 35 It is an auxiliary verb indicating liberty, opportunity,
permission and possibility. 36

Moreover, as correctly analyzed by private respondent, 37 Articles

548 to 558 of the Code of Commerce, on which petitioner seeks to
anchor respondent bank's supposed negligence, merely
established, on the one hand, a right of recourse in favor of a
dispossessed owner or holder of a bearer instrument so that he
may obtain a duplicate of the same, and, on the other, an option in
favor of the party liable thereon who, for some valid ground, may
elect to refuse to issue a replacement of the instrument.
Significantly, none of the provisions cited by petitioner categorically
restricts or prohibits the issuance a duplicate or replacement
instrument sans compliance with the procedure outlined therein,
and none establishes a mandatory precedent requirement therefor.

WHEREFORE, on the modified premises above set forth, the petition

is DENIED and the appealed decision is hereby AFFIRMED.

SO ORDERED.

Narvasa, C.J., Padilla and Nocon, JJ., concur.

G.R. No. 88866 February 18, 1991

METROPOLITAN BANK & TRUST COMPANY, petitioner,

vs.
COURT OF APPEALS, GOLDEN SAVINGS & LOAN
ASSOCIATION, INC., LUCIA CASTILLO, MAGNO CASTILLO and
GLORIA CASTILLO, respondents.

CRUZ, J.:p
This case, for all its seeming complexity, turns on a simple question
of negligence. The facts, pruned of all non-essentials, are easily
told.
The Metropolitan Bank and Trust Co. is a commercial bank with
branches throughout the Philippines and even abroad. Golden
Savings and Loan Association was, at the time these events
happened, operating in Calapan, Mindoro, with the other private
respondents as its principal officers.
In January 1979, a certain Eduardo Gomez opened an account with
Golden Savings and deposited over a period of two months 38
treasury warrants with a total value of P1,755,228.37. They were all
drawn by the Philippine Fish Marketing Authority and purportedly
signed by its General Manager and countersigned by its Auditor. Six
of these were directly payable to Gomez while the others appeared
to have been indorsed by their respective payees, followed by
Gomez as second indorser. 1
On various dates between June 25 and July 16, 1979, all these
warrants were subsequently indorsed by Gloria Castillo as Cashier
of Golden Savings and deposited to its Savings Account No. 2498 in
the Metrobank branch in Calapan, Mindoro. They were then sent for
clearing by the branch office to the principal office of Metrobank,
which forwarded them to the Bureau of Treasury for special
clearing. 2
More than two weeks after the deposits, Gloria Castillo went to the
Calapan branch several times to ask whether the warrants had
been cleared. She was told to wait. Accordingly, Gomez was
meanwhile not allowed to withdraw from his account. Later,
however, "exasperated" over Gloria's repeated inquiries and also as
an accommodation for a "valued client," the petitioner says it
finally decided to allow Golden Savings to withdraw from the
proceeds of the warrants. 3 The first withdrawal was made on July 9,
1979, in the amount of P508,000.00, the second on July 13, 1979,
in the amount of P310,000.00, and the third on July 16, 1979, in the
amount of P150,000.00. The total withdrawal was P968.000.00. 4
In turn, Golden Savings subsequently allowed Gomez to make
withdrawals from his own account, eventually collecting the total
amount of P1,167,500.00 from the proceeds of the apparently
cleared warrants. The last withdrawal was made on July 16, 1979.
On July 21, 1979, Metrobank informed Golden Savings that 32 of
the warrants had been dishonored by the Bureau of Treasury on July
19, 1979, and demanded the refund by Golden Savings of the
amount it had previously withdrawn, to make up the deficit in its
account.
The demand was rejected. Metrobank then sued Golden Savings in
the Regional Trial Court of Mindoro. 5 After trial, judgment was
rendered in favor of Golden Savings, which, however, filed a motion
for reconsideration even as Metrobank filed its notice of appeal. On
November 4, 1986, the lower court modified its decision thus:
ACCORDINGLY, judgment is hereby rendered:
1. Dismissing the complaint with costs against the plaintiff;
2. Dissolving and lifting the writ of attachment of the
properties of defendant Golden Savings and Loan
Association, Inc. and defendant Spouses Magno Castillo and
Lucia Castillo;
3. Directing the plaintiff to reverse its action of debiting
Savings Account No. 2498 of the sum of P1,754,089.00 and
to reinstate and credit to such account such amount existing
before the debit was made including the amount of
P812,033.37 in favor of defendant Golden Savings and Loan
Association, Inc. and thereafter, to allow defendant Golden
Savings and Loan Association, Inc. to withdraw the amount
outstanding thereon before the debit;
4. Ordering the plaintiff to pay the defendant Golden
Savings and Loan Association, Inc. attorney's fees and
expenses of litigation in the amount of P200,000.00.
5. Ordering the plaintiff to pay the defendant Spouses
Magno Castillo and Lucia Castillo attorney's fees and
expenses of litigation in the amount of P100,000.00.
SO ORDERED.
On appeal to the respondent court, 6 the decision was affirmed,
prompting Metrobank to file this petition for review on the following
grounds:
 1. Respondent Court of Appeals erred in disregarding and
failing to apply the clear contractual terms and conditions
on the deposit slips allowing Metrobank to charge back any
amount erroneously credited.
(a) Metrobank's right to charge back is not limited to
instances where the checks or treasury warrants are forged
or unauthorized.
(b) Until such time as Metrobank is actually paid, its
obligation is that of a mere collecting agent which cannot be
held liable for its failure to collect on the warrants.
2. Under the lower court's decision, affirmed by respondent
Court of Appeals, Metrobank is made to pay for warrants
already dishonored, thereby perpetuating the fraud
committed by Eduardo Gomez.
3. Respondent Court of Appeals erred in not finding that as
between Metrobank and Golden Savings, the latter should
bear the loss.
4. Respondent Court of Appeals erred in holding that the
treasury warrants involved in this case are not negotiable
instruments.
The petition has no merit.
From the above undisputed facts, it would appear to the Court that
Metrobank was indeed negligent in giving Golden Savings the
impression that the treasury warrants had been cleared and that,
consequently, it was safe to allow Gomez to withdraw the proceeds
thereof from his account with it. Without such assurance, Golden
Savings would not have allowed the withdrawals; with such
assurance, there was no reason not to allow the withdrawal.
Indeed, Golden Savings might even have incurred liability for its
refusal to return the money that to all appearances belonged to the
depositor, who could therefore withdraw it any time and for any
reason he saw fit.
It was, in fact, to secure the clearance of the treasury warrants that
Golden Savings deposited them to its account with Metrobank.
Golden Savings had no clearing facilities of its own. It relied on
Metrobank to determine the validity of the warrants through its own
services. The proceeds of the warrants were withheld from Gomez
until Metrobank allowed Golden Savings itself to withdraw them
from its own deposit. 7 It was only when Metrobank gave the go-
signal that Gomez was finally allowed by Golden Savings to
withdraw them from his own account.
The argument of Metrobank that Golden Savings should have
exercised more care in checking the personal circumstances of
Gomez before accepting his deposit does not hold water. It was
Gomez who was entrusting the warrants, not Golden Savings that
was extending him a loan; and moreover, the treasury warrants
were subject to clearing, pending which the depositor could not
withdraw its proceeds. There was no question of Gomez's identity
or of the genuineness of his signature as checked by Golden
Savings. In fact, the treasury warrants were dishonored allegedly
because of the forgery of the signatures of the drawers, not of
Gomez as payee or indorser. Under the circumstances, it is clear
that Golden Savings acted with due care and diligence and cannot
be faulted for the withdrawals it allowed Gomez to make.
By contrast, Metrobank exhibited extraordinary carelessness. The
amount involved was not trifling more than one and a half million
pesos (and this was 1979). There was no reason why it should not
have waited until the treasury warrants had been cleared; it would
not have lost a single centavo by waiting. Yet, despite the lack of
such clearance and notwithstanding that it had not received a
single centavo from the proceeds of the treasury warrants, as it
now repeatedly stresses it allowed Golden Savings to withdraw
not once, not twice, but thrice from the uncleared treasury
warrants in the total amount of P968,000.00
Its reason? It was "exasperated" over the persistent inquiries of
Gloria Castillo about the clearance and it also wanted to
"accommodate" a valued client. It "presumed" that the warrants
had been cleared simply because of "the lapse of one week." 8 For
a bank with its long experience, this explanation is unbelievably
naive.
And now, to gloss over its carelessness, Metrobank would invoke
the conditions printed on the dorsal side of the deposit slips
through which the treasury warrants were deposited by Golden
Savings with its Calapan branch. The conditions read as follows:
Kindly note that in receiving items on deposit, the bank
obligates itself only as the depositor's collecting agent,
 assuming no responsibility beyond care in selecting
correspondents, and until such time as actual payment shall
have come into possession of this bank, the right is
reserved to charge back to the depositor's account any
amount previously credited, whether or not such item is
returned. This also applies to checks drawn on local banks
and bankers and their branches as well as on this
bank, which are unpaid due to insufficiency of funds,
forgery, unauthorized overdraft or any other reason.
(Emphasis supplied.)
According to Metrobank, the said conditions clearly show that it was
acting only as a collecting agent for Golden Savings and give it the
right to "charge back to the depositor's account any amount
previously credited, whether or not such item is returned. This also
applies to checks ". . . which are unpaid due to insufficiency of
funds, forgery, unauthorized overdraft of any other reason." It is
claimed that the said conditions are in the nature of contractual
stipulations and became binding on Golden Savings when Gloria
Castillo, as its Cashier, signed the deposit slips.
Doubt may be expressed about the binding force of the conditions,
considering that they have apparently been imposed by the bank
unilaterally, without the consent of the depositor. Indeed, it could
be argued that the depositor, in signing the deposit slip, does so
only to identify himself and not to agree to the conditions set forth
in the given permit at the back of the deposit slip. We do not have
to rule on this matter at this time. At any rate, the Court feels that
even if the deposit slip were considered a contract, the petitioner
could still not validly disclaim responsibility thereunder in the light
of the circumstances of this case.
In stressing that it was acting only as a collecting agent for Golden
Savings, Metrobank seems to be suggesting that as a mere agent it
cannot be liable to the principal. This is not exactly true. On the
contrary, Article 1909 of the Civil Code clearly provides that
Art. 1909. The agent is responsible not only for fraud, but
also for negligence, which shall be judged 'with more or less
rigor by the courts, according to whether the agency was or
was not for a compensation.
The negligence of Metrobank has been sufficiently established. To
repeat for emphasis, it was the clearance given by it that assured
Golden Savings it was already safe to allow Gomez to withdraw the
proceeds of the treasury warrants he had deposited
Metrobank misled Golden Savings. There may have been no
express clearance, as Metrobank insists (although this is refuted by
Golden Savings) but in any case that clearance could be implied
from its allowing Golden Savings to withdraw from its account not
only once or even twice but three times. The total withdrawal was
in excess of its original balance before the treasury warrants were
deposited, which only added to its belief that the treasury warrants
had indeed been cleared.
Metrobank's argument that it may recover the disputed amount if
the warrants are not paid for any reason is not acceptable. Any
reason does not mean no reason at all. Otherwise, there would
have been no need at all for Golden Savings to deposit the treasury
warrants with it for clearance. There would have been no need for it
to wait until the warrants had been cleared before paying the
proceeds thereof to Gomez. Such a condition, if interpreted in the
way the petitioner suggests, is not binding for being arbitrary and
unconscionable. And it becomes more so in the case at bar when it
is considered that the supposed dishonor of the warrants was not
communicated to Golden Savings before it made its own payment
to Gomez.
The belated notification aggravated the petitioner's earlier
negligence in giving express or at least implied clearance to the
treasury warrants and allowing payments therefrom to Golden
Savings. But that is not all. On top of this, the supposed reason for
the dishonor, to wit, the forgery of the signatures of the general
manager and the auditor of the drawer corporation, has not been
established. 9 This was the finding of the lower courts which we see
no reason to disturb. And as we said in MWSS v. Court of Appeals: 10
Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139
SCRA 238). It must be established by clear, positive and
convincing evidence. This was not done in the present case.
A no less important consideration is the circumstance that the
treasury warrants in question are not negotiable instruments.
Clearly stamped on their face is the word "non-negotiable."
Moreover, and this is of equal significance, it is indicated that they
are payable from a particular fund, to wit, Fund 501.
The following sections of the Negotiable Instruments Law,
especially the underscored parts, are pertinent:
 Sec. 1. Form of negotiable instruments. An instrument
to be negotiable must conform to the following
requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a
sum certain in money;
(c) Must be payable on demand, or at a fixed or
determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must
be named or otherwise indicated therein with reasonable
certainty.
xxx xxx xxx
Sec. 3. When promise is unconditional. An unqualified
order or promise to pay is unconditional within the meaning
of this Act though coupled with
(a) An indication of a particular fund out of which
reimbursement is to be made or a particular account to be
debited with the amount; or
(b) A statement of the transaction which gives rise to the
instrument judgment.
But an order or promise to pay out of a particular fund is not
unconditional.
The indication of Fund 501 as the source of the payment to be
made on the treasury warrants makes the order or promise to pay
"not unconditional" and the warrants themselves non-negotiable.
There should be no question that the exception on Section 3 of the
Negotiable Instruments Law is applicable in the case at bar. This
conclusion conforms to Abubakar vs. Auditor General 11 where the
Court held:
The petitioner argues that he is a holder in good faith and
for value of a negotiable instrument and is entitled to the
rights and privileges of a holder in due course, free from
defenses. But this treasury warrant is not within the scope of
the negotiable instrument law. For one thing, the document
bearing on its face the words "payable from the
appropriation for food administration, is actually an Order
for payment out of "a particular fund," and is not
unconditional and does not fulfill one of the essential
requirements of a negotiable instrument (Sec. 3 last
sentence and section [1(b)] of the Negotiable Instruments
Law).
Metrobank cannot contend that by indorsing the warrants in
general, Golden Savings assumed that they were "genuine and in
all respects what they purport to be," in accordance with Section 66
of the Negotiable Instruments Law. The simple reason is that this
law is not applicable to the non-negotiable treasury warrants. The
indorsement was made by Gloria Castillo not for the purpose of
guaranteeing the genuineness of the warrants but merely to
deposit them with Metrobank for clearing. It was in fact Metrobank
that made the guarantee when it stamped on the back of the
warrants: "All prior indorsement and/or lack of endorsements
guaranteed, Metropolitan Bank & Trust Co., Calapan Branch."
The petitioner lays heavy stress on Jai Alai Corporation v. Bank of
the Philippine Islands, 12 but we feel this case is inapplicable to the
present controversy. That case involved checks whereas this case
involves treasury warrants. Golden Savings never represented that
the warrants were negotiable but signed them only for the purpose
of depositing them for clearance. Also, the fact of forgery was
proved in that case but not in the case before us. Finally, the Court
found the Jai Alai Corporation negligent in accepting the checks
without question from one Antonio Ramirez notwithstanding that
the payee was the Inter-Island Gas Services, Inc. and it did not
appear that he was authorized to indorse it. No similar negligence
can be imputed to Golden Savings.
We find the challenged decision to be basically correct. However,
we will have to amend it insofar as it directs the petitioner to credit
Golden Savings with the full amount of the treasury checks
deposited to its account.
The total value of the 32 treasury warrants dishonored was
P1,754,089.00, from which Gomez was allowed to withdraw
P1,167,500.00 before Golden Savings was notified of the dishonor.
The amount he has withdrawn must be charged not to Golden
Savings but to Metrobank, which must bear the consequences of its
own negligence. But the balance of P586,589.00 should be debited
to Golden Savings, as obviously Gomez can no longer be permitted
to withdraw this amount from his deposit because of the dishonor
of the warrants. Gomez has in fact disappeared. To also credit the
balance to Golden Savings would unduly enrich it at the expense of
Metrobank, let alone the fact that it has already been informed of
the dishonor of the treasury warrants.
WHEREFORE, the challenged decision is AFFIRMED, with the
modification that Paragraph 3 of the dispositive portion of the
judgment of the lower court shall be reworded as follows:
3. Debiting Savings Account No. 2498 in the sum of
P586,589.00 only and thereafter allowing defendant Golden
Savings & Loan Association, Inc. to withdraw the amount
outstanding thereon, if any, after the debit.
SO ORDERED.
Narvasa, Gancayco, Grio-Aquino and Medialdea, JJ., concur.
G.R. No. 148789 January 16, 2003
BPI FAMILY SAVINGS BANK, INC. AND HEDZELITO NOEL
BAYABORDA, petitioners,
vs.
ROMEO MANIKAN, respondent.
VITUG, J.:
Petitioners seek a review of the decision of the Court of Appeals in
C.A. G.R. SP. No. 48011 which has affirmed the judgment of the
Regional Trial Court, Branch 26, of Iloilo City, dismissing the
complaint of petitioners formandamus and ordering them to pay
respondent the sum of P30,000.00 by way of attorney's fees.
It would appear that respondent, being the City Treasurer of Iloilo
City, assessed petitioner bank business taxes for the years 1992
and 1993. On 26 January 1994, the bank issued two manager's
checks payable to the City Treasurer of Iloilo City, the first,
Manager's Check No. 010649 for P462,270.60, was to cover the
business tax for the year 1992, and the second, Manager's Check
No. 010650 in the amount of P482,988.45, was to settle the
business tax for the year 1993. Hedzelito Bayaborda, then manager
of the banks Iloilo Branch, instructed an employee, Edmund Sabio,
to deliver the two manager's checks to the Secretary to the City
Mayor, a certain Toto Espinosa, who, in turn, handed them over to
his secretary, Leila Salcedo, for transmittal to the City Treasurer.
The value of the checks were eventually credited to the account of
the City Treasurer of Iloilo City. The checks, however, were not
applied to satisfy the tax liabilities of petitioner but of other
taxpayers.
The misapplication of the proceeds of the checks came to the
knowledge of respondent City Treasurer who, thereupon, created a
committee to look into the matter. The investigation revealed that
it was upon the representation of Leila Salcedo that the manager's
checks were used to pay tax liabilities of other taxpayers and not
those of petitioner bank. Meanwhile, the bank, through counsel,
made a demand on respondent to issue official receipts to show
that it had paid its business taxes for the years 1992 and 1993
covered by the diverted manager's checks. When he refused to
issue the receipts requested, respondent was sued by petitioners
formandamus and damages.
The Regional Trial Court dismissed the complaint
for mandamus and ruled that petitioners had no clear legal right to
demand the issuance of official receipts nor could respondent,
given the circumstances, be compelled to issue another set of
receipts in the name of the bank. The trial court further ordered
petitioners to pay respondent the sum of P30,000.00 by way of
attorney's fees.
The Court of Appeals, on appeal by petitioners, sustained the trial
court in toto.
In their petition for review before this Court, petitioners urge a responsible for the wrongdoing or who might have been unjustly
reversal of the decision of the appellate court contending that - benefited thereby.

"a) AN ACTION FOR MANDAMUS NECESSARILY INCLUDES
INDEMNIFICATION FOR DAMAGES AND IS ASSESSED ON A
PUBLIC OFFICIAL'S PRIVATE CAPACITY. HENCE, SUING A
PUBLIC OFFICIAL IN HIS PRIVATE CAPACITY DOES NOT AS A
MATTER OF RIGHT ENTITLE HIM TO AN AWARD OF
ATTORNEY'S FEES BY WAY OF COUNTERCLAIM.
"b) THE RECEIPT BY THE CITY TREASURER'S OFFICE OF
ILOILO OF THE FACE VALUE OF THE TWO MANAGER'S
CHECKS INTENDED FOR PAYMENT OF ITS BUSINESS TAXES
FOR THE YEAR 1992 AND 1993 ENTITLES IT TO THE
ISSUANCE OF AN OFFICIAL RECEIPT ENFORCEABLE BY A
WRIT OF MANDAMUS."
In order that a writ of mandamus may aptly issue, it is essential
that, on the one hand, the person petitioning for it has a clear legal
right to the claim that is sought and that, on the other hand, the
respondent has an imperative duty to perform that which is
demanded of him.1 Mandamus will not issue to enforce a right, or to
compel compliance with a duty, which is questionable or over
which a substantial doubt exists. The principal function of the writ
of mandamus is to command and to expedite, not to inquire and to
adjudicate; thus, it is neither the office nor the aim of the writ to
secure a legal right but to implement that which is already
established. Unless the right to the relief sought is
unclouded, mandamus will not issue.2
The award of attorneys fees in favor of respondent City Treasurer,
however, should be deleted. Such an award, in the concept of
damages under Article 2208 of the Civil Code, demands factual and
legal justifications.4 While the law allows some degree of discretion
on the part of the courts in awarding attorneys fees and expenses
of litigation, the use of that judgment, however, must be done with
great care approximating as closely as possible the instances
exemplified by the law. Attorneys fees in the concept of damages
are not recoverable against a party just because of an unfavorable
judgment. Repeatedly, it has been said that no premium should be
placed on the right to litigate.5
WHEREFORE, the instant petition is partly granted. The appealed
decision is affirmed save for the award of attorneys fees in favor of
private respondent which is ordered deleted. No costs.
SO ORDERED.
Davide, Jr., C.J., Ynares-Santiago, Carpio, and Azcuna, JJ., concur.

The checks delivered by petitioner bank to Toto Espinosa were

managers checks. A managers check, like a cashiers check, is an
order of the bank to pay, drawn upon itself, committing in effect its
total resources, integrity and honor behind its issuance. By its
peculiar character and general use in commerce, a managers
check or a cashiers check is regarded substantially to be as good
as the money it represents.3

By allowing the delivery of the subject checks to a person who is

not directly charged with the collection of its tax liabilities, the bank
must be deemed to have assumed the risk of a possible misuse
thereof even as it appears to have fallen short of the diligence
ordinarily expected of it. The bank, of course, is not precluded from
pursuing a right of action against those who could have been
G.R. No. L-2516, September 25, 1950
ANG TEK LIAN, PETITIONER, VS.
THE COURT OF APPEALS, RESPONDENTS.

DECISION

BENGZON, J.:
For having issued a rubber check, Ang Tek Lian was Convicted of
estafa in the court of first instance of Manila. The Court of Appeals
affirmed the verdict.
It appears that, knowing he had no funds therefor, Ang Tek Lian
drew on Saturday, November 16, 1946, the check Exhibit A upon
the China Banking Corporation for the sum of P4,000, payable to
the order of "cash". He delivered it to Lee Hua Hong in exchange for
money which the latter handed in the act. On November 18, 1946,
the next business day, the check was presented by Lee Hua Hong
to the drawee bank for payment, but it was dishonored for
insufficiency of funds, the balance of the deposit of Ang Tek Lian on
both dates being P335 only.

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

"* * * Consequently, a drawee bank to which a bearer check is

presented for payment need not necessarily have the holder
identified and ordinarily may not be charged with negligence in
failing to do so. See Opinions 6C:2 and 6C:3. If the bank has no
reasonable cause for.suspecting any irregularity, it will be protected
in paying abearer check, 'no matter what facts unknown to it may
have occurred prior to the presentment.' 1 Morse, Banks and
Banking, sec. 393.

"Although a bank is entitled to pay the amount of a bearer check

without further inquiry, it is entirely reasonable for the bank to
insist that the holder give satisfactory proof of his identity, * * *."
G.R. No. 126568 April 30, 2003
(Patois Digest, Vol. I, p. 1089).
QUIRINO GONZALES LOGGING CONCESSIONAIRE, QUIRINO
Anyway, it is significant,and conclusive, that the form of the check GONZALES and EUFEMIA GONZALES,petitioners,
vs.
Exhibit A was totally unconnected with its dishonor. The Court of
THE COURT OF APPEALS (CA) and REPUBLIC PLANTERS
Appeals declared that it was returned unsatisfied because the BANK, respondents.
drawer had insufficient fundsnot because the drawer's
CARPIO MORALES, J.:
endorsement was lacking.
Wherefore, there being no question as to the correctness of the In the expansion of its logging business, petitioner Quirino Gonzales
penalty imposed on the appellant, the writ of certiorari is denied Logging Concessionaire (QGLC), through its proprietor, general
manager co-petitioner Quirino Gonzales, applied on October 15,
1962 for credit accommodations 1 with respondent Republic Bank
(the Bank), later known as Republic Planters Bank.
The Bank approved QGLC's application on December 21, 1962,
granting it a credit line of P900,000.00 2 broken into an overdraft
line of P500,000.00 which was later reduced to P450,000.00 and a
Letter of Credit (LC) line of P400,000.00.3
Pursuant to the grant, the Bank and petitioners QGLC and the
spouses Quirino and Eufemia Gonzales executed ten documents:
two denominated "Agreement for Credit in Current Account," 4 four
denominated "Application and Agreement for Commercial Letter of
Credit,"5 and four denominated "Trust Receipt."6
Petitioners' obligations under the credit line were secured by a real
estate mortgage on four parcels of land: two in Pandacan, Manila,
one in Makati (then part of Rizal), and another in Diliman, Quezon
City.7
In separate transactions, petitioners, to secure certain advances
from the Bank in connection with QGLC's exportation of logs,
executed a promissory note in 1964 in favor of the Bank. They were
to execute three more promissory notes in 1967.
In 1965, petitioners having long defaulted in the payment of their
obligations under the credit line, the Bank foreclosed the mortgage
and bought the properties covered thereby, it being the highest
bidder in the auction sale held in the same year. Ownership over
the properties was later consolidated in the Bank on account of
which new titles thereto were issued to it.8
On January 27, 1977, alleging non-payment of the balance of
QGLC's obligation after the proceeds of the foreclosure sale were
applied thereto, and non-payment of the promissory notes despite
repeated demands, the Bank filed a complaint for "sum of money"
(Civil Case No. 106635) against petitioners before the Regional Trial
Court (RTC) of Manila.
The complaint listed ten causes of action. The first concerns the
overdraft line under which the Bank claimed that petitioners
withdrew amounts (unspecified) at twelve percent per
annum which were unpaid at maturity and that after it applied the
proceeds of the foreclosure sale to the overdraft debt, there
remained an unpaid balance of P1,224,301.56.
The Bank's second to fifth causes of action pertain to the LC line
under which it averred that on the strength of the LCs it issued, the
beneficiaries thereof drew and presented sight drafts to it which it
all paid after petitioners' acceptance; and that it delivered the
tractors and equipment subject of the LCs to petitioners who have
not paid either the full or part of the face value of the drafts.
Specifically with respect to its second cause of action, the Bank
alleged that it issued LC No. 63-0055D on January 15, 1963 in favor
of Monark International Incorporated9 covering the purchase of a
tractor10 on which the latter allegedly drew a sight draft with a face
value of P71,500.00,11 which amount petitioners have not, however,
paid in full.
Under its third cause of action, the Bank charged that it issued LC
No. 61-1110D on December 27, 1962 also in favor of Monark
International covering the purchase of another tractor and other
equipment;12 and that Monark International drew a sight draft with
a face value of P80,350.00,13 and while payments for the value
thereof had been made by petitioners, a balance of P68,064.97
remained.
Under the fourth cause of action, the Bank maintained that it
issued LC No. 63-0182D on February 11, 1963 in favor of J.B.L.
Enterprises, Inc.14 covering the purchase of two tractors,15 and J.B.L.
Enterprises drew on February 13, 1963 a sight draft on said LC in
the amount of P155,000.00 but petitioners have not paid said
amount.
On its fifth cause of action, the Bank alleged that it issued LC No.
63-0284D on March 14, 1963 in favor of Super Master Auto Supply
(SMAS) covering the purchase of "Eight Units GMC (G.I.) Trucks";
that on March 14, 1963, SMAS drew a sight draft with a face value
of P64,000.0016 on the basis of said LC; and that the payments
made by petitioners for the value of said draft were deficient by
P45,504.74.
The Bank thus prayed for the settlement of the above-stated
obligations at an interest rate of eleven percent per annum, and for
the award of trust receipt commissions, attorney's fees and other
fees and costs of collection.
The sixth to ninth causes of action are anchored on the promissory
notes issued by petitioners allegedly to secure certain advances
from the Bank in connection with the exportation of logs as
reflected above.17 The notes were payable 30 days after date and
provided for the solidary liability of petitioners as well as attorney's
fees at ten percent of the total amount due 18 in the event of their
non-payment at maturity.
The note dated June 18, 1964, subject of the sixth cause of action,
has a face value of P55,000.00 with interest rate of twelve
percent per annum;19 that dated July 7, 1967 subject of the seventh
has a face value of P20,000.00; 20 that dated July 18, 1967 subject
of the eighth has a face value of P38,000.00; 21 and that dated
August 23, 1967 subject of the ninth has a face value of
P11,000.00.22 The interest rate of the last three notes is pegged at
thirteen percent per annum.23
On its tenth and final cause of action, the Bank claimed that it has
accounts receivable from petitioners in the amount of P120.48.
In their Answer24 of March 3, 1977, petitioners admit the following:
having applied for credit accommodations totaling P900,000.00 to
secure which they mortgaged real properties; opening of the
LC/Trust Receipt Line; the issuance by the Bank of the various LCs;
and the foreclosure of the real estate mortgage and the
consolidation of ownership over the mortgaged properties in favor
of the Bank. They deny, however, having availed of the credit
accommodations and having received the value of the promissory
notes, as they do deny having physically received the tractors and
equipment subject of the LCs.
As affirmative defenses, petitioners assert that the complaint states
no cause of action, and assuming that it does, the same is/are
barred by prescription or null and void for want of consideration.
By Order of March 10, 1977, Branch 36 of the Manila RTC attached
the preferred shares of stocks of the spouses Quirino and Eufemia
Gonzales with the Bank with a total par value of P414,000.00.
Finding for petitioners, the trial court rendered its Decision of April
22, 1992 the dispositive portion of which reads:
WHEREFORE, judgment is rendered as follows:
1. All the claims of plaintiff particularly those described in
the first to the tenth causes of action of its complaint are
denied for the reasons earlier mentioned in the body of this
decision;
2. As regards the claims of defendants pertaining to their
counterclaim (Exhibits "1", "2" and "3"), they are hereby
given ten (10) years from the date of issuance of the torrens
title to plaintiff and before the transfer thereof in good faith
to a third party buyer within which to ask for the
reconveyance of the real properties foreclosed by plaintiff,
3. The order of attachment which was issued against the
preferred shares of stocks of defendants-spouses Quirino
Gonzales and Eufemia Gonzales with the Republic Bank now
known as Republic Planters Bank dated March 21, 1977 is
hereby dissolved and/or lifted, and
4. Plaintiff is likewise ordered to pay the sum of P20,000.00,
as and for attorney's fees, with costs against plaintiff.
SO ORDERED.
In finding for petitioners, the trial court ratiocinated:25
Art. 1144 of the Civil Code states that an action upon a
written contract prescribes in ten (10) years from the time
the right of action accrues. Art. 1150 states that prescription
starts to run from the day the action may be brought. The
obligations allegedly created by the written contracts or
documents supporting plaintiff's first to the sixth causes of
action were demandable at the latest in 1964. Thus when
the complaint was filed on January 27, 1977 more than ten
(10) years from 1964 [when the causes of action accrued]
had already lapsed. The first to the sixth causes of action
are thus barred by prescription. . . .
As regards the seventh and eight causes of action, the
authenticity of which documents were partly in doubt in the
light of the categorical and uncontradicted statements that
in 1965, defendant Quirino Gonzales logging concession was
terminated based on the policy of the government to
terminate logging concessions covering less than 20,000
hectares. If this is the case, the Court is in a quandary why
 there were log exports in 1967? Because of the foregoing,
the Court does not find any valid ground to sustain the
seventh and eight causes of action of plaintiff's complaint.
As regards the ninth cause of action, the Court is baffled
why plaintiff extended to defendants another loan when
defendants according to plaintiff's records were defaulting
creditors? The above facts and circumstances has (sic)
convinced this Court to give credit to the testimony of
defendants' witnesses thatthe Gonzales spouses signed the
documents in question in blank and that the promised loan
was never released to them. There is therefore a total
absence of consent since defendants did not give their
consent to loans allegedly procured, the proceeds of which
were never received by the alleged debtors, defendants
herein. . . .
Plaintiff did not present evidence to support its tenth cause
of action. For this reason, it must consequently be denied for
lack of evidence.
On the matter of [the] counterclaims of defendants, they
seek the return of the real and personal properties which
they have given in good faith to plaintiff. Again, prescription
may apply. The real properties of defendants acquired by
plaintiff were foreclosed in 1965 and consequently,
defendants had one (1) year to redeem the property or ten
(10) years from issuance of title on the ground that the
obligation foreclosed was fictitious.
xxx xxx xxx
On appeal,26 the Court of Appeals (CA) reversed the decision of the
trial court by Decision27 of June 28, 1996 which disposed as
follows:28
WHEREFORE, premises considered, the appealed decision
(dated April 22, 1992) of the Regional Trial Court (Branch 36)
in Manila in Civil Case No. 82-4141 is hereby REVERSED
and let the case be remanded back to the court a quo for
the determination of the amount(s) to be awarded to the
[the Bank]-appellant relative to its claims against the
appellees.
SO ORDERED.
With regard to the first to sixth causes of action, the CA upheld the
contention of the Bank that the notices of foreclosure sale were
"tantamount" to demand letters upon the petitioners which
interrupted the running of the prescriptive period.29
As regards the seventh to ninth causes of action, the CA also
upheld the contention of the Bank that the written agreements-
promissory notes prevail over the oral testimony of petitioner
Quirino Gonzales that the cancellation of their logging concession
in 1967 made it unbelievable for them to secure in 1967 the
advances reflected in the promissory notes.30
With respect to petitioners' counterclaim, the CA agreed with the
Bank that:31
Certainly, failure on the part of the trial court to pass upon
and determine the authenticity and genuineness of [the
Bank's] documentary evidence [the trial court having ruled
on the basis of prescription of the Bank's first to sixth causes
of action] makes it impossible for the trial court' to
eventually conclude that theobligation foreclosed (sic) was
fictitious. Needless to say, the trial court's ruling averses
(sic) the well-entrenched rule that 'courts must render
verdict on their findings of facts." (China Banking Co. vs. CA,
70 SCRA 398)
Furthermore, the defendants-appellees' [herein petitioners']
counterclaim is basically an action for the reconveyance of
their properties, thus, the trial court's earlier ruling that the
defendants-appellees' counterclaim has prescribed is itself a
ruling that the defendants-appellees' separate action for
reconveyance has also prescribed.
The CA struck down the trial court's award of attorney's fees for
lack of legal basis.32
Hence, petitioners now press the following issues before this Court
by the present petition for review on certiorari:
1. WHETHER OR NOT RESPONDENT COURT ERRED IN SO
HOLDING THAT RESPONDENT-APPELLEES (SIC.) REPUBLIC
PLANTERS BANK['S] FIRST, SECOND, THIRD, FOURTH, FIFTH
 AND SIXTH CAUSES OF ACTION HAVE NOT PRESCRIBED
CONTRARY TO THE FINDINGS OF THE LOWER COURT, RTC
BRANCH 36 THAT THE SAID CAUSES OF ACTION HAVE
ALREADY PRESCRIBED.
2. WHETHER OR NOT RESPONDENT COURT ERRED IN SO
HOLDING THAT RESPODNENT-APPELLEES (SIC.) REPUBLIC
PLANTERS BANK['S] SEVENTH, EIGHT AND NINTH CAUSES
OF ACTION APPEARS (SIC.) TO BE IMPRESSED WITH MERIT
CONTRARY TO THE FINDINGS OF THE LOWER COURT RTC
BRANCH 36 THAT THE SAID CAUSES HAVE NO VALID
GROUND TO SUSTAIN [THEM] AND FOR LACK OF EVIDENCE.
3. WHETHER OR NOT RESPONDENT COURT [ERRED] IN
REVERSING THE FINDINGS OF THE REGIONAL TRIAL COURT
BRANCH 36 OF MANILA THAT PETITIONERS-APPELLANT (SIC.)
MAY SEEK THE RETURN OF THE REAL AND PERSONAL
PROPERTIES WHICH THEY MAY HAVE GIVEN IN GOOD FAITH
AS THE SAME IS BARRED BY PRESCRIPTION AND THAT
PETITIONERS-APPELLANT (SIC.) HAD ONE (1) YEAR TO
REDEEM THE PROPERTY OR TEN (10) YEARS FROM
ISSUANCE OF THE TITLE ON THE GROUND THAT THE
OBLIGATION FORECLOSED WAS FICTITIOUS.
4. WHETHER OR NOT RESPONDENT COURT ERRED IN SO
HOLDING THAT PEITIONERS-APPELLANTS [SIC] ARE NOT
ENTITLED TO AN AWARD OF ATTORNEY'S FEES.
The petition is partly meritorious.
On the first issue. The Civil Code provides that an action upon
written contract, an obligation created by law, and a judgment
must be brought within ten years from the time the right of action
accrues.33
The finding of the trial court that more than ten years had elapsed
since the right to bring an action on the Bank's first to sixth causes
had arisen34 is not disputed. The Bank contends, however, that "the
notices of foreclosure sale in the foreclosure proceedings of 1965
are tantamount to formal demands upon petitioners for the
payment of their past due loan obligations with the Bank, hence,
said notices of foreclosure sale interrupted/forestalled the running
of the prescriptive period."35
The Bank's contention does not impress. Prescription of actions is
interrupted when they are filed before the court, when there is a
written extrajudicial demand by the creditors, and when there is
any written acknowledgment of the debt by the debtor. 36
The law specifically requires a written extrajudicial demand by the
creditors which is absent in the case at bar. The contention that the
notices of foreclosure are "tantamount" to a written extrajudicial
demand cannot be appreciated, the contents of said notices not
having been brought to light.
But even assuming arguendo that the notices interrupted the
running of the prescriptive period, the argument would still not lie
for the following reasons:
With respect to the first to the fifth causes of action, as gleaned
from the complaint, the Bank seeks the recovery of the deficient
amount of the obligation after the foreclosure of the mortgage.
Such suit is in the nature of a mortgage action because its purpose
is precisely to enforce the mortgage contract. 37 A mortgage action
prescribes after ten years from the time the right of action
accrued.38
The law gives the mortgagee the right to claim for the deficiency
resulting from the price obtained in the sale of the property at
public auction and the outstanding obligation at the time of the
foreclosure proceedings.39 In the present case, the Bank, as
mortgagee, had the right to claim payment of the deficiency after it
had foreclosed the mortgage in 1965. 40 In other words, the
prescriptive period started to run against the Bank in 1965. As it
filed the complaint only on January 27, 1977, more than ten years
had already elapsed, hence, the action on its first to fifth causes
had by then prescribed. No other conclusion can be reached even if
the suit is considered as one upon a written contract or upon an
obligation to pay the deficiency which is created by law, 41 the
prescriptive period of both being also ten years. 42
As regards the promissory note subject of the sixth cause of action,
its period of prescription could not have been interrupted by the
notices of foreclosure sale not only because, as earlier discussed,
petitioners' contention that the notices of foreclosure are
tantamount to written extra-judicial demand cannot be considered
absent any showing of the contents thereof, but also because it
does not appear from the records that the said note is covered by
the mortgage contract.
Coming now to the second issue, petitioners seek to evade liability
under the Bank's seventh to ninth causes of action by claiming that
petitioners Quirino and Eufemia Gonzales signed the promissory
notes in blank; that they had not received the value of said notes,
and that the credit line thereon was unnecessary in view of their
money deposits, they citing "Exhibits 2 to 2-B,"43 in, and unremitted
proceeds on log exports from, the Bank. In support of their claim,
they also urge this Court to look at Exhibits "B" (the Bank's
recommendation for approval of petitioners' application for credit
accommodations), "P" (the "Application and Agreement for
Commercial Letter of Credit" dated January 16, 1963) and "T" (the
"Application and Agreement for Commercial Letter of Credit" dated
February 14, 1963).
The genuineness and due execution of the notes had, however,
been deemed admitted by petitioners, they having failed to deny
the same under oath.44 Their claim that they signed the notes in
blank does not thus lie.
Petitioners' admission of the genuineness and due execution of the
promissory notes notwithstanding, they raise want of
consideration45 thereof. The promissory notes, however, appear to
be negotiable as they meet the requirements of Section 1 46 of the
Negotiable Instruments Law. Such being the case, the notes
are prima faciedeemed to have been issued for consideration. 47 It
bears noting that no sufficient evidence was adduced by petitioners
to show otherwise.
Exhibits "2" to "2-B" to which petitioners advert in support of their
claim that the credit line on the notes was unnecessary because
they had deposits in, and remittances due from, the Bank deserve
scant consideration. Said exhibits are merely claims by petitioners
under their then proposals for a possible settlement of the case
dated February 3, 1978. Parenthetically, the proposals were not
even signed by petitioners but by certain Attorneys Osmundo R.
Victoriano and Rogelio P. Madriaga.
In any case, it is no defense that the promissory notes were signed
in blank as Section 1448 of the Negotiable Instruments Law
concedes the prima facie authority of the person in possession of
negotiable instruments, such as the notes herein, to fill in the
blanks.
As for petitioners' reliance on Exhibits "B", "P" and "T," they have
failed to show the relevance thereof to the seventh up to the ninth
causes of action of the Bank.
On the third issue, petitioners asseverate that with the trial court's
dismissal of the Bank's complaint and the denial of its first to sixth
causes of action, it is but fair and just that the real properties which
were mortgaged and foreclosed be returned to them. 49 Such,
however, does not lie. It is not disputed that the properties were
foreclosed under Act No. 3135 (An Act to Regulate the Sale of
Property under Special Powers Inserted in or Annexed to Real
Estate Mortgages), as amended. Though the Bank's action for
deficiency is barred by prescription, nothing irregular attended the
foreclosure proceedings to warrant the reconveyance of the
properties covered thereby.
As for petitioners' prayer for moral and exemplary damages, it not
having been raised as issue before the courts below, it can not now
be considered. Neither can the award of attorney's fees for lack of
legal basis.
WHEREFORE, the CA Decision is hereby AFFIRMED with
MODIFICATION.
Republic Bank's Complaint with respect to its first to sixth causes of
action is hereby DISMISSED. Its complaint with respect to its
seventh to ninth causes of action is REMANDED to the court of
origin, the Manila Regional Trial Court, Branch 36, for it to
determine the amounts due the Bank thereunder.
SO ORDERED.
Puno, Panganiban, Sandoval-Gutierrez and Corona, JJ ., concur.
G.R. No. 85419 March 9, 1993

DEVELOPMENT BANK OF RIZAL, plaintiff-petitioner,

vs.
SIMA WEI and/or LEE KIAN HUAT, MARY CHENG UY, SAMSON
TUNG, ASIAN INDUSTRIAL PLASTIC CORPORATION and
PRODUCERS BANK OF THE PHILIPPINES, defendants-
respondents.

CAMPOS, JR., J.:

On July 6, 1986, the Development Bank of Rizal (petitioner Bank for

brevity) filed a complaint for a sum of money against respondents
Sima Wei and/or Lee Kian Huat, Mary Cheng Uy, Samson Tung,
Asian Industrial Plastic Corporation (Plastic Corporation for short)
and the Producers Bank of the Philippines, on two causes of action:

(1) To enforce payment of the balance of P1,032,450.02 on a

promissory note executed by respondent Sima Wei on June
9, 1983; and

(2) To enforce payment of two checks executed by Sima Wei,

payable to petitioner, and drawn against the China Banking
Corporation, to pay the balance due on the promissory note.

Except for Lee Kian Huat, defendants filed their separate Motions to
Dismiss alleging a common ground that the complaint states no
cause of action. The trial court granted the defendants' Motions to
Dismiss. The Court of Appeals affirmed this decision, * to which the
petitioner Bank, represented by its Legal Liquidator, filed this
Petition for Review by Certiorari, assigning the following as the
alleged errors of the Court of Appeals: 1

(1) THE COURT OF APPEALS ERRED IN HOLDING THAT THE

PLAINTIFF-PETITIONER HAS NO CAUSE OF ACTION AGAINST
DEFENDANTS-RESPONDENTS HEREIN.

(2) THE COURT OF APPEALS ERRED IN HOLDING THAT

SECTION 13, RULE 3 OF THE REVISED RULES OF COURT ON
ALTERNATIVE DEFENDANTS IS NOT APPLICABLE TO HEREIN
DEFENDANTS-RESPONDENTS.

The antecedent facts of this case are as follows:

In consideration for a loan extended by petitioner Bank to
respondent Sima Wei, the latter executed and delivered to the
former a promissory note, engaging to pay the petitioner Bank or
order the amount of P1,820,000.00 on or before June 24, 1983 with
interest at 32% per annum. Sima Wei made partial payments on
the note, leaving a balance of P1,032,450.02. On November 18,
1983, Sima Wei issued two crossed checks payable to petitioner
Bank drawn against China Banking Corporation, bearing
respectively the serial numbers 384934, for the amount of
P550,000.00 and 384935, for the amount of P500,000.00. The said
checks were allegedly issued in full settlement of the drawer's
account evidenced by the promissory note. These two checks were
not delivered to the petitioner-payee or to any of its authorized
representatives. For reasons not shown, these checks came into the
possession of respondent Lee Kian Huat, who deposited the checks
without the petitioner-payee's indorsement (forged or otherwise) to
the account of respondent Plastic Corporation, at the Balintawak
branch, Caloocan City, of the Producers Bank. Cheng Uy, Branch
Manager of the Balintawak branch of Producers Bank, relying on the
assurance of respondent Samson Tung, President of Plastic
Corporation, that the transaction was legal and regular, instructed
the cashier of Producers Bank to accept the checks for deposit and
to credit them to the account of said Plastic Corporation, inspite of
the fact that the checks were crossed and payable to petitioner
Bank and bore no indorsement of the latter. Hence, petitioner filed
the complaint as aforestated.
The main issue before Us is whether petitioner Bank has a cause of
action against any or all of the defendants, in the alternative or
otherwise.
A cause of action is defined as an act or omission of one party in
violation of the legal right or rights of another. The essential
elements are: (1) legal right of the plaintiff; (2) correlative
obligation of the defendant; and (3) an act or omission of the
defendant in violation of said legal right. 2
The normal parties to a check are the drawer, the payee and the
drawee bank. Courts have long recognized the business custom of
using printed checks where blanks are provided for the date of
issuance, the name of the payee, the amount payable and the
drawer's signature. All the drawer has to do when he wishes to
issue a check is to properly fill up the blanks and sign it. However,
the mere fact that he has done these does not give rise to any
liability on his part, until and unless the check is delivered to the
payee or his representative. A negotiable instrument, of which a
check is, is not only a written evidence of a contract right but is
also a species of property. Just as a deed to a piece of land must be
delivered in order to convey title to the grantee, so 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. 4Without 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 Narvasa, C.J., Padilla, Regalado and Nocon, JJ., concur.
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 G.R. Nos. L-25836-37 January 31, 1981
therefore no cause of action against said respondents, in the
alternative or otherwise. If at all, it is Sima Wei, the drawer, who THE PHILIPPINE BANK OF COMMERCE, plaintiff-appellee,
would have a cause of action against her vs.
co-respondents, if the allegations in the complaint are found to be JOSE M. ARUEGO, defendant-appellant.
true.
FERNANDEZ, J.:
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 The defendant, Jose M. Aruego, appealed to the Court of Appeals
finding that the petitioner Bank did not acquire any right or interest from the order of the Court of First Instance of Manila, Branch XIII,
in the checks due to lack of delivery. It therefore has no cause of in Civil Case No. 42066 denying his motion to set aside the order
action against the respondents, in the alternative or otherwise. declaring him in default, 1and from the order of said court in the
same case denying his motion to set aside the judgment rendered
after he was declared in default. 2 These two appeals of the
In the light of the foregoing, the judgment of the Court of Appeals defendant were docketed as CA-G.R. NO. 27734-R and CA-G.R. NO.
dismissing the petitioner's complaint is AFFIRMED insofar as the 27940-R, respectively.
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 Upon motion of the defendant on July 25, 1960, 3 he was allowed by
respondent Sima Wei is liable to the Development Bank of Rizal for the Court of Appeals to file one consolidated record on appeal of
any amount under the promissory note allegedly signed by her. CA-G.R. NO. 27734-R and CA-G.R. NO. 27940-R. 4

SO ORDERED.
In a resolution promulgated on March 1, 1966, the Court of Appeals,
First Division, certified the consolidated appeal to the Supreme
Court on the ground that only questions of law are involved. 5
On December 1, 1959, the Philippine Bank of Commerce instituted
against Jose M. Aruego Civil Case No. 42066 for the recovery of the
total sum of about P35,000.00 with daily interest thereon from
November 17, 1959 until fully paid and commission equivalent to
3/8% for every thirty (30) days or fraction thereof plus attorney's
fees equivalent to 10% of the total amount due and costs. 6 The
complaint filed by the Philippine Bank of Commerce contains
twenty-two (22) causes of action referring to twenty-two (22)
transactions entered into by the said Bank and Aruego on different
dates covering the period from August 28, 1950 to March 14,
1951. 7 The sum sought to be recovered represents the cost of the
printing of "World Current Events," a periodical published by the
defendant. To facilitate the payment of the printing the defendant
obtained a credit accommodation from the plaintiff. Thus, for every
printing of the "World Current Events," the printer, Encal Press and
Photo Engraving, collected the cost of printing by drawing a draft
against the plaintiff, said draft being sent later to the defendant for
acceptance. As an added security for the payment of the amounts
advanced to Encal Press and Photo-Engraving, the plaintiff bank
also required defendant Aruego to execute a trust receipt in favor
of said bank wherein said defendant undertook to hold in trust for
plaintiff the periodicals and to sell the same with the promise to
turn over to the plaintiff the proceeds of the sale of said publication
to answer for the payment of all obligations arising from the draft. 8
Aruego received a copy of the complaint together with the
summons on December 2, 1959. 9 On December 14, 1959
defendant filed an urgent motion for extension of time to plead,
and set the hearing on December 16, 1959. 10 At the hearing, the
court denied defendant's motion for extension. Whereupon, the
defendant filed a motion to dismiss the complaint on December 17,
1959 on the ground that the complaint states no cause of action
because:
a) When the various bills of exchange were presented to the
defendant as drawee for acceptance, the amounts thereof had
already been paid by the plaintiff to the drawer (Encal Press and
Photo Engraving), without knowledge or consent of the defendant
drawee.
b) In the case of a bill of exchange, like those involved in the case
at bar, the defendant drawee is an accommodating party only for
the drawer (Encal Press and Photo-Engraving) and win be liable in
the event that the accommodating party (drawer) fails to pay its
obligation to the plaintiff. 11
The complaint was dismissed in an order dated December 22,
1959, copy of which was received by the defendant on December
24, 1959. 12
On January 13, 1960, the plaintiff filed a motion for
reconsideration. 13 On March 7, 1960, acting upon the motion for
reconsideration filed by the plaintiff, the trial court set aside its
order dismissing the complaint and set the case for hearing on
March 15, 1960 at 8:00 in the morning. 14 A copy of the order
setting aside the order of dismissal was received by the defendant
on March 11, 1960 at 5:00 o'clock in the afternoon according to the
affidavit of the deputy sheriff of Manila, Mamerto de la Cruz. On the
following day, March 12, 1960, the defendant filed a motion to
postpone the trial of the case on the ground that there having been
no answer as yet, the issues had not yet been joined. 15 On the
same date, the defendant filed his answer to the complaint
interposing the following defenses: That he signed the document
upon which the plaintiff sues in his capacity as President of the
Philippine Education Foundation; that his liability is only secondary;
and that he believed that he was signing only as an
accommodation party. 16
On March 15, 1960, the plaintiff filed an ex parte motion to declare
the defendant in default on the ground that the defendant should
have filed his answer on March 11, 1960. He contends that by filing
his answer on March 12, 1960, defendant was one day late. 17 On
March 19, 1960 the trial court declared the defendant in
default. 18 The defendant learned of the order declaring him in
default on March 21, 1960. On March 22, 1960 the defendant filed
a motion to set aside the order of default alleging that although the
order of the court dated March 7, 1960 was received on March 11,
1960 at 5:00 in the afternoon, it could not have been reasonably
expected of the defendant to file his answer on the last day of the
reglementary period, March 11, 1960, within office hours, especially
because the order of the court dated March 7, 1960 was brought to
the attention of counsel only in the early hours of March 12, 1960.
The defendant also alleged that he has a good and substantial
defense. Attached to the motion are the affidavits of deputy sheriff
Mamerto de la Cruz that he served the order of the court dated
March 7, 1960 on March 11, 1960, at 5:00 o'clock in the afternoon
and the affidavit of the defendant Aruego that he has a good and
substantial defense. 19 The trial court denied the defendant's
motion on March 25, 1960. 20 On May 6, 1960, the trial court
rendered judgment sentencing the defendant to pay to the plaintiff
the sum of P35,444.35 representing the total amount of his
obligation to the said plaintiff under the twenty-two (22) causes of
action alleged in the complaint as of November 15, 1957 and the
sum of P10,000.00 as attorney's fees. 21
On May 9, 1960 the defendant filed a notice of appeal from the
order dated March 25, 1961 denying his motion to set aside the
order declaring him in default, an appeal bond in the amount of
P60.00, and his record on appeal. The plaintiff filed his opposition to
the approval of defendant's record on appeal on May 13, 1960. The
following day, May 14, 1960, the lower court dismissed defendant's
appeal from the order dated March 25, 1960 denying his motion to
set aside the order of default. 22 On May 19, 1960, the defendant
filed a motion for reconsideration of the trial court's order
dismissing his appeal. 23 The plaintiff, on May 20, 1960, opposed
the defendant's motion for reconsideration of the order dismissing
appeal. 24 On May 21, 1960, the trial court reconsidered its previous
order dismissing the appeal and approved the defendant's record
on appeal. 25 On May 30, 1960, the defendant received a copy of a
notice from the Clerk of Court dated May 26, 1960, informing the
defendant that the record on appeal filed ed by the defendant was
forwarded to the Clerk of Court of Appeals. 26
On June 1, 1960 Aruego filed a motion to set aside the judgment
rendered after he was declared in default reiterating the same
ground previously advanced by him in his motion for relief from the
order of default. 27 Upon opposition of the plaintiff filed on June 3,
1960, 28 the trial court denied the defendant's motion to set aside
the judgment by default in an order of June 11, 1960. 29 On June 20,
1960, the defendant filed his notice of appeal from the order of the
court denying his motion to set aside the judgment by default, his
appeal bond, and his record on appeal. The defendant's record on
appeal was approved by the trial court on June 25, 1960. 30 Thus,
the defendant had two appeals with the Court of Appeals: (1)
Appeal from the order of the lower court denying his motion to set
aside the order of default docketed as CA-G.R. NO. 27734-R; (2)
Appeal from the order denying his motion to set aside the judgment
by default docketed as CA-G.R. NO. 27940-R.
In his brief, the defendant-appellant assigned the following errors:
I
THE LOWER COURT ERRED IN HOLDING THAT THE
DEFENDANT WAS IN DEFAULT.
II
THE LOWER COURT ERRED IN ENTERTAINING THE MOTION
TO DECLARE DEFENDANT IN DEFAULT ALTHOUGH AT THE
TIME THERE WAS ALREADY ON FILE AN ANSWER BY HIM
WITHOUT FIRST DISPOSING OF SAID ANSWER IN AN
APPROPRIATE ACTION.
III
THE LOWER COURT ERRED IN DENYING DEFENDANT'S
PETITION FOR RELIEF OF ORDER OF DEFAULT AND FROM
JUDGMENT BY DEFAULT AGAINST DEFENDANT. 31
It has been held that to entitle a party to relief from a judgment
taken against him through his mistake, inadvertence, surprise or
excusable neglect, he must show to the court that he has a
meritorious defense. 32 In other words, in order to set aside the
order of default, the defendant must not only show that his failure
to answer was due to fraud, accident, mistake or excusable
negligence but also that he has a meritorious defense.
The record discloses that Aruego received a copy of the complaint
together with the summons on December 2, 1960; that on
December 17, 1960, the last day for filing his answer, Aruego filed
a motion to dismiss; that on December 22, 1960 the lower court
dismissed the complaint; that on January 23, 1960, the plaintiff
filed a motion for reconsideration and on March 7, 1960, acting
upon the motion for reconsideration, the trial court issued an order
setting aside the order of dismissal; that a copy of the order was
received by the defendant on March 11, 1960 at 5:00 o'clock in the
afternoon as shown in the affidavit of the deputy sheriff; and that
on the following day, March 12, 1960, the defendant filed his
answer to the complaint.
The failure then of the defendant to file his answer on the last day
for pleading is excusable. The order setting aside the dismissal of
the complaint was received at 5:00 o'clock in the afternoon. It was
therefore impossible for him to have filed his answer on that same
day because the courts then held office only up to 5:00 o'clock in
the afternoon. Moreover, the defendant immediately filed his
answer on the following day.
However, while the defendant successfully proved that his failure to
answer was due to excusable negligence, he has failed to show that
he has a meritorious defense. The defendant does not have a good
and substantial defense.
Defendant Aruego's defenses consist of the following:
a) The defendant signed the bills of exchange referred to in the
plaintiff's complaint in a representative capacity, as the then
President of the Philippine Education Foundation Company,
publisher of "World Current Events and Decision Law Journal,"
printed by Encal Press and Photo-Engraving, drawer of the said bills
of exchange in favor of the plaintiff bank;
b) The defendant signed these bills of exchange not as principal
obligor, but as accommodation or additional party obligor, to add to
the security of said plaintiff bank. The reason for this statement is
that unlike real bills of exchange, where payment of the face value
is advanced to the drawer only upon acceptance of the same by
the drawee, in the case in question, payment for the supposed bills
of exchange were made before acceptance; so that in effect,
although these documents are labelled bills of exchange, legally
they are not bills of exchange but mere instruments evidencing
indebtedness of the drawee who received the face value thereof,
with the defendant as only additional security of the same. 33
The first defense of the defendant is that he signed the supposed
bills of exchange as an agent of the Philippine Education
Foundation Company where he is president. Section 20 of the
Negotiable Instruments Law provides that "Where the instrument
contains or a person adds to his signature words indicating that he
signs for or on behalf of a principal or in a representative capacity,
he is not liable on the instrument if he was duly authorized; but the
mere addition of words describing him as an agent or as filing a
representative character, without disclosing his principal, does not
exempt him from personal liability."
An inspection of the drafts accepted by the defendant shows that
nowhere has he disclosed that he was signing as a representative
of the Philippine Education Foundation Company. 34 He merely
signed as follows: "JOSE ARUEGO (Acceptor) (SGD) JOSE ARGUEGO
For failure to disclose his principal, Aruego is personally liable for
the drafts he accepted.
The defendant also contends that he signed the drafts only as an
accommodation party and as such, should be made liable only after
a showing that the drawer is incapable of paying. This contention is
also without merit.
An accommodation party is one who has signed the instrument as
maker, drawer, indorser, without receiving value therefor and for
the purpose of lending his name to some other person. Such person
is liable on the instrument to a holder for value, notwithstanding
such holder, at the time of the taking of the instrument knew him
to be only an accommodation party. 35 In lending his name to the
accommodated party, the accommodation party is in effect a
surety for the latter. He lends his name to enable the
accommodated party to obtain credit or to raise money. He
receives no part of the consideration for the instrument but
assumes liability to the other parties thereto because he wants to
accommodate another. In the instant case, the defendant signed as
a drawee/acceptor. Under the Negotiable Instrument Law, a drawee
is primarily liable. Thus, if the defendant who is a lawyer, he should
not have signed as an acceptor/drawee. In doing so, he became
primarily and personally liable for the drafts.
The defendant also contends that the drafts signed by him were not
really bills of exchange but mere pieces of evidence of
indebtedness because payments were made before acceptance.
This is also without merit. Under the Negotiable Instruments Law, a
bill of exchange is an unconditional order in writting addressed by
one person to another, signed by the person giving it, requiring the
person to whom it is addressed to pay on demand or at a fixed or
determinable future time a sum certain in money to order or to
bearer. 36 As long as a commercial paper conforms with the
definition of a bill of exchange, that paper is considered a bill of
exchange. The nature of acceptance is important only in the
determination of the kind of liabilities of the parties involved, but
not in the determination of whether a commercial paper is a bill of
exchange or not.
It is evident then that the defendant's appeal cannot prosper. To
grant the defendant's prayer will result in a new trial which will
serve no purpose and will just waste the time of the courts as well
as of the parties because the defense is nil or ineffective. 37
WHEREFORE, the order appealed from in Civil Case No. 42066 of
the Court of First Instance of Manila denying the petition for relief
from the judgment rendered in said case is hereby affirmed,
without pronouncement as to costs.
SO ORDERED.
Teehankee (Chairman), Makasiar, Guerrero and Melencio-Herrera
JJ., concur.
G.R. No. L-18657 August 23, 1922
THE GREAT EASTERN LIFE INSURANCE CO., plaintiff-appellant,
vs.
HONGKONG & SHANGHAI BANKING CORPORATION and
PHILIPPINE NATIONAL BANK, defendants-appellees.
STATEMENT
The plaintiff is an insurance corporation, and the defendants are
banking corporations, and each is duly licensed to do its respective
business in the Philippines Islands.
May 3, 1920, the plaintiff drew its check for P2,000 on the
Hongkong and Shanghai Banking Corporation with whom it had an
account, payable to the order of Lazaro Melicor. E. M. Maasim
fraudulently obtained possession of the check, forged Melicor's
signature, as an endorser, and then personally endorsed and
presented it to the Philippine National Bank where the amount of
the check was placed to his credit. After having paid the check, and
on the next day, the Philippine national Bank endorsed the check to
the Hongkong and Shanghai Banking Corporation which paid it and
charged the amount of the check to the account of the plaintiff. In
the ordinary course of business, the Hongkong Shanghai Banking
Corporation rendered a bank statement to the plaintiff showing that
the amount of the check was charged to its account, and no
objection was then made to the statement. About four months after
the check was charged to the account of the plaintiff, it developed
that Lazaro Melicor, to whom the check was made payable, had
never received it, and that his signature, as an endorser, was
forged by Maasim, who presented and deposited it to his private
account in the Philippine National Bank. With this knowledge , the
plaintiff promptly made a demand upon the Hongkong and
Shanghai Banking Corporation that it should be given credit for the
amount of the forged check, which the bank refused to do, and the
plaintiff commenced this action to recover the P2,000 which was
paid on the forged check. On the petition of the Shanghai Bank, the
Philippine National Bank was made defendant. The Shanghai Bank
denies any liability, but prays that, if a judgment should be
rendered against it, in turn, it should have like judgment against
the Philippine National Bank which denies all liability to either party.
Upon the issues being joined, a trial was had and judgment was
rendered against the plaintiff and in favor of the defendants, from
which the plaintiff appeals, claiming that the court erred in
dismissing the case, notwithstanding its finding of fact, and in not
rendering a judgment in its favor, as prayed for in its complaint.
JOHNS, J.:
There is no dispute about any of the findings of fact made by the
trial court, and the plaintiff relies upon them for a reversal. Among
other things, the trial court says:
Who is responsible for the refund to the drawer of the
amount of the check drawn and payable to order, when its
value was collected by a third person by means of forgery of
the signature of the payee? Is it the drawee or the last
indorser, who ignored the forgery at the time of making the
payment, or the forger?
To lower court found that Melicor's name was forged to the check.
"So that the person to whose order the check was issued did not
receive the money, which was collected by E. M. Maasim," and then
says:
Now then, the National Bank should not be held responsible
for the payment of made to Maasim in good faith of the
amount of the check, because the indorsement of Maasim is
unquestionable and his signature perfectly genuine, and the
bank was not obliged to identify the signature of the former
indorser. Neither could the Hongkong and Shanghai Banking
Corporation be held responsible in making payment in good
 faith to the National Bank, because the latter is a holder in
due course of the check in question. In other words, the two
defendant banks can not be held civilly responsible for the
consequences of the falsification or forgery of the signature
of Lazaro Melicor, the National Bank having had no notice of
said forgery in making payment to Maasim, nor the
Hongkong bank in making payment to National Bank.
Neither bank incurred in any responsibility arising from that
crime, nor was either of the said banks by subsequent acts,
guilty of negligence or fault.
This was fundamental error.
Plaintiff's check was drawn on Shanghai Bank payable to the order
of Melicor. In other words, the plaintiff authorized and directed the
Shanghai Bank to pay Melicor, or his order, P2,000. It did not
authorize or direct the bank to pay the check to any other person
than Melicor, or his order, and the testimony is undisputed that
Melicor never did part with his title or endorse the check, and never
received any of its proceeds. Neither is the plaintiff estopped or
bound by the banks statement, which was made to it by the
Shanghai Bank. This is not a case where the plaintiff's own
signature was forged to one of it checks. In such a case, the
plaintiff would have known of the forgery, and it would have been
its duty to have promptly notified the bank of any forged signature,
and any failure on its part would have released bank from any
liability. That is not this case. Here, the forgery was that of Melicor,
who was the payee of the check, and the legal presumption is that
the bank would not honor the check without the genuine
endorsement of Melicor. In other words, when the plaintiff received
it banks statement, it had a right to assume that Melicor had
personally endorsed the check, and that, otherwise, the bank would
not have paid it.
Section 23 of Act No. 2031, known as the Negotiable Instruments
Law, says:
When a signature is forged or made without the authority of
the person whose signature it purports to be, it is wholly
inoperative, and no right to retain the instrument, or to give
a discharge therefor, or to enforce payment thereof against
any party thereto, can be acquired through or under such
signature, unless the party against whom it is sought to
enforce such right is precluded from setting up the forgery
or want of authority.
That section is square in point.
The money was on deposit in the Shanghai Bank, and it had no
legal right to pay it out to anyone except the plaintiff or its order.
Here, the plaintiff ordered the Shanghai Bank to pay the P2,000 to
Melicor, and the money was actually paid to Maasim and was never
paid to Melicor, and he never paid to Melicor, and he never
personally endorsed the check, or authorized any one to endorse it
for him, and the alleged endorsement was a forgery. Hence, upon
the undisputed facts, it must follow that the Shanghai Bank has no
defense to this action.
It is admitted that the Philippine National Bank cashed the check
upon a forged signature, and placed the money to the credit of
Maasim, who was a forger. That the Philippine National Bank then
endorsed the check and forwarded it to the Shanghai Bank by
whom it was paid. The Philippine National Bank had no license or
authority to pay the money to Maasim or anyone else upon a forge
signature. It was its legal duty to know that Melicor's endorsment
was genuine before cashing the check. Its remedy is against
Maasim to whom it paid the money.
The judgment of the lower court is reversed, and one will be
entered here in favor of the plaintiff and against the Hongkong and
Shanghai Banking Corporation for the P2,000, with interest thereon
from November 8, 1920 at the rate of 6 per cent per annum, and
the costs of this action, and a corresponding judgment will be
entered in favor of the Hongkong Shanghai Banking Corporation
against the Philippine National Bank for the same amount, together
with the amount of its costs in this action. So ordered.
Araullo, C.J., Johnson, Street, Malcolm, Avancea, Villamor, Ostrand
and Romualdez, JJ., concur.
 of the decision of the Court of Appeals in C.A.-G.R. 34042-R
dated June 25, 1968 in favor of the Bank of the Philippine Islands
(hereinafter referred to as the respondent).

From April 2, 1959 to May 18, 1959, ten checks with a total face
value of P8,030.58 were deposited by the petitioner in its current
account with the respondent bank. The particulars of these checks
are as follows:
1. Drawn by the Delta Engineering Service upon the Pacific Banking
Corporation and payable to the Inter-Island Gas Service, Inc. or
order:
Date Check Exhibit

Deposited Number Amount Number

4/2/59 B-352680 P500.00 18

4/20/59 A-156907 372.32 19

4/24/59 A-156924 397.82 20

5/4/59 B-364764 250.00 23

5/6/59 B-364775 250.00 24

2. Drawn by the Enrique Cortiz & Co. upon the Pacific Banking
Corporation and payable to the Inter-Island Gas Service, Inc. or
bearer:
4/13/59 B-335063 P2108.70 21
4/27/59 B-335072 2210.94 22
G.R. No. L-29432, August 06, 1975
3. Drawn by the Luzon Tinsmith & Company upon the China
JAI-ALAI CORPORATION OF THE PHILIPPINES, PETITIONER, Banking Corporation and payable to the Inter-Island Gas Service,
VS. BANK OF THE PHILIPPINE ISLANDS, RESPONDENT.
Inc. or bearer:
DECISION 5/18/59 VN430188 P940.80 25
4. Drawn by the Roxas Manufacturing, Inc. upon the Philippine
CASTRO, J.: National Bank and payable to the Inter-Island Gas Service, Inc. or
This is a petition by the Jai-Alai Corporation of order:
the Philippines (hereinafter referred to as the petitioner) for review 5/14/59 1860160 P500.00 26
5/18/59 1860660 500.00 27
All the foregoing checks, which were acquired by the petitioner
from one Antonio J. Ramirez, a sales agent of the Inter-Island Gas
and a regular bettor at jai-alai games, were, upon deposit,
temporarily credited to the petitioner's account in accordance with
the clause printed on the deposit slips issued by the respondent
and which reads:
"Any credit allowed the depositor on the books of the Bank for
checks or drafts hereby received for deposit, is provisional only,
until such time as the proceeds thereof, in current funds or solvent
credits, shall have been actually received by the Bank and the
latter reserves to itself the right to charge back the item to the
account of itsdepositor, at any time before that event, regardless of
whether or not the item itself can be returned."
About the latter part of July 1959, after Ramirez had resigned from
the Inter-Island Gas and after the checks had been submitted to
inter-bank clearing, the Inter-Island Gas discovered that all
the indorsements made on the checks purportedly by its cashiers,
Santiago Amplayo and Vicenta Mucor (who were merely authorized
to deposit checks issued payable to the said company) as well as
the rubber stamp impression thereon reading "Inter-Island Gas
Service, Inc.," were forgeries. In due time, the Inter-Island Gas
advised the petitioner, the respondent, the drawers and
the drawee-banks of the said checks about the forgeries, and filed
a criminal complaint against Ramirez with the Office of the City
Fiscal of Manila. [1]
The respondent's cashier, Ramon Sarthou, upon receipt of the letter
of Inter-Island Gas dated August 31, 1959, called up the petitioner's
cashier, Manuel Garcia, and advised the latter that in view of the
circumstances he would debit the value of the checks against the
petitioner's account as soon as they were returned by the
respectivedrawee-banks.
Meanwhile, the drawers of the checks, having been notified of the
forgeries, demanded reimbursement to their respective accounts
from the drawee-banks, which in turn demanded from the
respondent, as collecting bank, the return of the amounts they had
paid on account thereof. When the drawee-banks returned the
checks to the respondent, the latter paid their value which the
former in turn paid to the Inter-Island Gas. The respondent, for its
part, debited the petitioner's current account and forwarded to the
latter the checks containing the forgedindorsements, which the
petitioner, however, refused to accept.
On October 8, 1959 the petitioner drew against its current account
with the respondent a check for P135,000 payable to the order of
the Marino Olondriz y Cia. in payment of certain shares of
stock. The check was, however, dishonored by the respondent as
its records showed that as of October 8, 1959 the current account
of the petitioner, after netting out the value of the checks
(P8,030.58) with the forged indorsements, had a balance of only
P128,257.65.
The petitioner then filed a complaint against the respondent with
the Court of First Instance of Manila, which was however dismissed
by the trial court after due trial, and as well by the Court of
Appeals, on appeal.
Hence, the present recourse.
The issues posed by the petitioner in the instant petition may be
briefly stated as follows:
(a) Whether the respondent had the right to debit the petitioner's
current account in the amount corresponding to the total value of
the checks in question after more than three months had elapsed
from the date their value was credited to the petitioner's account;
(b) Whether the respondent is estopped from claiming that the
amount of P8,030.58, representing the total value of the checks
with the forged indorsements, had not been properly credited to
the petitioner's account, since the same had already been paid by
the drawee-banks and received in due course by the respondent;
and
(c) On the assumption that the respondent had improperly debited
the petitioner's current account, whether the latter is entitled to
damages.
These three issues interlock and will be resolved jointly.
In our opinion, the respondent acted within legal bounds when it
debited the petitioner's account. When the petitioner deposited
the checks with the respondent, the nature of the relationship
created at that stage was one of agency, that is, the bank was to
collect from the drawees of the checks the corresponding
proceeds. It is true that the respondent had already collected the
proceeds of the checks when it debited the petitioner's account, so
that following the rule in Gullas vs. Philippine National Bank
might be argued that the relationship between the parties had
become that of creditor and debtor as to preclude the respondent
from using the petitioner's funds to make payments not authorized
by the latter. It is our view nonetheless that no creditor-debtor
relationship was created between the parties.
Section 23 of the Negotiable Instruments Law (Act 2031) states
that[3]
"When a signature is forged or made without the authority of the
person whose signature it purports to be, it is wholly inoperative,
and no right to retain the instrument, or to
discharge therefor, or to enforce payment thereof against any party
thereto, can be acquired through or under such signature, unless
the party against whom it is sought to enforce such right is
precluded from setting up the forgery or want of authority."
Since under the foregoing provision, a forged signature in a
negotiable instrument is wholly inoperative and no right to
discharge it or enforce its payment can be acquired through or
under the forged signature except against a party who cannot
invoke the forgery, it stands to reason, upon the facts of record,
that the respondent, as a collecting bank which indorsed the
checks to the drawee-banks for clearing, should be liable to the
latter for reimbursement, for, as found by the court a quo and by
the appellate court, the indorsements on the checks had been
forged prior to their delivery to the petitioner. In legal
contemplation, therefore, the payments made by thedrawee-banks
to the respondent on account of the said checks were ineffective;
and, such being the case, the relationship of creditor and debtor
between the petitioner and the respondent had not been validly
effected, the checks not having been properly and legitimately
converted into cash.[4]
In Great Eastern Life Ins. Co. vs. Hongkong & Shanghai Bank,[5] the
Court ruled that it is the obligation of the collecting bank to
[2]
it reimburse the drawee-bank the value of the checks subsequently
found to contain the forgedindorsement of the payee. The reason
is that the bank with which the check was deposited has no right to
pay the sum stated therein to the forger "or anyone else upon a
forged signature." "It was its duty to know," said the Court, "that
[the payee's] endorsement was genuine before cashing the check."
The petitioner must in turn shoulder the loss of the amounts which
the respondent, as its collecting agent, had to reimburse to
the drawee-banks.
We do not consider material for the purposes of the case at bar that
give a more than three months had elapsed since the proceeds of the
checks in question were collected by the respondent. The record
shows that the respondent had acted promptly after being informed
that the indorsements on the checks were forged. Moreover,
having received the checks merely for collection and deposit, the
respondent cannot be expected to know or ascertain the the title of Ramirez over them and his authority to cash them
genuineness of all prior indorsements on the said checks. Indeed, (apparently to purchase jai-alai tickets from the petitioner), it
having itself indorsed them to the respondent in accordance with appearing on their face that a corporate entity the Inter-Island
the rules and practices of commercial banks, of which the Court Gas Service, Inc. was the payee thereof and Ramirez delivered
takes due cognizance, the petitioner is deemed to have given the the said checks to the petitioner ostensibly on the strength of the
warranty prescribed in Section 66 of the Negotiable Instruments payee's cashiers' indorsements.
Law that every single one of those checks "is genuine and in all At all events, under Section 67 of the Negotiable Instruments Law,
respects what it purports to be." "Where a person places his indorsement on an instrument
The petitioner was, moreover, grossly recreant in accepting the negotiable by delivery he incurs all the liability of an indorser," and
checks in question from Ramirez. It could not have escaped the under Section 66 of the same statute a general indorser warrants
attention of the petitioner that the payee of all the checks was a that the instrument "is genuine and in all respects what it purports
corporation the Inter-Island Gas Service, Inc. Yet, the petitioner to be." Considering that the petitioner indorsed the said checks
cashed these checks to a mere individual who was admittedly when it deposited them with the respondent, the petitioner as
a habitue at its jai-alai games without making any inquiry as to his an indorser guaranteed the genuineness of all
authority to exchange checks belonging to the payee- prior indorsements thereon. The respondent which relied upon the
corporation. In Insular Drug Co. vs. National [6]
the Court made the petitioner's warranty should not be held liable for the resulting
pronouncement that loss. This conclusion applies similarly to exh. 22 which is an
". . . The right of an agent to indorse commercial paper is a very uncrossed bearer instrument, for under Section 65 of the
responsible power and will not be lightly inferred. A salesman with Negotiable Instruments Law, "Every person negotiating an
authority to collect money belonging to his principal does not have instrument by deliverywarrants (a) That the instrument is
the implied authority to indorse checks received in payment. Any genuine and in all respects what it purports to be." Under that
person taking checks made payable to a corporation, which can act same section this warranty "extends in favor of no holder other
only by agents, does so at his peril, and must abide by the than the immediate transferee," which, in the case at bar, would be
consequences if the agent who indorses the same is without the respondent.
authority." (italics supplied) The provision in the deposit slip issued by the respondent which
It must be noted further that three of the checks in question are stipulates that it "reserves to itself the right to charge back the
crossed checks, namely, exhs. 21, 25 and 27, which may only be item to the account of its depositor," at any time before "current
deposited, but not encashed; yet, the petitioner negligently funds or solvent credits shall have been actually received by the
accepted them for cash. That two of the crossed checks, Bank," would not materially affect the conclusion we have
namely, exhs. 21 and 25, are bearer instruments would not, in our reached. That stipulation prescribes that there must be an actual
view, exculpate the petitioner from liability with respect to receipt by the bank of current funds or solvent credits; but as we
them. The fact that they are bearer checks and at the same time have earlier indicated the transfer by the drawee-banks of funds to
crossed checks should have aroused the petitioner's suspicion as to the respondent on account of the checks in question was
ineffectual because made under the mistaken and valid assumption
that the indorsements of the payee thereon were genuine. Under
article 2154 of the New Civil Code "If something is received when
there is no right to demand it and it was unduly delivered through
mistake, the obligation to return it arises." There was, therefore, in
contemplation of law, no valid payment of money made by
the drawee-banks to the respondent on account of the questioned
checks.
ACCORDINGLY, the judgment of the Court of Appeals is affirmed,
at petitioner's cost.
Makasiar, Esguerra, Muoz Palma, and Martin, JJ., concur.
Teehankee, J., is on leave.

G.R. No. L-40796 July 31, 1975
REPUBLIC BANK, plaintiff-appellee,
vs.
MAURICIA T. EBRADA, defendant-appellant.
MARTIN, J.:
Appeal on a question of law of the decision of the Court of First
Instance of Manila, Branch XXIII in Civil Case No. 69288, entitled
"Republic Bank vs. Mauricia T. Ebrada."
On or about February 27, 1963 defendant Mauricia T. Ebrada,
encashed Back Pay Check No. 508060 dated January 15, 1963 for
P1,246.08 at the main office of the plaintiff Republic Bank at
Escolta, Manila. The check was issued by the Bureau of
Treasury. 1 Plaintiff Bank was later advised by the said bureau that
the alleged indorsement on the reverse side of the aforesaid check
by the payee, "Martin Lorenzo" was a forgery 2 since the latter had
allegedly died as of July 14, 1952. 3 Plaintiff Bank was then
requested by the Bureau of Treasury to refund the amount of
P1,246.08. 4 To recover what it had refunded to the Bureau of
Treasury, plaintiff Bank made verbal and formal demands upon
defendant Ebrada to account for the sum of P1,246.08, but said
defendant refused to do so. So plaintiff Bank sued defendant
Ebrada before the City Court of Manila.
On July 11, 1966, defendant Ebrada filed her answer denying the
material allegations of the complaint and as affirmative defenses
alleged that she was a holder in due course of the check in
question, or at the very least, has acquired her rights from a holder
in due course and therefore entitled to the proceeds thereof. She
also alleged that the plaintiff Bank has no cause of action against
her; that it is in estoppel, or so negligent as not to be entitled to
recover anything from her. 5
About the same day, July 11, 1966 defendant Ebrada filed a Third-
Party complaint against Adelaida Dominguez who, in turn, filed on
September 14, 1966 a Fourth-Party complaint against Justina Tinio.
On March 21, 1967, the City Court of Manila rendered judgment for
the plaintiff Bank against defendant Ebrada; for Third-Party plaintiff
against Third-Party defendant, Adelaida Dominguez, and for Fourth-
Party plaintiff against Fourth-Party defendant, Justina Tinio.
From the judgment of the City Court, defendant Ebrada took an
appeal to the Court of First Instance of Manila where the parties
submitted a partial stipulation of facts as follows:
COME NOW the undersigned counsel for the plaintiff,
defendant, Third-Party defendant and Fourth-Party plaintiff
and unto this Honorable Court most respectfully submit the
following:
PARTIAL STIPULATION OF FACTS
1. That they admit their respective capacities to sue and be
sued;
2. That on January 15, 1963 the Treasury of the Philippines
issued its Check No. BP-508060, payable to the order of one
MARTIN LORENZO, in the sum of P1,246.08, and drawn on
the Republic Bank, plaintiff herein, which check will be
marked as Exhibit "A" for the plaintiff;
3. That the back side of aforementioned check bears the
following signatures, in this order:
1) MARTIN LORENZO;
2) RAMON R. LORENZO;
3) DELIA DOMINGUEZ; and
4) MAURICIA T. EBRADA;
4. That the aforementioned check was delivered to the defendant
MAURICIA T. EBRADA by the Third-Party defendant and Fourth-Party
plaintiff ADELAIDA DOMINGUEZ, for the purpose of encashment;
5. That the signature of defendant MAURICIA T. EBRADA was
affixed on said check on February 27, 1963 when she
encashed it with the plaintiff Bank;
 6. That immediately after defendant MAURICIA T. EBRADA
received the cash proceeds of said check in the sum of
P1,246.08 from the plaintiff Bank, she immediately turned
over the said amount to the third-party defendant and
fourth-party plaintiff ADELAIDA DOMINGUEZ, who in turn
handed the said amount to the fourth-party defendant
JUSTINA TINIO on the same date, as evidenced by the
receipt signed by her which will be marked as Exhibit "1-
Dominguez"; and
7. That the parties hereto reserve the right to present
evidence on any other fact not covered by the foregoing
stipulations,
Manila, Philippines, June 6, 1969.
Based on the foregoing stipulation of facts and the documentary
evidence presented, the trial court rendered a decision, the
dispositive portion of which reads as follows:
WHEREFORE, the Court renders judgment ordering the
defendant Mauricia T. Ebrada to pay the plaintiff the amount
of ONE THOUSAND TWO FORTY-SIX 08/100 (P1,246.08), with
interest at the legal rate from the filing of the complaint on
June 16, 1966, until fully paid, plus the costs in both
instances against Mauricia T. Ebrada.
The right of Mauricia T. Ebrada to file whatever claim she
may have against Adelaida Dominguez in connection with
this case is hereby reserved. The right of the estate of
Dominguez to file the fourth-party complaint against Justina
Tinio is also reserved.
SO ORDERED.
In her appeal, defendant-appellant presses that the lower court
erred:
IN ORDERING THE APPELLANT TO PAY THE APPELLEE THE
FACE VALUE OF THE SUBJECT CHECK AFTER FINDING THAT
THE DRAWER ISSUED THE SUBJECT CHECK TO A PERSON
ALREADY DECEASED FOR 11- YEARS AND THAT THE
APPELLANT DID NOT BENEFIT FROM ENCASHING SAID
CHECK.
From the stipulation of facts it is admitted that the check in
question was delivered to defendant-appellant by Adelaida
Dominguez for the purpose of encashment and that her signature
was affixed on said check when she cashed it with the plaintiff
Bank. Likewise it is admitted that defendant-appellant was the last
indorser of the said check. As such indorser, she was supposed to
have warranted that she has good title to said check; for under
Section 65 of the Negotiable Instruments Law: 6
Every person negotiating an instrument by delivery or by
qualified indorsement, warrants:
(a) That the instrument is genuine and in all respects what it
purports to be.
(b) That she has good title to it.
xxx xxx xxx
and under Section 65 of the same Act:
Every indorser who indorses without qualification warrants
to all subsequent holders in due course:
(a) The matters and things mentioned in subdivisions (a),
(b), and (c) of the next preceding sections;
(b) That the instrument is at the time of his indorsement
valid and subsisting.
It turned out, however, that the signature of the original payee of
the check, Martin Lorenzo was a forgery because he was already
dead 7 almost 11 years before the check in question was issued by
the Bureau of Treasury. Under action 23 of the Negotiable
Instruments Law (Act 2031):
When a signature is forged or made without the authority of
the person whose signature it purports to be, it is wholly
inoperative, and no right to retain the instruments, or to
give a discharge thereof against any party thereto, can be
acquired through or under such signature unless the party
against whom it is sought to enforce such right is precluded
from setting up the forgery or want of authority.
It is clear from the provision that where the signature on a
negotiable instrument if forged, the negotiation of the check is
without force or effect. But does this mean that the existence of
one forged signature therein will render void all the other
negotiations of the check with respect to the other parties whose
signature are genuine?
In the case of Beam vs. Farrel, 135 Iowa 670, 113 N.W. 590, where
a check has several indorsements on it, it was held that it is only
the negotiation based on the forged or unauthorized signature
which is inoperative. Applying this principle to the case before Us, it
can be safely concluded that it is only the negotiation predicated
on the forged indorsement that should be declared inoperative.
This means that the negotiation of the check in question from
Martin Lorenzo, the original payee, to Ramon R. Lorenzo, the
second indorser, should be declared of no affect, but the
negotiation of the aforesaid check from Ramon R. Lorenzo to
Adelaida Dominguez, the third indorser, and from Adelaida
Dominguez to the defendant-appellant who did not know of the
forgery, should be considered valid and enforceable, barring any
claim of forgery.
What happens then, if, after the drawee bank has paid the amount
of the check to the holder thereof, it was discovered that the
signature of the payee was forged? Can the drawee bank recover
from the one who encashed the check?
In the case of State v. Broadway Mut. Bank, 282 S.W. 196, 197, it
was held that the drawee of a check can recover from the holder
the money paid to him on a forged instrument. It is not supposed to
be its duty to ascertain whether the signatures of the payee or
indorsers are genuine or not. This is because the indorser is
supposed to warrant to the drawee that the signatures of the payee
and previous indorsers are genuine, warranty not extending only to
holders in due course. One who purchases a check or draft is bound
to satisfy himself that the paper is genuine and that by indorsing it
or presenting it for payment or putting it into circulation before
presentation he impliedly asserts that he has performed his duty
and the drawee who has paid the forged check, without actual
negligence on his part, may recover the money paid from such
negligent purchasers. In such cases the recovery is permitted
because although the drawee was in a way negligent in failing to
detect the forgery, yet if the encasher of the check had performed
his duty, the forgery would in all probability, have been detected
and the fraud defeated. The reason for allowing the drawee bank to
recover from the encasher is:
Every one with even the least experience in business knows
that no business man would accept a check in exchange for
money or goods unless he is satisfied that the check is
genuine. He accepts it only because he has proof that it is
genuine, or because he has sufficient confidence in the
honesty and financial responsibility of the person who
vouches for it. If he is deceived he has suffered a loss of his
cash or goods through his own mistake. His own credulity or
recklessness, or misplaced confidence was the sole cause of
the loss. Why should he be permitted to shift the loss due to
his own fault in assuming the risk, upon the drawee, simply
because of the accidental circumstance that the drawee
afterwards failed to detect the forgery when the check was
presented? 8
Similarly, in the case before Us, the defendant-appellant, upon
receiving the check in question from Adelaida Dominguez, was
duty-bound to ascertain whether the check in question was genuine
before presenting it to plaintiff Bank for payment. Her failure to do
so makes her liable for the loss and the plaintiff Bank may recover
from her the money she received for the check. As reasoned out
above, had she performed the duty of ascertaining the genuineness
of the check, in all probability the forgery would have been
detected and the fraud defeated.
In our jurisdiction We have a case of similar import. 9 The Great
Eastern Life Insurance Company drew its check for P2000.00 on the
Hongkong and Shanghai Banking Corporation payable to the order
of Lazaro Melicor. A certain E. M. Maasin fraudulently obtained the
check and forged the signature of Melicor, as an indorser, and then
personally indorsed and presented the check to the Philippine
National Bank where the amount of the check was placed to his
(Maasin's) credit. On the next day, the Philippine National Bank
indorsed the cheek to the Hongkong and Shanghai Banking
Corporation which paid it and charged the amount of the check to
the insurance company. The Court held that the Hongkong and
Shanghai Banking Corporation was liable to the insurance company
for the amount of the check and that the Philippine National Bank
was in turn liable to the Hongkong and Shanghai Banking
Corporation. Said the Court:
 Where a check is drawn payable to the order of one person
and is presented to a bank by another and purports upon its
face to have been duly indorsed by the payee of the check,
it is the duty of the bank to know that the check was duly
indorsed by the original payee, and where the bank pays the
amount of the check to a third person, who has forged the
signature of the payee, the loss falls upon the bank who
cashed the check, and its only remedy is against the person
to whom it paid the money.
With the foregoing doctrine We are to concede that the plaintiff
Bank should suffer the loss when it paid the amount of the check in
question to defendant-appellant, but it has the remedy to recover
from the latter the amount it paid to her. Although the defendant-
appellant to whom the plaintiff Bank paid the check was not proven
to be the author of the supposed forgery, yet as last indorser of the
check, she has warranted that she has good title to it 10 even if in
fact she did not have it because the payee of the check was
already dead 11 years before the check was issued. The fact that
immediately after receiving title cash proceeds of the check in
question in the amount of P1,246.08 from the plaintiff Bank,
defendant-appellant immediately turned over said amount to
Adelaida Dominguez (Third-Party defendant and the Fourth-Party
plaintiff) who in turn handed the amount to Justina Tinio on the
same date would not exempt her from liability because by doing so,
she acted as an accommodation party in the check for which she is
also liable under Section 29 of the Negotiable Instruments Law (Act
2031), thus: .An accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser, without
receiving value therefor, and for the purpose of lending his name to
some other person. Such a person is liable on the instrument to a
holder for value, notwithstanding such holder at the time of taking
the instrument knew him to be only an accommodation party.
IN VIEW OF THE FOREGOING, the judgment appealed from is
hereby affirmed in toto with costs against defendant-appellant. SO
ORDERED.
Makalintal, C.J, Castro, Makasiar and Esguerra, JJ., concur.
G.R. No. L-62943 July 14, 1986
METROPOLITAN WATERWORKS AND SEWERAGE
SYSTEM, petitioner,
vs.
COURT OF APPEALS (Now INTERMEDIATE APPELLATE COURT)
and THE PHILIPPINE NATIONAL BANK,respondents.
GUTIERREZ, JR., J.:
This petition for review asks us to set aside the October 29, 1982
decision of the respondent Court of Appeals, now Intermediate
Appellate Court which reversed the decision of the Court of First
Instance of Manila, Branch XL, and dismissed the plaintiff's
complaint, the third party complaint, as well as the defendant's
counterclaim.
The background facts which led to the filing of the instant petition
are summarized in the decision of the respondent Court of Appeals:
Metropolitan Waterworks and Sewerage System (hereinafter
referred to as MWSS) is a government owned and controlled
corporation created under Republic Act No. 6234 as the
successor-in- interest of the defunct NWSA. The Philippine
National Bank (PNB for short), on the other hand, is the
depository bank of MWSS and its predecessor-in-interest
NWSA. Among the several accounts of NWSA with PNB is
NWSA Account No. 6, otherwise known as Account No. 381-
777 and which is presently allocated No. 010-500281. The
authorized signature for said Account No. 6 were those of
MWSS treasurer Jose Sanchez, its auditor Pedro Aguilar, and
its acting General Manager Victor L. Recio. Their respective
specimen signatures were submitted by the MWSS to and on
file with the PNB. By special arrangement with the PNB, the
MWSS used personalized checks in drawing from this
account. These checks were printed for MWSS by its printer,
F. Mesina Enterprises, located at 1775 Rizal Extension,
Caloocan City.
During the months of March, April and May 1969, twenty-
three (23) checks were prepared, processed, issued and
released by NWSA, all of which were paid and cleared by
PNB and debited by PNB against NWSA Account No. 6, to
wit:
Check No. Date Payee Amount Date Paid
By PNB
1. 59546 8-21-69 Deogracias P 3,187.79 4-2-69 12. 59574 4-8-69 Florentino 100,000.00 4-11-69

Estrella Santos

2. 59548 3-31-69 Natividad 2,848.86 4-23 69 13. 59578 4-8-69 Mla. Daily 95.00 Unreleased

Rosario Bulletin

3. 59547 3-31-69 Pangilinan 195.00 Unreleased 14. 59580 4-8-69 Phil. Herald 100.00 5-9-69

Enterprises 15. 59582 4-8-69 Galauran 7,729.09 5-6-69

4. 59549 3-31-69 Natividad 3,239.88 4-23-69 & Pilar

Rosario 16. 59581 4-8-69 Manila 110.00 5-12 69

5. 59552 4-1-69 Villarama 987.59 5-6-69 Chronicle

& Sons 17. 59588 4-8-69 Treago 21,583.00 4-11 69

6. 59554 4-1-69 Gascom 6,057.60 4-16 69 Tunnel

Engineering 18. 59587 4-8-69 Delfin 120,000.00 4-11-69

7. 59558 4-2-69 The Evening 112.00 Unreleased Santiago

News 19. 59589 4-10-69 Deogracias 1,257.49 4-16 69

8. 59544 3-27-69 Progressive 18,391.20 4-18 69 Estrella

Const. 20. 59594 4-14-69 Philam Ac- 33.03 4-29 69

9. 59564 4-2-69 Ind. Insp. 594.06 4-18 69 cident Inc.

Int. Inc. 21. 59577 4-8-69 Esla 9,429.78 4-29 69

10. 59568 4-7-69 Roberto 800.00 4-22-69 22. 59601 4-16-69 Justino 20,000.00 4-18-69

Marsan Torres

11. 59570 4-7-69 Paz Andres 200.00 4-22-69 23. 59595 4-14-69 Neris Phil. 4,274.00 5-20-69
Inc. --------------------
P 320,636.26
During the same months of March, April and May 1969,
twenty-three (23) checks bearing the same numbers as the
aforementioned NWSA checks were likewise paid and
cleared by PNB and debited against NWSA Account No. 6, to
wit:
Check Date Payee Amount Date Paid
No. Issued By PNB
1. 59546 3-6-69 Raul Dizon P 84,401.00 3-16-69
2. 59548 3-11-69 Raul Dizon 104,790.00 4-1-69
3. 59547 3-14-69 Arturo Sison 56,903.00 4-11-69
4. 59549 3-20-69 Arturo Sison 48,903.00 4-15-69
5. 59552 3-24-69 Arturo Sison 63,845.00 4-16-69
6. 59544 3-26-69 Arturo Sison 98,450.00 4-17-69
7. 59558 3-28-69 Arturo Sison 114,840.00 4-21-69
8. 59544 3-16-69 Antonio 38,490.00 4-22-69 Mendoza
9. 59564 3-31-69 Arturo Sison 180,900.00 4-23-69
10.59568 4-2-69 Arturo Sison 134,940.00 4- 5-69
11.59570 4-1-69 Arturo Sison 64,550.00 4-28-69
12.59574 4-2-69 Arturo Sison 148,610.00 4-29-69
13.59578 4-10-69 Antonio 93,950.00 4-29-69
Mendoza
14.59580 4-8-69 Arturo Sison 160,000.00 5-2-69
15.59582 4-10-69 Arturo Sison 155,400.00 5-5-69
16.59581 4-8-69 Antonio 176,580.00 5-6-69
Mendoza
17.59588 4-16-69 Arturo Sison 176,000.00 5-8-69
18.59587 4-16-69 Arturo Sison 300,000.00 5-12-69
19.59589 4-18-69 Arturo Sison 122,000.00 5-14-69
20.59594 4-18-69 Arturo Sison 280,000.00 5-15-69
21.59577 4-14-69 Antonio 260,000.00 5-16-69
Mendoza
22.59601 4-18-69 Arturo Sison 400,000.00 5-19-69
23.59595 4-28-69 Arturo Sison 190,800.00 5-21-69
---------------
P3,457,903.00
The foregoing checks were deposited by the payees Raul
Dizon, Arturo Sison and Antonio Mendoza in their respective
current accounts with the Philippine Commercial and
Industrial Bank (PCIB) and Philippine Bank of Commerce
(PBC) in the months of March, April and May 1969. Thru the
Central Bank Clearing, these checks were presented for
payment by PBC and PCIB to the defendant PNB, and paid,
also in the months of March, April and May 1969. At the time
of their presentation to PNB these checks bear the standard
indorsement which reads 'all prior indorsement and/or lack
of endorsement guaranteed.'
Subsequent investigation however, conducted by the NBI
showed that Raul Dizon, Arturo Sison and Antonio Mendoza
were all fictitious persons. The respective balances in their
current account with the PBC and/or PCIB stood as follows:
Raul Dizon P3,455.00 as of April 30, 1969; Antonio Mendoza
 P18,182.00 as of May 23, 1969; and Arturo Sison Pl,398.92
as of June 30, 1969.
On June 11, 1969, NWSA addressed a letter to PNB
requesting the immediate restoration to its Account No. 6, of
the total sum of P3,457,903.00 corresponding to the total
amount of these twenty-three (23) checks claimed by NWSA
to be forged and/or spurious checks. "In view of the refusal
of PNB to credit back to Account No. 6 the said total sum of
P3,457,903.00 MWSS filed the instant complaint on
November 10, 1972 before the Court of First Instance of
Manila and docketed thereat as Civil Case No. 88950.
In its answer, PNB contended among others, that the checks
in question were regular on its face in all respects, including
the genuineness of the signatures of authorized NWSA
signing officers and there was nothing on its face that could
have aroused any suspicion as to its genuineness and due
execution and; that NWSA was guilty of negligence which
was the proximate cause of the loss.
PNB also filed a third party complaint against the
negotiating banks PBC and PCIB on the ground that they
failed to ascertain the Identity of the payees and their title
to the checks which were deposited in the respective new
accounts of the payees with them.
xxx xxx xxx
On February 6, 1976, the Court of First Instance of Manila rendered
judgment in favor of the MWSS. The dispositive portion of the
decision reads:
WHEREFORE, on the COMPLAINT by a clear preponderance
of evidence and in accordance with Section 23 of the
Negotiable Instruments Law, the Court hereby renders
judgment in favor of the plaintiff Metropolitan Waterworks
and Sewerage System (MWSS) by ordering the defendant
Philippine National Bank (PNB) to restore the total sum of
THREE MILLION FOUR HUNDRED FIFTY SEVEN THOUSAND
NINE HUNDRED THREE PESOS (P3,457,903.00) to plaintiff's
Account No. 6, otherwise known as Account No. 010-50030-
3, with legal interest thereon computed from the date of the
filing of the complaint and until as restored in the said
Account No. 6.
On the THIRD PARTY COMPLAINT, the Court, for lack of
evidence, hereby renders judgment in favor of the third
party defendants Philippine Bank of Commerce (PBC) and
Philippine Commercial and Industrial Bank (PCIB) by
dismissing the Third Party Complaint.
The counterclaims of the third party defendants are likewise
dismissed for lack of evidence.
No pronouncement as to costs.
As earlier stated, the respondent court reversed the decision of the
Court of First Instance of Manila and rendered judgment in favor of
the respondent Philippine National Bank.
A motion for reconsideration filed by the petitioner MWSS was
denied by the respondent court in a resolution dated January 3,
1983.
The petitioner now raises the following assignments of errors for
the grant of this petition:
I. IN NOT HOLDING THAT AS THE SIGNATURES ON THE
CHECKS WERE FORGED, THE DRAWEE BANK WAS LIABLE
FOR THE LOSS UNDER SECTION 23 OF THE NEGOTIABLE
INSTRUMENTS LAW.
II. IN FAILING TO CONSIDER THE PROXIMATE NEGLIGENCE OF
PNB IN ACCEPTING THE SPURIOUS CHECKS DESPITE THE
OBVIOUS IRREGULARITY OF TWO SETS OF CHECKS BEARING
IdENTICAL NUMBER BEING ENCASHED WITHIN DAYS OF
EACH OTHER.
III. IN NOT HOLDING THAT THE SIGNATURES OF THE DRAWEE
MWSS BEING CLEARLY FORGED, AND THE CHECKS
SPURIOUS, SAME ARE INOPERATIVE AS AGAINST THE
ALLEGED DRAWEE.
The appellate court applied Section 24 of the Negotiable
Instruments Law which provides:
Every negotiable instrument is deemed prima facie to have
been issued for valuable consideration and every person
 whose signature appears thereon to have become a party
thereto for value.
The petitioner submits that the above provision does not apply to
the facts of the instant case because the questioned checks were
not those of the MWSS and neither were they drawn by its
authorized signatories. The petitioner states that granting that
Section 24 of the Negotiable Instruments Law is applicable, the
same creates only a prima facie presumption which was overcome
by the following documents, to wit: (1) the NBI Report of November
2, 1970; (2) the NBI Report of November 21, 1974; (3) the NBI
Chemistry Report No. C-74891; (4) the Memorandum of Mr. Juan
Dino, 3rd Assistant Auditor of the respondent drawee bank
addressed to the Chief Auditor of the petitioner; (5) the admission
of the respondent bank's counsel in open court that the National
Bureau of Investigation found the signature on the twenty-three
(23) checks in question to be forgeries; and (6) the admission of the
respondent bank's witness, Mr. Faustino Mesina, Jr. that the checks
in question were not printed by his printing press. The petitioner
contends that since the signatures of the checks were forgeries, the
respondent drawee bank must bear the loss under the rulings of
this Court.
A bank is bound to know the signatures of its customers;
and if it pays a forged check it must be considered as
making the payment out of its obligation funds, and cannot
ordinarily charge the amount so paid to the account of the
depositor whose name was forged.
xxx xxx xxx
The signatures to the checks being forged, under Section 23
of the Negotiable Instruments Law they are not a charge
against plaintiff nor are the checks of any value to the
defendant.
It must therefore be held that the proximate cause of loss
was due to the negligence of the Bank of the Philippine
Islands in honoring and cashing the two forged checks. (San
Carlos Milling Co. v. Bank of the P. I., 59 Phil. 59)
It is admitted that the Philippine National Bank cashed the
check upon a forged signature, and placed the money to the
credit of Maasim, who was the forger. That the Philippine
National Bank then endorsed the chock and forwarded it to
the Shanghai Bank by whom it was paid. The Philippine
National Bank had no license or authority to pay the money
to Maasim or anyone else upon a forged signature. It was its
legal duty to know that Malicor's endorsement was genuine
before cashing the check. Its remedy is against Maasim to
whom it paid the money. (Great Eastern Life Ins. Co. v.
Hongkong & Shanghai Bank, 43 Phil. 678).
We have carefully reviewed the documents cited by the petitioner.
There is no express and categorical finding in these documents that
the twenty-three (23) questioned checks were indeed signed by
persons other than the authorized MWSS signatories. On the
contrary, the findings of the National Bureau of Investigation in its
Report dated November 2, 1970 show that the MWSS fraud was an
"inside job" and that the petitioner's delay in the reconciliation of
bank statements and the laxity and loose records control in the
printing of its personalized checks facilitated the fraud. Likewise,
the questioned Documents Report No. 159-1074 dated November
21, 1974 of the National Bureau of Investigation does not declare or
prove that the signatures appearing on the questioned checks are
forgeries. The report merely mentions the alleged differences in the
type face, checkwriting, and printing characteristics appearing in
the standard or submitted models and the questioned typewritings.
The NBI Chemistry Report No. C-74-891 merely describes the inks
and pens used in writing the alleged forged signatures.
It is clear that these three (3) NBI Reports relied upon by the
petitioner are inadequate to sustain its allegations of forgery. These
reports did not touch on the inherent qualities of the signatures
which are indispensable in the determination of the existence of
forgery. There must be conclusive findings that there is a variance
in the inherent characteristics of the signatures and that they were
written by two or more different persons.
Forgery cannot be presumed (Siasat, et al. v. Intermediate
Appellate Court, et al, 139 SCRA 238). It must be established by
clear, positive, and convincing evidence. This was not done in the
present case.
The cases of San Carlos Milling Co. Ltd. v. Bank of the Philippine
Islands, et al. (59 Phil. 59) and Great Eastern Life Ins., Co. v.
Hongkong and Shanghai Bank (43 Phil. 678) relied upon by the
petitioner are inapplicable in this case because the forgeries in
those cases were either clearly established or admitted while in the
instant case, the allegations of forgery were not clearly established
during trial.
Considering the absence of sufficient security in the printing of the
checks coupled with the very close similarities between the
genuine signatures and the alleged forgeries, the twenty-three (23)
checks in question could have been presented to the petitioner's
signatories without their knowing that they were bogus checks.
Indeed, the cashier of the petitioner whose signatures were
allegedly forged was unable to ten the difference between the
allegedly forged signature and his own genuine signature. On the
other hand, the MWSS officials admitted that these checks could
easily be passed on as genuine.
The memorandum of Mr. A. T. Tolentino, no, Assistant Chief
Accountant of the drawee Philippine National Bank to Mr. E.
Villatuya, Executive Vice-President of the petitioner dated June 9,
1969 cites an instance where even the concerned NWSA officials
could not ten the differences between the genuine checks and the
alleged forged checks.
At about 12:00 o'clock on June 6, 1969, VP Maramag
requested me to see him in his office at the Cashier's Dept.
where Messrs. Jose M. Sanchez, treasurer of NAWASA and
Romeo Oliva of the same office were present. Upon my
arrival I observed the NAWASA officials questioning the issue
of the NAWASA checks appearing in their own list, xerox
copy attached.
For verification purposes, therefore, the checks were taken
from our file. To everybody there present namely VIP
Maramag, the two abovementioned NAWASA officials, AVP,
Buhain, Asst. Cashier Castelo, Asst. Cashier Tejada and
Messrs. A. Lopez and L. Lechuga, both C/A bookkeepers, no
one was able to point out any difference on the signatures of
the NAWASA officials appearing on the checks compared to
their official signatures on file. In fact 3 checks, one of those
under question, were presented to the NAWASA treasurer for
verification but he could not point out which was his genuine
signature. After intent comparison, he pointed on the
questioned check as bearing his correct signature.
xxx xxx xxx
Moreover, the petitioner is barred from setting up the defense of
forgery under Section 23 of the Negotiable Instruments Law which
provides that:
SEC. 23. FORGED SIGNATURE; EFFECT OF.- When the
signature is forged or made without authority of the person
whose signature it purports to be, it is wholly inoperative,
and no right to retain the instrument, or to give a discharge
therefor, or to enforce payment thereof against any party
thereto can be acquired through or under such signature
unless the party against whom it is sought to enforce such
right is precluded from setting up the forgery or want of
authority.
because it was guilty of negligence not only before the questioned
checks were negotiated but even after the same had already been
negotiated. (See Republic v. Equitable Banking Corporation, 10
SCRA 8) The records show that at the time the twenty-three (23)
checks were prepared, negotiated, and encashed, the petitioner
was using its own personalized checks, instead of the official PNB
Commercial blank checks. In the exercise of this special privilege,
however, the petitioner failed to provide the needed security
measures. That there was gross negligence in the printing of its
personalized checks is shown by the following uncontroverted facts,
to wit:
(1) The petitioner failed to give its printer, Mesina Enterprises,
specific instructions relative to the safekeeping and disposition of
excess forms, check vouchers, and safety papers;
(2) The petitioner failed to retrieve from its printer all spoiled check
forms;
(3) The petitioner failed to provide any control regarding the paper
used in the printing of said checks;
(4) The petitioner failed to furnish the respondent drawee bank with
samples of typewriting, cheek writing, and print used by its printer
in the printing of its checks and of the inks and pens used in
signing the same; and
(5) The petitioner failed to send a representative to the printing
office during the printing of said checks.
This gross negligence of the petitioner is very evident from the
sworn statement dated June 19, 1969 of Faustino Mesina, Jr., the
owner of the printing press which printed the petitioner's
personalized checks:
xxx xxx xxx
7. Q: Do you have any business transaction with the
National Waterworks and Sewerage Authority (NAWASA)?
A: Yes, sir. I have a contract with the NAWASA in printing
NAWASA Forms such as NAWASA Check
xxx xxx xxx
15. Q: Were you given any ingtruction by the NAWASA in
connection with the printing of these check vouchers?
A: There is none, sir. No instruction whatsoever was given to
me.
16. Q: Were you not advised as to what kind of paper would
be used in the check vouchers?
A: Only as per sample, sir.
xxx xxx xxx
20. Q: Where did you buy this Hammermill Safety check
paper?
A: From Tan Chiong, a paper dealer with store located at
Juan Luna, Binondo, Manila. (In front of the Metropolitan
Bank).
xxx xxx xxx
24. Q: Were all these check vouchers printed by you
submitted to NAWASA?
A: Not all, sir. Because we have to make reservations or
allowances for spoilage.
25. Q: Out of these vouchers printed by you, how many
were spoiled and how many were the excess printed check
vouchers?
A: Approximately four hundred (400) sheets, sir. I cannot
determine the proportion of the excess and spoiled because
the final act of perforating these check vouchers has not yet
been done and spoilage can only be determined after this
final act of printing.
26. Q: What did you do with these excess check vouchers?
A: I keep it under lock and key in my firing cabinet.
xxx xxx xxx
28. Q: Were you not instructed by the NAWASA authorities to
bum these excess check vouchers?
A: No, sir. I was not instructed.
29. Q: What do you intend to do with these excess printed
check vouchers?
A: I intend to use them for future orders from the
xxx xxx xxx
32. Q: In the process of printing the check vouchers ordered
by the NAWASA, how many sheets were actually spoiled?
A: I cannot approximate, sir. But there are spoilage in the
process of printing and perforating.
33. Q: What did you do with these spoilages?
A: Spoiled printed materials are usually thrown out, in the
garbage can.
34. Q: Was there any representative of the NAWASA to
supervise the printing or watch the printing of these check
vouchers?
 A: None, sir.
xxx xxx xxx
39. Q: During the period of printing after the days work,
what measures do you undertake to safeguard the mold and
other paraphernalia used in the printing of these particular
orders of NAWASA?
A: Inasmuch as I have an employee who sleeps in the
printing shop and at the same time do the guarding, we just
leave the mold attached to the machine and the other
finished or unfinished work check vouchers are left in the
rack so that the work could be continued the following day.
The National Bureau of Investigation Report dated November 2,
1970 is even more explicit. Thus
xxx xxx xxx
60. We observed also that there is some laxity and loose
control in the printing of NAWASA cheeks. We gathered from
MESINA ENTERPRISES, the printing firm that undertook the
printing of the check vouchers of NAWASA that NAWASA had
no representative at the printing press during the process of
the printing and no particular security measure instructions
adopted to safeguard the interest of the government in
connection with printing of this accountable form.
Another factor which facilitated the fraudulent encashment of the
twenty-three (23) checks in question was the failure of the
petitioner to reconcile the bank statements with its own records.
It is accepted banking procedure for the depository bank to furnish
its depositors bank statements and debt and credit memos through
the mail. The records show that the petitioner requested the
respondent drawee bank to discontinue the practice of mailing the
bank statements, but instead to deliver the same to a certain Mr.
Emiliano Zaporteza. For reasons known only to Mr. Zaporteza
however, he was unreasonably delayed in taking prompt deliveries
of the said bank statements and credit and debit memos. As a
consequence, Mr. Zaporteza failed to reconcile the bank statements
with the petitioner's records. If Mr. Zaporteza had not been remiss
in his duty of taking the bank statements and reconciling them with
the petitioner's records, the fraudulent encashments of the first
checks should have been discovered, and further frauds prevented.
This negligence was, therefore, the proximate cause of the failure
to discover the fraud. Thus,
When a person opens a checking account with a bank, he is
given blank checks which he may fill out and use whenever
he wishes. Each time he issues a check, he should also fill
out the check stub to which the check is usually attached.
This stub, if properly kept, will contain the number of the
check, the date of its issue, the name of the payee and the
amount thereof. The drawer would therefore have a
complete record of the checks he issues. It is the custom of
banks to send to its depositors a monthly statement of the
status of their accounts, together with all the cancelled
checks which have been cashed by their respective holders.
If the depositor has filled out his check stubs properly, a
comparison between them and the cancelled checks will
reveal any forged check not taken from his checkbook. It is
the duty of a depositor to carefully examine the bank's
statement, his cancelled checks, his check stubs and other
pertinent records within a reasonable time, and to report
any errors without unreasonable delay. If his negligence
should cause the bank to honor a forged check or prevent it
from recovering the amount it may have already paid on
such check, he cannot later complain should the bank refuse
to recredit his account with the amount of such check. (First
Nat. Bank of Richmond v. Richmond Electric Co., 106 Va.
347, 56 SE 152, 7 LRA, NS 744 [1907]. See also Leather
Manufacturers' Bank v. Morgan, 117 US 96, 6 S. Ct. 657
[1886]; Deer Island Fish and Oyster Co. v. First Nat. Bank of
Biloxi, 166 Miss. 162, 146 So. 116 [1933]). Campos and
Campos, Notes and Selected Cases on Negotiable
Instruments Law, 1971, pp. 267-268).
This failure of the petitioner to reconcile the bank statements with
its cancelled checks was noted by the National Bureau of
Investigation in its report dated November 2, 1970:
58. One factor which facilitate this fraud was the delay in
the reconciliation of bank (PNB) statements with the
NAWASA bank accounts. x x x. Had the NAWASA
representative come to the PNB early for the statements
and had the bank been advised promptly of the reported
bogus check, the negotiation of practically all of the
 remaining checks on May, 1969, totalling P2,224,736.00
could have been prevented.
The records likewise show that the petitioner failed to provide
appropriate security measures over its own records thereby laying
confidential records open to unauthorized persons. The petitioner's
own Fact Finding Committee, in its report submitted to their
General manager underscored this laxity of records control. It
observed that the "office of Mr. Ongtengco (Cashier No. VI of the
Treasury Department at the NAWASA) is quite open to any person
known to him or his staff members and that the check writer is
merely on top of his table."
When confronted with this report at the Anti-Fraud Action Section of
the National Bureau of Investigation. Mr. Ongtengco could only
state that:
A. Generally my order is not to allow anybody to enter my
office. Only authorized persons are allowed to enter my
office. There are some cases, however, where some persons
enter my office because they are following up their checks.
Maybe, these persons may have been authorized by Mr.
Pantig. Most of the people entering my office are changing
checks as allowed by the Resolution of the Board of
Directors of the NAWASA and the Treasurer. The check writer
was never placed on my table. There is a place for the check
write which is also under lock and key.
Q. Is Mr. Pantig authorized to allow unauthorized persons to
enter your office?
A. No, sir.
Q. Why are you tolerating Mr. Pantig admitting unauthorized
persons in your office?
A. I do not want to embarrass Mr. Pantig. Most of the people
following up checks are employees of the NAWASA.
Q. Was the authority given by the Board of Directors and the
approval by the Treasurer for employees, and other persons
to encash their checks carry with it their authority to enter
your office?
A. No, sir.
xxx xxx xxx
Q. From the answers that you have given to us we observed
that actually there is laxity and poor control on your part
with regards to the preparations of check payments
inasmuch as you allow unauthorized persons to follow up
their vouchers inside your office which may leakout
confidential informations or your books of account. After
being apprised of all the shortcomings in your office, as
head of the Cashiers' Office of the Treasury Department
what remedial measures do you intend to undertake?
A. Time and again the Treasurer has been calling our
attention not to allow interested persons to hand carry their
voucher checks and we are trying our best and if I can do it
to follow the instructions to the letter, I will do it but
unfortunately the persons who are allowed to enter my
office are my co-employees and persons who have
connections with our higher ups and I can not possibly
antagonize them. Rest assured that even though that
everybody will get hurt, I win do my best not to allow
unauthorized persons to enter my office.
xxx xxx xxx
Q. Is it not possible inasmuch as your office is in charge of
the posting of check payments in your books that leakage of
payments to the banks came from your office?
A. I am not aware of it but it only takes us a couple of
minutes to process the checks. And there are cases wherein
every information about the checks may be obtained from
the Accounting Department, Auditing Department, or the
Office of the General Manager.
Relying on the foregoing statement of Mr. Ongtengco, the National
Bureau of Investigation concluded in its Report dated November 2,
1970 that the fraudulent encashment of the twenty-three
(23)cheeks in question was an "inside job". Thus-
We have all the reasons to believe that this fraudulent act
was an inside job or one pulled with inside connivance at
 NAWASA. As pointed earlier in this report, the serial
numbers of these checks in question conform with the
numbers in current use of NAWASA, aside from the fact that
these fraudulent checks were found to be of the same kind
and design as that of NAWASA's own checks. While
knowledge as to such facts may be obtained through the
possession of a NAWASA check of current issue, an outsider
without information from the inside can not possibly pinpoint
which of NAWASA's various accounts has sufficient balance
to cover all these fraudulent checks. None of these checks,
it should be noted, was dishonored for insufficiency of funds.
..
Even if the twenty-three (23) checks in question are considered
forgeries, considering the petitioner's gross negligence, it is barred
from setting up the defense of forgery under Section 23 of the
Negotiable Instruments Law.
Nonetheless, the petitioner claims that it was the negligence of the
respondent Philippine National Bank that was the proximate cause
of the loss. The petitioner relies on our ruling in Philippine National
Bank v. Court of Appeals(25 SCRA 693) that.
Thus, by not returning the cheek to the PCIB, by thereby
indicating that the PNB had found nothing wrong with the
check and would honor the same, and by actually paying its
amount to the PCIB, the PNB induced the latter, not only to
believe that the check was genuine and good in every
respect, but, also, to pay its amount to Augusto Lim. In other
words, the PNB was the primary or proximate cause of the
loss, and, hence, may not recover from the PCIB.
The argument has no merit. The records show that the respondent
drawee bank, had taken the necessary measures in the detection of
forged checks and the prevention of their fraudulent encashment.
In fact, long before the encashment of the twenty-three (23) checks
in question, the respondent Bank had issued constant reminders to
all Current Account Bookkeepers informing them of the activities of
forgery syndicates. The Memorandum of the Assistant Vice-
President and Chief Accountant of the Philippine National Bank
dated February 17, 1966 reads in part:
SUBJECT: ACTIVITIES OF FORGERY SYNDICATE
From reliable information we have gathered that
personalized checks of current account depositors are now
the target of the forgery syndicate. To protect the interest of
the bank, you are hereby enjoined to be more careful in
examining said checks especially those coming from the
clearing, mails and window transactions. As a reminder
please be guided with the following:
1. Signatures of drawers should be properly scrutinized and
compared with those we have on file.
2. The serial numbers of the checks should be compared
with the serial numbers registered with the Cashier's Dept.
3. The texture of the paper used and the printing of the
checks should be compared with the sample we have on file
with the Cashier's Dept.
4. Checks bearing several indorsements should be given a
special attention.
5. Alteration in amount both in figures and words should be
carefully examined even if signed by the drawer.
6. Checks issued in substantial amounts particularly by
depositors who do not usually issue checks in big amounts
should be brought to the attention of the drawer by
telephone or any fastest means of communication for
purposes of confirmation.
and your attention is also invited to keep abreast of previous
circulars and memo instructions issued to bookkeepers.
We cannot fault the respondent drawee Bank for not having
detected the fraudulent encashment of the checks because the
printing of the petitioner's personalized checks was not done under
the supervision and control of the Bank. There is no evidence on
record indicating that because of this private printing the petitioner
furnished the respondent Bank with samples of checks, pens, and
inks or took other precautionary measures with the PNB to
safeguard its interests.
Under the circumstances, therefore, the petitioner was in a better
position to detect and prevent the fraudulent encashment of its
checks.
WHEREFORE, the petition for review on certiorari is hereby
DISMISSED for lack of merit. The decision of the respondent Court
of Appeals dated October 29, 1982 is AFFIRMED. No
pronouncement as to costs.
SO ORDERED.
Feria (Chairman), Fernan, Alampay and Cruz, JJ., concur.
Paras * , J., took no part.
G.R. No. 92244 February 9, 1993
NATIVIDAD GEMPESAW, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and PHILIPPINE BANK
OF COMMUNICATIONS, respondents.
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
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 13-00038-1 with the Caloocan City
Branch of the respondent drawee Bank. To facilitate payment of
debts to her suppliers, petitioner draws checks against her
checking account with the respondent bank as drawee. Her
customary practice of issuing checks in payment of her suppliers
was as follows: the checks were prepared and filled up as to all
material particulars by her trusted bookkeeper, Alicia Galang, an
employee for more than eight (8) years. After the bookkeeper
prepared the checks, the completed checks were submitted to the
petitioner for her signature, together with the corresponding
invoice receipts which indicate the correct obligations due and
payable to her suppliers. Petitioner signed each and every check
without bothering to verify the accuracy of the checks against the
corresponding invoices because she reposed full and implicit trust
and confidence on her bookkeeper. The issuance and delivery of
the checks to the payees named therein were left to the
bookkeeper. Petitioner admitted that she did not make any
verification as to whether or not the checks were delivered to their
respective payees. Although the respondent drawee Bank notified
her of all checks presented to and paid by the bank, petitioner did
not verify he correctness of the returned checks, much less check if
the payees actually received the checks in payment for the
supplies she received. In the course of her business operations
covering a period of two years, petitioner issued, following her
usual practice stated above, a total of eighty-two (82) checks in
favor of several suppliers. These checks were all presented by the
indorsees as holders thereof to, and honored by, the respondent
drawee Bank. Respondent drawee Bank correspondingly debited
the amounts thereof against petitioner's checking account
numbered 30-00038-1. Most of the aforementioned checks were for
amounts in excess of her actual obligations to the various payees
as shown in their corresponding invoices. To mention a few:
. . . 1) in Check No. 621127, dated June 27, 1984 in the
amount of P11,895.23 in favor of Kawsek Inc. (Exh. A-60),
appellant's actual obligation to said payee was only P895.33
(Exh. A-83); (2) in Check No. 652282 issued on September
18, 1984 in favor of Senson Enterprises in the amount of
P11,041.20 (Exh. A-67) appellant's actual obligation to said
payee was only P1,041.20 (Exh. 7); (3) in Check No. 589092
dated April 7, 1984 for the amount of P11,672.47 in favor of
Marchem (Exh. A-61) appellant's obligation was only
P1,672.47 (Exh. B); (4) in Check No. 620450 dated May 10,
1984 in favor of Knotberry for P11,677.10 (Exh. A-31) her
actual obligation was only P677.10 (Exhs. C and C-1); (5) in
Check No. 651862 dated August 9, 1984 in favor of Malinta
Exchange Mart for P11,107.16 (Exh. A-62), her obligation
was only P1,107.16 (Exh. D-2); (6) in Check No. 651863
dated August 11, 1984 in favor of Grocer's International
Food Corp. in the amount of P11,335.60 (Exh. A-66), her
obligation was only P1,335.60 (Exh. E and E-1); (7) in Check
No. 589019 dated March 17, 1984 in favor of Sophy Products
in the amount of P11,648.00 (Exh. A-78), her obligation was
only P648.00 (Exh. G); (8) in Check No. 589028 dated March
10, 1984 for the amount of P11,520.00 in favor of the Yakult
Philippines (Exh. A-73), the latter's invoice was only P520.00
(Exh. H-2); (9) in Check No. 62033 dated May 23, 1984 in
the amount of P11,504.00 in favor of Monde Denmark
Biscuit (Exh. A-34), her obligation was only P504.00 (Exhs. I-
1 and I-2). 2
Practically, all the checks issued and honored by the respondent
drawee bank were crossed checks. 3 Aside from the daily notice
given to the petitioner by the respondent drawee Bank, the latter
also furnished her with a monthly statement of her transactions,
attaching thereto all the cancelled checks she had issued and
which were debited against her current account. It was only after
the lapse of more two (2) years that petitioner found out about the
fraudulent manipulations of her bookkeeper.
All the eighty-two (82) checks with forged signatures of the payees
were brought to Ernest L. Boon, Chief Accountant of respondent
drawee Bank at the Buendia branch, who, without authority
therefor, accepted them all for deposit at the Buendia branch to the
credit and/or in the accounts of Alfredo Y. Romero and Benito Lam.
Ernest L. Boon was a very close friend of Alfredo Y. Romero. Sixty-
three (63) out of the eighty-two (82) checks were deposited in
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.


G.R. No. 139130 November 27, 2002
RAMON K. ILUSORIO, petitioner,
vs.
HON. COURT OF APPEALS, and THE MANILA BANKING
CORPORATION, respondents.
DECISION
QUISUMBING, J.:
This petition for review seeks to reverse the decision 1 promulgated
on January 28, 1999 by the Court of Appeals in CA-G.R. CV No.
47942, affirming the decision of the then Court of First Instance of
Rizal, Branch XV (now the Regional Trial Court of Makati, Branch
138) dismissing Civil Case No. 43907, for damages.
The facts as summarized by the Court of Appeals are as follows:
Petitioner is a prominent businessman who, at the time material to
this case, was the Managing Director of Multinational Investment
Bancorporation and the Chairman and/or President of several other
corporations. He was a depositor in good standing of respondent
bank, the Manila Banking Corporation, under current Checking
Account No. 06-09037-0. As he was then running about 20
corporations, and was going out of the country a number of times,
petitioner entrusted to his secretary, Katherine2 E. Eugenio, his
credit cards and his checkbook with blank checks. It was also
Eugenio who verified and reconciled the statements of said
checking account.3
Between the dates September 5, 1980 and January 23, 1981,
Eugenio was able to encash and deposit to her personal account
about seventeen (17) checks drawn against the account of the
petitioner at the respondent bank, with an aggregate amount
of P119,634.34. Petitioner did not bother to check his statement of
account until a business partner apprised him that he saw Eugenio
use his credit cards. Petitioner fired Eugenio immediately, and
instituted a criminal action against her for estafa thru falsification
before the Office of the Provincial Fiscal of Rizal. Private
respondent, through an affidavit executed by its employee, Mr.
Dante Razon, also lodged a complaint for estafa thru falsification of
commercial documents against Eugenio on the basis of petitioners
statement that his signatures in the checks were forged. 4 Mr.
Razons affidavit states:
That I have examined and scrutinized the following checks in
accordance with prescribed verification procedures with utmost
care and diligence by comparing the signatures affixed thereat
against the specimen signatures of Mr. Ramon K. Ilusorio which we
have on file at our said office on such dates,
xxx
That the aforementioned checks were among those issued by
Manilabank in favor of its client MR. RAMON K. ILUSORIO,
That the same were personally encashed by KATHERINE E.
ESTEBAN, an executive secretary of MR. RAMON K. ILUSORIO in said
Investment Corporation;
That I have met and known her as KATHERINE E. ESTEBAN the
attending verifier when she personally encashed the above-
mentioned checks at our said office;
That MR. RAMON K. ILUSORIO executed an affidavit expressly
disowning his signature appearing on the checks further alleged to
have not authorized the issuance and encashment of the same.5
Petitioner then requested the respondent bank to credit back and
restore to its account the value of the checks which were wrongfully
encashed but respondent bank refused. Hence, petitioner filed the
instant case.6
At the trial, petitioner testified on his own behalf, attesting to the
truth of the circumstances as narrated above, and how he
discovered the alleged forgeries. Several employees of Manila Bank
were also called to the witness stand as hostile witnesses. They
testified that it is the banks standard operating procedure that
whenever a check is presented for encashment or clearing, the
signature on the check is first verified against the specimen
signature cards on file with the bank.
Manila Bank also sought the expertise of the National Bureau of
Investigation (NBI) in determining the genuineness of the
signatures appearing on the checks. However, in a letter dated
March 25, 1987, the NBI informed the trial court that they could not
conduct the desired examination for the reason that the standard
specimens submitted were not sufficient for purposes of rendering
a definitive opinion. The NBI then suggested that petitioner be
asked to submit seven (7) or more additional standard signatures
executed before or about, and immediately after the dates of the
questioned checks. Petitioner, however, failed to comply with this
request.
After evaluating the evidence on both sides, the court a quo
rendered judgment on May 12, 1994 with the following dispositive
portion:
WHEREFORE, finding no sufficient basis for plaintiff's cause herein
against defendant bank, in the light of the foregoing considerations
and established facts, this case would have to be, as it is hereby
DISMISSED.
Defendants counterclaim is likewise DISMISSED for lack of
sufficient basis.
SO ORDERED.7
Aggrieved, petitioner elevated the case to the Court of Appeals by
way of a petition for review but without success. The appellate
court held that petitioners own negligence was the proximate
cause of his loss. The appellate court disposed as follows:
WHEREFORE, the judgment appealed from is AFFIRMED. Costs
against the appellant.
SO ORDERED.8
Before us, petitioner ascribes the following errors to the Court of
Appeals:
A. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE
RESPONDENT BANK IS ESTOPPED FROM RAISING THE DEFENSE
THAT THERE WAS NO FORGERY OF THE SIGNATURES OF THE
PETITIONER IN THE CHECK BECAUSE THE RESPONDENT FILED A
CRIMINAL COMPLAINT FOR ESTAFA THRU FALSIFICATION OF
COMMERCIAL DOCUMENTS AGAINST KATHERINE EUGENIO USING
THE AFFIDAVIT OF PETITIONER STATING THAT HIS SIGNATURES
WERE FORGED AS PART OF THE AFFIDAVIT-COMPLAINT.9
B. THE COURT OF APPEALS ERRED IN NOT APPLYING SEC. 23,
NEGOTIABLE INSTRUMENTS LAW.10
C. THE COURT OF APPEALS ERRED IN NOT HOLDING THE BURDEN
OF PROOF IS WITH THE RESPONDENT BANK TO PROVE THE DUE
DILIGENCE TO PREVENT DAMAGE, TO THE PETITIONER, AND THAT
IT WAS NOT NEGLIGENT IN THE SELECTION AND SUPERVISION OF
ITS EMPLOYEES.11
D. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT
RESPONDENT BANK SHOULD BEAR THE LOSS, AND SHOULD BE
MADE TO PAY PETITIONER, WITH RECOURSE AGAINST KATHERINE
EUGENIO ESTEBAN.12
Essentially the issues in this case are: (1) whether or not petitioner
has a cause of action against private respondent; and (2) whether
or not private respondent, in filing an estafa case against
petitioners secretary, is barred from raising the defense that the
fact of forgery was not established.
Petitioner contends that Manila Bank is liable for damages for its
negligence in failing to detect the discrepant checks. He adds that
as a general rule a bank which has obtained possession of a check
upon an unauthorized or forged endorsement of the payees
signature and which collects the amount of the check from the
drawee is liable for the proceeds thereof to the payee. Petitioner
invokes the doctrine of estoppel, saying that having itself instituted
a forgery case against Eugenio, Manila Bank is now estopped from
asserting that the fact of forgery was never proven.
For its part, Manila Bank contends that respondent appellate court
did not depart from the accepted and usual course of judicial
proceedings, hence there is no reason for the reversal of its ruling.
Manila Bank additionally points out that Section 2313 of the
Negotiable Instruments Law is inapplicable, considering that the
fact of forgery was never proven. Lastly, the bank negates
petitioners claim of estoppel.14
On the first issue, we find that petitioner has no cause of action
against Manila Bank. To be entitled to damages, petitioner has the
burden of proving negligence on the part of the bank for failure to
detect the discrepancy in the signatures on the checks. It is
incumbent upon petitioner to establish the fact of forgery, i.e., by
submitting his specimen signatures and comparing them with those
on the questioned checks. Curiously though, petitioner failed to
submit additional specimen signatures as requested by the
National Bureau of Investigation from which to draw a conclusive
finding regarding forgery. The Court of Appeals found that
petitioner, by his own inaction, was precluded from setting up
forgery. Said the appellate court:
We cannot fault the court a quo for such declaration, considering
that the plaintiffs evidence on the alleged forgery is not convincing
enough. The burden to prove forgery was upon the plaintiff, which
burden he failed to discharge. Aside from his own testimony, the
appellant presented no other evidence to prove the fact of forgery.
He did not even submit his own specimen signatures, taken on or
about the date of the questioned checks, for examination and
comparison with those of the subject checks. On the other hand,
the appellee presented specimen signature cards of the appellant,
taken at various years, namely, in 1976, 1979 and 1981 (Exhibits
"1", "2", "3" and "7"), showing variances in the appellants
unquestioned signatures. The evidence further shows that the
appellee, as soon as it was informed by the appellant about his
questioned signatures, sought to borrow the questioned checks
from the appellant for purposes of analysis and examination
(Exhibit "9"), but the same was denied by the appellant. It was also
the former which sought the assistance of the NBI for an expert
analysis of the signatures on the questioned checks, but the same
was unsuccessful for lack of sufficient specimen signatures. 15
Moreover, petitioners contention that Manila Bank was remiss in
the exercise of its duty as drawee lacks factual basis. Consistently,
the CA and the RTC found that Manila Bank employees exercised
due diligence in cashing the checks. The banks employees in the
present case did not have a hint as to Eugenios modus operandi
because she was a regular customer of the bank, having been
designated by petitioner himself to transact in his behalf. According
to the appellate court, the employees of the bank exercised due
diligence in the performance of their duties. Thus, it found that:
The evidence on both sides indicates that TMBCs employees
exercised due diligence before encashing the checks. Its verifiers
first verified the drawers signatures thereon as against his
specimen signature cards, and when in doubt, the verifier went
further, such as by referring to a more experienced verifier for
further verification. In some instances the verifier made a
confirmation by calling the depositor by phone. It is only after
taking such precautionary measures that the subject checks were
given to the teller for payment.
Of course it is possible that the verifiers of TMBC might have made
a mistake in failing to detect any forgery -- if indeed there was.
However, a mistake is not equivalent to negligence if they were
honest mistakes. In the instant case, we believe and so hold that if
there were mistakes, the same were not deliberate, since the bank
took all the precautions.16
As borne by the records, it was petitioner, not the bank, who was
negligent. Negligence is the omission to do something which a
reasonable man, guided by those considerations which ordinarily
regulate the conduct of human affairs, would do, or the doing of
something which a prudent and reasonable man would do. 17 In the
present case, it appears that petitioner accorded his secretary
unusual degree of trust and unrestricted access to his credit cards,
passbooks, check books, bank statements, including custody and
possession of cancelled checks and reconciliation of accounts. Said
the Court of Appeals on this matter:
Moreover, the appellant had introduced his secretary to the bank
for purposes of reconciliation of his account, through a letter dated
July 14, 1980 (Exhibit "8"). Thus, the said secretary became a
familiar figure in the bank. What is worse, whenever the bank
verifiers call the office of the appellant, it is the same secretary who
answers and confirms the checks.
The trouble is, the appellant had put so much trust and confidence
in the said secretary, by entrusting not only his credit cards with
her but also his checkbook with blank checks. He also entrusted to
her the verification and reconciliation of his account. Further adding
to his injury was the fact that while the bank was sending him the
monthly Statements of Accounts, he was not personally checking
the same. His testimony did not indicate that he was out of the
country during the period covered by the checks. Thus, he had all
the opportunities to verify his account as well as the cancelled
checks issued thereunder -- month after month. But he did not,
until his partner asked him whether he had entrusted his credit
card to his secretary because the said partner had seen her use the
same. It was only then that he was minded to verify the records of
his account. 18
The abovecited findings are binding upon the reviewing court. We
stress the rule that the factual findings of a trial court, especially
when affirmed by the appellate court, are binding upon us 19 and
entitled to utmost respect 20 and even finality. We find no palpable
error that would warrant a reversal of the appellate courts
assessment of facts anchored upon the evidence on record.
Petitioners failure to examine his bank statements appears as the
proximate cause of his own damage. Proximate cause is that cause,
which, in natural and continuous sequence, unbroken by any
efficient intervening cause, produces the injury, and without which
the result would not have occurred. 21 In the instant case, the bank
was not shown to be remiss in its duty of sending monthly bank
statements to petitioner so that any error or discrepancy in the
entries therein could be brought to the banks attention at the
earliest opportunity. But, petitioner failed to examine these bank
statements not because he was prevented by some cause in not
doing so, but because he did not pay sufficient attention to the
matter. Had he done so, he could have been alerted to any
anomaly committed against him. In other words, petitioner had
sufficient opportunity to prevent or detect any misappropriation by
his secretary had he only reviewed the status of his accounts based
on the bank statements sent to him regularly. In view of Article
2179 of the New Civil Code, 22 when the plaintiffs own negligence
was the immediate and proximate cause of his injury, no recovery
could be had for damages.
Petitioner further contends that under Section 23 of the Negotiable
Instruments Law a forged check is inoperative, and that Manila
Bank had no authority to pay the forged checks. True, it is a rule
that when a signature is forged or made without the authority of
the person whose signature it purports to be, the check is wholly
inoperative. No right to retain the instrument, or to give a discharge
therefor, or to enforce payment thereof against any party, can be
acquired through or under such signature. However, the rule does
provide for an exception, namely: "unless the party against whom it
is sought to enforce such right is precluded from setting up the
forgery or want of authority." In the instant case, it is the exception
that applies. In our view, petitioner is precluded from setting up the
forgery, assuming there is forgery, due to his own negligence in
entrusting to his secretary his credit cards and checkbook including
the verification of his statements of account.
Petitioners reliance on Associated Bank vs. Court of Appeals 23 and
Philippine Bank of Commerce vs. CA24 to buttress his contention
that respondent Manila Bank as the collecting or last endorser
generally suffers the loss because it has the duty to ascertain the
genuineness of all prior endorsements is misplaced. In the cited
cases, the fact of forgery was not in issue. In the present case, the
fact of forgery was not established with certainty. In those cited
cases, the collecting banks were held to be negligent for failing to
observe precautionary measures to detect the forgery. In the case
before us, both courts below uniformly found that Manila Banks
personnel diligently performed their duties, having compared the
signature in the checks from the specimen signatures on record
and satisfied themselves that it was petitioners.
On the second issue, the fact that Manila Bank had filed a case for
estafa against Eugenio would not estop it from asserting the fact
that forgery has not been clearly established. Petitioner cannot hold
private respondent in estoppel for the latter is not the actual party
to the criminal action. In a criminal action, the State is the plaintiff,
for the commission of a felony is an offense against the
State.25 Thus, under Section 2, Rule 110 of the Rules of Court the
complaint or information filed in court is required to be brought in
the name of the "People of the Philippines." 26
Further, as petitioner himself stated in his petition, respondent
bank filed the estafa case against Eugenio on the basis of
petitioners own affidavit,27 but without admitting that he had any
personal knowledge of the alleged forgery. It is, therefore, easy to
understand that the filing of the estafa case by respondent bank
was a last ditch effort to salvage its ties with the petitioner as a
valuable client, by bolstering the estafa case which he filed against
his secretary.
All told, we find no reversible error that can be ascribed to the
Court of Appeals.
WHEREFORE, the instant petition is DENIED for lack of merit. The
assailed decision of the Court of Appeals dated January 28, 1999 in
CA-G.R. CV No. 47942, is AFFIRMED. Costs against petitioner. SO
ORDERED.
Bellosillo, Acting C.J., (Chairman), Mendoza, Austria-Martinez, and
Callejo, Sr., JJ., concur.
G.R. No. 138510 October 10, 2002

TRADERS ROYAL BANK, petitioner,

vs.
RADIO PHILIPPINES NETWORK, INC.,
INTERCONTINENTAL BROADCASTING CORPORATION and
BANAHAW BROADCASTING CORPORATION,
through the BOARD OF ADMINISTRATORS,
and SECURITY BANK AND TRUST COMPANY, respondents.

DECISION

CORONA, J.:

Petitioner seeks the review and prays for the reversal of the
Decision1 of April 30, 1999 of Court of Appeals in CA-G.R. CV No.
54656, the dispositive portion of which reads:

WHEREFORE, the appealed decision is AFFIRMED with modification

in the sense that appellant SBTC is hereby absolved from any
liability. Appellant TRB is solely liable to the appellees for the
damages and costs of suit specified in the dispositive portion of the
appealed decision. Costs against appellant TRB.

SO ORDERED.2

As found by the Court of Appeals, the antecedent facts of the case

are as follows:

On April 15, 1985, the Bureau of Internal Revenue (BIR) assessed

plaintiffs Radio Philippines Network (RPN), Intercontinental
Broadcasting Corporation (IBC), and Banahaw Broadcasting
Corporation (BBC) of their tax obligations for the taxable years
1978 to 1983.

On March 25, 1987, Mrs. Lourdes C. Vera, plaintiffs comptroller,

sent a letter to the BIR requesting settlement of plaintiffs tax
obligations.

The BIR granted the request and accordingly, on June 26, 1986,
plaintiffs purchased from defendant Traders Royal Bank (TRB) three
(3) managers checks to be used as payment for their tax liabilities,
to wit:
Check
Amount
Number
P4,155.835.
30652
00
3,949,406.1
30650
2
1,685,475.7
30796
5 plus interest at the legal rate from the filing of this
Defendant TRB, through Aida Nuez, TRB Branch Manager at
Broadcast City Branch, turned over the checks to Mrs. Vera who
was supposed to deliver the same to the BIR in payment of
plaintiffs taxes.
Sometime in September, 1988, the BIR again assessed plaintiffs for
their tax liabilities for the years 1979-82. It was then they
discovered that the three (3) managers checks (Nos. 30652, 30650
and 30796) intended as payment for their taxes were never
delivered nor paid to the BIR by Mrs. Vera. Instead, the checks were
presented for payment by unknown persons to defendant Security
Bank and Trust Company (SBTC), Taytay Branch as shown by the
banks routing symbol transit number (BRSTN 01140027) or
clearing code stamped on the reverse sides of the checks.
Meanwhile, for failure of the plaintiffs to settle their obligations, the
BIR issued warrants of levy, distraint and garnishment against
them. Thus, they were constrained to enter into a compromise and
paid BIR P18,962,225.25 in settlement of their unpaid deficiency
taxes.
Thereafter, plaintiffs sent letters to both defendants, demanding
that the amounts covered by the checks be reimbursed or credited
to their account. The defendants refused, hence, the instant suit.3
On February 17, 1985, the trial court rendered its decision, thus:
WHEREFORE, in view of the foregoing considerations, judgment is
hereby rendered in favor of the plaintiffs and against the
defendants by :
a) Condemning the defendant Traders Royal Bank to pay
actual damages in the sum of Nine Million Seven Hundred
Ninety Thousand and Seven Hundred Sixteen Pesos and
Eighty-Seven Centavos (P9,790,716.87) broken down as
follows:
1) To plaintiff RPN-9 - P4,155,835.00
2) To Plaintiff IBC-13 - P3,949,406.12
3) To Plaintiff BBC-2 - P1,685,475.72
case in court.
b) Condemning the defendant Security Bank and Trust
Company, being collecting bank, to reimburse the defendant
Traders Royal Bank, all the amounts which the latter would
pay to the aforenamed plaintiffs;
c) Condemning both defendants to pay to each of the
plaintiffs the sum of Three Hundred Thousand (P300,000.00)
Pesos as exemplary damages and attorneys fees equivalent
to twenty-five percent of the total amount recovered; and
d) Costs of suit.
SO ORDERED.4
Defendants Traders Royal Bank and Security Bank and Trust
Company, Inc. both appealed the trial courts decision to the Court
of Appeals. However, as quoted in the beginning hereof, the
appellate court absolved defendant SBTC from any liability and held
TRB solely liable to respondent networks for damages and costs of
suit.
In the instant petition for review on certiorari of the Court of
Appeals decision, petitioner TRB assigns the following errors: (a)
the Honorable Court of Appeals manifestly overlooked facts which
would justify the conclusion that negligence on the part of RPN, IBC
and BBC bars them from recovering anything from TRB, (b) the
Honorable Court of Appeals plainly erred and misapprehended the
facts in relieving SBTC of its liability to TRB as collecting bank and
indorser by overturning the trial courts factual finding that SBTC
did endorse the three (3) managers checks subject of the instant
case, and (c) the Honorable Court of Appeals plainly misapplied the
law in affirming the award of exemplary damages in favor of RPN,
IBC and BBC.
In reply, respondents RPN, IBC, and BBC assert that TRBs petition
raises questions of fact in violation of Rule 45 of the 1997 Revised
Rules on Civil Procedure which restricts petitions for review on
certiorari of the decisions of the Court of Appeals on pure questions
of law. RPN, IBC and BBC maintain that the issue of whether or not
respondent networks had been negligent were already passed upon
both by the trial and appellate courts, and that the factual findings
of both courts are binding and conclusive upon this Court.
Likewise, respondent SBTC denies liability on the ground that it had
no participation in the negotiation of the checks, emphasizing that
the BRSTN imprints at the back of the checks cannot be considered
as proof that respondent SBTC accepted the disputed checks and
presented them to Philippine Clearing House Corporation for
clearing.
Setting aside the factual ramifications of the instant case, the
threshold issue now is whether or not TRB should be held solely
liable when it paid the amount of the checks in question to a person
other than the payee indicated on the face of the check, the Bureau
of Internal Revenue.
"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." 5 Consequently, if
a bank pays a forged check, it must be considered as paying out of
its funds and cannot charge the amount so paid to the account of
the depositor.
In the instant case, the 3 checks were payable to the BIR. It was
established, however, that said checks were never delivered or paid
to the payee BIR but were in fact presented for payment by some
unknown persons who, in order to receive payment therefor, forged
the name of the payee. Despite this fraud, petitioner TRB paid the 3
checks in the total amount of P9,790,716.87.
Petitioner ought to have known that, where a check is drawn
payable to the order of one person and is presented for payment by
another and purports upon its face to have been duly indorsed by
the payee of the check, it is the primary duty of petitioner to know
that the check was duly indorsed by the original payee and, where
it pays the amount of the check to a third person who has forged
the signature of the payee, the loss falls upon petitioner who
cashed the check. Its only remedy is against the person to whom it
paid the money.6
It should be noted further that one of the subject checks was
crossed. The crossing of one of the subject checks should have put
petitioner on guard; it was duty-bound to ascertain the indorsers
title to the check or the nature of his possession. Petitioner should
have known the effects of a crossed check: (a) the check may not
be encashed but only deposited in the bank; (b) the check may be
negotiated only once to one who has an account with a bank and
(c) the act of crossing the check serves as a warning to the holder
that the check has been issued for a definite purpose so that he
must inquire if he has received the check pursuant to that purpose,
otherwise, he is not a holder in due course.7
By encashing in favor of unknown persons checks which were on
their face payable to the BIR, a government agency which can only
act only through its agents, petitioner did so at its peril and must
suffer the consequences of the unauthorized or wrongful
endorsement.8 In this light, petitioner TRB cannot exculpate itself
from liability by claiming that respondent networks were
themselves negligent.
A bank is engaged in a business impressed with public interest and
it is its duty to protect its many clients and depositors who transact
business with it. It is under the obligation to treat the accounts of
the depositors and clients with meticulous care, whether such
accounts consist only of a few hundreds or millions of pesos.9
Petitioner argues that respondent SBTC, as the collecting bank and
indorser, should be held responsible instead for the amount of the
checks.
The Court of Appeals addressed exactly the same issue and made
the following findings and conclusions:
As to the alleged liability of appellant SBTC, a close examination of
the records constrains us to deviate from the lower courts finding
that SBTC, as a collecting bank, should similarly bear the loss.
"A collecting bank where a check is deposited and which indorses
the check upon presentment with the drawee bank, is such an
indorser. So even if the indorsement on the check deposited by the
banks client is forged, the collecting bank is bound by his
warranties as an indorser and cannot set up the defense of forgery
as against the drawee bank."
To hold appellant SBTC liable, it is necessary to determine whether
it is a party to the disputed transactions.
Section 3 of the Negotiable Instruments Law reads:
"SECTION 63. When person deemed indorser. - A person placing his
signature upon an instrument otherwise than as maker, drawer, or
acceptor, is deemed to be an indorser unless he clearly indicates
by appropriate words his intention to be bound in some other
capacity."
Upon the other hand, the Philippine Clearing House Corporation
(PCHC) rules provide:
"Sec. 17.- BANK GUARANTEE. All checks cleared through the PCHC
shall bear the guarantee affixed thereto by the Presenting
Bank/Branch which shall read as follows:
"Cleared thru the Philippine Clearing House Corporation. All prior
endorsements and/or lack of endorsement guaranteed. NAME OF
BANK/BRANCH BRSTN (Date of clearing)."
Here, not one of the disputed checks bears the requisite
endorsement of appellant SBTC. What appears to be a guarantee
stamped at the back of the checks is that of the Philippine National
Bank, Buendia Branch, thereby indicating that it was the latter
Bank which received the same.
It was likewise established during the trial that whenever appellant
SBTC receives a check for deposit, its practice is to stamp on its
face the words, "non-negotiable". Lana Echevarrias testimony is
relevant:
"ATTY. ROMANO: Could you tell us briefly the procedure you follow
in receiving checks?
"A: First of all, I verify the check itself, the place, the date, the
amount in words and everything. And then, if all these things are in
order and verified in the data sheet I stamp my non-negotiable
stamp at the face of the check."
Unfortunately, the words "non-negotiable" do not appear on the
face of either of the three (3) disputed checks.
Moreover, the aggregate amount of the checks is not reflected in
the clearing documents of appellant SBTC. Section 19 of the Rules
of the PCHC states:
"Section 19 Regular Item Procedure:
Each clearing participant, through its authorized representatives,
shall deliver to the PCHC fully qualified MICR checks grouped in 200
or less items to a batch and supported by an add-list, a batch
control slip, and a delivery statement.
It bears stressing that through the add-list, the PCHC can
countercheck and determine which checks have been presented on
a particular day by a particular bank for processing and clearing. In
this case, however, the add-list submitted by appellant SBTC
together with the checks it presented for clearing on August 3,
1987 does not show that Check No. 306502 in the sum of
P3,949,406.12 was among those that passed for clearing with the
PCHC on that date. The same is true with Check No. 30652 with a
face amount of P4,155,835.00 presented for clearing on August 11,
1987 and Check No. 30796 with a face amount of P1,685,475.75.
The foregoing circumstances taken altogether create a serious
doubt on whether the disputed checks passed through the hands of
appellant SBTC."10
We subscribe to the foregoing findings and conclusions of the Court
of Appeals.
A collecting bank which indorses a check bearing a forged
indorsement and presents it to the drawee bank guarantees all
prior indorsements, including the forged indorsement itself, and
ultimately should be held liable therefor. However, it is doubtful if
the subject checks were ever presented to and accepted by SBTC
so as to hold it liable as a collecting bank, as held by the Court of
Appeals.
Since TRB did not pay the rightful holder or other person or entity
entitled to receive payment, it has no right to reimbursement.
Petitioner TRB was remiss in its duty and obligation, and must
therefore suffer the consequences of its own negligence and
disregard of established banking rules and procedures.

We agree with petitioner, however, that it should not be made to

pay exemplary damages to RPN, IBC and BBC because its wrongful
act was not done in bad faith, and it did not act in a wanton,
fraudulent, reckless or malevolent manner.11

We find the award of attorneys fees, 25% of P10 million, to be

manifestly exorbitant.12 Considering the nature and extent of the
services rendered by respondent networks counsel, however, the
Court deems it appropriate to award the amount of P100,000 as
attorneys fees.

WHEREFORE, the appealed decision is MODIFIED by deleting the

award of exemplary damages. Further, respondent networks are
granted the amount of P100,000 as attorneys fees. In all other
respects, the Court of Appeals decision is hereby AFFIRMED.

SO ORDERED.

Puno, (Chairman), Panganiban, and Morales, JJ., concur.

Sandoval-Gutierrez, J., no part.

G.R. No. L-8844 December 16, 1914

FERNANDO MAULINI, ET AL., plaintiffs-appellees,

vs.
ANTONIO G. SERRANO, defendant-appellant.

MORELAND, J.:
This is an appeal from a judgment of the Court of First Instance of
the city of Manila in favor of the plaintiff for the sum of P3,000, with
interest thereon at the rate of 1 per cent month from September
5, 1912, together with the costs.
The action was brought by the plaintiff upon the contract of
indorsement alleged to have been made in his favor by the
defendant upon the following promissory note:
3,000. Due 5th of September, 1912.
We jointly and severally agree to pay to the order of Don
Antonio G. Serrano on or before the 5th day of September,
1912, the sum of three thousand pesos (P3,000) for value
received for commercial operations. Notice and protest
renounced. If the sum herein mentioned is not completely
paid on the 5th day of September, 1912, this instrument will
draw interest at the rate of 1 per cent per month from the
date when due until the date of its complete payment. The
makers hereof agree to pay the additional sum of P500 as
attorney's fees in case of failure to pay the note.
Manila, June 5, 1912.
(Sgd.) For Padern, Moreno & Co., by F. Moreno, member of
the firm. For Jose Padern, by F. Moreno. Angel Gimenez.
The note was indorsed on the back as follows:
Pay note to the order of Don Fernando Maulini, value
received. Manila, June 5, 1912. (Sgd.) A.G. Serrano.
The first question for resolution on this appeal is whether or not,
under the Negotiable Instruments Law, an indorser of a negotiable
promissory note may, in an action brought by his indorsee, show,
by parol evidence, that the indorsement was wholly without
consideration and that, in making it, the indorser acted as agent for
the indorsee, as a mere vehicle of transfer of the naked title from
the maker to the indorsee, for which he received no consideration
whatever.
The learned trial court, although it received parol evidence on the
subject provisionally, held, on the final decision of the case, that
such evidence was not admissible to alter, very, modify or
contradict the terms of the contract of indorsement, and, therefore,
refused to consider the evidence thus provisionally received, which
tended to show that, by verbal agreement between the indorser
and the indorsee, the indorser, in making the indorsement, was
acting as agent for the indorsee, as a mere vehicle for the
transference of naked title, and that his indorsement was wholly
without consideration. The court also held that it was immaterial
whether there was a consideration for the transfer or not, as the
indorser, under the evidence offered, was an accommodation
indorser.
We are of the opinion that the trial court erred in both
findings.1awphil.net
In the first place, the consideration of a negotiable promissory note,
or of any of the contracts connected therewith, like that of any
other written instrument, is, between the immediate parties to the
contract, open to attack, under proper circumstances, for the
purpose of showing an absolute lack or failure of consideration.
It seems, according to the parol evidence provisionally admitted on
the trial, that the defendant was a broker doing business in the city
of Manila and that part of his business consisted in looking up and
ascertaining persons who had money to loan as well as those who
desired to borrow money and, acting as a mediary, negotiate a loan
between the two. He had done much business with the plaintiff and
the borrower, as well as with many other people in the city of
Manila, prior to the matter which is the basis of this action, and was
well known to the parties interested. According to his custom in
transactions of this kind, and the arrangement made in this
particular case, the broker obtained compensation for his services
of the borrower, the lender paying nothing therefor. Sometimes this
was a certain per cent of the sum loaned; at other times it was a
part of the interest which the borrower was to pay, the latter paying
1 per cent and the broker per cent. According to the method
usually followed in these transactions, and the procedure in this
particular case, the broker delivered the money personally to the
borrower, took note in his own name and immediately transferred it
by indorsement to the lender. In the case at bar this was done at
the special request of the indorsee and simply as a favor to him,
the latter stating to the broker that he did not wish his name to
appear on the books of the borrowing company as a lender of
money and that he desired that the broker take the note in his own
name, immediately transferring to him title thereto by indorsement.
This was done, the note being at once transferred to the lender.
According to the evidence referred to, there never was a moment
when Serrano was the real owner of the note. It was always the
note of the indorsee, Maulini, he having furnished the money which
was the consideration for the note directly to the maker and being
the only person who had the slightest interest therein, Serrano, the
broker, acting solely as an agent, a vehicle by which the naked title
to the note passed fro the borrower to the lender. The only
payment that the broker received was for his services in
negotiating the loan. He was paid absolutely nothing for becoming
responsible as an indorser on the paper, nor did the indorsee lose,
pay or forego anything, or alter his position thereby.
Nor was the defendant an accommodation indorser. The learned
trial court quoted that provision of the Negotiable Instruments Law
which defines an accommodation party as "one who has signed the
instrument as maker, drawer, acceptor, or indorser, without
receiving value therefor, and for the purpose of lending his name to
some other person. Such a person is liable on the instrument to a
holder for value, notwithstanding such holder at the time of taking
the instrument knew the same to be only an accommodation
party." (Act No. 2031, sec. 29.)
We are of the opinion that the trial court misunderstood this
definition. The accommodation to which reference is made in the
section quoted is not one to the person who takes the note that
is, the payee or indorsee, but one to the maker or indorser of the
note. It is true that in the case at bar it was an accommodation to
the plaintiff, in a popular sense, to have the defendant indorse the
note; but it was not the accommodation described in the law, but,
rather, a mere favor to him and one which in no way bound
Serrano. In cases of accommodation indorsement the indorser
makes the indorsement for the accommodation of the maker. Such
an indorsement is generally for the purpose of better securing the
payment of the note that is, he lend his name to the maker, not
to the holder. Putting it in another way: An accommodation note is
one to which the accommodation party has put his name, without
consideration, for the purpose of accommodating some other party
who is to use it and is expected to pay it. The credit given to the
accommodation part is sufficient consideration to bind the
accommodation maker. Where, however, an indorsement is made
as a favor to the indorsee, who requests it, not the better to secure
payment, but to relieve himself from a distasteful situation, and
where the only consideration for such indorsement passes from the
indorser to the indorsee, the situation does not present one
creating an accommodation indorsement, nor one where there is a
consideration sufficient to sustain an action on the indorsement.
The prohibition in section 285 of the Code of Civil Procedure does
not apply to a case like the one before us. The purpose of that
prohibition is to prevent alternation, change, modification or
contradiction of the terms of a written instrument, admittedly
existing, by the use of parol evidence, except in the cases
specifically named in the section. The case at bar is not one where
the evidence offered varies, alters, modifies or contradicts
the terms of the contract of indorsement admittedly existing. The
evidence was not offered for that purpose. The purpose was to
show that no contract of indorsement ever existed; that the minds
of the parties never met on the terms of such contract; that they
never mutually agreed to enter into such a contract; and that there
never existed a consideration upon which such an agreement could
be founded. The evidence was not offered to vary, alter, modify, or
contradict the terms of an agreement which it is admitted existed
between the parties, but to deny that there ever existed any
agreement whatever; to wipe out all apparent relations between
the parties, and not to vary, alter or contradict the terms of a
relation admittedly existing; in other words, the purpose of the
parol evidence was to demonstrate, not that the indorser did not
intend to make the particular indorsement which he did make; not
that he did not intend to make the indorsement in the terms made;
but, rather, to deny the reality of any indorsement; that a relation
of any kind whatever was created or existed between him and the
indorsee by reason of the writing on the back of the instrument;
that no consideration ever passed to sustain an indorsement of any
kind whatsoever.
The contention has some of the appearances of a case in which an
indorser seeks prove forgery. Where an indorser claims that his
name was forged, it is clear that parol evidence is admissible to
prove that fact, and, if he proves it, it is a complete defense, the
fact being that the indorser never made any such contract, that no
such relation ever existed between him and the indorsee, and that
there was no consideration whatever to sustain such a contract. In
the case before us we have a condition somewhat similar. While the
indorser does not claim that his name was forged, he does claim
that it was obtained from him in a manner which, between the
parties themselves, renders, the contract as completely inoperative
as if it had been forged.
Parol evidence was admissible for the purpose named.1awphil.net
There is no contradiction of the evidence offered by the defense
and received provisionally by the court. Accepting it as true the
judgment must be reversed.
The judgment appealed from is reversed and the complaint
dismissed on the merits; no special finding as to costs.
Arellano, C.J., Johnson and Trent, JJ., concur.
Separate Opinions
TORRES, J., concurring:
Act No. 2031, known as the Negotiable Instruments Law, which
governs the present case, establishes various kinds of
indorsements by means of which the liability of the indorser is in
some manner limited, distinguishing it from that of the regular or
general indorser, and among those kinds is that of the qualified
indorsement which, pursuant to section 38 of the same Act,
constitutes the indorser a mere assignor of the title to the
instrument, and may be made by adding to the indorser's signature
the words "without recourse" or any words of similar import.
If the defendant, Antonio G. Serrano, intervened, as he alleged and
tried to prove that he did at the trial, only as a broker or agent
between the lender and plaintiff, Maulini, and the makers of the
promissory note, Padern, Moreno & Co. and Angel Gimenez, in
order to afford an opportunity to the former to invest the amount of
the note in such manner that it might bring him interest, the
defendant could have qualified the indorsement in question by
adding to his signature the words "without recourse" or any others
such as would have made known in what capacity he intervened in
that transaction. As the defendant did not do so ad as he signed
the indorsement in favor of the plaintiff Maulini for value received
from the latter, his liability, according to section 66 of the Act
aforecited, is that of a regular or general indorser, who, this same
section provides, engages that if the instrument be dishonored, and
the necessary proceedings on dishonor be duly taken, he will pay
the amount thereof to the holder, or to any subsequent indorser
who may be compelled to pay it. And the evidence which the
defendant presented, tending to show what were the conditions to
which the defendant presented, tending to show what were the
conditions to which he obligated himself and in what capacity he
intervened in making that indorsement and that this latter was
absolutely without consideration, should not have been admitted so
that he might elude the aforesaid obligation, or, if admitted, should
not be taken into account, because as a regular indorser he
warranted, pursuant to the said section 66, that the instrument was
genuine and in all respects what it purported to be, that he had a
good title to it, and that it was at the time of his indorsement valid
and subsisting. He cannot, therefore, by means of any evidence,
and much less of such as consists of his own testimony, and as
such interested party, alter, modify, contradict or annul, as he
virtually claimed and claims to be entitled to do, what in writing
and with a full and perfect knowledge of the meaning and import of
the words contained in the indorsement, he set forth therein over
his signature.
Section 63 of the Act above cited says that a person placing his
signature upon an instrument otherwise than as maker, drawer, or
acceptor is deemed to be an indorser, unless he clearly indicates
by appropriate words his contention to be bound indicates by
appropriate words his intention to be bound in some other capacity.
This provision of the law clearly indicates that in every negotiable
instrument it is absolutely necessary to specify the capacity in
which the person intervenes who is mentioned therein or takes part
in its negotiation, because only by so doing can it be determined
what liabilities arise from that intervention and from whom, how
and when they must be exacted. And if, in the vent of a failure to
express the capacity in which the person who signed the negotiable
instrument intended to be bound, he should be deemed to be an
indorser, when the very words of the instrument expressly and
conclusively show that such he is, as occurs in the present case,
and when the indorsement contains no restriction, modification,
condition or qualification whatever, there cannot be attributed to
him, without violating the provisions of the said Act, any other
intention than that of being bound in the capacity in which he
appears in the instrument itself, nor can evidence be admitted or, if
already admitted, taken into consideration, for the purpose of
proving such other intention, for the simple reason that if the law
has already fixed ad determined the capacity in which it must be
considered that the person who signed the negotiable instrument
intervened and the intention of his being bound in a definite
capacity, for no other purpose, undoubtedly, than that there shall
be no evidence given in the matter, when the capacity appears in
the instrument itself and the intention is determined by the very
same capacity, as occurs in this case, the admission of evidence in
reference thereto is entirely unnecessary, useless, and contrary to
the purposes of the law, which is clear and precise in its provisions
and admits of no subterfuges or evasions for escaping obligations
contracted upon the basis of credit, with evident and sure
detriment to those who intervened or took part in the negotiation of
the instrument.
However, it is held in the majority opinion, for the purpose of
sustaining the premises that the proofs presented by the defendant
could have been admitted without violating the provisions of
section 285 of the Code of Civil Procedure, that the evidence was
not offered to vary, alter, modify, or contradict the terms of an
agreement which it is admitted existed between the parties, but
to deny that there ever existed any agreement whatever; to wipe
out all apparent relations between the parties, and not to vary,
alter or contradict the terms of a relation admittedly existing; in
other words, the purpose of the parol evidence was to demonstrate,
not that the indorser did not intend to make the particular
indorsement in the terms made, but rather to deny the reality
of any indorsement; to deny that a relation of any kind
whatsoever was created or existed between him and the
indorsee by reason of the writing on the back of the instrument; to
deny that any consideration ever passed to sustain an indorsement
of any kind whatsoever. It is stated in the same decision that the
contention has some of the appearances of a case in which an
indorser seeks to prove forgery.
First of all, we do not see that there exists any appearance or
similarity whatever between the case at bar and one where forgery
is sought to be proved. The defendant did not, either civilly or
criminally, impugn the indorsement as being false. He admitted its
existence, as stated in the majority opinion itself, and did not
disown his signature written in the indorsement. His denial to the
effect that the indorsement was wholly without consideration, aside
from the fact that it is i contradiction to the statements that he over
his signature made in the instrument, does not allow the
supposition that the instrument was forged.
The meaning which the majority opinion apparently wishes to
convey, in calling attention to the difference between what, as it
says, was the purpose of the evidence presented by the defendant
and what was sought to be proved thereby, is that the defendant
does not endeavor to contradict or alter the terms of the
agreement, which is contained in the instrument and is admitted to
exist between the parties; but to deny the existence of such an
agreement between them, that is, the existence of any
indorsement at all, and that any consideration ever passed to
sustain the said indorsement, or, in other words, that the defendant
acknowledged the indorsement as regards the form in which it
appears to have been drawn up, but not with respect to its
essence, that is, to the truth of the particular facts set forth in the
indorsement. It cannot be denied that the practical result evidence
is other than to contradict, modify, alter or even to annul the terms
of the agreement contained in the indorsement: so that, in reality,
the distinction does not exist that is mentioned as a ground of the
decision of the majority of the court in support of the opinion that
the evidence in question might have been admitted, without
violating the provisions of the aforementioned section 285 of the
Code of Civil Procedure. This section is based upon the same
principle which is taken into account in the Negotiable Instruments
Law to write into it such positive and definite provisions which
purport, without possibility of discussion or doubt, the uselessness
of taking evidence when the capacity of the person who intervened
in a negotiable instrument or his intention of being bound in a
particular way appears in the instrument itself or has been fixed by
statute, if it is not shown that he did so in some other capacity than
that of maker, drawer or acceptor.
But aside from what the Code of Civil Procedure prescribes with
respect to this matter, as the present case is governed by the
Negotiable Instruments Law, we must abide by its provisions.
Section 24 of this Act, No. 2031, says that every negotiable
instrument is deemed prima facie to have been issued for a
valuable consideration; and every person whose signature appears
thereon, to have become a party thereto for value. If the Act
establishes this presumption for the case where there might be
doubt with respect to the existence of a valuable consideration, in
order to avoid the taking of evidence in the matter, when the
consideration appears from the instrument itself by the expression
of the value, the introduction of evidence is entirely unnecessary
and improper.
According to section 25 of the same Act, value is any consideration
sufficient to support a simple contract, and so broad is the scope
the law gives to the meaning of "value" in this kind of instruments
that it considers as such a prior of preexistent debt, whether the
instrument be payable on demand or at some future date.
Section 26 provides that where value has at any time been given
for the instrument, the holder is deemed a holder for value, both in
respect to the maker and to the defendant indorser, it is immaterial
whether he did so directly to the person who appears in the
promissory note as the maker or whether he delivered the sum to
the defendant in order that this latter might in turn deliver it to the
maker.
The defendant being the holder of the instrument, he is also
unquestionably the holder in due course. In the first place, in order
to avoid doubts with respect to this matter which might require the
introduction of evidence, the Act before mentioned has provided, in
section 59, that every holder is deemed prima facie to be a holder
in due course, and such is the weight it gives to this presumption
and to the consequences derived therefrom, that it imposes upon
the holder the burden to prove that he or some person under whom
he claims acquired the title in due course, only when it is shown
that the title of any person who has negotiated the instrument was
defective. This rule, however, pursuant to the said section, does not
apply in favor of a party who became bound on the instrument
prior to the acquisition of such defective title, in which case the
defendant Serrano is not included, because, in the first place, he
was not bound on the instrument prior to the acquisition of the title
by the plaintiff, but it was the maker of the promissory note who
was bound on the instrument executed in favor of the defendant or
indorser prior to the acquisition of the title by the plaintiff; and, in
the second place, it does not appear, nor was it proved, as will be
seen hereinafter, that the title in question was defective.
According to section 52 of the same Act, the plaintiff is the holder in
due course of the instrument in question, that is, of the promissory
note containing the obligation compliance with which is demanded
of him by the defendant, because he took the instrument under the
condition: (a) That it was 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; (c) that he took it in
good faith and for value; and (d) that at the time it was negotiated
to him he had no notice of any deficiency in the instrument or
defect in the title of the person negotiating it.
Pursuant to section 56 of the said Act, to constitute notice of a
deficiency in the instrument or defect in the title of the person
negotiating the same, the person to whom it is transferred must
have had actual knowledge of the deficiency or defect, or
knowledge of such facts that his action in taking the instrument
amounted to bad faith.
In the present case it cannot be said, for it is not proven, that the
plaintiff, upon accepting the instrument from the defendant, had
actual knowledge of any deficiency or defect in the same, for the
simple reason that it contains no deficiency or defect. Its terms are
very clear and positive. There is nothing ambiguous, concealed, or
which might give rise to any doubt whatever with respect to its
terms or to the agreement made by the parties. Furthermore, as
stated in the majority opinion, the defendant did not intend to
make the particular indorsement which he did make in the terms,
form and manner in which it was made, nor did he intend to change
or alter the terms of the agreement which is admitted to have
existed between the parties. All of which indicates that, neither as
regards the plaintiff nor as regards the defendant, was there any
deficiency or defect in the title or in the instrument, and that the
plaintiff, upon taking or receiving the instrument from the
defendant, had no knowledge of any fact from which bad faith on
his part might be implied. Besides, no evidence was produced of
the existence of any such bad faith, nor of the knowledge of any
deficiency or defect.
Moreover, section 55 of Act No. 2031 provides that the title of a
person who negotiates an instrument is defective within the
meaning of this Act when he obtained the instrument, or any
signature thereto, by fraud, duress, or force and fear, or other
unlawful means, or for an illegal consideration, or when he
negotiates it in breach of faith, or under such circumstances as
amount to a fraud. As no evidence was taken on these points, the
only ones that may be proven as regards negotiable instruments,
the defendant must be deemed to be the holder of the instrument
in due course, pursuant to the provisions of the aforecited section
59, and he cannot be required to prove that he or his predecessor
in interest acquired the title as such holder in due course.
Now then, according to section 28 of the same Act, as against the
holder of the instrument in due course absence or failure of
consideration is not a matter of defense; and, pursuant to section
57, a holder in due course holds the instrument free from any
defect of title of prior parties, and free from defenses available to
prior parties among themselves, and may enforce payment of the
instrument for the full amount thereof against all parties liable
thereon. And the next section, No. 58 prescribes 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
nonnegotiable.
So it could not be clearer than that, pursuant to the provisions of
the Negotiable Instrument Law, which governs the case at bar, as
the plaintiff is the holder in due course of the instrument in
question, no proof whatever from the defendant could be admitted,
nor if admitted should be taken into account, bearing on the lack of
consideration in the indorsement, as alleged by him, and for the
purpose of denying the existence of any indorsement and that any
relation whatever was created or existed between him and the
indorsee; likewise, that no defense of any kind could have been
admitted from the defendant in respect to the said instrument, and,
finally, that the defendant is obligated to pay the sum mentioned in
the said indorsement, it being immaterial whether or not he be
deemed to be an accommodation party in the instrument, in order
that compliance with the said obligation may be required of him in
his capacity of indorser.
Basing our conclusions on the foregoing grounds, and regretting to
dissent from the opinion of the majority of our colleagues, we
believe that the judgment appealed from should be affirmed, with
the costs against the appellant.
Araullo, J., dissents.
#Separate Opinions
TORRES, J., concurring:
Act No. 2031, known as the Negotiable Instruments Law, which
governs the present case, establishes various kinds of
indorsements by means of which the liability of the indorser is in
some manner limited, distinguishing it from that of the regular or
general indorser, and among those kinds is that of the qualified
indorsement which, pursuant to section 38 of the same Act,
constitutes the indorser a mere assignor of the title to the
instrument, and may be made by adding to the indorser's signature
the words "without recourse" or any words of similar import.
If the defendant, Antonio G. Serrano, intervened, as he alleged and
tried to prove that he did at the trial, only as a broker or agent
between the lender and plaintiff, Maulini, and the makers of the
promissory note, Padern, Moreno & Co. and Angel Gimenez, in
order to afford an opportunity to the former to invest the amount of
the note in such manner that it might bring him interest, the
defendant could have qualified the indorsement in question by
adding to his signature the words "without recourse" or any others
such as would have made known in what capacity he intervened in
that transaction. As the defendant did not do so ad as he signed
the indorsement in favor of the plaintiff Maulini for value received
from the latter, his liability, according to section 66 of the Act
aforecited, is that of a regular or general indorser, who, this same
section provides, engages that if the instrument be dishonored, and
the necessary proceedings on dishonor be duly taken, he will pay
the amount thereof to the holder, or to any subsequent indorser
who may be compelled to pay it. And the evidence which the
defendant presented, tending to show what were the conditions to
which the defendant presented, tending to show what were the
conditions to which he obligated himself and in what capacity he
intervened in making that indorsement and that this latter was
absolutely without consideration, should not have been admitted so
that he might elude the aforesaid obligation, or, if admitted, should
not be taken into account, because as a regular indorser he
warranted, pursuant to the said section 66, that the instrument was
genuine and in all respects what it purported to be, that he had a
good title to it, and that it was at the time of his indorsement valid
and subsisting. He cannot, therefore, by means of any evidence,
and much less of such as consists of his own testimony, and as
such interested party, alter, modify, contradict or annul, as he
virtually claimed and claims to be entitled to do, what in writing
and with a full and perfect knowledge of the meaning and import of
the words contained in the indorsement, he set forth therein over
his signature.
Section 63 of the Act above cited says that a person placing his
signature upon an instrument otherwise than as maker, drawer, or
acceptor is deemed to be an indorser, unless he clearly indicates
by appropriate words his contention to be bound indicates by
appropriate words his intention to be bound in some other capacity.
This provision of the law clearly indicates that in every negotiable
instrument it is absolutely necessary to specify the capacity in
which the person intervenes who is mentioned therein or takes part
in its negotiation, because only by so doing can it be determined
what liabilities arise from that intervention and from whom, how
and when they must be exacted. And if, in the vent of a failure to
express the capacity in which the person who signed the negotiable
instrument intended to be bound, he should be deemed to be an
indorser, when the very words of the instrument expressly and
conclusively show that such he is, as occurs in the present case,
and when the indorsement contains no restriction, modification,
condition or qualification whatever, there cannot be attributed to
him, without violating the provisions of the said Act, any other
intention than that of being bound in the capacity in which he
appears in the instrument itself, nor can evidence be admitted or, if
already admitted, taken into consideration, for the purpose of
proving such other intention, for the simple reason that if the law
has already fixed ad determined the capacity in which it must be
considered that the person who signed the negotiable instrument
intervened and the intention of his being bound in a definite
capacity, for no other purpose, undoubtedly, than that there shall
be no evidence given in the matter, when the capacity appears in
the instrument itself and the intention is determined by the very
same capacity, as occurs in this case, the admission of evidence in
reference thereto is entirely unnecessary, useless, and contrary to
the purposes of the law, which is clear and precise in its provisions
and admits of no subterfuges or evasions for escaping obligations
contracted upon the basis of credit, with evident and sure
detriment to those who intervened or took part in the negotiation of
the instrument.
However, it is held in the majority opinion, for the purpose of
sustaining the premises that the proofs presented by the defendant
could have been admitted without violating the provisions of
section 285 of the Code of Civil Procedure, that the evidence was
not offered to vary, alter, modify, or contradict the terms of an
agreement which it is admitted existed between the parties, but
to deny that there ever existed any agreement whatever; to wipe
out all apparent relations between the parties, and not to vary,
alter or contradict the terms of a relation admittedly existing; in
other words, the purpose of the parol evidence was to demonstrate,
not that the indorser did not intend to make the particular
indorsement in the terms made, but rather to deny the reality
of any indorsement; to deny that a relation of any kind
whatsoever was created or existed between him and the
indorsee by reason of the writing on the back of the instrument; to
deny that any consideration ever passed to sustain an indorsement
of any kind whatsoever. It is stated in the same decision that the
contention has some of the appearances of a case in which an
indorser seeks to prove forgery.
First of all, we do not see that there exists any appearance or
similarity whatever between the case at bar and one where forgery
is sought to be proved. The defendant did not, either civilly or
criminally, impugn the indorsement as being false. He admitted its
existence, as stated in the majority opinion itself, and did not
disown his signature written in the indorsement. His denial to the
effect that the indorsement was wholly without consideration, aside
from the fact that it is i contradiction to the statements that he over
his signature made in the instrument, does not allow the
supposition that the instrument was forged.
The meaning which the majority opinion apparently wishes to
convey, in calling attention to the difference between what, as it
says, was the purpose of the evidence presented by the defendant
and what was sought to be proved thereby, is that the defendant
does not endeavor to contradict or alter the terms of the
agreement, which is contained in the instrument and is admitted to
exist between the parties; but to deny the existence of such an
agreement between them, that is, the existence of any
indorsement at all, and that any consideration ever passed to
sustain the said indorsement, or, in other words, that the defendant
acknowledged the indorsement as regards the form in which it
appears to have been drawn up, but not with respect to its
essence, that is, to the truth of the particular facts set forth in the
indorsement. It cannot be denied that the practical result evidence
is other than to contradict, modify, alter or even to annul the terms
of the agreement contained in the indorsement: so that, in reality,
the distinction does not exist that is mentioned as a ground of the
decision of the majority of the court in support of the opinion that
the evidence in question might have been admitted, without
violating the provisions of the aforementioned section 285 of the
Code of Civil Procedure. This section is based upon the same
principle which is taken into account in the Negotiable Instruments
Law to write into it such positive and definite provisions which
purport, without possibility of discussion or doubt, the uselessness
of taking evidence when the capacity of the person who intervened
in a negotiable instrument or his intention of being bound in a
particular way appears in the instrument itself or has been fixed by
statute, if it is not shown that he did so in some other capacity than
that of maker, drawer or acceptor.
But aside from what the Code of Civil Procedure prescribes with
respect to this matter, as the present case is governed by the
Negotiable Instruments Law, we must abide by its provisions.
Section 24 of this Act, No. 2031, says that every negotiable
instrument is deemed prima facie to have been issued for a
valuable consideration; and every person whose signature appears
thereon, to have become a party thereto for value. If the Act
establishes this presumption for the case where there might be
doubt with respect to the existence of a valuable consideration, in
order to avoid the taking of evidence in the matter, when the
consideration appears from the instrument itself by the expression
of the value, the introduction of evidence is entirely unnecessary
and improper.
According to section 25 of the same Act, value is any consideration
sufficient to support a simple contract, and so broad is the scope
the law gives to the meaning of "value" in this kind of instruments
that it considers as such a prior of preexistent debt, whether the
instrument be payable on demand or at some future date.
Section 26 provides that where value has at any time been given
for the instrument, the holder is deemed a holder for value, both in
respect to the maker and to the defendant indorser, it is immaterial
whether he did so directly to the person who appears in the
promissory note as the maker or whether he delivered the sum to
the defendant in order that this latter might in turn deliver it to the
maker.
The defendant being the holder of the instrument, he is also
unquestionably the holder in due course. In the first place, in order
to avoid doubts with respect to this matter which might require the
introduction of evidence, the Act before mentioned has provided, in
section 59, that every holder is deemed prima facie to be a holder
in due course, and such is the weight it gives to this presumption
and to the consequences derived therefrom, that it imposes upon
the holder the burden to prove that he or some person under whom
he claims acquired the title in due course, only when it is shown
that the title of any person who has negotiated the instrument was
defective. This rule, however, pursuant to the said section, does not
apply in favor of a party who became bound on the instrument
prior to the acquisition of such defective title, in which case the
defendant Serrano is not included, because, in the first place, he
was not bound on the instrument prior to the acquisition of the title
by the plaintiff, but it was the maker of the promissory note who
was bound on the instrument executed in favor of the defendant or
indorser prior to the acquisition of the title by the plaintiff; and, in
the second place, it does not appear, nor was it proved, as will be
seen hereinafter, that the title in question was defective.
According to section 52 of the same Act, the plaintiff is the holder in
due course of the instrument in question, that is, of the promissory
note containing the obligation compliance with which is demanded
of him by the defendant, because he took the instrument under the
condition: (a) That it was 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; (c) that he took it in
good faith and for value; and (d) that at the time it was negotiated
to him he had no notice of any deficiency in the instrument or
defect in the title of the person negotiating it.
Pursuant to section 56 of the said Act, to constitute notice of a
deficiency in the instrument or defect in the title of the person
negotiating the same, the person to whom it is transferred must
have had actual knowledge of the deficiency or defect, or
knowledge of such facts that his action in taking the instrument
amounted to bad faith.
In the present case it cannot be said, for it is not proven, that the
plaintiff, upon accepting the instrument from the defendant, had
actual knowledge of any deficiency or defect in the same, for the
simple reason that it contains no deficiency or defect. Its terms are
very clear and positive. There is nothing ambiguous, concealed, or
which might give rise to any doubt whatever with respect to its
terms or to the agreement made by the parties. Furthermore, as
stated in the majority opinion, the defendant did not intend to
make the particular indorsement which he did make in the terms,
form and manner in which it was made, nor did he intend to change
or alter the terms of the agreement which is admitted to have
existed between the parties. All of which indicates that, neither as
regards the plaintiff nor as regards the defendant, was there any
deficiency or defect in the title or in the instrument, and that the
plaintiff, upon taking or receiving the instrument from the
defendant, had no knowledge of any fact from which bad faith on
his part might be implied. Besides, no evidence was produced of
the existence of any such bad faith, nor of the knowledge of any
deficiency or defect.
Moreover, section 55 of Act No. 2031 provides that the title of a
person who negotiates an instrument is defective within the
meaning of this Act when he obtained the instrument, or any
signature thereto, by fraud, duress, or force and fear, or other
unlawful means, or for an illegal consideration, or when he
negotiates it in breach of faith, or under such circumstances as
amount to a fraud. As no evidence was taken on these points, the
only ones that may be proven as regards negotiable instruments,
the defendant must be deemed to be the holder of the instrument
in due course, pursuant to the provisions of the aforecited section
59, and he cannot be required to prove that he or his predecessor
in interest acquired the title as such holder in due course.
Now then, according to section 28 of the same Act, as against the
holder of the instrument in due course absence or failure of
consideration is not a matter of defense; and, pursuant to section
57, a holder in due course holds the instrument free from any
defect of title of prior parties, and free from defenses available to
prior parties among themselves, and may enforce payment of the
instrument for the full amount thereof against all parties liable
thereon. And the next section, No. 58 prescribes 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
nonnegotiable.

So it could not be clearer than that, pursuant to the provisions of

the Negotiable Instrument Law, which governs the case at bar, as
the plaintiff is the holder in due course of the instrument in
question, no proof whatever from the defendant could be admitted,
nor if admitted should be taken into account, bearing on the lack of
consideration in the indorsement, as alleged by him, and for the
purpose of denying the existence of any indorsement and that any
relation whatever was created or existed between him and the
indorsee; likewise, that no defense of any kind could have been
admitted from the defendant in respect to the said instrument, and,
finally, that the defendant is obligated to pay the sum mentioned in
the said indorsement, it being immaterial whether or not he be
deemed to be an accommodation party in the instrument, in order
that compliance with the said obligation may be required of him in
his capacity of indorser.

Basing our conclusions on the foregoing grounds, and regretting to

dissent from the opinion of the majority of our colleagues, we
believe that the judgment appealed from should be affirmed, with
the costs against the appellant.

Araullo, J., dissents.

G.R. No. L-17845 April 27, 1967

INTESTATE ESTATE OF VICTOR SEVILLA. SIMEON
SADAYA, petitioner,
vs.
FRANCISCO SEVILLA, respondent.
SANCHEZ, J.:
On March 28, 1949, Victor Sevilla, Oscar Varona and Simeon
Sadaya executed, jointly and severally, in favor of the Bank of the
Philippine Islands, or its order, a promissory note for P15,000.00
with interest at 8% per annum, payable on demand. The entire,
amount of P15,000.00, proceeds of the promissory note, was
received from the bank by Oscar Varona alone. Victor Sevilla and
Simeon Sadaya signed the promissory note as co-makers only as a
favor to Oscar Varona. Payments were made on account. As of June
15, 1950, the outstanding balance stood P4,850.00. No payment
thereafter made.
On October 6, 1952, the bank collected from Sadaya the foregoing
balance which, together with interest, totalled P5,416.12. Varona
failed to reimburse Sadaya despite repeated demands.
Victor Sevilla died. Intestate estate proceedings were started in the
Court of First Instance of Rizal, Special Proceeding No. 1518.
Francisco Sevilla was named administrator.
In Special Proceeding No. 1518, Sadaya filed a creditor's claim for
the above sum of P5,746.12, plus attorneys fees in the sum of
P1,500.00. The administrator resisted the claim upon the averment
that the deceased Victor Sevilla "did not receive any amount as
consideration for the promissory note," but signed it only "as surety
for Oscar Varona".
On June 5, 1957, the trial court issued an order admitting the claim
of Simeon Sadaya in the amount of P5,746.12, and directing the
administrator to pay the same from any available funds belonging
to the estate of the deceased Victor Sevilla.
The motion to reconsider having been overruled, the administrator
appealed.1 The Court of Appeals, in a decision promulgated on July,
15, 1960, voted to set aside the order appealed from and to
disapprove and disallow "appellee's claim of P5,746.12 against the
intestate estate."
The case is now before this Court on certiorari to review the
judgment of the Court of Appeals.
Sadaya's brief here seeks reversal of the appellate court's decision
and prays that his claim "in the amount of 50% of P5,746.12, or
P2,873.06, against the intestate estate of the deceased Victor
Sevilla," be approved.
1. That Victor Sevilla and Simeon Sadaya were joint and several
accommodation makers of the 15,000.00-peso promissory note in
favor of the Bank of the Philippine Islands, need not be essayed. As
such accommodation the makers, the individual obligation of each
of them to the bank is no different from, and no greater and no less
than, that contract by Oscar Varona. For, while these two did not
receive value on the promissory note, they executed the same with,
and for the purpose of lending their names to, Oscar Varona. Their
liability to the bank upon the explicit terms of the promissory note
is joint and several.2 Better yet, the bank could have pursued its
right to collect the unpaid balance against either Sevilla or Sadaya.
And the fact is that one of the last two, Simeon Sadaya, paid that
balance.
2. It is beyond debate that Simeon Sadaya could have sought
reimbursement of the total amount paid from Oscar Varona. This is
but right and just. Varona received full value of the promissory
note.3 Sadaya received nothing therefrom. He paid the bank
because he was a joint and several obligor. The least that can be
said is that, as between Varona and Sadaya, there is an implied
contract of indemnity. And Varona is bound by the obligation to
reimburse Sadaya.4
3. The common creditor, the Bank of the Philippine Islands, now out
of the way, we first look into the relations inter se amongst the
three consigners of the promissory note. Their relations vis-a-
vis the Bank, we repeat, is that of joint and several obligors. But
can the same thing be said about the relations of the three
consigners, in respect to each other?
Surely enough, as amongst the three, the obligation of Varona and
Sevilla to Sadaya who paid can not be joint and several. For,
indeed, had payment been made by Oscar Varona, instead of
Simeon Sadaya, Varona could not have had reason to seek
reimbursement from either Sevilla or Sadaya, or both. After all, the
proceeds of the loan went to Varona and the other two received
nothing therefrom.
4. On principle, a solidary accommodation maker who made
payment has the right to contribution, from his co-
accommodation maker, in the absence of agreement to the
contrary between them, and subject to conditions imposed by law.
This right springs from an implied promise between the
accommodation makers to share equallythe burdens that may
ensue from their having consented to stamp their signatures on the
promissory note.5 For having lent their signatures to the principal
debtor, they clearly placed themselves in so far as payment
made by one may create liability on the other in the category of
mere joint grantors of the former. 6 This is as it should be. Not one of
them benefited by the promissory note. They stand on the same
footing. In misfortune, their burdens should be equally spread.
Manresa, commenting on Article 1844 of the Civil Code of
Spain,7 which is substantially reproduced in Article 2073 8 of our
Civil Code, on this point stated:
Otros, como Pothier, entienden que, si bien el principio es
evidente enestricto concepto juridico, se han extremado sus
consecuencias hasta el punto de que estas son contrarias,
no solo a la logica, sino tambien a la equidad, que debe ser
el alma del Derecho, como ha dicho Laurent.
Esa accion sostienen no nace de la fianza, pues, en
efecto, el hecho de afianzar una misma deuda no crea
ningun vinculo juridico, ni ninguna razon de obligar entre los
fiadores, sino que trae, por el contrario, su origen de una
acto posterior, cual es el pago de toda la deuda realizado
por uno de ellos, y la equdad, no permite que los denias
fiadores, que igualmente estaban estaban obligos a dicho
pago, se aprovenchen de ese acto en perjuico del que lo
realozo.
Lo cierto es que esa accion concedida al fiador nace, si, del
hecho del pago, pero es consecuencia del beneficio o
del derecho de division, como tenemos ya dicho. En efecto,
por virtud de esta todos los cofiadores vienen obligados a
contribuir al pago de parte que a cada uno corresponde. De
ese obligacion, contraida por todos ellos, se libran los que
no han pagado por consecuencia del acto realizado por el
que pago, y si bien este no hizo mas que cumplir el deber
que el contracto de fianza le imponia de responder de todo
el debito cuando no limito su obligacion a parte alguna del
mismo, dicho acto redunda en beneficio de los otros
cofiadores los cuales se aprovechan de el para quedar
desligados de todo compromiso con el acreedor.9
5. And now, to the requisites before one accommodation maker can
seek reimbursement from a co-accommodation maker.
By Article 18 of the Civil Code in matters not covered by the special
laws, "their deficiency shall be supplied by the provisions of this
Code". Nothing extant in the Negotiable Instruments Law would
define the right of one accommodation maker to seek
reimbursement from another. Perforce, we must go to the Civil
Code.1wph1.t
Because Sevilla and Sadaya, in themselves, are but co-guarantors
of Varona, their case comes within the ambit of Article 2073 of the
Civil Code which reads:
ART. 2073. When there are two or more guarantors of the
same debtor and for the same debt, the one among them
who has paid may demand of each of the others the share
which is proportionally owing from him.
If any of the guarantors should be insolvent, his share shall
be borne by the others, including the payer, in the same
proportion.
The provisions of this article shall not be applicable, unless
the payment has been made in virtue of a judicial demand
or unless the principal debtor is insolvent.10
As Mr. Justice Street puts it: "[T]hat article deals with the situation
which arises when one surety has paid the debt to the creditor and
is seeking contribution from his cosureties."11
Not that the requirements in paragraph 3, Article 2073, just quoted,
are devoid of cogent reason. Says Manresa:12
c) Requisitos para el ejercicio del derecho de reintegro o de
reembolso derivado de la corresponsabilidad de los
cofiadores.
La tercera de las prescripciones que comprende el
articulo se refiere a los requisitos que deben concurrir para
que pueda tener lugar lo dispuesto en el mismo. Ese
 derecho que concede al fiador para reintegrarse
directamente de los fiadores de lo que pago por ellos en vez
de dirigir su reclamacion contra el deudor, es un beneficio
otorgado por la ley solo ell dos casos determinados, cuya
justificacion resulta evidenciada desde luego; y esa
limitacion este debidamente aconsejada por una razon de
prudencia que no puede desconocerse, cual es la de evitar
que por la mera voluntad de uno de los cofiadores pueda
hacerse surgir la accion de reintegro contra los demas en
prejuicio de los mismos.
El perjuicio que con tal motivo puede inferirse a los
cofiadores es bien notorio, pues teniendo en primer termino
el fiador que paga por el deudor el derecho de
indemnizacion contra este, sancionado por el art. 1,838, es
de todo punto indudable que ejercitando esta
accion pueden quedar libres de toda responsabilidad los
demas cofiadores si, a consecuencia de ella, indemniza el
fiado a aquel en los terminos establecidos en el expresado
articulo. Por el contrario de prescindir de dicho derecho el
fiador, reclamando de los confiadores en primer lugar el
oportuno reintegro, estos en tendrian mas remedio que
satisfacer sus ductares respectivas, repitiendo despues por
ellas contra el deudor con la imposicion de las molestias y
gastos consiguientes.
accommodation maker who pays on the said promissory note may
directly demand reimbursement from his co-accommodation maker
without first directing his action against the principal debtor
provided that (a) he made the payment by virtue of a judicial
demand, or (b) a principal debtor is insolvent.
The Court of Appeals found that Sadaya's payment to the bank
"was made voluntarily and without any judicial demand," and that
"there is an absolute absence of evidence showing that Varona is
insolvent". This combination of fact and lack of fact epitomizes the
fatal distance between payment by Sadaya and Sadaya's right to
demand of Sevilla "the share which is proportionately owing from
him."
For the reasons given, the judgment of the Court of Appeals under
review is hereby affirmed. No costs. So ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon,
J.P., Zaldivar and Castro, JJ., concur.

No es aventurado asegurar que si el fiador que paga pudiera

libremente utilizar uno u otro de dichos derechos, el de
indemnizacion por el deudor y el del reintegro por los
cofiadores, indudablemente optaria siempre y en todo caso
por el segundo, puesto que mucha mas garantias de
solvencia y mucha mas seguridad del cobro ha de encontrar
en los fiadores que en el deudor; y en la practica quedaria
reducido el primero a la indemnizacion por el deudor a los
confiadores que hubieran hecho el reintegro, obligando a
estos, sin excepcion alguna, a soportar siempre los gastos y
las molestias que anteriormente homos indicado. Y para
evitar estos perjuicios, la ley no ha podido menos de reducir
el ejercicio de ese derecho a los casos en que
absolutamente sea indispensable.13

6. All of the foregoing postulate the following rules: (1) A joint and
several accommodation maker of a negotiable promissory note
may demand from the principal debtor reimbursement for the
amount that he paid to the payee; and (2) a joint and several
 reversed the decision of the trial Court 2 dismissing the complaint
for consignation filed by therein plaintiff Ricardo S. Santos, Jr.
The parties are substantially agreed on the following facts as found
by both lower courts:
G.R. No. 80599 September 15, 1989
ERNESTINA CRISOLOGO-JOSE, petitioner,
vs.
COURT OF APPEALS and RICARDO S. SANTOS, JR. in his own
behalf and as Vice-President for Sales of Mover Enterprises,
Inc., respondents.
REGALADO, J.:
Petitioner seeks the annulment of the decision 1 of respondent
Court of Appeals, promulgated on September 8, 1987, which
In 1980, plaintiff Ricardo S. Santos, Jr. was the vice-president
of Mover Enterprises, Inc. in-charge of marketing and sales;
and the president of the said corporation was Atty. Oscar Z.
Benares. On April 30, 1980, Atty. Benares, in
accommodation of his clients, the spouses Jaime and Clarita
Ong, issued Check No. 093553 drawn against Traders Royal
Bank, dated June 14, 1980, in the amount of P45,000.00
(Exh- 'I') payable to defendant Ernestina Crisologo-Jose.
Since the check was under the account of Mover
Enterprises, Inc., the same was to be signed by its
president, Atty. Oscar Z. Benares, and the treasurer of the
said corporation. However, since at that time, the treasurer
of Mover Enterprises was not available, Atty. Benares
prevailed upon the plaintiff, Ricardo S. Santos, Jr., to sign the
aforesaid chEck as an alternate story. Plaintiff Ricardo S.
Santos, Jr. did sign the check.
It appears that the check (Exh. '1') was issued to defendant
Ernestina Crisologo-Jose in consideration of the waiver or
quitclaim by said defendant over a certain property which
the Government Service Insurance System (GSIS) agreed to
sell to the clients of Atty. Oscar Benares, the spouses Jaime
and Clarita Ong, with the understanding that upon approval
by the GSIS of the compromise agreement with the spouses
Ong, the check will be encashed accordingly. However, since
the compromise agreement was not approved within the
expected period of time, the aforesaid check for P45,000.00
(Exh. '1') was replaced by Atty. Benares with another Traders
Royal Bank cheek bearing No. 379299 dated August 10,
1980, in the same amount of P45,000.00 (Exhs. 'A' and '2'),
also payable to the defendant Jose. This replacement check
was also signed by Atty. Oscar Z. Benares and by the
plaintiff Ricardo S. Santos, Jr. When defendant deposited this
replacement check (Exhs. 'A' and '2') with her account at
Family Savings Bank, Mayon Branch, it was dishonored for
insufficiency of funds. A subsequent redepositing of the said
check was likewise dishonored by the bank for the same
reason. Hence, defendant through counsel was constrained
to file a criminal complaint for violation of Batas Pambansa
 Blg. 22 with the Quezon City Fiscal's Office against Atty.
Oscar Z. Benares and plaintiff Ricardo S. Santos, Jr. The
investigating Assistant City Fiscal, Alfonso Llamas,
accordingly filed an amended information with the court
charging both Oscar Benares and Ricardo S. Santos, Jr., for
violation of Batas Pambansa Blg. 22 docketed as Criminal
Case No. Q-14867 of then Court of First Instance of Rizal,
Quezon City.
Meanwhile, during the preliminary investigation of the
criminal charge against Benares and the plaintiff herein,
before Assistant City Fiscal Alfonso T. Llamas, plaintiff
Ricardo S. Santos, Jr. tendered cashier's check No. CC
160152 for P45,000.00 dated April 10, 1981 to the
defendant Ernestina Crisologo-Jose, the complainant in that
criminal case. The defendant refused to receive the
cashier's check in payment of the dishonored check in the
amount of P45,000.00. Hence, plaintiff encashed the
aforesaid cashier's check and subsequently deposited said
amount of P45,000.00 with the Clerk of Court on August 14,
1981 (Exhs. 'D' and 'E'). Incidentally, the cashier's check
adverted to above was purchased by Atty. Oscar Z. Benares
and given to the plaintiff herein to be applied in payment of
the dishonored check. 3
After trial, the court a quo, holding that it was "not persuaded to
believe that consignation referred to in Article 1256 of the Civil
Code is applicable to this case," rendered judgment dismissing
plaintiff s complaint and defendant's counterclaim. 4
As earlier stated, respondent court reversed and set aside said
judgment of dismissal and revived the complaint for consignation,
directing the trial court to give due course thereto.
Hence, the instant petition, the assignment of errors wherein are
prefatorily stated and discussed seriatim.
1. Petitioner contends that respondent Court of Appeals
erred in holding that private respondent, one of the
signatories of the check issued under the account of Mover
Enterprises, Inc., is an accommodation party under the
Negotiable Instruments Law and a debtor of petitioner to the
extent of the amount of said check.
Petitioner avers that the accommodation party in this case is Mover
Enterprises, Inc. and not private respondent who merely signed the
check in question in a representative capacity, that is, as vice-
president of said corporation, hence he is not liable thereon under
the Negotiable Instruments Law.
The pertinent provision of said law referred to provides:
Sec. 29. Liability of accommodation party an
accommodation party is one who has signed the instrument
as maker, drawer, acceptor, or indorser, without receiving
value therefor, and for the purpose of lending his name to
some other person. Such a person is liable on the
instrument to a holder for value, notwithstanding such
holder, at the time of taking the instrument, knew him to be
only an accommodation party.
Consequently, to be considered an accommodation party, a person
must (1) be a party to the instrument, signing as maker, drawer,
acceptor, or indorser, (2) not receive value therefor, and (3) sign for
the purpose of lending his name for the credit of some other
person.
Based on the foregoing requisites, it is not a valid defense that the
accommodation party did not receive any valuable consideration
when he executed the instrument. From the standpoint of contract
law, he differs from the ordinary concept of a debtor therein in the
sense that he has not received any valuable consideration for the
instrument he signs. Nevertheless, he is liable to a holder for value
as if the contract was not for accommodation 5in whatever capacity
such accommodation party signed the instrument, whether
primarily or secondarily. Thus, it has been held that in lending his
name to the accommodated party, the accommodation party is in
effect a surety for the latter. 6
Assuming arguendo that Mover Enterprises, Inc. is the
accommodation party in this case, as petitioner suggests, the
inevitable question is whether or not it may be held liable on the
accommodation instrument, that is, the check issued in favor of
herein petitioner.
We hold in the negative.
The aforequoted provision of the Negotiable Instruments Law which
holds an accommodation party liable on the instrument to a holder
for value, although such holder at the time of taking the instrument
knew him to be only an accommodation party, does not include nor
apply to corporations which are accommodation parties. 7 This is
because the issue or indorsement of negotiable paper by a
corporation without consideration and for the accommodation of
another is ultra vires. 8 Hence, one who has taken the instrument
with knowledge of the accommodation nature thereof cannot
recover against a corporation where it is only an accommodation
party. If the form of the instrument, or the nature of the transaction,
is such as to charge the indorsee with knowledge that the issue or
indorsement of the instrument by the corporation is for the
accommodation of another, he cannot recover against the
corporation thereon. 9
By way of exception, an officer or agent of a corporation shall have
the power to execute or indorse a negotiable paper in the name of
the corporation for the accommodation of a third person only if
specifically authorized to do so. 10 Corollarily, corporate officers,
such as the president and vice-president, have no power to execute
for mere accommodation a negotiable instrument of the
corporation for their individual debts or transactions arising from or
in relation to matters in which the corporation has no legitimate
concern. Since such accommodation paper cannot thus be enforced
against the corporation, especially since it is not involved in any
aspect of the corporate business or operations, the inescapable
conclusion in law and in logic is that the signatories thereof shall be
personally liable therefor, as well as the consequences arising from
their acts in connection therewith.
The instant case falls squarely within the purview of the aforesaid
decisional rules. If we indulge petitioner in her aforesaid
postulation, then she is effectively barred from recovering from
Mover Enterprises, Inc. the value of the check. Be that as it may,
petitioner is not without recourse.
The fact that for lack of capacity the corporation is not bound by an
accommodation paper does not thereby absolve, but should render
personally liable, the signatories of said instrument where the facts
show that the accommodation involved was for their personal
account, undertaking or purpose and the creditor was aware
thereof.
Petitioner, as hereinbefore explained, was evidently charged with
the knowledge that the cheek was issued at the instance and for
the personal account of Atty. Benares who merely prevailed upon
respondent Santos to act as co-signatory in accordance with the
arrangement of the corporation with its depository bank. That it
was a personal undertaking of said corporate officers was apparent
to petitioner by reason of her personal involvement in the financial
arrangement and the fact that, while it was the corporation's check
which was issued to her for the amount involved, she actually had
no transaction directly with said corporation.
There should be no legal obstacle, therefore, to petitioner's claims
being directed personally against Atty. Oscar Z. Benares and
respondent Ricardo S. Santos, Jr., president and vice-president,
respectively, of Mover Enterprises, Inc.
2. On her second assignment of error, petitioner argues that
the Court of Appeals erred in holding that the consignation
of the sum of P45,000.00, made by private respondent after
his tender of payment was refused by petitioner, was proper
under Article 1256 of the Civil Code.
Petitioner's submission is that no creditor-debtor relationship exists
between the parties, hence consignation is not proper.
Concomitantly, this argument was premised on the assumption that
private respondent Santos is not an accommodation party.
As previously discussed, however, respondent Santos is an
accommodation party and is, therefore, liable for the value of the
check. The fact that he was only a co-signatory does not detract
from his personal liability. A co-maker or co-drawer under the
circumstances in this case is as much an accommodation party as
the other co-signatory or, for that matter, as a lone signatory in an
accommodation instrument. Under the doctrine in Philippine Bank
of Commerce vs. Aruego, supra, he is in effect a co-surety for the
accommodated party with whom he and his co-signatory, as the
other co-surety, assume solidary liability ex lege for the debt
involved. With the dishonor of the check, there was created a
debtor-creditor relationship, as between Atty. Benares and
respondent Santos, on the one hand, and petitioner, on the other.
This circumstance enables respondent Santos to resort to an action
of consignation where his tender of payment had been refused by
petitioner.
We interpose the caveat, however, that by holding that the remedy
of consignation is proper under the given circumstances, we do not
thereby rule that all the operative facts for consignation which
would produce the effect of payment are present in this case.
Those are factual issues that are not clear in the records before us
and which are for the Regional Trial Court of Quezon City to
ascertain in Civil Case No. Q-33160, for which reason it has
advisedly been directed by respondent court to give due course to
the complaint for consignation, and which would be subject to such
issues or claims as may be raised by defendant and the
counterclaim filed therein which is hereby ordered similarly revived.
3. That respondent court virtually prejudged Criminal Case
No. Q-14687 of the Regional Trial Court of Quezon City filed
against private respondent for violation of Batas Pambansa
Blg. 22, by holding that no criminal liability had yet attached
to private respondent when he deposited with the court the
amount of P45,000.00 is the final plaint of petitioner.
We sustain petitioner on this score.
Indeed, respondent court went beyond the ratiocination called for
in the appeal to it in CA-G.R. CV. No. 05464. In its own decision
therein, it declared that "(t)he lone issue dwells in the question of
whether an accommodation party can validly consign the amount
of the debt due with the court after his tender of payment was
refused by the creditor." Yet, from the commercial and civil law
aspects determinative of said issue, it digressed into the merits of
the aforesaid Criminal Case No. Q-14867, thus:
Section 2 of B.P. 22 establishes the prima facie evidence of
knowledge of such insufficiency of funds or credit. Thus, the
making, drawing and issuance of a check, payment of which
is refused by the drawee because of insufficient funds in or
credit with such bank is prima facie evidence of knowledge
of insufficiency of funds or credit, when the check is
presented within 90 days from the date of the check.
It will be noted that the last part of Section 2 of B.P. 22
provides that the element of knowledge of insufficiency of
funds or credit is not present and, therefore, the crime does
not exist, when the drawer pays the holder the amount due
or makes arrangements for payment in full by the drawee of
such check within five (5) banking days after receiving
notice that such check has not been paid by the drawee.
Based on the foregoing consideration, this Court finds that
the plaintiff-appellant acted within Ms legal rights when he
consigned the amount of P45,000.00 on August 14, 1981,
between August 7, 1981, the date when plaintiff-appellant
receive (sic) the notice of non-payment, and August 14,
1981, the date when the debt due was deposited with the
Clerk of Court (a Saturday and a Sunday which are not
banking days) intervened. The fifth banking day fell on
August 14, 1981. Hence, no criminal liability has yet
attached to plaintiff-appellant when he deposited the
amount of P45,000.00 with the Court a quo on August 14,
1981. 11
That said observations made in the civil case at bar and the
intrusion into the merits of the criminal case pending in another
court are improper do not have to be belabored. In the latter case,
the criminal trial court has to grapple with such factual issues as,
for instance, whether or not the period of five banking days had
expired, in the process determining whether notice of dishonor
should be reckoned from any prior notice if any has been given or
from receipt by private respondents of the subpoena therein with
supporting affidavits, if any, or from the first day of actual
preliminary investigation; and whether there was a justification for
not making the requisite arrangements for payment in full of such
check by the drawee bank within the said period. These are
matters alien to the present controversy on tender and
consignation of payment, where no such period and its legal effects
are involved.
These are aside from the considerations that the disputed period
involved in the criminal case is only a presumptive rule, juris
tantum at that, to determine whether or not there was knowledge
of insufficiency of funds in or credit with the drawee bank; that
payment of civil liability is not a mode for extinguishment of
criminal liability; and that the requisite quantum of evidence in the
two types of cases are not the same.
To repeat, the foregoing matters are properly addressed to the trial
court in Criminal Case No. Q-14867, the resolution of which should
not be interfered with by respondent Court of Appeals at the
present posture of said case, much less preempted by the
inappropriate and unnecessary holdings in the aforequoted portion
of the decision of said respondent court. Consequently, we modify
the decision of respondent court in CA-G.R. CV No. 05464 by setting
aside and declaring without force and effect its pronouncements
and findings insofar as the merits of Criminal Case No. Q-14867 and
the liability of the accused therein are concerned.

WHEREFORE, subject to the aforesaid modifications, the judgment

of respondent Court of Appeals is AFFIRMED.

SO ORDERED.

Paras, Padilla and Sarmiento, JJ., concur.

Melencio-Herrera J., took no part.

G.R. No. 96160 June 17, 1992

STELCO MARKETING CORPORATION, petitioner,

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

NARVASA, c.J.:

Stelco Marketing Corporation is engaged in the distribution and sale

to the public of structural steel bars. 1 On seven (7) different
occasions in September and October, 1980, it sold to RYL
Construction, Inc. quantities of steels bars of various sizes and rolls
of G.I. wire. These bars and wire were delivered at different places
at the indication of RYL Construction, Inc. The aggregate price for
the purchases was P126,859.61.
Although the corresponding invoices issued by STELCO stipulated
that RYL pay "COD" (cash on delivery), the latter made no
payments for the construction materials thus ordered and delivered
despite insistent demands for payment by the former.
On April 4, 1981, RYL gave to Armstrong, Industries described by
STELCO as its "sister corporation" and "manufacturing arm" 2 a
check drawn against Metrobank in the amount of P126,129.86,
numbered 765380 and dated April 4, 1981. That check was a
company check of another corporation, Steelweld Corporation of
the Philippines, signed by its President, Peter Rafael Limson, and its
Vice-President, Artemio Torres.
The check was issued by Limson at the behest of his friend, Romeo
Y. Lim, President of RYL. Romeo Lim had asked Limson, for financial
assistance, and the latter had agreed to give Lim a check only by
way of accommodation, "only as guaranty but not to pay for
anything." 3 Why the check was made out in the amount of
P126,129.86 is not explained. Anyway, the check was actually
issued in said amount of P126, 129.86, and as already stated, was
given by R.Y. Lim to Armstrong Industries, 4 in payment of an
obligation. When the latter deposited the check at its bank, it was
dishonored because "drawn against insufficient funds." 5 When so
deposited, the check bore two(2) endorsements, that of "RYL
Construction," followed by that of "Armstrong Industries." 6
On account of the dishonor of Metrobank Check No. 765380, and on
complaint of Armstrong Industries (through a Mr. Young), Rafael
Limson and Artemio Torres were charged in the Regional Trial Court
of Manila with a violation of Batas Pambansa Bilang 22. 7 They were
acquitted in a decision rendered on June 28, 1984 "on the ground
that the check in question was not issued by the drawer "to apply
on account for value," it being merely for accommodation
purposes. 8 The judgment however conditioned the acquittal with
the following pronouncement:
This is not however to release Steelweld Corporation from its
liability under Sec. 29 of the Negotiable Instruments Law for
having issued it for the accommodation of Romeo Lim.
Eleven months or so later and some four (4) years after issuance
of the check in question in May, 1985, STELCO filed with the
Regional Trial Court at Caloocan City a civil complaint 9 against both
RYL and STEELWELD for the recovery of the valued of the steel bars
and wire sold to and delivered to RYL (as already narrated) in the
amount of P126,129.86, "plus 18% interest from August 20, 1980 . .
. (and) 25% of the total amount sought to be recovered as and by
way of attorney's fees . . . ." 10 Among the allegations of its
complaint was that Metrobank Check No. 765380 above mentioned
had been given to it in payment of RYL's indebtedness, duly
indorsed by R.Y. Lim. 11 A preliminary attachment was issued by the
trial court on the basis of the averments of the complaint but was
shortly dissolved upon the filing of a counter-bond by STEELWELD.
RYL could no longer be located and could not be served with
summons. 12 It never appeared. Only STEELWELD filed an answer,
under date of July 16, 1985. 13 In said pleading, it specifically
denied the facts alleged in the complaint, the truth, according to
Steelweld, being basically that
1) STELCO "is a complete stranger to it;" it had "not entered into
any transaction or business dealing of any kind" with STELCO, the
transactions described in the complaint having been solely and
exclusively between the plaintiff and RYL Construction;
2) the check in question was "only given to a certain R. Lim to be
used as collateral for another obligation . . . (but) in breach of his
agreement (Lim) utilized and negotiated the check for another
purpose. . . .;
3) nevertheless, the check "is wholly inoperative since . . .
Steelweld
. . . did not issue it for any valuable consideration either to R. Lim or
to the plaintiff not to mention also the fact that the said plaintiff
failed to comply with the requirements of the law to hold the said
defendant (STEELWELD) liable
. . ."
Trial ensued upon these issues, after which judgment was rendered
on June 26, 1986. 14 The judgment sentenced "the defendant
Steelweld Corporation to pay to . . . (Stelco Marketing Corporation)
the amount of P126,129.86 with legal rate of interest from May 9,
1985, when this case was instituted until fully paid, plus another
sum equivalent to 25% of the total amount due as and for
attorney's fees . . . 15 That disposition was justified in the judgment
as follows: 16
 There is no question, then, that as far as any commercial
transaction is concerned between plaintiff and defendant
Steelweld no such transaction ever occurred. Ordinarily,
under civil law rules, there having been no transaction
between them involving the purchase of certain
merchandise there would be no privity of contract between
them, and plaintiff will have no right to sue the defendant
for payment of said merchandise for the simple reason that
the defendant did not order them, such less receive them.
But we have here a case where the defendant Steelweld
thru its President Peter Rafael Limson admitted to have
issued a check payable to cash in favor of his friend Romeo
Lim who was the President of RYL Construction by way of
accommodation. Under the Negotiable Instruments Law an
accommodation party is liable.
Sec. 29. Liability of an accommodation party. An
accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose
of lending his name to some other person. Such a
person is liable on the instrument to a holder for
value notwithstanding such holder at the time of
taking the instrument knew him to be only an
accommodation party.
From this adverse judgment STEELWELD appealed to the Court of
Appeals 17 and there succeeded in reversing the judgment. By
Decision promulgated on May 29, 1990, 18 the Court of
Appeals 19 ordered "the complaint against appellant (STEELWELD)
DISMISSED; (and the appellee, STELCO) to pay appellant the sum of
P15,000.00 as attorney's fees and cost of litigation, the suit . . .
(being) a baseless one that dragged appellant in court and caused
it to incur attorney's fees and expense of litigation.
STELCO's motion for reconsideration was denied by the Appellate
Tribunal's resolution dated November 13, 1990.20 The Court
stressed that
. . . as far as Steelweld is concerned, there was no
commercial transaction between said appellant and
appellee. Moreover, there is no evidence that appellee
Stelco Marketing became a holder for value. Nowhere in the
check itself does the name of Stelco Marketing appear as
payee, indorsee or depositor thereof. Finally, appellee's
complaint is for the collection of the unpaid accounts for
delivery of steels bars and construction materials. It having
been established that appellee had no commercial
transaction with appellant Stelco, appellee had no cause of
action against said appellant.
STELCO appealed to this Court in accordance with Rule 45 of the
Rules of Court. In this Court it seeks to make the following points in
connection with its plea for the overthrow of the Appellate
Tribunal's aforesaid decision, viz.:
1) said decision is "not in accord with law and jurisprudence;"
2) "STELCO is a "holder" within the meaning of the Negotiable
Instruments Law;"
3) "STELCO is a holder in due course of Metrobank Check No.
765380 . . . (and hence) holds the same free from personal or
equitable defense;" and
4) "Negotiation in breach of faith is a personal defense . . . (and
hence) not effective as against a holder in due course."
The points are not well taken.
The crucial question is whether or not STELCO ever became
a holder in due course of Check No. 765380, a bearer instrument,
within the contemplation of the Negotiable Instruments Law. It
never did.
STELCO evidently places much reliance on the pronouncement of
the Regional Trial Court in Criminal Case No. 66571, 21 that the
acquittal of the two (2) accused (Limson and Torres) did not operate
"to release Steelweld Corporation from its liability under Sec. 29 of
the Negotiable Instruments Law for having issued . . . (the check)
for the accommodation of Romeo Lim." The cited provision reads as
follows:
Sec. 29. Liability of accommodation party. An
accommodation party is one who has singed the instrument
as maker, drawer, acceptor, or indorser, without receiving
valued therefor, and for the purpose of lending his name to
some other person. Such a person is liable on the
 instrument to a holder for value, notwithstanding such
holder, at the time of taking the instrument, knew him to be
only an accommodation party.
It is noteworthy that the Trial Court's pronouncement containing
reference to said Section 29 did not specify to whom STEELWELD,
as accommodation party, is supposed to be liable; and certain it is
that neither said pronouncement nor any other part of the
judgment of acquittal declared it liable to STELCO.
"A holder in due course," says the law, 22 "is a holder who
has taken the instrument under the following conditions:
(a) That is complete and regular upon its face;
(b) That he became the holder of it before it was overdue,
and without notice that it had been previously dishonored, if
such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no
notice of any infirmity in the instrument or defect in the title
of the persons negotiating it.
To be sure, as regards an accommodation party (such as
STEELWELD), the fourth condition, i.e., lack of notice of any
infirmity in the instruments or defect in title of the persons
negotiating it, has no application. This is because Section 29 of the
law above quoted preserves the right of recourse of a "holder for
value" against the accommodation party notwithstanding that
"such holder, at the time of taking the instrument, knew him to be
only an accommodation party." 23
Now, STELCO theorizes that it should be deemed a "holder for
value" of STEELWELD's Check No. 765380 because the record
shows it to have been in "actual possession" thereof; otherwise, it
"could not have presented, marked and introduced (said check) in
evidence . . . before the court a quo." "Besides," it adds, the check
in question was presented by STELCO to the drawee bank for
payment through Armstrong Industries, the manufacturing arm of
STELCO and its sister company." 24
The trouble is, there is no evidence whatever that STELCO's
possession of Check No. 765380 ever dated back to nay
time before the instrument's presentment and dishonor. There is no
evidence whatsoever that the check was ever given to it, or
indorsed to it in any manner or form in payment of an obligation or
as security for an obligation, or for any other purpose before it was
presented for payment. On the contrary, the factual finding of the
Court of Appeals, which by traditional precept is normally
conclusive on this Court, is that STELCO never became a holder for
value and that "(n)owhere in the check itself does the name of
Stelco Marketing appear as payee, indorsee or depositor thereof." 25
What the record shows is that: (1) the STEELWELD company check
in question was given by its president to R.Y. Lim; (2) it was given
only by way of accommodation, to be "used as collateral for
another obligation;" (3) in breach of the agreement, however, R.Y.
Lim indorsed the check to Armstrong in payment of obligation; (4)
Armstrong deposited the check to its account, after indorsing it; (5)
the check was dishonored. The record does not show any
intervention or participation by STELCO in any manner of form
whatsoever in these transactions, or any communication of any sort
between STEELWELD and STELCO, or between either of them and
Armstrong Industries, at any time before the dishonor of the check.
The record does show that after the check had been deposited and
dishonored, STELCO came into possession of it in some way, and
was able, several years after the dishonor of the check, to give it in
evidence at the trial of the civil case it had instituted against the
drawers of the check (Limson and Torres) and RYL. But, as already
pointed out, possession of a negotiable instrument after
presentment and dishonor, or payment, is utterly inconsequential;
it does not make the possessor a holder for value within the
meaning of the law; it gives rise to no liability on the part of the
maker or drawer and indorsers.
It is clear from the relevant circumstances that STELCO cannot be
deemed a holder of the check for value. It does not meet two of the
essential requisites prescribed by the statute. It did not become
"the holder of it before it was overdue, and without notice that it
had been previously dishonored," and it did not take the check "in
good faith and for value." 26
Neither is there any evidence whatever that Armstrong Industries,
to whom R.Y. Lim negotiated the check accepted the instrument
and attempted to encash it in behalf, and as agent of STELCO. On
the contrary, the indications are that Armstrong was really the
intended payee of the check and was the party actually injured by
its dishonor; it was after all its representative (a Mr. Young) who
instituted the criminal prosecution of the drawers, Limson and
Torres, albeit unsuccessfully.
The petitioner has failed to show any sufficient cause for
modification or reversal of the challenged judgment of the Court of
Appeals which, on the contrary, appears to be entirely in accord
with the facts and the applicable law.
WHEREFORE, the petition is DENIED and the Decision of the Court
of Appeals in CA-G.R. CV No. 13418 is AFFIRMED in toto. Costs
against petitioner.
SO ORDERED
Paras, Padilla and Regalado, JJ., concur.
Nocon., J., is on leave.
G.R. No. L-15126 November 30, 1961
VICENTE R. DE OCAMPO & CO., plaintiff-appellee,
vs.
ANITA GATCHALIAN, ET AL., 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. (Defendants-appellants' brief, pp. 52-53)
Answering the first contention of appellant, counsel for plaintiff-
appellee argues that in accordance with the best authority on the
Negotiable Instruments Law, plaintiff-appellee may be considered
as a holder in due course, citing Brannan's Negotiable Instruments
Law, 6th edition, page 252. On this issue Brannan holds that a
payee may be a holder in due course and says that to this effect is
the greater weight of authority, thus:
Whether the payee may be a holder in due course under the
N. I. L., as he was at common law, is a question upon which
the courts are in serious conflict. There can be no doubt that
a proper interpretation of the act read as a whole leads to
the conclusion that a payee may be a holder in due course
under any circumstance in which he meets the requirements
of Sec. 52.
The argument of Professor Brannan in an earlier edition of
this work has never been successfully answered and is here
repeated.
Section 191 defines "holder" as the payee or indorsee of a
bill or note, who is in possession of it, or the bearer thereof.
Sec. 52 defendants defines a holder in due course as "a
holder who has taken the instrument under the following
conditions: 1. That it is complete and regular on its face. 2.
That he became the holder of it before it was overdue, and
without notice that it had been previously dishonored, if
such was the fact. 3. That he took it in good faith and for
value. 4. That at the time it was negotiated to him he had no
notice of any infirmity in the instrument or defect in the title
of the person negotiating it."
Since "holder", as defined in sec. 191, includes a payee who
is in possession the word holder in the first clause of sec. 52
and in the second subsection may be replaced by the
definition in sec. 191 so as to read "a holder in due course is
a payee or indorsee who is in possession," etc. (Brannan's
on Negotiable Instruments Law, 6th ed., p. 543).
The first argument of the defendants-appellants, therefore,
depends upon whether or not the plaintiff-appellee is a holder in
due course. If it is such a holder in due course, it is immaterial that
it was the payee and an immediate party to the instrument.
The other contention of the plaintiff is that there has been no
negotiation of the instrument, because the drawer did not deliver
the instrument to Manuel Gonzales with the intention of negotiating
the same, or for the purpose of giving effect thereto, for as the
stipulation of facts declares the check was to remain in the
possession Manuel Gonzales, and was not to be negotiated, but
was to serve merely as evidence of good faith of defendants in
their desire to purchase the car being sold to them. Admitting that
such was the intention of the drawer of the check when she
delivered it to Manuel Gonzales, it was no fault of the plaintiff-
appellee drawee if Manuel Gonzales delivered the check or
negotiated it. As the check was payable to the plaintiff-appellee,
and was entrusted to Manuel Gonzales by Gatchalian, the delivery
to Manuel Gonzales was a delivery by the drawer to his own agent;
in other words, Manuel Gonzales was the agent of the drawer Anita
Gatchalian insofar as the possession of the check is concerned. So,
when the agent of drawer Manuel Gonzales negotiated the check
with the intention of getting its value from plaintiff-appellee,
negotiation took place through no fault of the plaintiff-appellee,
unless it can be shown that the plaintiff-appellee should be
considered as having notice of the defect in the possession of the
holder Manuel Gonzales. Our resolution of this issue leads us to a
consideration of the last question presented by the appellants, i.e.,
whether the plaintiff-appellee may be considered as a holder in due
course.
Section 52, Negotiable Instruments Law, defines holder in due
course, thus:
A holder in due course is a holder who has taken the
instrument under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue,
and without notice that it had been previously dishonored, if
such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no
notice of any infirmity in the instrument or defect in the title
of the person negotiating it.
The stipulation of facts expressly states that plaintiff-appellee was
not aware of the circumstances under which the check was
delivered to Manuel Gonzales, but we agree with the defendants-
appellants that the circumstances indicated by them in their briefs,
such as the fact that appellants had no obligation or liability to the
Ocampo Clinic; that the amount of the check did not correspond
exactly with the obligation of Matilde Gonzales to Dr. V. R. de
Ocampo; and that the check had two parallel lines in the upper left
hand corner, which practice means that the check could only be
deposited but may not be converted into cash all these
circumstances should have put the plaintiff-appellee to inquiry as to
the why and wherefore of the possession of the check by Manuel
Gonzales, and why he used it to pay Matilde's account. It was
payee's duty to ascertain from the holder Manuel Gonzales what
the nature of the latter's title to the check was or the nature of his
possession. Having failed in this respect, we must declare that
plaintiff-appellee was guilty of gross neglect in not finding out the
nature of the title and possession of Manuel Gonzales, amounting
to legal absence of good faith, and it may not be considered as a
holder of the check in good faith. To such effect is the consensus of
authority.
In order to show that the defendant had "knowledge of such
facts that his action in taking the instrument amounted to
bad faith," it is not necessary to prove that the defendant
knew the exact fraud that was practiced upon the plaintiff
by the defendant's assignor, it being sufficient to show that
the defendant had notice that there was something wrong
about his assignor's acquisition of title, although he did not
have notice of the particular wrong that was committed.
Paika v. Perry, 225 Mass. 563, 114 N.E. 830.
It is sufficient that the buyer of a note had notice or
knowledge that the note was in some way tainted with
fraud. It is not necessary that he should know the particulars
or even the nature of the fraud, since all that is required is
knowledge of such facts that his action in taking the note
amounted bad faith. Ozark Motor Co. v. Horton (Mo. App.),
196 S.W. 395. Accord. Davis v. First Nat. Bank, 26 Ariz. 621,
229 Pac. 391.
 Liberty bonds stolen from the plaintiff were brought by the
thief, a boy fifteen years old, less than five feet tall,
immature in appearance and bearing on his face the stamp
a degenerate, to the defendants' clerk for sale. The boy
stated that they belonged to his mother. The defendants
paid the boy for the bonds without any further inquiry. Held,
the plaintiff could recover the value of the bonds. The term
'bad faith' does not necessarily involve furtive motives, but
means bad faith in a commercial sense. The manner in
which the defendants conducted their Liberty Loan
department provided an easy way for thieves to dispose of
their plunder. It was a case of "no questions asked."
Although gross negligence does not of itself constitute bad
faith, it is evidence from which bad faith may be inferred.
The circumstances thrust the duty upon the defendants to
make further inquiries and they had no right to shut their
eyes deliberately to obvious facts. Morris v. Muir, 111 Misc.
Rep. 739, 181 N.Y. Supp. 913, affd. in memo., 191 App. Div.
947, 181 N.Y. Supp. 945." (pp. 640-642, Brannan's
Negotiable Instruments Law, 6th ed.).
The above considerations would seem sufficient to justify our ruling
that plaintiff-appellee should not be allowed to recover the value of
the check. Let us now examine the express provisions of the
Negotiable Instruments Law pertinent to the matter to find if our
ruling conforms thereto. Section 52 (c) provides that a holder in due
course is one who takes the instrument "in good faith and for
value;" Section 59, "that every holder is deemed prima facie to be
a holder in due course;" and Section 52 (d), that in order that one
may be a holder in due course it is necessary that "at the time the
instrument was negotiated to him "he had no notice of any . . .
defect in the title of the person negotiating it;" and lastly Section
59, that every holder is deemed prima facieto be a holder in due
course.
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 G.R. No. 101163 January 11, 1993
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 STATE INVESTMENT HOUSE, INC., petitioner,
thereof. vs.
COURT OF APPEALS and NORA B. MOULIC, respondents.
For the foregoing considerations, the decision appealed from should
be, as it is hereby, reversed, and the defendants are absolved from BELLOSILLO, J.:
the complaint. With costs against plaintiff-appellee.
The liability to a holder in due course of the drawer of checks
Padilla, Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, issued to another merely as security, and the right of a real estate
Paredes, Dizon and De Leon, JJ., concur. mortgagee after extrajudicial foreclosure to recover the balance of
Bengzon, C.J., concurs in the result.
the obligation, are the issues in this Petition for Review of the
Decision of respondent Court of Appeals.
Private respondent Nora B. Moulic issued to Corazon Victoriano, as
security for pieces of jewelry to be sold on commission, two (2)
post-dated Equitable Banking Corporation checks in the amount of
Fifty Thousand Pesos (P50,000.00) each, one dated 30 August 1979
and the other, 30 September 1979. Thereafter, the payee
negotiated the checks to petitioner State Investment House. Inc.
(STATE).
MOULIC failed to sell the pieces of jewelry, so she returned them to
the payee before maturity of the checks. The checks, however,
could no longer be retrieved as they had already been negotiated.
Consequently, before their maturity dates, MOULIC withdrew her
funds from the drawee bank.
Upon presentment for payment, the checks were dishonored for
insufficiency of funds. On 20 December 1979, STATE allegedly
notified MOULIC of the dishonor of the checks and requested that it
be paid in cash instead, although MOULIC avers that no such notice
was given her.
On 6 October 1983, STATE sued to recover the value of the checks
plus attorney's fees and expenses of litigation.
In her Answer, MOULIC contends that she incurred no obligation on
the checks because the jewelry was never sold and the checks
were negotiated without her knowledge and consent. She also
instituted a Third-Party Complaint against Corazon Victoriano, who
later assumed full responsibility for the checks.
On 26 May 1988, the trial court dismissed the Complaint as well as
the Third-Party Complaint, and ordered STATE to pay MOULIC
P3,000.00 for attorney's fees.
STATE elevated the order of dismissal to the Court of Appeals, but
the appellate court affirmed the trial court on the ground that the
Notice of Dishonor to MOULIC was made beyond the period
prescribed by the Negotiable Instruments Law and that even if
STATE did serve such notice on MOULIC within the reglementary
period it would be of no consequence as the checks should never
have been presented for payment. The sale of the jewelry was
never effected; the checks, therefore, ceased to serve their
purpose as security for the jewelry.
We are not persuaded.
The negotiability of the checks is not in dispute. Indubitably, they
were negotiable. After all, at the pre-trial, the parties agreed to limit
the issue to whether or not STATE was a holder of the checks in due
course. 1
In this regard, Sec. 52 of the Negotiable Instruments Law provides
Sec. 52. What constitutes a holder in due course. A holder
in due course is a holder who has taken the instrument
under the following conditions: (a) That it is complete and
regular upon its face; (b) That he became the holder of it
before it was overdue, and without notice that it was
previously dishonored, if such was the fact; (c) That he took
it in good faith and for value; (d) That at the time it was
negotiated to him he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.
Culled from the foregoing, a prima facie presumption exists that the
holder of a negotiable instrument is a holder in due
course. 2 Consequently, the burden of proving that STATE is not a
holder in due course lies in the person who disputes the
presumption. In this regard, MOULIC failed.
The evidence clearly shows that: (a) on their faces the post-dated
checks were complete and regular: (b) petitioner bought these
checks from the payee, Corazon Victoriano, before their due
dates; 3 (c) petitioner took these checks in good faith and for value,
albeit at a discounted price; and, (d) petitioner was never informed
nor made aware that these checks were merely issued to payee as
security and not for value.
Consequently, STATE is indeed a holder in due course. As such, it
holds the instruments free from any defect of title of prior parties,
and from defenses available to prior parties among themselves;
STATE may, therefore, enforce full payment of the checks. 4
MOULIC cannot set up against STATE the defense that there was
failure or absence of consideration. MOULIC can only invoke this
defense against STATE if it was privy to the purpose for which they
were issued and therefore is not a holder in due course.
That the post-dated checks were merely issued as security is not a
ground for the discharge of the instrument as against a holder in
due course. For the only grounds are those outlined in Sec. 119 of
the Negotiable Instruments Law:
Sec. 119. Instrument; how discharged. A negotiable
instrument is discharged: (a) By payment in due course by
or on behalf of the principal debtor; (b) By payment in due
course by the party accommodated, where the instrument is
made or accepted for his accommodation; (c) By the
intentional cancellation thereof by the holder; (d) By any
other act which will discharge a simple contract for the
payment of money; (e) When the principal debtor becomes
the holder of the instrument at or after maturity in his own
right.
Obviously, MOULIC may only invoke paragraphs (c) and (d) as
possible grounds for the discharge of the instrument. But, the
intentional cancellation contemplated under paragraph (c) is that
cancellation effected by destroying the instrument either by tearing
it up, 5 burning it, 6 or writing the word "cancelled" on the
instrument. The act of destroying the instrument must also be
made by the holder of the instrument intentionally. Since MOULIC
failed to get back possession of the post-dated checks, the
intentional cancellation of the said checks is altogether impossible.
On the other hand, the acts which will discharge a simple contract
for the payment of money under paragraph (d) are determined by
other existing legislations since Sec. 119 does not specify what
these acts are, e.g., Art. 1231 of the Civil Code 7 which enumerates
the modes of extinguishing obligations. Again, none of the modes
outlined therein is applicable in the instant case as Sec. 119
contemplates of a situation where the holder of the instrument is
the creditor while its drawer is the debtor. In the present action, the
payee, Corazon Victoriano, was no longer MOULIC's creditor at the
time the jewelry was returned.
Correspondingly, MOULIC may not unilaterally discharge herself
from her liability by the mere expediency of withdrawing her funds
from the drawee bank. She is thus liable as she has no legal basis
to excuse herself from liability on her checks to a holder in due
course.
Moreover, the fact that STATE failed to give Notice of Dishonor to
MOULIC is of no moment. The need for such notice is not absolute;
there are exceptions under Sec. 114 of the Negotiable Instruments
Law:
Sec. 114. When notice need not be given to drawer.
Notice of dishonor is not required to be given to the drawer
in the following cases: (a) Where the drawer and the drawee
are the same person; (b) When the drawee is a fictitious
person or a person not having capacity to contract; (c)
When the drawer is the person to whom the instrument is
presented for payment: (d) Where the drawer has no right to
expect or require that the drawee or acceptor will honor the
instrument; (e) Where the drawer had countermanded
payment.
Indeed, MOULIC'S actuations leave much to be desired. She did not
retrieve the checks when she returned the jewelry. She simply
withdrew her funds from her drawee bank and transferred them to
another to protect herself. After withdrawing her funds, she could
not have expected her checks to be honored. In other words, she
was responsible for the dishonor of her checks, hence, there was no
need to serve her Notice of Dishonor, which is simply bringing to
the knowledge of the drawer or indorser of the instrument, either
verbally or by writing, the fact that a specified instrument, upon
proper proceedings taken, has not been accepted or has not been
paid, and that the party notified is expected to pay it. 8
In addition, the Negotiable Instruments Law was enacted for the
purpose of facilitating, not hindering or hampering transactions in
commercial paper. Thus, the said statute should not be tampered
with haphazardly or lightly. Nor should it be brushed aside in order
to meet the necessities in a single case. 9
The drawing and negotiation of a check have certain effects aside
from the transfer of title or the incurring of liability in regard to the
instrument by the transferor. The holder who takes the negotiated
paper makes a contract with the parties on the face of the
instrument. There is an implied representation that funds or credit
are available for the payment of the instrument in the bank upon
which it is drawn. 10 Consequently, the withdrawal of the money
from the drawee bank to avoid liability on the checks cannot
prejudice the rights of holders in due course. In the instant case,
such withdrawal renders the drawer, Nora B. Moulic, liable to
STATE, a holder in due course of the checks.
Under the facts of this case, STATE could not expect payment as respectively, is just another means of recovering the unpaid
MOULIC left no funds with the drawee bank to meet her obligation balance of the debt of the VICTORIANOs.
on the checks, 11 so that Notice of Dishonor would be futile.
In fine, MOULIC, as drawer, is liable for the value of the checks she
The Court of Appeals also held that allowing recovery on the checks issued to the holder in due course, STATE, without prejudice to any
would constitute unjust enrichment on the part of STATE action for recompense she may pursue against the VICTORIANOs as
Investment House, Inc. This is error. Third-Party Defendants who had already been declared as in
default.
The record shows that Mr. Romelito Caoili, an Account Assistant,
testified that the obligation of Corazon Victoriano and her husband WHEREFORE, the petition is GRANTED. The decision appealed from
at the time their property mortgaged to STATE was extrajudicially is REVERSED and a new one entered declaring private respondent
foreclosed amounted to P1.9 million; the bid price at public auction NORA B. MOULIC liable to petitioner STATE INVESTMENT HOUSE,
was only P1 million. 12 Thus, the value of the property foreclosed INC., for the value of EBC Checks Nos. 30089658 and 30089660 in
was not even enough to pay the debt in full. the total amount of P100,000.00, P3,000.00 as attorney's fees, and
the costs of suit, without prejudice to any action for recompense
Where the proceeds of the sale are insufficient to cover the debt in she may pursue against the VICTORIANOs as Third-Party
an extrajudicial foreclosure of mortgage, the mortgagee is entitled Defendants.
to claim the deficiency from the debtor. 13 The step thus taken by
the mortgagee-bank in resorting to an extra-judicial foreclosure was Costs against private respondent.
merely to find a proceeding for the sale of the property and its
action cannot be taken to mean a waiver of its right to demand SO ORDERED.
payment for the whole debt. 14 For, while Act 3135, as amended,
does not discuss the mortgagee's right to recover such deficiency, Cruz and Grio-Aquino, JJ., concur.
it does not contain any provision either, expressly or impliedly,
prohibiting recovery. In this jurisdiction, when the legislature
intends to foreclose the right of a creditor to sue for any deficiency Padilla, J., took no part.
resulting from foreclosure of a security given to guarantee an
obligation, it so expressly provides. For instance, with respect to
pledges, Art. 2115 of the Civil Code 15 does not allow the creditor to
recover the deficiency from the sale of the thing pledged. Likewise,
in the case of a chattel mortgage, or a thing sold on installment
basis, in the event of foreclosure, the vendor "shall have no further
action against the purchaser to recover any unpaid balance of the
price. Any agreement to the contrary will be void". 16

It is clear then that in the absence of a similar provision in Act No.

3135, as amended, it cannot be concluded that the creditor loses
his right recognized by the Rules of Court to take action for the
recovery of any unpaid balance on the principal obligation simply
because he has chosen to extrajudicially foreclose the real estate
mortgage pursuant to a Special Power of Attorney given him by the
mortgagor in the contract of mortgage. 17

The filing of the Complaint and the Third-Party Complaint to enforce

the checks against MOULIC and the VICTORIANO spouses,

G.R. No. 93048 March 3, 1994
BATAAN CIGAR AND CIGARETTE FACTORY, INC., petitioner,
vs.
THE COURT OF APPEALS and STATE INVESTMENT HOUSE,
INC., respondents.
NOCON, J.:
For our review is the decision of the Court of Appeals in the case
entitled "State Investment House, Inc. v. Bataan Cigar & Cigarette
Factory Inc.," 1 affirming the decision of the Regional Trial Court 2 in
a complaint filed by the State Investment House, Inc. (hereinafter
referred to as SIHI) for collection on three unpaid checks issued by
Bataan Cigar & Cigarette Factory, Inc. (hereinafter referred to as
BCCFI). The foregoing decisions unanimously ruled in favor of SIHI,
the private respondent in this case.
Emanating from the records are the following facts. Petitioner,
Bataan Cigar & Cigarette Factory, Inc. (BCCFI), a corporation
involved in the manufacturing of cigarettes, engaged one of its
suppliers, King Tim Pua George (herein after referred to as George
King), to deliver 2,000 bales of tobacco leaf starting October 1978.
In consideration thereof, BCCFI, on July 13, 1978 issued crossed
checks post dated sometime in March 1979 in the total amount of
P820,000.00. 3
Relying on the supplier's representation that he would complete
delivery within three months from December 5, 1978, petitioner
agreed to purchase additional 2,500 bales of tobacco leaves,
despite the supplier's failure to deliver in accordance with their
earlier agreement. Again petitioner issued post dated crossed
checks in the total amount of P1,100,000.00, payable sometime in
September 1979. 4
During these times, George King was simultaneously dealing with
private respondent SIHI. On July 19, 1978, he sold at a discount
check TCBT 551826 5 bearing an amount of P164,000.00, post
dated March 31, 1979, drawn by petitioner, naming George King as
payee to SIHI. On December 19 and 26, 1978, he again sold to
respondent checks TCBT Nos. 608967 & 608968, 6 both in the
amount of P100,000.00, post dated September 15 & 30, 1979
respectively, drawn by petitioner in favor of George King.
In as much as George King failed to deliver the bales of tobacco
leaf as agreed despite petitioner's demand, BCCFI issued on March
30, 1979, a stop payment order on all checks payable to George
King, including check TCBT 551826. Subsequently, stop payment
was also ordered on checks TCBT Nos. 608967 & 608968 on
September 14 & 28, 1979, respectively, due to George King's
failure to deliver the tobacco leaves.
Efforts of SIHI to collect from BCCFI having failed, it instituted the
present case, naming only BCCFI as party defendant. The trial court
pronounced SIHI as having a valid claim being a holder in due
course. It further said that the non-inclusion of King Tim Pua George
as party defendant is immaterial in this case, since he, as payee, is
not an indispensable party.
The main issue then is whether SIHI, a second indorser, a holder of
crossed checks, is a holder in due course, to be able to collect from
the drawer, BCCFI.
The Negotiable Instruments Law states what constitutes a holder in
due course, thus:
Sec. 52 A holder in due course is a holder who has taken
the instrument under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue,
and without notice that it had been previously dishonored, if
such was the fact;
(c) That he took it in good faith and for value;
 (d) That at the time it was negotiated to him he had no
notice of any infirmity in the instrument or defect in the title
of the person negotiating it.
Section 59 of the NIL further states that every holder is
deemed prima facie a holder in due course. However, when it is
shown that the title of any person who has negotiated the
instrument was defective, the burden is on the holder to prove that
he or some person under whom he claims, acquired the title as
holder in due course.
The facts in this present case are on all fours to the case of State
Investment House, Inc. (the very respondent in this case) v.
Intermediate Appellate Court 7 wherein we made a discourse on the
effects of crossing of checks.
As preliminary, a check is defined by law as a bill of exchange
drawn on a bank payable on demand. 8 There are a variety of
checks, the more popular of which are the memorandum check,
cashier's check, traveler's check and crossed check. Crossed check
is one where two parallel lines are drawn across its face or across a
corner thereof. It may be crossed generally or specially.
A check is crossed specially when the name of a particular banker
or a company is written between the parallel lines drawn. It is
crossed generally when only the words "and company" are written
or nothing is written at all between the parallel lines. It may be
issued so that the presentment can be made only by a bank.
Veritably the Negotiable Instruments Law (NIL) does not mention
"crossed checks," although Article 541 9 of the Code of Commerce
refers to such instruments.
According to commentators, the negotiability of a check is not
affected by its being crossed, whether specially or generally. It may
legally be negotiated from one person to another as long as the
one who encashes the check with the drawee bank is another bank,
or if it is specially crossed, by the bank mentioned between the
parallel lines. 10 This is specially true in England where the
Negotiable Instrument Law originated.
In the Philippine business setting, however, we used to be beset
with bouncing checks, forging of checks, and so forth that banks
have become quite guarded in encashing checks, particularly those
which name a specific payee. Unless one is a valued client, a bank
will not even accept second indorsements on checks.
In order to preserve the credit worthiness of checks, jurisprudence
has pronounced that crossing of a check should have the following
effects: (a) the check may not be encashed but only deposited in
the bank; (b) the check may be negotiated only once to one who
has an account with a bank; (c) and the act of crossing the check
serves as warning to the holder that the check has been issued for
a definite purpose so that he must inquire if he has received the
check pursuant to that purpose, otherwise, he is not a holder in
due course. 11
The foregoing was adopted in the case of SIHI v. IAC, supra. In that
case, New Sikatuna Wood Industries, Inc. also sold at a discount to
SIHI three post dated crossed checks, issued by Anita Pea Chua
naming as payee New Sikatuna Wood Industries, Inc. Ruling that
SIHI was not a holder in due course, we then said:
The three checks in the case at bar had been crossed
generally and issued payable to New Sikatuna Wood
Industries, Inc. which could only mean that the drawer had
intended the same for deposit only by the rightful person,
i.e. the payee named therein. Apparently, it was not the
payee who presented the same for payment and therefore,
there was no proper presentment, and the liability did not
attach to the drawer. Thus, in the absence of due
presentment, the drawer did not become liable.
Consequently, no right of recourse is available to petitioner
(SIHI) against the drawer of the subject checks, private
respondent wife (Anita), considering that petitioner is not
the proper party authorized to make presentment of the
checks in question.
xxx xxx xxx
That the subject checks had been issued subject to the
condition that private respondents (Anita and her husband)
on due date would make the back up deposit for said checks
but which condition apparently was not made, thus resulting
in the non-consummation of the loan intended to be granted
by private respondents to New Sikatuna Wood Industries,
Inc., constitutes a good defense against petitioner who is
not a holder in due course. 12
It is then settled that crossing of checks should put the holder on
inquiry and upon him devolves the duty to ascertain the indorser's
title to the check or the nature of his possession. Failing in this
respect, the holder is declared guilty of gross negligence amounting
to legal absence of good faith, contrary to Sec. 52(c) of the
Negotiable Instruments Law, 13 and as such the consensus of
authority is to the effect that the holder of the check is not a holder
in due course.
In the present case, BCCFI's defense in stopping payment is as
good to SIHI as it is to George King. Because, really, the checks
were issued with the intention that George King would supply BCCFI
with the bales of tobacco leaf. There being failure of consideration,
SIHI is not a holder in due course. Consequently, BCCFI cannot be
obliged to pay the checks.
The foregoing does not mean, however, that respondent could not
recover from the checks. The only disadvantage of a holder who is
not a holder in due course is that the instrument is subject to
defenses as if it were
non-negotiable. 14 Hence, respondent can collect from the
immediate indorser, in this case, George King.
WHEREFORE, finding that the court a quo erred in the application of
law, the instant petition is hereby GRANTED. The decision of the
Regional Trial Court as affirmed by the Court of Appeals is hereby
REVERSED. Cost against private respondent.
SO ORDERED.
Narvasa, C.J., Regalado and Puno, JJ., concur.
Padilla, J., took no part.
G.R. No. 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 decision1 of the Court of Appeals,
dated March 25, 1999, in CA-G.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.
54792 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.
4195-01165-2.
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. 4195-01165-2 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
Complaint4 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 inBataan 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,15meaning 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 facieholder 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 5217 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 checksgratis,
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 toBataan 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 23makes 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.1wphi1 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
221727 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.
G.R. No. L-39641 February 28, 1983
METROPOL (BACOLOD) FINANCING & INVESTMENT
CORPORATION, plaintiff-appellee,
vs.
SAMBOK MOTORS COMPANY and NG SAMBOK SONS
MOTORS CO., LTD., defendants-appellants.
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
) Company as assignor and a qualified indorsee of the
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
subject promissory note and in not holding it as only
secondarily liable thereof.
Appellant Sambok argues that by adding the words "with recourse" same as that of the original obligor. 6 Consequently, the holder
in the indorsement of the note, it becomes a qualified indorser that need not even proceed against the maker before suing the
being a qualified indorser, it does not warrant that if said note is indorser.
dishonored by the maker on presentment, it will pay the amount to
the holder; that it only warrants the following pursuant to Section WHEREFORE, the decision of the lower court is hereby affirmed. No
65 of the Negotiable Instruments Law: (a) that the instrument is costs.
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) SO ORDERED.
that he has no knowledge of any fact which would impair the
validity of the instrument or render it valueless.
Makasiar (Chairman), Concepcion, Jr., Guerrero and Escolin, JJ.,
concur.
The appeal is without merit.
Aquino, J., is on leave.
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 Separate Opinions
similar import. 2 Such an indorsement relieves the indorser of the
general obligation to pay if the instrument is dishonored but not of ABAD SANTOS, J., concurring:
the liability arising from warranties on the instrument as provided
in Section 65 of the Negotiable Instruments Law already mentioned I concur and wish to add the observation that the appeal could
herein. However, appellant Sambok indorsed the note "with have been treated as a petition for review under R.A. 5440 and
recourse" and even waived the notice of demand, dishonor, protest dismissed by minute resolution.
and presentment.
Separate Opinions
"Recourse" means resort to a person who is secondarily liable after
the default of the person who is primarily liable. 3 Appellant, by ABAD SANTOS, J., concurring:
indorsing the note "with recourse" does not make itself a qualified
indorser but a general indorser who is secondarily liable, because I concur and wish to add the observation that the appeal could
by such indorsement, it agreed that if Dr. Villaruel fails to pay the have been treated as a petition for review under R.A. 5440 and
note, plaintiff-appellee can go after said appellant. The effect of dismissed by minute resolution.
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

G.R. No. L-55079 November 19, 1982
METROPOLITAN BANK and TRUST COMPANY, petitioner,
vs.
THE FIRST NATIONAL CITY BANK and THE COURT OF
APPEALS, respondents.
MELENCIO-HERRERA, J.:
This is a Petition for Review on certiorari of the Decision of the
Court of Appeals in CA-G.R. No. 57129-R entitled, First National City
Bank vs. Metropolitan Bank and Trust Company, which affirmed in
toto the Decision of the Court of First Instance of Manila, Branch
VIII, in Civil Case No. 61488, ordering petitioner herein,
Metropolitan Bank, to reimburse respondent First National City Bank
the amount of P50,000.00, with legal rate of interest from June 25,
1965, and to pay attorney's fees of P5,000.00 and costs.
The controversy arose from the following facts:
On August 25, 1964, Check No. 7166 dated July 8, 1964 for
P50,000.00, payable to CASH, drawn by Joaquin Cunanan &
Company on First National City Bank (FNCB for brevity) was
deposited with Metropolitan Bank and Trust Company (Metro Bank
for short) by a certain Salvador Sales. Earlier that day, Sales had
opened a current account with Metro Bank depositing P500.00 in
cash. 1 Metro Bank immediately sent the cash check to the Clearing
House of the Central Bank with the following words stamped at the
back of the check:
Metropolitan Bank and Trust Company Cleared (illegible)
office All prior endorsements and/or Lack of endorsements
Guaranteed. 2
The check was cleared the same day. Private respondent paid
petitioner through clearing the amount of P50,000.00, and Sales
was credited with the said amount in his deposit with Metro Bank.
On August 26, 1964, Sales made his first withdrawal of P480.00
from his current account. On August 28, 1964, he withdrew
P32,100.00. Then on August 31, 1964, he withdrew the balance of
P17,920.00 and closed his account with Metro Bank.
On September 3, 1964, or nine (9) days later, FNCB returned
cancelled Check No. 7166 to drawer Joaquin Cunanan & Company,
together with the monthly statement of the company's account
with FNCB. That same day, the company notified FNCB that the
check had been altered. The actual amount of P50.00 was raised to
P50,000.00, and over the name of the payee, Manila Polo Club, was
superimposed the word CASH.
FNCB notified Metro Bank of the alteration by telephone, confirming
it the same day with a letter, which was received by Metro Bank on
the following day, September 4, 1964.
On September 10, 1964, FNCB wrote Metro Bank asking for
reimbursement of the amount of P50,000.00. The latter did not
oblige, so that FNCB reiterated its request on September 29, 1964.
Metro Bank was adamant in its refusal.
On June 29, 1965, FNCB filed in the Court of First Instance of
Manila, Branch VIII, Civil Case No. 61488 against Metro Bank for
recovery of the amount of P50,000.00.
On January 27, 1975, the Trial Court rendered its Decision ordering
Metro Bank to reimburse FNCB the amount of P50,000.00 with legal
rate of interest from June 25, 1965 until fully paid, to pay attorney's
fees of P5,000.00, and costs.
Petitioner appealed said Decision to the Court of Appeals (CA-G.R.
No. 57129-R). On August 29, 1980, respondent Appellate
Court 3 affirmed in toto the judgment of the Trial Court.
Petitioner came to this instance on appeal by Certiorari, alleging:
 I (January 30, 1962), and Circular No. 169 (March 30, 1964). Section
The Respondent Court of Appeals erred in completely
ignoring and disregarding the 24-hour clearing house rule
provided for under Central Bank Circular No. 9, as amended,
although:
1. The 24-hour regulation of the Central Bank in clearing
house operations is valid and banks are subject to and are
bound by the same; and
2. The 24-hour clearing house rule applies to the present
case of the petitioner and the private respondent.
II
The Respondent Court of Appeals erred in relying heavily on
its decision in Gallaites, et al. vs. RCA, etc., promulgated on
October 23, 1950 for the same is not controlling and is not
applicable to the present case.
III
The Respondent Court of Appeals erred in disregarding and
in not applying the doctrines in the cases of Republic of the
Philippines vs. Equitable Banking Corporation (10 SCRA 8)
and Hongkong & Shanghai Banking Corporation vs. People's
Bank and Trust Company (35 SCRA 140) for the same are
controlling and apply four square to the present case.
IV
The Respondent Court of Appeals erred in not finding the
private respondent guilty of operative negligence which is
the proximate cause of the loss.
The material facts of the case are not disputed. The issue for
resolution is, which bank is liable for the payment of the altered
check, the drawee bank (FNCB) or the collecting bank (Metro
Bank)?
The transaction occurred during the effectivity of Central Bank
Circular No. 9 (February 17, 1949) as amended by Circular No. 138
4 of said Circular, as amended, states:
Section 4. Clearing Procedures.
(c) Procedures for Returned Items
Items which should be returned for any reason whatsoever
shall be delivered to and received through the clearing
Office in the special red envelopes and shall be considered
and accounted as debits to the banks to which the items are
returned. Nothing in this section shall prevent the returned
items from being settled by reinbursement to the bank,
institution or entity returning the items. All items cleared on
a particular clearing shall be returned not later than 3:30
P.M. on the following business day.
xxx xxx xxx
The facts of this case fall within said Circular. Under the procedure
prescribed, the drawee bank receiving the check for clearing from
the Central Bank Clearing House must return the check to the
collecting bank within the 24-hour period if the check is defective
for any reason.
Metro Bank invokes this 24-hour regulation of the Central Bank as
its defense. FNCB on the other hand, relies on the guarantee of all
previous indorsements made by Metro Bank which guarantee had
allegedly misled FNCB into believing that the check in question was
regular and the payee's indorsements genuine; as well as on "the
general rule of law founded on equity and justice that a drawee or
payor bank which in good faith pays the amount of materially
altered check to the holder thereof is entitled to recover its
payment from the said holder, even if he be an innocent holder. 4
The validity of the 24-hour clearing house regulation has been
upheld by this Court in Republic vs. Equitable Banking Corporation,
10 SCRA 8 (1964). As held therein, since both parties are part of
our banking system, and both are subject to the regulations of the
Central Bank, they are bound by the 24-hour clearing house rule of
the Central Bank.
In this case, the check was not returned to Metro Bank in
accordance with the 24-hour clearing house period, but was cleared
by FNCB. Failure of FNCB, therefore, to call the attention of Metro
Bank to the alteration of the check in question until after the lapse
of nine days, negates whatever right it might have had against
Metro Bank in the light of the said Central Bank Circular. Its remedy
lies not against Metro Bank, but against the party responsible for
the changing the name of the payee 5 and the amount on the face
of the check.
FNCB contends that the stamp reading,
Metropolitan Bank and Trust Company Cleared (illegible)
office All prior endorsements and/or Lack of endorsements
Guaranteed. 6
made by Metro Bank is an unqualified representation that the
endorsement on the check was that of the true payee, and that the
amount thereon was the correct amount. In that connection, this
Court in the Hongkong & Shanghai Bank case, supra, ruled:
.. But Plaintiff Bank insists that Defendant Bank is liable on
its indorsement during clearing house operations. The
indorsement, itself, is very clear when it begins with words
'For clearance, clearing office **** In other words, such an
indorsement must be read together with the 24-hour
regulation on clearing House Operations of the Central Bank.
Once that 24- hour period is over, the liability on such an
indorsement has ceased. This being so, Plaintiff Bank has
not made out a case for relief. 7
Consistent with this ruling, Metro Bank can not be held liable for the
payment of the altered check.
Moreover, FNCB did not deny the allegation of Metro Bank that
before it allowed the withdrawal of the balance of P17,920.00 by
Salvador Sales, Metro Bank withheld payment and first verified,
through its Assistant Cashier Federico Uy, the regularity and
genuineness of the check deposit from Marcelo Mirasol,
Department Officer of FNCB, because its (Metro Bank) attention
was called by the fast movement of the account. Only upon being
assured that the same is not unusual' did Metro Bank allow the
withdrawal of the balance.
Reliance by respondent Court of Appeals, on its own ruling
in Gallaites vs. RCA, CA-G.R. No. 3805, October 23, 1950, by
stating:
... The laxity of appellant in its dealing with customers,
particularly in cases where the Identity of the person is new
to them (as in the case at bar) and in the obvious
carelessness of the appellant in handling checks which can
easily be forged or altered boil down to one conclusion-
negligence in the first order. This negligence enabled a
swindler to succeed in fraudulently encashing the chock in
question thereby defrauding drawee bank (appellee) in the
amount thereof.
is misplaced not only because the factual milieu is not four square
with this case but more so because it cannot prevail over the
doctrine laid down by this Court in the Hongkong & Shanghai Bank
case which is more in point and, hence, controlling:
WHEREFORE, the challenged Decision of respondent Court of
Appeals of August 29, 1980 is hereby set aside, and Civil Case No.
61488 is hereby dismissed.
Costs against private respondent The First National City Bank.
SO ORDERED.
Plana, Vasquez, Relova and Gutierrez, Jr., JJ., concur.
Teehankee ** (Chairman), J., took no part.

G.R. No. L-42725, April 22, 1991
REPUBLIC BANK, PETITIONER, VS. COURT OF APPEALS AND
FIRST NATIONAL CITY BANK, RESPONDENTS.
DECISION
GRINO-AQUINO, J.:
On January 25, 1966, San Miguel Corporation (SMC for short), drew
a dividend Check No. 108854 for P240, Philippine currency, on its
account in the respondent First National City Bank ("FNCB" for
brevity) in favor of J. Roberto C. Delgado, a stockholder. After the
check had been delivered to Delgado, the amount on its face was
fraudulently and without authority of the drawer, SMC, altered by
increasing it from P240 to P9,240. The check was indorsed and
deposited on March 14, 1966 by Delgado in his account with the
petitioner Republic Bank (hereafter "Republic").
Republic accepted the check for deposit without ascertaining its
genuineness and regularity. Later, Republic endorsed the check to
FNCB by stamping on the back of the check "all prior and/or lack of
indorsement guaranteed" and presented it to FNCB for payment
through the Central Bank Clearing House. Believing the check was
genuine, and relying on the guaranty and endorsement of Republic
appearing on the back of the check, FNCB paid P9,240 to Republic
through the Central Bank Clearing House on March 15, 1966.
On April 19, 1966, SMC notified FNCB of the material alteration in
the amount of the check in question. FNCB lost no time in
recrediting P9,240 to SMC. On May 19, 1966, FNCB informed
Republic in writing of the alteration and the forgery of the
endorsement of J. Roberto C. Delgado. By then, Delgado had
already withdrawn his account from Republic.
On August 15, 1966, FNCB demanded that Republic refund the
P9,240 on the basis of the latter's endorsement and guaranty.
Republic refused, claiming there was delay in giving it notice of the
alteration; that it was not guilty of negligence; that it was the
drawer's (SMC's) fault in drawing the check in such a way as to
permit the insertion of numerals increasing the amount; that FNCB,
as drawee, was absolved of any liability to the drawer (SMC), thus,
FNCB had no right of recourse against Republic.
On April 8, 1968, the trial court rendered judgment ordering
Republic to pay P9,240 to FNCB with 6% interest per annum from
February 27, 1967 until fully paid, plus P2,000 for attorney's fees
and costs of the suit. The Court of Appeals affirmed that decision,
but modified the award of attorney's fees by reducing it to P1,000
without pronouncement as to costs (CA-G.R. No. 41691-R,
December 22, 1975).
In this petition for review, the lone issue is whether Republic, as the
collecting bank, is protected, by the 24-hour clearing house rule,
found in CB Circular No. 9, as amended, from liability to refund the
amount paid by FNCB, as drawee of the SMC dividend check.
The petition for review is meritorious and must be granted.
The 24-hour clearing house rule embodied in Section 4(c) of Central
Bank Circular No. 9, as amended, provides:
"Items which should be returned for any reason whatsoever shall
be returned directly to the bank, institution or entity from which the
item was received. For this purpose, the Receipt for Returned
Checks (Cash Form No. 9) should be used. The original and
duplicate copies of said Receipt shall be given to the Bank,
institution or entity which returned the items and the triplicate copy
should be retained by the bank, institution or entity whose demand
is being returned. At the following clearing, the original of the
Receipt for Returned Checks shall be presented through the
Clearing Office as a demand against the bank, institution or entity
whose item has been returned. Nothing in this section shall
prevent the returned items from being settled by direct
reimbursement to the bank, institution or entity returning the
items. All items cleared at 11:00 o'clock A.M. shall be returned not
later than 2:00 o'clock P.M. on the same day and all items cleared
at 3:00 o'clock P.M. shall be returned not later than 8:30 A.M. of the
following business day except for items cleared on Saturday which
may be returned not later than 8:30 A.M. of the following day."
The 24-hour clearing house rule is a valid rule applicable to
commercial banks (Republic vs. Equitable Banking Corporation, 10
SCRA 8 [1964]; Metropolitan Bank & Trust Co. vs. First National City
Bank, 118 SCRA 537).
It is true that when an endorsement is forged, the collecting bank
or last endorser, as a general rule, bears the loss (Banco de Oro
Savings & Mortgage Bank vs. Equitable Banking Corp., 157 SCRA
188). But the unqualified endorsement of the collecting bank on
the check should be read together with the 24-hour regulation on
clearing house operation (Metropolitan Bank & Trust Co. vs. First
National City Bank, supra). Thus, when the drawee bank fails to
return a forged or altered check to the collecting bank within the
24-hour clearing period, the collecting bank is absolved from
liability. The following decisions of this Court are also relevant and
persuasive:
In Hongkong & Shanghai Banking Corp. vs. People's Bank & Trust
Co. (35 SCRA 140), a check for P14,608.05 was drawn by the
Philippine Long Distance Telephone Company on the Hongkong &
Shanghai Banking Corporation payable to the same bank. It was
mailed to the payee but fell into the hands of a certain Florentino
Changco who erased the name of the payee, typed his own name,
and thereafter deposited the altered check in his account in the
People's Bank & Trust Co. which presented it to the drawee bank
with the following indorsement:
"For clearance, clearing office. All prior endorsements and/or lack
of endorsements guaranteed. People's Bank and Trust Company."
The check was cleared by the drawee bank (Hongkong & Shanghai
Bank), whereupon the People's Bank credited Changco with the
amount of the check. Changco thereafter withdrew the contents of
his bank account. A month later, when the check was returned to
PLDT, the alteration was discovered. The Hongkong & Shanghai
Bank sued to recover from the People's Bank the sum of
P14,608.05. The complaint was dismissed. Affirming the decision
of the trial court, this Court held:
"The entire case of plaintiff is based on the indorsement that has
been heretofore copied namely, a guarantee of all prior
indorsements made by People's Bank and since such
indorsement carries with it a concomitant guarantee
genuineness, the Peoples Bank is liable to the Hongkong Shanghai
Bank for alteration made in the name of payee. On the other hand,
the People's Bank relies on the '24-hour' regulation of the Central
Bank that requires after a clearing, that all cleared items must be
returned not later than 3:00 P.M. of the following business day. And
since the Hongkong Shanghai Bank only advised the People's Bank
as to the alteration on April 12, 1965 or 27 days after clearing, the
People's Bank claims that it is now too late to do so. This regulation
of the Central Bank as to 24 hours is challenged by Plaintiff Bank as
being merely part of an ingenious device to facilitate banking
transactions. Be that what it may as both Plaintiff as well as
Defendant Banks are part of our banking system and both are
subject to regulations of the Central Bank they are both bound
by such regulations. x x x But Plaintiff Bank insists that Defendant
Bank is liable on its indorsement during clearing house operations.
The indorsement, itself, is very clear when it begins with the words
For clearance, clearing office ***. In other words, such an
indorsement must be read together with the 24-hour regulation on
clearing House Operations of the Central Bank. Once that 24-hour
period is over, the liability on such an indorsement has ceased.
This being so, Plaintiff Bank has not made out a case for relief."
xxx xxx xxx
"Moreover, in one of the very cases relied upon by plaintiff, as
appellant, mention is made of a principle on which defendant Bank
could have acted without incurring the liability now sought to be
imposed by plaintiff. Thus: It is a settled rule that a person who
presents for payment checks such as are here involved guarantees
the genuineness of the check, and the drawee bank need concern
itself with nothing but the genuineness of the signature, and the
state of the account with it of the drawee. (Interstate Trust Co. vs.
United States National Bank,185 Pac. 260 [1919].) If at all, then,
an whatever remedy the plaintiff has would lie not against defendant
of Bank but as against the party responsible for changing the name of
the payee. Its failure to call the attention of defendant Bank as to
such alteration until after the lapse of 27 days would, in the light of
the above Central Bank circular, negate whatever right it might
have had against defendant Bank. x x x." (35 SCRA 140, 142-143;
145-146.)
In Metropolitan Bank & Trust Co. vs. First National City Bank, et
al. (118 SCRA 537, 542) a check for P50, drawn by Joaquin Cunanan
and Company on its account at FNCB and payable to Manila Polo
Club, was altered by changing the amount to P50,000 and the
payee was changed to "Cash." It was deposited by a certain
Salvador Sales in his current account in the Metropolitan Bank
which sent it to the clearing house. The check was cleared the
same day by FNCB which paid the amount of P50,000 to Metro
Bank. Sales immediately withdrew the whole amount and closed
his account. Nine (9) days later, the alteration was discovered and
FNCB sought to recover from Metro Bank what it had paid. The trial
court and the Court of Appeals rendered judgment for FNCB but this
Court reversed it. We ruled:
"The validity of the 24-hour clearing house regulation has been
upheld by this Court in Republic vs. Equitable Banking
Corporation, 10 SCRA 8 (1964). As held therein, since both parties
are part of our banking system, and both are subject to the
regulations of the Central Bank, they are bound by the 24-hour
clearing house rule of the Central Bank.
"In this case, the check was not returned to Metro Bank in
accordance with the 24-hour clearing house period, but was cleared
by FNCB. Failure of FNCB, therefore, to call the attention of Metro
Bank to the alteration of the check in question until after the lapse
of nine days, negates whatever right it might have had against
Metro Bank in the light of the said Central Bank Circular. Its remedy
lies not against Metro Bank, but against the party responsible for
changing the name of the payee (Hongkong & Shanghai Banking
Corp. vs. Peoples Bank & Trust Co., 35 SCRA 140) and the amount
on the face of the check." (p. 542.)
Every bank that issues checks for the use of its customers should
know whether or not the drawer's signature thereon is genuine,
whether there are sufficient funds in the drawer's account to cover
checks issued, and it should be able to detect alterations, erasures,
superimpositions or intercalations thereon, for these instruments
are prepared, printed and issued by itself, it has control of the
drawer's account, and it is supposed to be familiar with the
drawer's signature. It should possess appropriate detecting devices
for uncovering forgeries and/or alterations on these instruments.
Unless an alteration is attributable to the fault or negligence of the
drawer himself, such as when he leaves spaces on the check which
would allow the fraudulent insertion of additional numerals in the
amount appearing thereon, the remedy of the drawee bank that
negligently clears a forged and/or altered check for payment is
against the party responsible for the forgery or alteration
(Hongkong & Shanghai Banking Corp. vs. People's Bank & Trust
Co., 35 SCRA 140), otherwise, it bears the loss. It may not charge
the amount so paid to the account of the drawer, if the latter was
free from blame, nor recover it from the collecting bank if the latter
made payment after proper clearance from the drawee. As this
Court pointed out in Philippine National Bank vs. Quimpo, et al.,
158 SCRA 582, 584:
"There is nothing inequitable in such a rule for if in the regular
course of business the check comes to the drawee bank which,
having the opportunity to ascertain its character, pronounces it to
be valid and pays it, it is not only a question of payment under
mistake, but payment in neglect of duty which the commercial law
places upon it, and the result of its negligence must rest upon it."
The Court of Appeals erred in laying upon Republic, instead of on
FNCB the drawee bank, the burden of loss for the payment of the
altered SMC check, the fraudulent character of which FNCB failed to
detect and warn Republic about, within the 24-hour clearing house
rule. The Court of Appeals departed from the ruling of this Court in
an earlier PNB case, that:
"Where a loss, which must be borne by one of two parties alike
innocent of forgery, can be traced to the neglect or fault of either, it
is reasonable that it would be borne by him, even if innocent of any
intentional fraud, through whose means it has succeeded. (Phil.
National Bank vs. National City Bank of New York, 63 Phil. 711,
733.)"
WHEREFORE, the petition for review is granted. The decision of
the Court of Appeals is hereby reversed and set aside, and another
is entered absolving the petitioner Republic Bank from liability to
refund to the First National City Bank the sum of P9,240, which the
latter paid on the check in question. No costs. SO ORDERED.
Narvasa, (Chairman), Gancayco, and Medialdea, JJ., concur.
Cruz, J., No part. Related to respondents counsel.
G.R. No. 107508 April 25, 1996
PHILIPPINE NATIONAL BANK, petitioner,
vs.
COURT OF APPEALS, CAPITOL CITY DEVELOPMENT BANK,
PHILIPPINE BANK OF COMMUNICATIONS, and F. ABANTE
MARKETING, respondents.
KAPUNAN, J.:p
This is a petition for review on certiorari under Rule 45 of the Rules
of Court assailing the decision dated April 29, 1992 of respondent
Court of Appeals in CA-G.R. CV No. 24776 and its resolution dated
September 16, 1992, denying petitioner Philippine National Bank's
motion for reconsideration of said decision.
The facts of the case are as follows.
A check with serial number 7-3666-223-3, dated August 7, 1981 in
the amount of P97,650.00 was issued by the Ministry of Education
and Culture (now Department of Education, Culture and Sports
[DECS]) payable to F. Abante Marketing. This check was drawn
against Philippine National Bank (herein petitioner).
On August 11, 1981, F. Abante Marketing, a client of Capitol City
Development Bank (Capitol), deposited the questioned check in its
savings account with said bank. In turn, Capitol deposited the same
in its account with the Philippine Bank of Communications (PBCom)
which, in turn, sent the check to petitioner for clearing.
Petitioner cleared the check as good and, thereafter, PBCom
credited Capitol's account for the amount stated in the check.
However, on October 19, 1981, petitioner returned the check to
PBCom and debited PBCom's account for the amount covered by
the check, the reason being that there was a "material alteration"
of the check number.
PBCom, as collecting agent of Capitol, then proceeded to debit the
latter's account for the same amount, and subsequently, sent the
check back to petitioner. Petitioner, however, returned the check to
PBCom.
On the other hand, Capitol could not, in turn, debit F. Abante
Marketing's account since the latter had already withdrawn the
amount of the check as of October 15, 1981. Capitol sought
clarification from PBCom and demanded the re-crediting of the
amount. PBCom followed suit by requesting an explanation and re-
crediting from petitioner.
Since the demands of Capitol were not heeded, it filed a civil suit
with the Regional Trial Court of Manila against PBCom which, in
turn, filed a third-party complaint against petitioner for
reimbursement/indemnity with respect to the claims of Capitol.
Petitioner, on its part, filed a fourth-party complaint against F.
Abante Marketing.
On October 3, 1989; the Regional Trial Court rendered its decision
the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered as follows:
1.) On plaintiffs complaint, defendant Philippine Bank of
Communications is ordered to re-credit or reimburse plaintiff
Capitol City Development Bank the amount of P97,650.00,
plus interest of 12 percent thereto from October 19, 1981
until the amount is fully paid;
2.) On Philippine Bank of Communications third-party
complaint third-party defendant PNB is ordered to reimburse
and indemnify Philippine Bank of Communications for
whatever amount PBCom pays to plaintiff;
3.) On Philippine National Bank's fourth-party complaint, F.
Abante Marketing is ordered to reimburse and indemnify
PNB for whatever amount PNB pays to PBCom;
4.) On attorney's fees, Philippine Bank of Communications is
ordered to pay Capitol City Development Bank attorney's
fees in the amount of Ten Thousand (P10,000.00) Pesos; but
PBCom is entitled to reimbursement/indemnity from PNB;
and Philippine National Bank to be, in turn reimbursed or
indemnified by F. Abante Marketing for the same amount;
5.) The Counterclaims of PBCom and PNB are hereby
dismissed;
6.) No pronouncement as to costs.
SO ORDERED. 1
An appeal was interposed before the respondent Court of Appeals
which rendered its decision on April 29, 1992, the decretal portion
of which reads:
WHEREFORE, the judgment appealed from is modified by
exempting PBCom from liability to plaintiff-appellee for
attorney's fees and ordering PNB to honor the check for
P97,650.00, with interest as declared by the trial court, and
pay plaintiff-appellee attorney's fees of P10,000.00. After
the check shall have been honored by PNB, PBCom shall re-
credit plaintiff-appellee's account with it with the amount.
No pronouncement as to costs.
SO ORDERED. 2
A motion for reconsideration of the decision was denied by the
respondent Court in its resolution dated September 16, 1992 for
lack of merit. 3
Hence, petitioner filed the instant petition which raises the
following issues:
I (d) The number or the relations of the parties;
WHETHER OR NOT AN ALTERATION OF THE SERIAL NUMBER
OF A CHECK IS A MATERIAL ALTERATION UNDER THE
NEGOTIABLE INSTRUMENTS LAW.
II
WHETHER OR NOT A CERTIFICATION HEREIN ISSUED BY THE
MINISTRY OF EDUCATION CAN BE GIVEN WEIGHT IN
EVIDENCE.
III
WHETHER OR NOT A DRAWEE BANK WHO FAILED TO
RETURN A. CHECK WITHIN THE TWENTY FOUR (24) HOUR
CLEARING PERIOD MAY RECOVER THE VALUE OF THE CHECK
FROM THE COLLECTING BANK.
IV
WHETHER OR NOT IN THE ABSENCE OF MALICE OR ILL WILL
PETITIONER PNB MAY BE HELD LIABLE FOR ATTORNEY'S
FEES. 4
We find no merit in the petition.
We shall first deal with the effect of the alteration of the serial
number on the negotiability of the check in question.
Petitioner anchors its position on Section 125 of the Negotiable
Instruments Law (ACT No. 2031) 5 which provides:
Sec. 225. What constitutes a material alteration. Any
alteration which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment;
(e) The medium or currency in which payment is to be
made;
(f) Or which adds a place of payment where no place of
payment is specified, or any other change or addition which
alters the effect of the instrument in any respect, is a
material alteration.
Petitioner alleges that there is no hard and fast rule in the
interpretation of the aforequoted provision of the Negotiable
Instruments Law. It maintains that under Section 125(f), any
change that alters the effect of the instrument is a material
alteration. 6
We do not agree.
An alteration is said to be material if it alters the effect of the
instrument. 7 It means an unauthorized change in an instrument
that purports to modify in any respect the obligation of a party or
an unauthorized addition of words or numbers or other change to
an incomplete instrument relating to the obligation of a party. 8 In
other words, a material alteration is one which changes the items
which are required to be stated under Section 1 of the Negotiable
Instruments Law.
Section 1 of the Negotiable Instruments Law provides:
Sec. 1. Form of negotiable instruments. An instrument to
be negotiable must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a
sum certain in money;
(c) Must be payable on demand, or at a fixed or
determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must
be named or otherwise indicated therein with reasonable
certainty.
In his book entitled "Pandect of Commercial Law and
Jurisprudence," Justice Jose C. Vitug opines that "an innocent
alteration (generally, changes on items other than those required
to be stated under Sec. 1, N.I.L.) and spoliation (alterations done by
a stranger) will not avoid the instrument, but the holder may
enforce it only according to its original tenor." 9
Reproduced hereunder are some examples of material and
immaterial alterations:
A. Material Alterations:
(1) Substituting the words "or bearer" for "order."
(2) Writing "protest waived" above blank indorsements.
(3) A change in the date from which interest is to run.
(4) A check was originally drawn as follows: "Iron County
Bank, Crystal Falls, Mich. Aug. 5, 1901. Pay to G.L. or order
$9 fifty cents CTR" The insertion of the figure 5 before the
figure 9, the instrument being otherwise unchanged.
(5) Adding the words "with interest" with or without a fixed
rate.
(6) An alteration in the maturity of a note, whether the time
for payment is thereby curtailed or extended.
(7) An instrument was payable "First Nat'l Bank" the plaintiff
added the word "Marion."
(8) Plaintiff, without consent of the defendant, struck out the
name of the defendant as payee and inserted the name of
the maker of the original note.
(9) Striking out the name of the payee and substituting that
of the person who actually discounted the note.
(10) Substituting the address of the maker for the name of a
co-maker. 10
B. Immaterial Alterations:
(1) Changing "I promise to pay" to "We promise to pay",
where there are two makers.
(2) Adding the word "annual" after the interest clause.
(3) Adding the date of maturity as a marginal notation.
(4) Filling in the date of actual delivery where the makers of
a note gave it with the date in blank, "July ____."
(5) An alteration of the marginal figures of a note where the
sum stated in words in the body remained unchanged.
(6) The insertion of the legal rate of interest where the note
had a provision for "interest at _______ per cent."
 (7) A printed form of promissory note had on the margin the
printed words, "Extended to ________." The holder on or after
maturity wrote in the blank space the words "May 1, 1913,"
as a reference memorandum of a promise made by him to
the principal maker at the time the words were written to
extend the time of payment.
(8) Where there was a blank for the place of payment, filling
in the blank with the place desired.
(9) Adding to an indorsee's name the abbreviation "Cash"
when it had been agreed that the draft should be discounted
by the trust company of which the indorsee was cashier.
(10) The indorsement of a note by a stranger after its
delivery to the payee at the time the note was negotiated to
the plaintiff.
(11) An extension of time given by the holder of a note to
the principal maker, without the consent of a surety co-
maker. 11
The case at bench is unique in the sense that what was altered is
the serial number of the check in question, an item which, it can
readily be observed, is not an essential requisite for negotiability
under Section 1 of the Negotiable Instruments Law. The
aforementioned alteration did not change the relations between the
parties. The name of the drawer and the drawee were not altered.
The intended payee was the same. The sum of money due to the
payee remained the same. Despite these findings, however,
petitioner insists, that:
xxx xxx xxx
It is an accepted concept, besides being a negotiable
instrument itself, that a TCAA check by its very nature is the
medium of exchange of governments (sic) instrumentalities
of agencies. And as (a) safety measure, every government
office o(r) agency (is) assigned TCAA checks bearing
different number series.
A concrete example is that of the disbursements of the
Ministry of Education and Culture. It is issued by the Bureau
of Treasury sizeable bundles of checks in booklet form with
serial numbers different from other government office or
agency. Now, for fictitious payee to succeed in its malicious
intentions to defraud the government, all it need do is to get
hold of a TCAA Check and have the serial numbers of
portion (sic) thereof changed or altered to make it appear
that the same was issued by the MEG.
Otherwise, stated, it is through the serial numbers that (a)
TCAA Check is determined to have been issued by a
particular office or agency of the government. 12
xxx xxx xxx
Petitioner's arguments fail to convince. The check's serial number is
not the sole indication of its origin.. As succinctly found by the
Court of Appeals, the name of the government agency which issued
the subject check was prominently printed therein. The check's
issuer was therefore sufficiently identified, rendering the referral to
the serial number redundant and inconsequential. Thus, we quote
with favor the findings of the respondent court:
xxx xxx xxx
If the purpose of the serial number is merely to identify the
issuing government office or agency, its alteration in this
case had no material effect whatsoever on the integrity of
the check. The identity of the issuing government office or
agency was not changed thereby and the amount of the
check was not charged against the account of another
government office or agency which had no liability under the
check. The owner and issuer of the check is boldly and
clearly printed on its face, second line from the
top: "MINISTRY OF EDUCATION AND CULTURE," and below
the name of the payee are the rubber-stamped words:
"Ministry of Educ. & Culture." These words are not alleged to
have been falsely or fraudulently intercalated into the
check. The ownership of the check is established without
the necessity of recourse to the serial number. Neither there
any proof that the amount of the check was erroneously
charged against the account of a government office or
agency other than the Ministry of Education and Culture.
Hence, the alteration in the number of the check did not
affect or change the liability of the Ministry of Education and
Culture under the check and, therefore, is immaterial. The
genuineness of the amount and the signatures therein of
 then Deputy Minister of Education Hermenegildo C. Dumlao
and of the resident Auditor, Penomio C. Alvarez are not
challenged. Neither is the authenticity of the different codes
appearing therein questioned . . . 13 (Emphasis ours.)
Petitioner, thus cannot refuse to accept the check in question on
the ground that the serial number was altered, the same being an
immaterial or innocent one.
We now go to the second issue. It is petitioner's submission that the
certification issued by Minrado C. Batonghinog, Cashier III of the
MEC clearly shows that the check was altered. Said certification
reads:
July 22, 1985
TO WHOM IT MAY CONCERN:
This is to certify that according to the records of this Office,
TCAA PNB Check Mo. SN7-3666223-3 dated August 7, 1981
drawn in favor of F. Abante Marketing in the amount of
NINETY (S)EVEN THOUSAND SIX HUNDRED FIFTY PESOS
ONLY (P97,650.00) was not issued by this Office nor released
to the payee concerned. The series number of said check
was not included among those requisition by this Office from
the Bureau of Treasury.
Very truly yours,
(SGD.) MINRADO C. BATONGHINOG
Cashier III 14
Petitioner claims that even if the author of the certification issued
by the Ministry of Education and Culture (MEG) was not presented,
still the best evidence of the material alteration would be the
disputed check itself and the serial number thereon. Petitioner thus
assails the refusal of respondent court to give weight to the
certification because the author thereof was not presented to
identify it and to be cross-examined thereon. 15
We agree with the respondent court.
The one who signed the certification was not presented before the
trial court to prove that the said document was really the document
he prepared and that the signature below the said document is his
own signature. Neither did petitioner present an eyewitness to the
execution of the questioned document who could possibly identify
it. 16 Absent this proof, we cannot rule on the authenticity of the
contents of the certification. Moreover, as we previously
emphasized, there was no material alteration on the check, the
change of its serial number not being substantial to its negotiability.
Anent the third issue whether or not the drawee bank may still
recover the value of the check from the collecting bank even if it
failed to return the check within the twenty-four (24) hour clearing
period because the check was tampered suffice it to state that
since there is no material alteration in the check, petitioner has no
right to dishonor it and return it to PBCom, the same being in all
respects negotiable.
However, the amount of P10,000.00 as attorney's fees is hereby
deleted. In their respective decisions, the trial court and the Court
of Appeals failed to explicitly state the rationale for the said award.
The trial court merely ruled as follows:
With respect to Capitol's claim for damages consisting of
alleged loss of opportunity, this Court finds that Capitol
failed to adequately substantiate its claim. What Capitol had
presented was a self-serving, unsubstantiated and
speculative computation of what it allegedly could have
earned or realized were it not for the debit made by PBCom
which was triggered by the return and debit made by PNB.
However, this Court finds that it would be fair and
reasonable to impose interest at 12% per annum on the
principal amount of the check computed from October 19,
1981 (the date PBCom debited Capitol's account) until the
amount is fully paid and reasonable attorney's
fees. 17(Emphasis ours.)
And contrary to the Court of Appeal's resolution, petitioner
unambiguously questioned before it the award of attorney's fees,
assigning the latter as one of the errors committed by the trial
court. 18
The foregoing is in conformity with the guiding principles laid down
in a long line of cases and reiterated recently inConsolidated Bank
& Trust Corporation (Solidbank) v. Court of Appeals: 19
 The award of attorney's fees lies within the discretion of the
court and depends upon the circumstances of each case.
However, the discretion of the court to award attorney's fees
under Article 2208 of the Civil Code of the Philippines
demands factual, legal and equitable justification, without
which the award is a conclusion without a premise and
improperly left to speculation and conjecture. It becomes a
violation of the proscription against the imposition of a
penalty on the right to litigate (Universal Shipping Lines, Inc.
v. Intermediate Appellate Court, 188 SCRA 170 [1990]). The
reason for the award must be stated in the text of the
court's decision. If it is stated only in the dispositive portion
of the decision, the same shall be disallowed. As to the
award of attorney's fees being an exception rather than the
rule, it is necessary for the court to make findings of fact
and law that would bring the case within the exception and
justify the grant of the award (Refractories Corporation of
the Philippines v. Intermediate Appellate Court, 176 SCRA
539 [176 SCRA 539]).
WHEREFORE, premises considered, except for the deletion of the
award of attorney's fees, the decision of the Court of Appeals is
hereby AFFIRMED.
SO ORDERED.
Padilla, Bellosillo, Vitug and Hermosisima, Jr., JJ., concur.
G.R. No. 74886 December 8, 1992
PRUDENTIAL BANK, petitioner,
vs.
INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON
MILLS, INC. and ANACLETO R. CHI, respondents.
DAVIDE, JR., J.:
Petitioner seeks to review and set aside the decision 1 of public
respondent; Intermediate Appellate Court (now Court of Appeals),
dated 10 March 1986, in AC-G.R. No. 66733 which affirmed in
toto the 15 June 1978 decision of Branch 9 (Quezon City) of the
then Court of First Instance (now Regional Trial Court) of Rizal in
Civil Case No. Q-19312. The latter involved an action instituted by
the petitioner for the recovery of a sum of money representing the
amount paid by it to the Nissho Company Ltd. of Japan for textile
machinery imported by the defendant, now private respondent,
Philippine Rayon Mills, Inc. (hereinafter Philippine Rayon),
represented by co-defendant Anacleto R. Chi.
The facts which gave rise to the instant controversy are
summarized by the public respondent as follows:
On August 8, 1962, defendant-appellant Philippine Rayon
Mills, Inc. entered into a contract with Nissho Co., Ltd. of
Japan for the importation of textile machineries under a five-
year deferred payment plan (Exhibit B, Plaintiff's Folder of
Exhibits, p 2). To effect payment for said machineries, the
defendant-appellant applied for a commercial letter of credit
with the Prudential Bank and Trust Company in favor of
Nissho. By virtue of said application, the Prudential Bank
opened Letter of Credit No. DPP-63762 for $128,548.78
(Exhibit A, Ibid., p. 1). Against this letter of credit, drafts
were drawn and issued by Nissho (Exhibits X, X-1 to X-
11, Ibid., pp. 65, 66 to 76), which were all paid by the
Prudential Bank through its correspondent in Japan, the
Bank of Tokyo, Ltd. As indicated on their faces, two of these
drafts (Exhibit X and X-1, Ibid., pp. 65-66) were accepted by
the defendant-appellant through its president, Anacleto R.
 Chi, while the others were not (Exhibits X-2 to X-11, Ibid., pp.
66 to 76).
Upon the arrival of the machineries, the Prudential Bank
indorsed the shipping documents to the defendant-appellant
which accepted delivery of the same. To enable the
defendant-appellant to take delivery of the machineries, it
executed, by prior arrangement with the Prudential Bank, a
trust receipt which was signed by Anacleto R. Chi in his
capacity as President (sic) of defendant-appellant company
(Exhibit C, Ibid., p. 13).
At the back of the trust receipt is a printed form to be
accomplished by two sureties who, by the very terms and
conditions thereof, were to be jointly and severally liable to
the Prudential Bank should the defendant-appellant fail to
pay the total amount or any portion of the drafts issued by
Nissho and paid for by Prudential Bank. The defendant-
appellant was able to take delivery of the textile
machineries and installed the same at its factory site at 69
Obudan Street, Quezon City.
Sometime in 1967, the defendant-appellant ceased business
operation (sic). On December 29, 1969, defendant-
appellant's factory was leased by Yupangco Cotton Mills for
an annual rental of P200,000.00 (Exhibit I, Ibid., p. 22). The
lease was renewed on January 3, 1973 (Exhibit J, Ibid., p.
26). On January 5, 1974, all the textile machineries in the
defendant-appellant's factory were sold to AIC Development
Corporation for P300,000.00 (Exhibit K, Ibid., p. 29).
The obligation of the defendant-appellant arising from the
letter of credit and the trust receipt remained unpaid and
unliquidated. Repeated formal demands (Exhibits U, V, and
W, Ibid., pp. 62, 63, 64) for the payment of the said trust
receipt yielded no result Hence, the present action for the
collection of the principal amount of P956,384.95 was filed
on October 3, 1974 against the defendant-appellant and
Anacleto R. Chi. In their respective answers, the defendants
interposed identical special defenses, viz., the complaint
states no cause of action; if there is, the same has
prescribed; and the plaintiff is guilty of laches. 2
On 15 June 1978, the trial court rendered its decision the
dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered sentencing the
defendant Philippine Rayon Mills, Inc. to pay plaintiff the
sum of P153,645.22, the amounts due under Exhibits "X" &
"X-1", with interest at 6% per annum beginning September
15, 1974 until fully paid.
Insofar as the amounts involved in drafts Exhs. "X" (sic) to
"X-11", inclusive, the same not having been accepted by
defendant Philippine Rayon Mills, Inc., plaintiff's cause of
action thereon has not accrued, hence, the instant case is
premature.
Insofar as defendant Anacleto R. Chi is concerned, the case
is dismissed. Plaintiff is ordered to pay defendant Anacleto
R. Chi the sum of P20,000.00 as attorney's fees.
With costs against defendant Philippine Rayon Mills, Inc.
SO ORDERED. 3
Petitioner appealed the decision to the then Intermediate Appellate
Court. In urging the said court to reverse or modify the decision,
petitioner alleged in its Brief that the trial court erred in (a)
disregarding its right to reimbursement from the private
respondents for the entire unpaid balance of the imported
machines, the total amount of which was paid to the Nissho
Company Ltd., thereby violating the principle of the third party
payor's right to reimbursement provided for in the second
paragraph of Article 1236 of the Civil Code and under the rule
against unjust enrichment; (b) refusing to hold Anacleto R. Chi, as
the responsible officer of defendant corporation, liable under
Section 13 of P.D No 115 for the entire unpaid balance of the
imported machines covered by the bank's trust receipt (Exhibit
"C"); (c) finding that the solidary guaranty clause signed by
Anacleto R. Chi is not a guaranty at all; (d) controverting the judicial
admissions of Anacleto R. Chi that he is at least a simple guarantor
of the said trust receipt obligation; (e) contravening, based on the
assumption that Chi is a simple guarantor, Articles 2059, 2060 and
2062 of the Civil Code and the related evidence and jurisprudence
which provide that such liability had already attached; (f)
contravening the judicial admissions of Philippine Rayon with
respect to its liability to pay the petitioner the amounts involved in
the drafts (Exhibits "X", "X-l" to "X-11''); and (g) interpreting "sight"
drafts as requiring acceptance by Philippine Rayon before the latter
could be held liable thereon. 4
In its decision, public respondent sustained the trial court in all
respects. As to the first and last assigned errors, it ruled that the
provision on unjust enrichment, Article 2142 of the Civil Code,
applies only if there is no express contract between the parties and
there is a clear showing that the payment is justified. In the instant
case, the relationship existing between the petitioner and Philippine
Rayon is governed by specific contracts, namely the application for
letters of credit, the promissory note, the drafts and the trust
receipt. With respect to the last ten (10) drafts (Exhibits "X-2" to "X-
11") which had not been presented to and were not accepted by
Philippine Rayon, petitioner was not justified in unilaterally paying
the amounts stated therein. The public respondent did not agree
with the petitioner's claim that the drafts were sight drafts which
did not require presentment for acceptance to Philippine Rayon
because paragraph 8 of the trust receipt presupposes prior
acceptance of the drafts. Since the ten (10) drafts were not
presented and accepted, no valid demand for payment can be
made.
Public respondent also disagreed with the petitioner's contention
that private respondent Chi is solidarily liable with Philippine Rayon
pursuant to Section 13 of P.D. No. 115 and based on his signature
on the solidary guaranty clause at the dorsal side of the trust
receipt. As to the first contention, the public respondent ruled that
the civil liability provided for in said Section 13 attaches only after
conviction. As to the second, it expressed misgivings as to whether
Chi's signature on the trust receipt made the latter automatically
liable thereon because the so-called solidary guaranty clause at the
dorsal portion of the trust receipt is to be signed not by one (1)
person alone, but by two (2) persons; the last sentence of the same
is incomplete and unsigned by witnesses; and it is not
acknowledged before a notary public. Besides, even granting that it
was executed and acknowledged before a notary public, Chi cannot
be held liable therefor because the records fail to show that
petitioner had either exhausted the properties of Philippine Rayon
or had resorted to all legal remedies as required in Article 2058 of
the Civil Code. As provided for under Articles 2052 and 2054 of the
Civil Code, the obligation of a guarantor is merely accessory and
subsidiary, respectively. Chi's liability would therefore arise only
when the principal debtor fails to comply with his obligation. 5
Its motion to reconsider the decision having been denied by the
public respondent in its Resolution of 11 June 1986, 6 petitioner
filed the instant petition on 31 July 1986 submitting the following
legal issues:
I. WHETHER OR NOT THE RESPONDENT APPELLATE COURT
GRIEVOUSLY ERRED IN DENYING PETITIONER'S CLAIM FOR
FULL REIMBURSEMENT AGAINST THE PRIVATE
RESPONDENTS FOR THE PAYMENT PETITIONER MADE TO
NISSHO CO. LTD. FOR THE BENEFIT OF PRIVATE
RESPONDENT UNDER ART. 1283 OF THE NEW CIVIL CODE OF
THE PHILIPPINES AND UNDER THE GENERAL PRINCIPLE
AGAINST UNJUST ENRICHMENT;
II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY
LIABLE UNDER THE TRUST RECEIPT (EXH. C);
III. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL
ADMISSIONS OF RESPONDENT CHI HE IS LIABLE THEREON
AND TO WHAT EXTENT;
IV. WHETHER OR NOT RESPONDENT CHI IS MERELY A SIMPLE
GUARANTOR; AND IF SO; HAS HIS LIABILITY AS SUCH
ALREADY ATTACHED;
V. WHETHER OR NOT AS THE SIGNATORY AND RESPONSIBLE
OFFICER OF RESPONDENT PHIL. RAYON RESPONDENT CHI IS
PERSONALLY LIABLE PURSUANT TO THE PROVISION OF
SECTION 13, P.D. 115;
VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS LIABLE
TO THE PETITIONER UNDER THE TRUST RECEIPT (EXH. C);
VII. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL
ADMISSIONS RESPONDENT PHIL. RAYON IS LIABLE TO THE
PETITIONER UNDER THE DRAFTS (EXHS. X, X-1 TO X-11) AND
TO WHAT EXTENT;
VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR
ACCEPTANCE FROM RESPONDENT PHIL. RAYON BEFORE THE
LATTER BECOMES LIABLE TO PETITIONER. 7
In the Resolution of 12 March 1990, 8 this Court gave due course to
the petition after the filing of the Comment thereto by private
respondent Anacleto Chi and of the Reply to the latter by the
petitioner; both parties were also required to submit their
respective memoranda which they subsequently complied with.
As We see it, the issues may be reduced as follows:
 1. Whether presentment for acceptance of the drafts was
indispensable to make Philippine Rayon liable thereon;
2. Whether Philippine Rayon is liable on the basis of the
trust receipt;
3. Whether private respondent Chi is jointly and severally
liable with Philippine Rayon for the obligation sought to be
enforced and if not, whether he may be considered a
guarantor; in the latter situation, whether the case should
have been dismissed on the ground of lack of cause of
action as there was no prior exhaustion of Philippine Rayon's
properties.
Both the trial court and the public respondent ruled that Philippine
Rayon could be held liable for the two (2) drafts, Exhibits "X" and
"X-1", because only these appear to have been accepted by the
latter after due presentment. The liability for the remaining ten (10)
drafts (Exhibits "X-2" to "X-11" inclusive) did not arise because the
same were not presented for acceptance. In short, both courts
concluded that acceptance of the drafts by Philippine Rayon was
indispensable to make the latter liable thereon. We are unable to
agree with this proposition. The transaction in the case at bar
stemmed from Philippine Rayon's application for a commercial
letter of credit with the petitioner in the amount of $128,548.78 to
cover the former's contract to purchase and import loom and textile
machinery from Nissho Company, Ltd. of Japan under a five-year
deferred payment plan. Petitioner approved the application. As
correctly ruled by the trial court in its Order of 6 March 1975: 9
. . . By virtue of said Application and Agreement for
Commercial Letter of Credit, plaintiff bank 10 was under
obligation to pay through its correspondent bank in Japan
the drafts that Nisso (sic) Company, Ltd., periodically drew
against said letter of credit from 1963 to 1968, pursuant to
plaintiff's contract with the defendant Philippine Rayon Mills,
Inc. In turn, defendant Philippine Rayon Mills, Inc., was
obligated to pay plaintiff bank the amounts of the drafts
drawn by Nisso (sic) Company, Ltd. against said plaintiff
bank together with any accruing commercial charges,
interest, etc. pursuant to the terms and conditions
stipulated in the Application and Agreement of Commercial
Letter of Credit Annex "A".
A letter of credit is defined as an engagement by a bank or other
person made at the request of a customer that the issuer will honor
drafts or other demands for payment upon compliance with the
conditions specified in the credit. 11 Through a letter of credit, the
bank merely substitutes its own promise to pay for one of its
customers who in return promises to pay the bank the amount of
funds mentioned in the letter of credit plus credit or commitment
fees mutually agreed upon. 12 In the instant case then, the drawee
was necessarily the herein petitioner. It was to the latter that the
drafts were presented for payment. In fact, there was no need for
acceptance as the issued drafts are sight drafts. Presentment for
acceptance is necessary only in the cases expressly provided for in
Section 143 of the Negotiable Instruments Law (NIL). 13 The said
section reads:
Sec. 143. When presentment for acceptance must be made.
Presentment for acceptance must be made:
(a) Where the bill is payable after sight, or in any
other case, where presentment for acceptance is
necessary in order to fix the maturity of the
instrument; or
(b) Where the bill expressly stipulates that it shall
be presented for acceptance; or
(c) Where the bill is drawn payable elsewhere
than at the residence or place of business of the
drawee.
In no other case is presentment for acceptance necessary in
order to render any party to the bill liable.
Obviously then, sight drafts do not require presentment for
acceptance.
The acceptance of a bill is the signification by the drawee of his
assent to the order of the drawer; 14 this may be done in writing by
the drawee in the bill itself, or in a separate instrument. 15
The parties herein agree, and the trial court explicitly ruled, that
the subject, drafts are sight drafts. Said the latter:
 . . . In the instant case the drafts being at sight, they are
supposed to be payable upon acceptance unless plaintiff
bank has given the Philippine Rayon Mills Inc. time within
which to pay the same. The first two drafts (Annexes C & D,
Exh. X & X-1) were duly accepted as indicated on their face
(sic), and upon such acceptance should have been paid
forthwith. These two drafts were not paid and although
Philippine Rayon Mills ought to have paid the same, the fact
remains that until now they are still unpaid. 16
Corollarily, they are, pursuant to Section 7 of the NIL, payable on
demand. Section 7 provides:
Sec. 7. When payable on demand. An instrument is
payable on demand
(a) When so it is expressed to be payable on
demand, or at sight, or on presentation; or
(b) In which no time for payment in expressed.
Where an instrument is issued, accepted, or indorsed when
overdue, it is, as regards the person so issuing, accepting, or
indorsing it, payable on demand. (emphasis supplied)
Paragraph 8 of the Trust Receipt which reads: "My/our liability
for payment at maturity of any accepted draft, bill of exchange
or indebtedness shall not be extinguished or modified" 17 does
not, contrary to the holding of the public respondent,
contemplate prior acceptance by Philippine Rayon, but by the
petitioner. Acceptance, however, was not even necessary in the
first place because the drafts which were eventually issued
were sight drafts And even if these were not sight drafts,
thereby necessitating acceptance, it would be the petitioner
and not Philippine Rayon which had to accept the same for
the latter was not the drawee. Presentment for acceptance is
defined an the production of a bill of exchange to a drawee for
acceptance. 18 The trial court and the public respondent,
therefore, erred in ruling that presentment for acceptance was
an indispensable requisite for Philippine Rayon's liability on the
drafts to attach. Contrary to both courts' pronouncements,
Philippine Rayon immediately became liable thereon upon
petitioner's payment thereof. Such is the essence of the letter of
credit issued by the petitioner. A different conclusion would
violate the principle upon which commercial letters of credit are
founded because in such a case, both the beneficiary and the
issuer, Nissho Company Ltd. and the petitioner, respectively,
would be placed at the mercy of Philippine Rayon even if the
latter had already received the imported machinery and the
petitioner had fully paid for it. The typical setting and purpose
of a letter of credit are described in Hibernia Bank and Trust
Co. vs. J. Aron & Co., Inc., 19 thus:
Commercial letters of credit have come into general use in
international sales transactions where much time
necessarily elapses between the sale and the receipt by a
purchaser of the merchandise, during which interval great
price changes may occur. Buyers and sellers struggle for the
advantage of position. The seller is desirous of being paid as
surely and as soon as possible, realizing that the vendee at
a distant point has it in his power to reject on trivial grounds
merchandise on arrival, and cause considerable hardship to
the shipper. Letters of credit meet this condition by affording
celerity and certainty of payment. Their purpose is to insure
to a seller payment of a definite amount upon presentation
of documents. The bank deals only with documents. It has
nothing to do with the quality of the merchandise. Disputes
as to the merchandise shipped may arise and be litigated
later between vendor and vendee, but they may not impede
acceptance of drafts and payment by the issuing bank when
the proper documents are presented.
The trial court and the public respondent likewise erred in
disregarding the trust receipt and in not holding that Philippine
Rayon was liable thereon. In People vs. Yu Chai Ho, 20 this Court
explains the nature of a trust receipt by quoting In re Dunlap
Carpet Co., 21 thus:
By this arrangement a banker advances money to an
intending importer, and thereby lends the aid of capital, of
credit, or of business facilities and agencies abroad, to the
enterprise of foreign commerce. Much of this trade could
hardly be carried on by any other means, and therefore it is
of the first importance that the fundamental factor in the
transaction, the banker's advance of money and credit,
should receive the amplest protection. Accordingly, in order
to secure that the banker shall be repaid at the critical point
that is, when the imported goods finally reach the hands
of the intended vendee the banker takes the full title to
the goods at the very beginning; he takes it as soon as the
 goods are bought and settled for by his payments or
acceptances in the foreign country, and he continues to hold
that title as his indispensable security until the goods are
sold in the United States and the vendee is called upon to
pay for them. This security is not an ordinary pledge by the
importer to the banker, for the importer has never owned
the goods, and moreover he is not able to deliver the
possession; but the security is the complete title vested
originally in the bankers, and this characteristic of the
transaction has again and again been recognized and
protected by the courts. Of course, the title is at bottom a
security title, as it has sometimes been called, and the
banker is always under the obligation to reconvey; but only
after his advances have been fully repaid and after the
importer has fulfilled the other terms of the contract.
As further stated in National Bank vs. Viuda e Hijos de Angel
Jose, 22 trust receipts:
. . . [I]n a certain manner, . . . partake of the nature of a
conditional sale as provided by the Chattel Mortgage Law,
that is, the importer becomes absolute owner of the
imported merchandise as soon an he has paid its price. The
ownership of the merchandise continues to be vested in the
owner thereof or in the person who has advanced payment,
until he has been paid in full, or if the merchandise has
already been sold, the proceeds of the sale should be turned
over to him by the importer or by his representative or
successor in interest.
Under P.D. No. 115, otherwise known an the Trust Receipts Law,
which took effect on 29 January 1973, a trust receipt transaction is
defined as "any transaction by and between a person referred to in
this Decree as the entruster, and another person referred to in this
Decree as the entrustee, whereby the entruster, who owns or holds
absolute title or security interests' over certain specified goods,
documents or instruments, releases the same to the possession of
the entrustee upon the latter's execution and delivery to the
entruster of a signed document called the "trust receipt" wherein
the entrustee binds himself to hold the designated goods,
documents or instruments in trust for the entruster and to sell or
otherwise dispose of the goods, documents or instruments with the
obligation to turn over to the entruster the proceeds thereof to the
extent of the amount owing to the entruster or as appears in the
trust receipt or the goods, instruments themselves if they are
unsold or not otherwise disposed of, in accordance with the terms
and conditions specified in the trusts receipt, or for other purposes
substantially equivalent to any one of the following: . . ."
It is alleged in the complaint that private respondents "not only
have presumably put said machinery to good use and have profited
by its operation and/or disposition but very recent information that
(sic) reached plaintiff bank that defendants already sold the
machinery covered by the trust receipt to Yupangco Cotton Mills,"
and that "as trustees of the property covered by the trust
receipt, . . . and therefore acting in fiduciary (sic) capacity,
defendants have willfully violated their duty to account for the
whereabouts of the machinery covered by the trust receipt or for
the proceeds of any lease, sale or other disposition of the same
that they may have made, notwithstanding demands therefor;
defendants have fraudulently misapplied or converted to their own
use any money realized from the lease, sale, and other disposition
of said machinery." 23 While there is no specific prayer for the
delivery to the petitioner by Philippine Rayon of the proceeds of the
sale of the machinery covered by the trust receipt, such relief is
covered by the general prayer for "such further and other relief as
may be just and equitable on the premises." 24 And although it is
true that the petitioner commenced a criminal action for the
violation of the Trust Receipts Law, no legal obstacle prevented it
from enforcing the civil liability arising out of the trust, receipt in a
separate civil action. Under Section 13 of the Trust Receipts Law,
the failure of an entrustee to turn over the proceeds of the sale of
goods, documents or instruments covered by a trust receipt to the
extent of the amount owing to the entruster or as appear in the
trust receipt or to return said goods, documents or instruments if
they were not sold or disposed of in accordance with the terms of
the trust receipt shall constitute the crime of estafa, punishable
under the provisions of Article 315, paragraph 1(b) of the Revised
Penal Code. 25Under Article 33 of the Civil Code, a civil action for
damages, entirely separate and distinct from the criminal action,
may be brought by the injured party in cases of defamation, fraud
and physical injuries. Estafa falls underfraud.
We also conclude, for the reason hereinafter discussed, and not for
that adduced by the public respondent, that private respondent
Chi's signature in the dorsal portion of the trust receipt did not bind
him solidarily with Philippine Rayon. The statement at the dorsal
portion of the said trust receipt, which petitioner describes as a
"solidary guaranty clause", reads:
 In consideration of the PRUDENTIAL BANK AND TRUST
COMPANY complying with the foregoing, we jointly and
severally agree and undertake to pay on demand to the
PRUDENTIAL BANK AND TRUST COMPANY all sums of money
which the said PRUDENTIAL BANK AND TRUST COMPANY
may call upon us to pay arising out of or pertaining to,
and/or in any event connected with the default of and/or
non-fulfillment in any respect of the undertaking of the
aforesaid:
PHILIPPINE RAYON MILLS, INC.
We further agree that the PRUDENTIAL BANK AND TRUST
COMPANY does not have to take any steps or exhaust its
remedy against aforesaid:
before making demand on me/us.
(Sgd.) Anacleto R. Chi
ANACLETO R. CHI 26
Petitioner insists that by virtue of the clear wording of the
statement, specifically the clause ". . . we jointly and severally
agree and undertake . . .," and the concluding sentence on
exhaustion, Chi's liability therein is solidary.
In holding otherwise, the public respondent ratiocinates as follows:
With respect to the second argument, we have our
misgivings as to whether the mere signature of defendant-
appellee Chi of (sic) the guaranty agreement, Exhibit "C-1",
will make it an actionable document. It should be noted that
Exhibit "C-1" was prepared and printed by the plaintiff-
appellant. A perusal of Exhibit "C-1" shows that it was to be
signed and executed by two persons. It was signed only by
defendant-appellee Chi. Exhibit "C-1" was to be witnessed
by two persons, but no one signed in that capacity. The last
sentence of the guaranty clause is incomplete. Furthermore,
the plaintiff-appellant also failed to have the purported
guarantee clause acknowledged before a notary public. All
these show that the alleged guaranty provision was
disregarded and, therefore, not consummated.
But granting arguendo that the guaranty provision in Exhibit
"C-1" was fully executed and acknowledged still defendant-
appellee Chi cannot be held liable thereunder because the
records show that the plaintiff-appellant had neither
exhausted the property of the defendant-appellant nor had
it resorted to all legal remedies against the said defendant-
appellant as provided in Article 2058 of the Civil Code. The
obligation of a guarantor is merely accessory under Article
2052 of the Civil Code and subsidiary under Article 2054 of
the Civil Code. Therefore, the liability of the defendant-
appellee arises only when the principal debtor fails to
comply with his obligation. 27
Our own reading of the questioned solidary guaranty clause yields
no other conclusion than that the obligation of Chi is only that of
a guarantor. This is further bolstered by the last sentence which
speaks of waiver of exhaustion, which, nevertheless, is ineffective
in this case because the space therein for the party whose property
may not be exhausted was not filled up. Under Article 2058 of the
Civil Code, the defense of exhaustion (excussion) may be raised by
a guarantor before he may be held liable for the obligation.
Petitioner likewise admits that the questioned provision is
a solidary guaranty clause, thereby clearly distinguishing it from a
contract of surety. It, however, described the guaranty as solidary
between the guarantors; this would have been correct if two (2)
guarantors had signed it. The clause "we jointly and severally agree
and undertake" refers to the undertaking of the two (2) parties who
are to sign it or to the liability existing between themselves. It does
not refer to the undertaking between either one or both of them on
the one hand and the petitioner on the other with respect to the
liability described under the trust receipt. Elsewise stated, their
liability is not divisible as between them, i.e., it can be enforced to
its full extent against any one of them.
Furthermore, any doubt as to the import, or true intent of the
solidary guaranty clause should be resolved against the petitioner.
The trust receipt, together with the questioned solidary guaranty
clause, is on a form drafted and prepared solely by the petitioner;
Chi's participation therein is limited to the affixing of his signature
thereon. It is, therefore, a contract of adhesion; 28 as such, it must
be strictly construed against the party responsible for its
preparation. 29
Neither can We agree with the reasoning of the public respondent
that this solidary guaranty clause was effectively disregarded
simply because it was not signed and witnessed by two (2) persons
and acknowledged before a notary public. While indeed, the clause
ought to have been signed by two (2) guarantors, the fact that it
was only Chi who signed the same did not make his act an idle
ceremony or render the clause totally meaningless. By his signing,
Chi became the sole guarantor. The attestation by witnesses and
the acknowledgement before a notary public are not required by
law to make a party liable on the instrument. The rule is that
contracts shall be obligatory in whatever form they may have been
entered into, provided all the essential requisites for their validity
are present; however, when the law requires that a contract be in
some form in order that it may be valid or enforceable, or that it be
proved in a certain way, that requirement is absolute and
indispensable. 30 With respect to a guaranty, 31 which is a promise
to answer for the debt or default of another, the law merely
requires that it, or some note or memorandum thereof, be in
writing. Otherwise, it would be unenforceable unless
ratified. 32 While the acknowledgement of a surety before a notary
public is required to make the same a public document, under
Article 1358 of the Civil Code, a contract of guaranty does not have
to appear in a public document.
And now to the other ground relied upon by the petitioner as basis
for the solidary liability of Chi, namely the criminal proceedings
against the latter for the violation of P.D. No. 115. Petitioner claims
that because of the said criminal proceedings, Chi would be
answerable for the civil liability arising therefrom pursuant to
Section 13 of P.D. No. 115. Public respondent rejected this claim
because such civil liability presupposes prior conviction as can be
gleaned from the phrase "without prejudice to the civil liability
arising from the criminal offense." Both are wrong. The said section
reads:
Sec. 13. Penalty Clause. The failure of an entrustee to
turn over the proceeds of the sale of the goods, documents
or instruments covered by a trust receipt to the extent of
the amount owing to the entruster or as appears in the trust
receipt or to return said goods, documents or instruments if
they were not sold or disposed of in accordance with the
terms of the trust receipt shall constitute the crime of
estafa, punishable under the provisions of Article Three
hundred and fifteen, paragraph one (b) of Act Numbered
Three thousand eight hundred and fifteen, as amended,
otherwise known as the Revised Penal Code. If the violation
or offense is committed by a corporation, partnership,
association or other juridical entities, the penalty provided
for in this Decree shall be imposed upon the directors,
officers, employees or other officials or persons therein
responsible for the offense, without prejudice to the civil
liabilities arising from the criminal offense.
A close examination of the quoted provision reveals that it is the
last sentence which provides for the correct solution. It is clear that
if the violation or offense is committed by a corporation,
partnership, association or other juridical entities, the penalty shall
be imposed upon the directors, officers, employees or other
officials or persons therein responsible for the offense. The penalty
referred to is imprisonment, the duration of which would depend on
the amount of the fraud as provided for in Article 315 of the
Revised Penal Code. The reason for this is obvious: corporations,
partnerships, associations and other juridical entities cannot be put
in jail. However, it is these entities which are made liable for the
civil liability arising from the criminal offense. This is the import of
the clause "without prejudice to the civil liabilities arising from the
criminal offense." And, as We stated earlier, since that violation of a
trust receipt constitutes fraud under Article 33 of the Civil Code,
petitioner was acting well within its rights in filing an independent
civil action to enforce the civil liability arising therefrom against
Philippine Rayon.
The remaining issue to be resolved concerns the propriety of the
dismissal of the case against private respondent Chi. The trial court
based the dismissal, and the respondent Court its affirmance
thereof, on the theory that Chi is not liable on the trust receipt in
any capacity either as surety or as guarantor because his
signature at the dorsal portion thereof was useless; and even if he
could be bound by such signature as a simple guarantor, he cannot,
pursuant to Article 2058 of the Civil Code, be compelled to pay until
after petitioner has exhausted and resorted to all legal remedies
against the principal debtor, Philippine Rayon. The records fail to
show that petitioner had done so 33 Reliance is thus placed on
Article 2058 of the Civil Code which provides:
Art. 2056. The guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the property of
the debtor, and has resorted to all the legal remedies
against the debtor.
Simply stated, there is as yet no cause of action against Chi.
We are not persuaded. Excussion is not a condition sine qua non for
the institution of an action against a guarantor. In Southern Motors,
Inc. vs. Barbosa, 34 this Court stated:
4. Although an ordinary personal guarantor not a
mortgagor or pledgor may demand the aforementioned
exhaustion, the creditor may, prior thereto, secure a
judgment against said guarantor, who shall be entitled,
however, to a deferment of the execution of said judgment
against him until after the properties of the principal debtor
shall have been exhausted to satisfy the obligation involved
in the case.
There was then nothing procedurally objectionable in impleading
private respondent Chi as a co-defendant in Civil Case No. Q-19312
before the trial court. As a matter of fact, Section 6, Rule 3 of the
Rules of Court on permissive joinder of parties explicitly allows it. It
reads:
Sec. 6. Permissive joinder of parties. All persons in whom
or against whom any right to relief in respect to or arising
out of the same transaction or series of transactions is
alleged to exist, whether jointly, severally, or in the
alternative, may, except as otherwise provided in these
rules, join as plaintiffs or be joined as defendants in one
complaint, where any question of law or fact common to all
such plaintiffs or to all such defendants may arise in the
action; but the court may make such orders as may be just
to prevent any plaintiff or defendant from being
embarrassed or put to expense in connection with any
proceedings in which he may have no interest.
This is the equity rule relating to multifariousness. It is based on
trial convenience and is designed to permit the joinder of plaintiffs
or defendants whenever there is a common question of law or fact.
It will save the parties unnecessary work, trouble and expense. 35
However, Chi's liability is limited to the principal obligation in the
trust receipt plus all the accessories thereof including judicial costs;
with respect to the latter, he shall only be liable for those costs
incurred after being judicially required to pay. 36 Interest and
damages, being accessories of the principal obligation, should also
be paid; these, however, shall run only from the date of the filing of
the complaint. Attorney's fees may even be allowed in appropriate
cases. 37
In the instant case, the attorney's fees to be paid by Chi cannot be
the same as that to be paid by Philippine Rayon since it is only the
trust receipt that is covered by the guaranty and not the full extent
of the latter's liability. All things considered, he can be held liable
for the sum of P10,000.00 as attorney's fees in favor of the
petitioner.
Thus, the trial court committed grave abuse of discretion in
dismissing the complaint as against private respondent Chi and
condemning petitioner to pay him P20,000.00 as attorney's fees.
In the light of the foregoing, it would no longer necessary to discuss
the other issues raised by the petitioner
WHEREFORE, the instant Petition is hereby GRANTED.
The appealed Decision of 10 March 1986 of the public
respondent in AC-G.R. CV No. 66733 and, necessarily, that of
Branch 9 (Quezon City) of the then Court of First Instance of
Rizal in Civil Case No. Q-19312 are hereby REVERSED and SET
ASIDE and another is hereby entered:
1. Declaring private respondent Philippine Rayon Mills, Inc.
liable on the twelve drafts in question (Exhibits "X", "X-1" to
"X-11", inclusive) and on the trust receipt (Exhibit "C"), and
ordering it to pay petitioner: (a) the amounts due thereon in
the total sum of P956,384.95 as of 15 September 1974, with
interest thereon at six percent (6%) per annum from 16
September 1974 until it is fully paid, less whatever may
have been applied thereto by virtue of foreclosure of
mortgages, if any; (b) a sum equal to ten percent (10%) of
the aforesaid amount as attorney's fees; and (c) the costs.
2. Declaring private respondent Anacleto R. Chi secondarily
liable on the trust receipt and ordering him to pay the face
value thereof, with interest at the legal rate, commencing
from the date of the filing of the complaint in Civil Case No.
Q-19312 until the same is fully paid as well as the costs and
attorney's fees in the sum of P10,000.00 if the writ of
execution for the enforcement of the above awards against
Philippine Rayon Mills, Inc. is returned unsatisfied.
Costs against private respondents.
SO ORDERED.

Gutierrez, Jr., Bidin, Romero and Melo, JJ., concur.

G.R. No. 117857 February 2, 2001

LUIS S. WONG, petitioner,

vs.
COURT OF APPEALS and PEOPLE OF THE
PHILIPPINES, respondents.

QUISUMBING, J.:

For review on certiorari is the decision dated October 28, 1994 of

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

The factual antecedents of the case are as follows:

Petitioner Wong was an agent of Limtong Press. Inc. (LPI), a

manufacturer of calendars. LPI would print sample calendars, then
give them to agents to present to customers. The agents would get
the purchase orders of customers and forward them to LPI. After
printing the calendars, LPI would ship the calendars directly to the
customers. Thereafter, the agents would come around to collect the
payments. Petitioner, however, had a history of unremitted
collections, which he duly acknowledged in a confirmation receipt
he co-signed with his wife. 2 Hence, petitioners customers were
required to issue postdated checks before LPI would accept their
purchase orders.
In early December 1985, Wong issued six (6) postdated checks
totaling P18,025.00, all dated December 30, 1985 and drawn
payable to the order of LPI, as follows:
(1) Allied Banking Corporation (ABC) Check No. 660143464-
C for P6,410.00 (Exh. "B");
(2) ABC Check No. 660143460-C for P540.00 (Exh. "C");
(3) ABC Check No. PA660143451-C for P5,500.00 (Exh. "D");
(4) ABC Check No. PA660143465-C for P1,100.00 (Exh. "E");
(5) ABC Check No. PA660143463-C for P3,375.00 (Exh. "F");
(6) ABC Check No. PA660143452-C for P1,100.00 (Exh. "G").
These checks were initially intended to guarantee the calendar
orders of customers who failed to issue post-dated checks.
However, following company policy, LPI refused to accept the
checks as guarantees. Instead, the parties agreed to apply the
checks to the payment of petitioners unremitted collections for
1984 amounting to P18,077.07.3 LPI waived the P52.07 difference.
Before the maturity of the checks, petitioner prevailed upon LPI not
to deposit the checks and promised to replace them within 30 days.
However, petitioner reneged on his promise. Hence, on June 5,
1986, LPI deposited the checks with Rizal Commercial Banking
Corporation (RCBC). The checks were returned for the reason
"account closed." The dishonor of the checks was evidenced by the
RCBC return slip.
On June 20, 1986, complainant through counsel notified the
petitioner of the dishonor. Petitioner failed to make arrangements
for payment within five (5) banking days.
On November 6, 1987, petitioner was charged with three (3) counts
of violation of B.P. Blg. 22 4 under three separate Informations for
the three checks amounting to P5,500.00, P3,375.00, and
P6,410.00.5
The Information in Criminal Case No. CBU-12055 reads as follows: 6 checks to guarantee the 1985 calendar bookings of his customers.
That on or about the 30th day of December, 1985 and for
sometime subsequent thereto, in the City of Cebu,
Philippines, and within the jurisdiction of this Honorable
Court, the said accused, knowing at the time of issue of the
check she/he does not have sufficient funds in or credit with
the drawee bank for the payment of such check in full upon
its presentment, with deliberate intent, with intent of gain
and of causing damage, did then and there issue, make or
draw Allied Banking Corporation Check No. 660143451
dated 12-30-85 in the amount of P5,500.00 payable to
Manuel T. Limtong which check was issued in payment of an
obligation of said accused, but when the said check was
presented with said bank, the same was dishonored for
reason ACCOUNT CLOSED and despite notice and demands
made to redeem or make good said check, said accused
failed and refused, and up to the present time still fails and
refuses to do so, to the damage and prejudice of said
Manuel T. Limtong in the amount of P5,500.00 Philippine
Currency.
Contrary to law.
Petitioner was similarly charged in Criminal Case No. 12057 for ABC
Check No. 660143463 in the amount of P3,375.00, and in Criminal
Case No. 12058 for ABC Check No. 660143464 for P6,410.00. Both
cases were raffled to the same trial court.
Upon arraignment, Wong pleaded not guilty. Trial ensued.
Manuel T. Limtong, general manager of LPI, testified on behalf of
the company, Limtong averred that he refused to accept the
personal checks of petitioner since it was against company policy
to accept personal checks from agents. Hence, he and petitioner
simply agreed to use the checks to pay petitioners unremitted
collections to LPI. According to Limtong, a few days before maturity
of the checks, Wong requested him to defer the deposit of said
checks for lack of funds. Wong promised to replace them within
thirty days, but failed to do so. Hence, upon advice of counsel, he
deposited the checks which were subsequently returned on the
ground of "account closed."
The version of the defense is that petitioner issued the six (6)
According to petitioner, he issued the checks not as payment for
any obligation, but to guarantee the orders of his customers. In
fact, the face value of the six (6) postdated checks tallied with the
total amount of the calendar orders of the six (6) customers of the
accused, namely, Golden Friendship Supermarket, Inc. (P6,410.00),
New Society Rice and Corn Mill (P5,500.00), Cuesta Enterprises
(P540.00), Pelrico Marketing (P1,100.00), New Asia Restaurant
P3,375.00), and New China Restaurant (P1,100.00). Although these
customers had already paid their respective orders, petitioner
claimed LPI did not return the said checks to him.
On August 30, 1990, the trial court issued its decision, disposing as
follows:7
"Wherefore, premises considered, this Court finds the
accused Luis S. Wong GUILTY beyond reasonable doubt of
the offense of Violations of Section 1 of Batas Pambansa
Bilang 22 in THREE (3) Counts and is hereby sentenced to
serve an imprisonment of FOUR (4) MONTHS for each count;
to pay Private Complainant Manuel T. Limtong the sums of
Five Thousand Five Hundred (P5,500.00) Pesos, Six
Thousand Four Hundred Ten (P6,410.00) Pesos and Three
Thousand Three Hundred Seventy-Five (P3,375.00) Pesos
corresponding to the amounts indicated in Allied Banking
Checks Nos. 660143451, 66[0]143464 and 660143463 all
issued on December 30, 1985 together with the legal rate of
interest from the time of the filing of the criminal charges in
Court and pay the costs."8
Petitioner appealed his conviction to the Court of Appeals. On
October 28, 1994, it affirmed the trial courts decision in toto.9
Hence, the present petition.10 Petitioner raises the following
questions of law -11
May a complainant successfully prosecute a case under BP
22 --- if there is no more consideration or price or value
ever the binding tie that it is in contracts in general and in
negotiable instruments in particular behind the checks? if
even before he deposits the checks, he has ceased to be a
holder for value because the purchase orders (POs)
guaranteed by the checks were already paid?
Given the fact that the checks lost their reason for being, as
above stated, is it not then the duty of complainant
knowing he is no longer a holder for value to return the
checks and not to deposit them ever? Upon what legal basis
then may such a holder deposit them and get paid twice?
Is petitioner, as the drawer of the guarantee checks which
lost their reason for being, still bound under BP 22 to
maintain his account long after 90 days from maturity of the
checks?
May the prosecution apply the prima facie presumption of
"knowledge of lack of funds" against the drawer if the
checks were belatedly deposited by the complainant 157
days after maturity, or will it be then necessary for the
prosecution to show actual proof of "lack of funds" during
the 90-day term?
Petitioner insists that the checks were issued as guarantees for the
1985 purchase orders (POs) of his customers. He contends that
private respondent is not a "holder for value" considering that the
checks were deposited by private respondent after the customers
already paid their orders. Instead of depositing the checks, private
respondent should have returned the checks to him. Petitioner
further assails the credibility of complainant considering that his
answers to cross-examination questions included: "I cannot recall,
anymore" and "We have no more record."
In his Comment,12 the Solicitor General concedes that the checks
might have been initially intended by petitioner to guarantee
payments due from customers, but upon the refusal of LPI to
accept said personal checks per company policy, the parties had
agreed that the checks would be used to pay off petitioners
unremitted collections. Petitioners contention that he did not
demand the return of the checks because he trusted LPIs good
faith is contrary to human nature and sound business practice,
according to the Solicitor General.
The issue as to whether the checks were issued merely as
guarantee or for payment of petitioners unremitted collections is a
factual issue involving as it does the credibility of witnesses. Said
factual issue has been settled by the trial court and Court of
Appeals. Although initially intended to be used as guarantee for the
purchase orders of customers, they found the checks were
eventually used to settle the remaining obligations of petitioner
with LPI. Although Manuel Limtong was the sole witness for the
prosecution, his testimony was found sufficient to prove all the
elements of the offense charged.13 We find no cogent reason to
depart from findings of both the trial and appellate courts. In cases
elevated from the Court of Appeals, our review is confined to allege
errors of law. Its findings of fact are generally conclusive. Absent
any showing that the findings by the respondent court are entirely
devoid of any substantiation on record, the same must stand. 14 The
lack of accounting between the parties is not the issue in this case.
As repeatedly held, this Court is not a trier of facts. 15 Moreover,
in Llamado v. Court of Appeals,16 we held that "[t]o determine the
reason for which checks are issued, or the terms and conditions for
their issuance, will greatly erode the faith the public reposes in the
stability and commercial value of checks as currency substitutes,
and bring about havoc in trade and in banking communities. So
what the law punishes is the issuance of a bouncing check and not
the purpose for which it was issued nor the terms and conditions
relating to its issuance. The mere act of issuing a worthless check
is malum prohibitum." Nothing herein persuades us to hold
otherwise.
The only issue for our resolution now is whether or not the
prosecution was able to establish beyond reasonable doubt all the
elements of the offense penalized under B.P. Blg. 22.
There are two (2) ways of violating B.P. Blg. 22: (1) by making or
drawing and issuing a check to apply on account or for value
knowing at the time of issue that the check is not sufficiently
funded; and (2) by having sufficient funds in or credit with the
drawee bank at the time of issue but failing to keep sufficient funds
therein or credit with said bank to cover the full amount of the
check when presented to the drawee bank within a period of ninety
(90) days.17
The elements of B.P. Blg. 22 under the first situation, pertinent to
the present case, are:18
"(1) The making, drawing and issuance of any check to
apply for account or for value;
(2) The knowledge of the maker, drawer, or issuer that at
the time of issue he does not have sufficient funds in or
credit with the drawee bank for the payment of such check
in full upon its presentment; and
(3) The subsequent dishonor of the check by the drawee
bank for insufficiency of funds or credit or dishonor for the
same reason had not the drawer, without any valid cause,
ordered the bank to stop payment."
Petitioner contends that the first element does not exist because
the checks were not issued to apply for account or for value. He
attempts to distinguish his situation from the usual "cut-and-dried"
B.P. 22 case by claiming that the checks were issued as guarantee
and the obligations they were supposed to guarantee were already
paid. This flawed argument has no factual basis, the RTC and CA
having both ruled that the checks were in payment for unremitted
collections, and not as guarantee. Likewise, the argument has no
legal basis, for what B.P. Blg. 22 punishes is the issuance of a
bouncing check and not the purpose for which it was issued nor the
terms and conditions relating to its issuance.19
As to the second element, B.P. Blg. 22 creates a presumption juris
tantum that the second element prima facieexists when the first
and third elements of the offense are present. 20 Thus, the makers
knowledge is presumed from the dishonor of the check for
insufficiency of funds. 21
Petitioner avers that since the complainant deposited the checks on
June 5, 1986, or 157 days after the December 30, 1985 maturity
date, the presumption of knowledge of lack of funds under Section
2 of B.P. Blg. 22 should not apply to him. He further claims that he
should not be expected to keep his bank account active and funded
beyond the ninety-day period.
Section 2 of B.P. Blg. 22 provides:
Evidence of knowledge of insufficient funds. The making,
drawing and issuance of a check payment of which is
refused by the drawee because of insufficient funds in or
credit with such bank, when presented within ninety (90)
days from the date of the check, shall be prima
facie evidence of knowledge of such insufficiency of funds or
credit unless such maker or drawer pays the holder thereof
the amount due thereon, or makes arrangements for
payment in full by the drawee of such check within five (5)
banking days after receiving notice that such check has not
been paid by the drawee.
An essential element of the offense is "knowledge" on the part of
the maker or drawer of the check of the insufficiency of his funds in
or credit with the bank to cover the check upon its presentment.
Since this involves a state of mind difficult to establish, the statute However, pursuant to the policy guidelines in Administrative
itself creates a prima facie presumption of such knowledge where Circular No. 12-2000, which took effect on November 21, 2000, the
payment of the check "is refused by the drawee because of penalty imposed on petitioner should now be modified to a fine of
insufficient funds in or credit with such bank when presented within not less than but not more than double the amount of the checks
ninety (90) days from the date of the check." To mitigate the that were dishonored.
harshness of the law in its application, the statute provides that
such presumption shall not arise if within five (5) banking days from WHEREFORE, the petition is DENIED. Petitioner Luis S. Wong is
receipt of the notice of dishonor, the maker or drawer makes found liable for violation of Batas Pambansa Blg. 22 but the penalty
arrangements for payment of the check by the bank or pays the imposed on him is hereby MODIFIED so that the sentence of
holder the amount of the check.22 imprisonment is deleted. Petitioner is ORDERED to pay a FINE of
(1) P6,750.00, equivalent to double the amount of the check
Contrary to petitioners assertions, nowhere in said provision does involved in Criminal Case No. CBU-12057, (2) P12,820.00,
the law require a maker to maintain funds in his bank account for equivalent to double the amount of the check involved in Criminal
only 90 days. Rather, the clear import of the law is to establish Case No. CBU-12058, and (3) P11,000.00, equivalent to double the
a prima facie presumption of knowledge of such insufficiency of amount of the check involved in Criminal Case No. CBU-12055, with
funds under the following conditions (1) presentment within 90 subsidiary imprisonment24 in case of insolvency to pay the
days from date of the check, and (2) the dishonor of the check and aforesaid fines. Finally, as civil indemnity, petitioner is also ordered
failure of the maker to make arrangements for payment in full to pay to LPI the face value of said checks totaling P18,025.00 with
within 5 banking days after notice thereof. That the check must be legal interest thereon from the time of filing the criminal charges in
deposited within ninety (90) days is simply one of the conditions for court, as well as to pay the costs.1wphi1.nt
the prima facie presumption of knowledge of lack of funds to arise.
It is not an element of the offense. Neither does it discharge SO ORDERED.
petitioner from his duty to maintain sufficient funds in the account
within a reasonable time thereof. Under Section 186 of the Bellosillo, Mendoza, Buena, and De Leon, Jr., JJ., concur.
Negotiable Instruments Law, "a check must be presented for
payment within a reasonable time after its issue or the drawer will
be discharged from liability thereon to the extent of the loss caused
by the delay." By current banking practice, a check becomes stale
after more than six (6) months,23 or 180 days. Private respondent
herein deposited the checks 157 days after the date of the check.
Hence said checks cannot be considered stale. Only the
presumption of knowledge of insufficiency of funds was lost, but
such knowledge could still be proven by direct or circumstantial
evidence. As found by the trial court, private respondent did not
deposit the checks because of the reassurance of petitioner that he
would issue new checks. Upon his failure to do so, LPI was
constrained to deposit the said checks. After the checks were
dishonored, petitioner was duly notified of such fact but failed to
make arrangements for full payment within five (5) banking days
thereof. There is, on record, sufficient evidence that petitioner had
knowledge of the insufficiency of his funds in or credit with the
drawee bank at the time of issuance of the checks. And despite
petitioners insistent plea of innocence, we find no error in the
respondent courts affirmance of his conviction by the trial court for
violations of the Bouncing Checks Law.
 Rempson TRB 1,575.00 January 9, 1982
Corona RCBC 2,500.00 December 22, 1981

When she went to these companies to collect on what she thought

were still unpaid accounts, she was informed of the issuance of the
above-listed crossed checks. Further inquiry revealed that the said
checks had been deposited with the Associated Bank (hereinafter,
"the Bank") and subsequently paid by it to one Rafael Sayson, one
of its "trusted depositors," in the words of its branch manager and
co-petitioner, Conrado Cruz, Sayson had not been authorized by
the private respondent to deposit and encash the said checks.

The private respondent sued the petitioners in the Regional Trial

G.R. No. 89802 May 7, 1992 Court of Quezon City for recovery of the total value of the checks
plus damages. After trial, judgment was rendered requiring them to
ASSOCIATED BANK and CONRADO CRUZ, petitioners, pay the private respondent the total value of the subject checks in
vs. the amount of P15,805.00 plus 12% interest, P50,000.00 actual
HON. COURT OF APPEALS, and MERLE V. REYES, doing damages, P25,000.00 exemplary damages, P5,000.00 attorney's
business under the name and style "Melissa's fees, and the costs of the suit. 1
RTW," respondents.
The petitioners appealed to the respondent court, reiterating their
CRUZ, J.: argument that the private respondent had no cause of action
against them and should have proceeded instead against the
The sole issue raised in this case is whether or not the private companies that issued the checks. In disposing of this contention,
respondent has a cause of action against the petitioners for their the Court of Appeals 2 said:
encashment and payment to another person of certain crossed
checks issued in her favor. The cause of action of the appellee in the case at bar arose
from the illegal, anomalous and irregular acts of the
The private respondent is engaged in the business of ready-to-wear appellants in violating common banking practices to the
garments under the firm name "Melissa's RTW." She deals with, damage and prejudice of the appellees, in allowing to be
among other customers, Robinson's Department Store, Payless deposited and encashed as well as paying to improper
Department Store, Rempson Department Store, and the Corona parties without the knowledge, consent, authority or
Bazaar. endorsement of the appellee which totalled P15,805.00, the
six (6) checks in dispute which were "crossed checks" or "for
These companies issued in payment of their respective accounts payee's account only," the appellee being the payee.
crossed checks payable to Melissa's RTW in the amounts and on the
dates indicated below: The three (3) elements of a cause of action are present in
the case at bar, namely: (1) a right in favor of the plaintiff by
PAYOR BANK AMOUNT DATE whatever means and under whatever law it arises or is
created; (2) an obligation on the part of the named
defendant to respect or not to violate such right; and (3) an
Payless Solid Bank P3,960.00 January 19, 1982 act or omission on the part of such defendant violative of
Robinson's FEBTC 4,140.00 December 18, 1981 the right of the plaintiff or constituting a breach thereof.
Robinson's FEBTC 1,650.00 December 24, 1981 (Republic Planters Bank vs. Intermediate Appellate Court,
Robinson's FEBTC 1,980.00 January 12, 1982 131 SCRA 631).
 And such cause of action has been proved by evidence of
great weight. The contents of the said checks issued by the
customers of the appellee had not been questioned. There is
no dispute that the same are crossed checks or for payee's
account only, which is Melissa's RTW. The appellee had
clearly shown that she had never authorized anyone to
deposit the said checks nor to encash the same; that the
appellants had allowed all said checks to be deposited,
cleared and paid to one Rafael Sayson in violation of the
instructions in the said crossed checks that the same were
for payee's account only; and that the appellee maintained
a savings account with the Prudential Bank, Cubao Branch,
Quezon City which never cleared the said checks and the
appellee had been damaged by such encashment of the
same.
We affirm.
Under accepted banking practice, crossing a check is done by
writing two parallel lines diagonally on the left top portion of the
checks. The crossing is special where the name of a bank or a
business institution is written between the two parallel lines, which
means that the drawee should pay only with the intervention of
that company.3 The crossing is general where the words written
between the two parallel lines are "and Co." or "for payee's account
only," as in the case at bar. This means that the drawee bank
should not encash the check but merely accept it for deposit. 4
In State Investment House vs. IAC, 5 this Court declared that "the
effects of crossing a check are: (1) that the check may not be
encashed but only deposited in the bank; (2) that the check may be
negotiated only once to one who has an account with a bank;
and (3) that the act of crossing the check serves as a warning to
the holder that the check has been issued for a definite purpose so
that he must inquire if he has received the check pursuant to that
purpose."
The effects therefore of crossing a check relate to the mode of its
presentment for payment. Under Sec. 72 of the Negotiable
Instruments Law, presentment for payment, to be sufficient, must
be made by the holder or by some person authorized to receive
payment on his behalf. Who the holder or authorized person is
depends on the instruction stated on the face of the check.
The six checks in the case at bar had been crossed and issued "for
payee's account only." This could only signify that the drawers had
intended the same for deposit only by the person indicated, to wit,
Melissa's RTW.
The petitioners argue that the cause of action for violation of the
common instruction found on the face of the checks exclusively
belongs to the issuers thereof and not to the payee. Moreover,
having acted in good faith as they merely facilitated the
encashment of the checks, they cannot be made liable to the
private respondent.
The subject checks were accepted for deposit by the Bank for the
account of Rafael Sayson although they were crossed checks and
the payee was not Sayson but Melissa's RTW. The Bank stamped
thereon its guarantee that "all prior endorsements and/or lack of
endorsements (were) guaranteed." By such deliberate and positive
act, the Bank had for all legal intents and purposes treated the said
checks as negotiable instruments and, accordingly, assumed the
warranty of the endorser.
The weight of authority is to the effect that "the possession of
check on a forged or unauthorized indorsement is wrongful, and
when the money is collected on the check, the bank can be held
'for moneys had and received." 6The proceeds are held for the
rightful owner of the payment and may be recovered by him. The
position of the bank taking the check on the forged or unauthorized
indorsement is the same as if it had taken the check and collected
without indorsement at all. The act of the bank amounts to
conversion of the check. 7
It is not disputed that the proceeds of the subject checks belonged
to the private respondent. As she had not at any time authorized
Rafael Sayson to endorse or encash them, there was conversion of
the funds by the Bank.
When the Bank paid the checks so endorsed notwithstanding that
title had not passed to the endorser, it did so at its peril and
became liable to the payee for the value of the checks. This liability
attached whether or not the Bank was aware of the unauthorized
endorsement. 8
The petitioners were negligent when they permitted the
encashment of the checks by Sayson. The Bank should have first
verified his right to endorse the crossed checks, of which he was
not the payee, and to deposit the proceeds of the checks to his own
account. The Bank was by reason of the nature of the checks put
upon notice that they were issued for deposit only to the private
respondent's account. Its failure to inquire into Sayson's authority
was a breach of a duty it owed to the private respondent.
As the Court stressed in Banco de Oro Savings and Mortgage Bank
vs. Equitable Banking Corp., 9 "the law imposes a duty of diligence
on the collecting bank to scrutinize checks deposited with it, for the
purpose of determining their genuineness and regularity. The
collecting bank, being primarily engaged in banking, holds itself out
to the public as the expert on this field, and the law thus holds it to
a high standard of conduct."
The petitioners insist that the private respondent has no cause of
action against them because they have no privity of contract with
her. They also argue that it was Eddie Reyes, the private
respondent's own husband, who endorsed the checks.
the checks were actually delivered to the payee. 11
We approve such
direct action in the case at bar.
It is worth repeating that before presenting the checks for clearing
and for payment, the Bank had stamped on the back thereof the
words: "All prior endorsements and/or lack of endorsements
guaranteed," and thus made the assurance that it had ascertained
the genuineness of all prior endorsements.
We find that the respondent court committed no reversible error in
holding that the private respondent had a valid cause of action
against the petitioners and that the latter are indeed liable to her
for their unauthorized encashment of the subject checks. We also
agree with the reduction of the award of the exemplary damages
for lack of sufficient evidence to support them.
WHEREFORE, the petition is DENIED, with costs against the
petitioner. It is so ordered.

Assuming that Eddie Reyes did endorse the crossed checks, we Narvasa, C.J., Grio-Aquino, Medialdea and Bellosillo, JJ., concur.
hold that the Bank would still be liable to the private respondent
because he was not authorized to make the endorsements. And
even if the endorsements were forged, as alleged, the Bank would
still be liable to the private respondent for not verifying the
endorser's authority. There is no substantial difference between an
actual forging of a name to a check as an endorsement by a person
not authorized to make the signature and the affixing of a name to
a check as an endorsement by a person not authorized to endorse
it. 10

The Bank does not deny collecting the money on the endorsement.
It was its responsibility to inquire as to the authority of Rafael
Sayson to deposit crossed checks payable to Melissa's RTW upon a
prior endorsement by Eddie Reyes. The failure of the Bank to make
this inquiry was a breach of duty that made it liable to the private
respondent for the amount of the checks.

There being no evidence that the crossed checks were actually

received by the private respondent, she would have a right of
action against the drawer companies, which in turn could go
against their respective drawee banks, which in turn could sue the
herein petitioner as collecting bank. In a similar situation, it was
held that, to simplify proceedings, the payee of the illegally
encashed checks should be allowed to recover directly from the
bank responsible for such encashment regardless of whether or not

G.R. No. 75954 October 22, 1992
PEOPLE OF THE PHILIPPINES, petitioner,
vs.
HON. DAVID G. NITAFAN, Presiding Judge, Regional Trial
Court, Branch 52, Manila, and K.T. LIM alias MARIANO
LIM, respondents.
BELLOSILLO, J.:
Failing in his argument that B.P. 22, otherwise known as the
"Bouncing Check Law", is unconstitutional, 1 private respondent
now argues that the check he issued, a memorandum check, is in
the nature of a promissory note, hence, outside the purview of the
statute. Here, his argument must also fail.
The facts are simple. Private respondent K.T. Lim was charged
before respondent court with violation of B.P. 22 in an Information
alleging
That on . . . January 10, 1985, in the City of Manila . . . the
said accused did then and there wilfully, unlawfully and
feloniously make or draw and issue to Fatima Cortez Sasaki .
. . Philippine Trust Company Check No. 117383 dated
February 9, 1985 . . . in the amount of P143,000.00, . . . well
knowing that at the time of issue he . . . did not have
sufficient funds in or credit with the drawee bank . . . which
check . . . was subsequently dishonored by the drawee bank
for insufficiency of funds, and despite receipt of notice of
such dishonor, said accused failed to pay said Fatima Cortez
Sasaki the amount of said check or to make arrangement for
full payment of the same within five (5) banking days after
receiving said notice. 2
On 18 July 1986, private respondent moved to quash the
Information of the ground that the facts charged did not constitute
a felony as B.P. 22 was unconstitutional and that the check he
issued was a memorandum check which was in the nature of a
promissory note, perforce, civil in nature. On 1 September 1986,
respondent judge, ruling that B.P. 22 on which the Information was
based was unconstitutional, issued the questioned Order quashing
the Information. Hence, this petition for review on certiorari filed by
the Solicitor General in behalf of the government.
Since the constitutionality of the "Bouncing Check Law" has already
been sustained by this Court in Lozano v.Martinez 3 and the seven
(7) other cases decided jointly with it, 4 the remaining issue, as
aptly stated by private respondent in his Memorandum, is whether
a memorandum check issued postdated in partial payment of a
pre-existing obligation is within the coverage of B.P. 22.
Citing U.S. v. Isham, 5 private respondent contends that although a
memorandum check may not differ in form and appearance from
an ordinary check, such a check is given by the drawer to the
payee more in the nature of memorandum of indebtedness and,
should be sued upon in a civil action.
We are not persuaded.
A memorandum check is in the form of an ordinary check, with the
word "memorandum", "memo" or "mem" written across its face,
signifying that the maker or drawer engages to pay the bona
fide holder absolutely, without any condition concerning its
presentment. 6 Such a check is an evidence of debt against the
drawer, and although may not be intended to be presented, 7 has
the same effect as an ordinary check, 8 and if passed to the third
person, will be valid in his hands like any other check. 9
From the above definition, it is clear that a memorandum check,
which is in the form of an ordinary check, is still drawn on a bank
and should therefore be distinguished from a promissory note,
which is but a mere promise to pay. If private respondent seeks to
equate memorandum check with promissory note, as he does to
skirt the provisions of B.P. 22, he could very well have issued a
promissory note, and this would be have exempted him form the
coverage of the law. In the business community a promissory note,
certainly, has less impact and persuadability than a check.
Verily, a memorandum check comes within the meaning of Sec.
185 of the Negotiable Instruments Law which defines a check as "a
bill of exchange drawn on a bank payable on demand." A check is
also defined as " [a] written order or request to a bank or persons
carrying on the business of banking, by a party having money in
their hands, desiring them to pay, on presentment, to a person
therein named or bearer, or to such person or order, a named sum
of money," citing 2 Dan. Neg. Inst. 528; Blair v. Wilson, 28 Gratt.
(Va.) 170; Deener v. Brown,1 MacArth. (D.C.) 350; In re Brown, 2
Sto. 502, Fed. Cas. No. 1,985. See Chapman v. White, 6 N.Y. 412, 57
Am. Dec 464. 10 Another definition of check is that is "[a] draft
drawn upon a bank and payable on demand, signed by the maker
or drawer, containing an unconditional promise to pay a sum
certain in money to the order of the payee," citing State
v. Perrigoue, 81 Wash, 2d 640, 503 p. 2d 1063, 1066. 11
A memorandum check must therefore fall within the ambit of B.P.
22 which does not distinguish but merely provides that "[a]ny
person who makes or draws and issues any check knowing at the
time of issue that he does not have sufficient funds in or credit with
the drawee bank . . . which check is subsequently dishonored . . .
shall be punished by imprisonment . . ." (Emphasis
supplied ). 12 Ubi lex no distinguit nec nos distinguere debemus.
But even if We retrace the enactment of the "Bouncing Check Law"
to determine the parameters of the concept of "check", We can
easily glean that the members of the then Batasang Pambansa
intended it to be comprehensive as to include all checks drawn
against banks. This was particularly the ratiocination of Mar.
Estelito P. Mendoza, co-sponsor of Cabinet Bill No. 9 which later
became B.P. 22, when in response to the interpellation of Mr.
Januario T. Seo, Mr. Mendoza explained that the draft or order
must be addressed to a bank or depository, 13 and accepted the
proposed amendment of Messrs. Antonio P. Roman and Arturo M.
Tolentino that the words "draft or order", and certain terms which
technically meant promissory notes, wherever they were found in
the text of the bill, should be deleted since the bill was mainly
directed against the pernicious practice of issuing checks with
insufficient or no funds, and not to drafts which were not drawn
against banks. 14
A memorandum check, upon presentment, is generally accepted by
the bank. Hence it does not matter whether the check issued is in
the nature of a memorandum as evidence of indebtedness or
whether it was issued is partial fulfillment of a pre-existing
obligation, for what the law punishes is the issuance itself of a
bouncing check 15 and not the purpose for which it was issuance.
The mere act of issuing a worthless check, whether as a deposit, as
a guarantee, or even as an evidence of a pre-existing debt,
is malum prohibitum. 16
We are not unaware that a memorandum check may carry with it
the understanding that it is not be presented at the bank but will be
redeemed by the maker himself when the loan fall due. This
understanding may be manifested by writing across the check
"Memorandum", "Memo" or "Mem." However, with the
promulgation of B.P. 22, such understanding or private
arrangement may no longer prevail to exempt it from penal
sanction imposed by the law. To require that the agreement
surrounding the issuance of check be first looked into and
thereafter exempt such issuance from the punitive provision of B.P.
22 on the basis of such agreement or understanding would
frustrate the very purpose for which the law was enacted to
stem the proliferation of unfunded checks. After having effectively
reduced the incidence of worthless checks changing hands, the
country will once again experience the limitless circulation of
bouncing checks in the guise of memorandum checks if such
checks will be considered exempt from the operation of B.P. 22. It is
common practice in commercial transactions to require debtors to
issue checks on which creditors must rely as guarantee of payment.
To determine the reasons for which checks are issued, or the terms
and conditions for their issuance, will greatly erode the faith the
public responses in the stability and commercial value of checks as
currency substitutes, and bring about havoc in trade and in banking
communities. 17

WHEREFORE, the petition is GRANTED and the Order of respondent

Judge of 1 September 1986 is SET ASIDE. Consequently,
respondent Judge, or whoever presides over the Regional Trial Court
of Manila, Branch 52, is hereby directed forthwith to proceed with
the hearing of the case until terminated. G.R. No. 121413 January 29, 2001

SO ORDERED. PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly

INSULAR BANK OF ASIA AND AMERICA),petitioner,
Gutierrez, Jr., Cruz, Feliciano, Padilla, Bidin, Grio-Aquino, vs.
Medialdea, Regalado, Davide, Jr., Romero, Nocon, Bellosillo and COURT OF APPEALS and FORD PHILIPPINES, INC. and
Melo, JJ., concur. CITIBANK, N.A., respondents.

Narvasa, C.J., is on leave. G.R. No. 121479 January 29, 2001

FORD PHILIPPINES, INC., petitioner-plaintiff,

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

G.R. No. 128604 January 29, 2001

FORD PHILIPPINES, INC., petitioner,

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

QUISUMBING, J.:

These consolidated petitions involve several fraudulently

negotiated checks.

The original actions a quo were instituted by Ford Philippines to

recover from the drawee bank, CITIBANK, N.A. (Citibank) and
collecting bank, Philippine Commercial International Bank (PCIBank)
[formerly Insular Bank of Asia and America], the value of several
checks payable to the Commissioner of Internal Revenue, which
were embezzled allegedly by an organized syndicate.1wphi1.nt
G.R. Nos. 121413 and 121479 are twin petitions for review of the
March 27, 1995 Decision1 of the Court of Appeals in CA-G.R. CV No.
25017, entitled "Ford Philippines, Inc. vs. Citibank, N.A. and Insular
Bank of Asia and America (now Philipppine Commercial
International Bank), and the August 8, 1995 Resolution, 2 ordering
the collecting bank, Philippine Commercial International Bank, to
pay the amount of Citibank Check No. SN-04867.
In G.R. No. 128604, petitioner Ford Philippines assails the October
15, 1996 Decision3 of the Court of Appeals and its March 5, 1997
Resolution4 in CA-G.R. No. 28430 entitled "Ford Philippines, Inc. vs.
Citibank, N.A. and Philippine Commercial International Bank,"
affirming in toto the judgment of the trial court holding the
defendant drawee bank, Citibank, N.A., solely liable to pay the
amount of P12,163,298.10 as damages for the misapplied proceeds
of the plaintiff's Citibanl Check Numbers SN-10597 and 16508.
I. G.R. Nos. 121413 and 121479
The stipulated facts submitted by the parties as accepted by the
Court of Appeals are as follows:
"On October 19, 1977, the plaintiff Ford drew and issued its
Citibank Check No. SN-04867 in the amount of
P4,746,114.41, in favor of the Commissioner of Internal
Revenue as payment of plaintiff;s percentage or
manufacturer's sales taxes for the third quarter of 1977.
The aforesaid check was deposited with the degendant IBAA
(now PCIBank) and was subsequently cleared at the Central
Bank. Upon presentment with the defendant Citibank, the
proceeds of the check was paid to IBAA as collecting or
depository bank.
The proceeds of the same Citibank check of the plaintiff was
never paid to or received by the payee thereof, the
Commissioner of Internal Revenue.
As a consequence, upon demand of the Bureau and/or
Commissioner of Internal Revenue, the plaintiff was
compelled to make a second payment to the Bureau of
Internal Revenue of its percentage/manufacturers' sales
taxes for the third quarter of 1977 and that said second
payment of plaintiff in the amount of P4,746,114.41 was
duly received by the Bureau of Internal Revenue.
It is further admitted by defendant Citibank that during the
time of the transactions in question, plaintiff had been
maintaining a checking account with defendant Citibank;
that Citibank Check No. SN-04867 which was drawn and
issued by the plaintiff in favor of the Commissioner of
Internal Revenue was a crossed check in that, on its face
were two parallel lines and written in between said lines was
the phrase "Payee's Account Only"; and that defendant
Citibank paid the full face value of the check in the amount
of P4,746,114.41 to the defendant IBAA.
It has been duly established that for the payment of
plaintiff's percentage tax for the last quarter of 1977, the
Bureau of Internal Revenue issued Revenue Tax Receipt No.
18747002, dated October 20, 1977, designating therein in
Muntinlupa, Metro Manila, as the authorized agent bank of
Metrobanl, Alabang branch to receive the tax payment of
the plaintiff.
On December 19, 1977, plaintiff's Citibank Check No. SN-
04867, together with the Revenue Tax Receipt No.
18747002, was deposited with defendant IBAA, through its
Ermita Branch. The latter accepted the check and sent it to
the Central Clearing House for clearing on the samd day,
with the indorsement at the back "all prior indorsements
and/or lack of indorsements guaranteed." Thereafter,
defendant IBAA presented the check for payment to
defendant Citibank on same date, December 19, 1977, and
the latter paid the face value of the check in the amount of
P4,746,114.41. Consequently, the amount of P4,746,114.41
was debited in plaintiff's account with the defendant
Citibank and the check was returned to the plaintiff.
Upon verification, plaintiff discovered that its Citibank Check
No. SN-04867 in the amount of P4,746,114.41 was not paid
to the Commissioner of Internal Revenue. Hence, in
separate letters dated October 26, 1979, addressed to the
 defendants, the plaintiff notified the latter that in case it will
be re-assessed by the BIR for the payment of the taxes
covered by the said checks, then plaintiff shall hold the
defendants liable for reimbursement of the face value of the
same. Both defendants denied liability and refused to pay.
In a letter dated February 28, 1980 by the Acting
Commissioner of Internal Revenue addressed to the plaintiff
- supposed to be Exhibit "D", the latter was officially
informed, among others, that its check in the amount of P4,
746,114.41 was not paid to the government or its
authorized agent and instead encashed by unauthorized
persons, hence, plaintiff has to pay the said amount within
fifteen days from receipt of the letter. Upon advice of the
plaintiff's lawyers, plaintiff on March 11, 1982, paid to the
Bureau of Internal Revenue, the amount of P4,746,114.41,
representing payment of plaintiff's percentage tax for the
third quarter of 1977.
As a consequence of defendant's refusal to reimburse
plaintiff of the payment it had made for the second time to
the BIR of its percentage taxes, plaintiff filed on January 20,
1983 its original complaint before this Court.
On December 24, 1985, defendant IBAA was merged with
the Philippine Commercial International Bank (PCI Bank)
with the latter as the surviving entity.
Defendant Citibank maintains that; the payment it made of
plaintiff's Citibank Check No. SN-04867 in the amount of
P4,746,114.41 "was in due course"; it merely relied on the
clearing stamp of the depository/collecting bank, the
defendant IBAA that "all prior indorsements and/or lack of
indorsements guaranteed"; and the proximate cause of
plaintiff's injury is the gross negligence of defendant IBAA in
indorsing the plaintiff's Citibank check in question.
It is admitted that on December 19, 1977 when the
proceeds of plaintiff's Citibank Check No. SN-048867 was
paid to defendant IBAA as collecting bank, plaintiff was
maintaining a checking account with defendant Citibank." 5
Although it was not among the stipulated facts, an investigation by
the National Bureau of Investigation (NBI) revealed that Citibank
Check No. SN-04867 was recalled by Godofredo Rivera, the General
Ledger Accountant of Ford. He purportedly needed to hold back the
check because there was an error in the computation of the tax due
to the Bureau of Internal Revenue (BIR). With Rivera's instruction,
PCIBank replaced the check with two of its own Manager's Checks
(MCs). Alleged members of a syndicate later deposited the two MCs
with the Pacific Banking Corporation.
Ford, with leave of court, filed a third-party complaint before the
trial court impleading Pacific Banking Corporation (PBC) and
Godofredo Rivera, as third party defendants. But the court
dismissed the complaint against PBC for lack of cause of action.
The course likewise dismissed the third-party complaint against
Godofredo Rivera because he could not be served with summons as
the NBI declared him as a "fugitive from justice".
On June 15, 1989, the trial court rendered its decision, as follows:
"Premises considered, judgment is hereby rendered as
follows:
"1. Ordering the defendants Citibank and IBAA (now
PCI Bank), jointly and severally, to pay the plaintiff
the amount of P4,746,114.41 representing the face
value of plaintiff's Citibank Check No. SN-04867, with
interest thereon at the legal rate starting January 20,
1983, the date when the original complaint was filed
until the amount is fully paid, plus costs;
"2. On defendant Citibank's cross-claim: ordering the
cross-defendant IBAA (now PCI Bank) to reimburse
defendant Citibank for whatever amount the latter
has paid or may pay to the plaintiff in accordance
with next preceding paragraph;
"3. The counterclaims asserted by the defendants
against the plaintiff, as well as that asserted by the
cross-defendant against the cross-claimant are
dismissed, for lack of merits; and
"4. With costs against the defendants.
SO ORDERED."6
Not satisfied with the said decision, both defendants, Citibank and
PCIBank, elevated their respective petitions for review on certiorari
to the Courts of Appeals. On March 27, 1995, the appellate court
issued its judgment as follows:
"WHEREFORE, in view of the foregoing, the court AFFIRMS
the appealed decision with modifications.
The court hereby renderes judgment:
1. Dismissing the complaint in Civil Case No. 49287
insofar as defendant Citibank N.A. is concerned;
2. Ordering the defendant IBAA now PCI Bank to
pay the plaintiff the amount of P4,746,114.41
representing the face value of plaintiff's Citibank
Check No. SN-04867, with interest thereon at the
legal rate starting January 20, 1983, the date when
the original complaint was filed until the amount is
fully paid;
3. Dismissing the counterclaims asserted by the
defendants against the plaintiff as well as that
asserted by the cross-defendant against the cross-
claimant, for lack of merits.
Costs against the defendant IBAA (now PCI Bank).
IT IS SO ORDERED."7
PCI Bank moved to reconsider the above-quoted decision of the
Court of Appeals, while Ford filed a "Motion for Partial
Reconsideration." Both motions were denied for lack of merit.
Separately, PCIBank and Ford filed before this Court, petitions for
review by certiorari under Rule 45.
In G.R. No. 121413, PCIBank seeks the reversal of the decision and
resolution of the Twelfth Division of the Court of Appeals contending
that it merely acted on the instruction of Ford and such casue of
action had already prescribed.
PCIBank sets forth the following issues for consideration:
I. Did the respondent court err when, after finding that the
petitioner acted on the check drawn by respondent Ford on
the said respondent's instructions, it nevertheless found the
petitioner liable to the said respondent for the full amount of
the said check.
II. Did the respondent court err when it did not find
prescription in favor of the petitioner.8
In a counter move, Ford filed its petition docketed as G.R. No.
121479, questioning the same decision and resolution of the Court
of Appeals, and praying for the reinstatement in toto of the decision
of the trial court which found both PCIBank and Citibank jointly and
severally liable for the loss.
In G.R. No. 121479, appellant Ford presents the following
propositions for consideration:
I. Respondent Citibank is liable to petitioner Ford considering
that:
1. As drawee bank, respondent Citibank owes to
petitioner Ford, as the drawer of the subject check
and a depositor of respondent Citibank, an absolute
and contractual duty to pay the proceeds of the
subject check only to the payee thereof, the
Commissioner of Internal Revenue.
2. Respondent Citibank failed to observe its duty as
banker with respect to the subject check, which was
crossed and payable to "Payee's Account Only."
3. Respondent Citibank raises an issue for the first
time on appeal; thus the same should not be
considered by the Honorable Court.
4. As correctly held by the trial court, there is no
evidence of gross negligence on the part of petitioner
Ford.9
II. PCI Bank is liable to petitioner Ford considering that:
1. There were no instructions from petitioner Ford to
deliver the proceeds of the subject check to a person
 other than the payee named therein, the
Commissioner of the Bureau of Internal Revenue;
thus, PCIBank's only obligation is to deliver the
proceeds to the Commissioner of the Bureau of
Internal Revenue.10
2. PCIBank which affixed its indorsement on the
subject check ("All prior indorsement and/or lack of
indorsement guaranteed"), is liable as collecting
bank.11
3. PCIBank is barred from raising issues of fact in the
instant proceedings.12
4. Petitioner Ford's cause of action had not
prescribed.13
II. G.R. No. 128604
The same sysndicate apparently embezzled the proceeds of checks
intended, this time, to settle Ford's percentage taxes appertaining
to the second quarter of 1978 and the first quarter of 1979.
The facts as narrated by the Court of Appeals are as follows:
Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the
amount of P5,851,706.37 representing the percentage tax due for
the second quarter of 1978 payable to the Commissioner of Internal
Revenue. A BIR Revenue Tax Receipt No. 28645385 was issued for
the said purpose.
On April 20, 1979, Ford drew another Citibank Check No. SN-16508
in the amount of P6,311,591.73, representing the payment of
percentage tax for the first quarter of 1979 and payable to the
Commissioner of Internal Revenue. Again a BIR Revenue Tax
Receipt No. A-1697160 was issued for the said purpose.
Both checks were "crossed checks" and contain two diagonal lines
on its upper corner between, which were written the words
"payable to the payee's account only."
The checks never reached the payee, CIR. Thus, in a letter dated
February 28, 1980, the BIR, Region 4-B, demanded for the said tax
payments the corresponding periods above-mentioned.
As far as the BIR is concernced, the said two BIR Revenue Tax
Receipts were considered "fake and spurious". This anomaly was
confirmed by the NBI upon the initiative of the BIR. The findings
forced Ford to pay the BIR a new, while an action was filed against
Citibank and PCIBank for the recovery of the amount of Citibank
Check Numbers SN-10597 and 16508.
The Regional Trial Court of Makati, Branch 57, which tried the case,
made its findings on the modus operandi of the syndicate, as
follows:
"A certain Mr. Godofredo Rivera was employed by the
plaintiff FORD as its General Ledger Accountant. As such, he
prepared the plaintiff's check marked Ex. 'A' [Citibank Check
No. Sn-10597] for payment to the BIR. Instead, however, fo
delivering the same of the payee, he passed on the check to
a co-conspirator named Remberto Castro who was a pro-
manager of the San Andres Branch of PCIB.* In connivance
with one Winston Dulay, Castro himself subsequently
opened a Checking Account in the name of a fictitious
person denominated as 'Reynaldo reyes' in the Meralco
Branch of PCIBank where Dulay works as Assistant Manager.
After an initial deposit of P100.00 to validate the account,
Castro deposited a worthless Bank of America Check in
exactly the same amount as the first FORD check (Exh. "A",
P5,851,706.37) while this worthless check was coursed
through PCIB's main office enroute to the Central Bank for
clearing, replaced this worthless check with FORD's Exhibit
'A' and accordingly tampered the accompanying documents
to cover the replacement. As a result, Exhibit 'A' was cleared
by defendant CITIBANK, and the fictitious deposit account of
'Reynaldo Reyes' was credited at the PCIB Meralco Branch
with the total amount of the FORD check Exhibit 'A'. The
same method was again utilized by the syndicate in
profiting from Exh. 'B' [Citibank Check No. SN-16508] which
was subsequently pilfered by Alexis Marindo, Rivera's
Assistant at FORD.
From this 'Reynaldo Reyes' account, Castro drew various
checks distributing the sahres of the other participating
conspirators namely (1) CRISANTO BERNABE, the
mastermind who formulated the method for the
embezzlement; (2) RODOLFO R. DE LEON a customs broker
who negotiated the initial contact between Bernabe, FORD's
 Godofredo Rivera and PCIB's Remberto Castro; (3) JUAN
VASTILLO who assisted de Leon in the initial arrangements;
(4) GODOFREDO RIVERA, FORD's accountant who passed on
the first check (Exhibit "A") to Castro; (5) REMERTO CASTRO,
PCIB's pro-manager at San Andres who performed the
switching of checks in the clearing process and opened the
fictitious Reynaldo Reyes account at the PCIB Meralco
Branch; (6) WINSTON DULAY, PCIB's Assistant Manager at its
Meralco Branch, who assisted Castro in switching the checks
in the clearing process and facilitated the opening of the
fictitious Reynaldo Reyes' bank account; (7) ALEXIS
MARINDO, Rivera's Assistant at FORD, who gave the second
check (Exh. "B") to Castro; (8) ELEUTERIO JIMENEZ, BIR
Collection Agent who provided the fake and spurious
revenue tax receipts to make it appear that the BIR had
received FORD's tax payments.
Several other persons and entities were utilized by the
syndicate as conduits in the disbursements of the proceeds
of the two checks, but like the aforementioned participants
in the conspiracy, have not been impleaded in the present
case. The manner by which the said funds were distributed
among them are traceable from the record of checks drawn
against the original "Reynaldo Reyes" account and
indubitably identify the parties who illegally benefited
therefrom and readily indicate in what amounts they did
so."14
On December 9, 1988, Regional Trial Court of Makati, Branch 57,
held drawee-bank, Citibank, liable for the value of the two checks
while adsolving PCIBank from any liability, disposing as follows:
"WHEREFORE, judgment is hereby rendered sentencing
defendant CITIBANK to reimburse plaintiff FORD the total
amount of P12,163,298.10 prayed for in its complaint, with
6% interest thereon from date of first written demand until
full payment, plus P300,000.00 attorney's fees and
expenses litigation, and to pay the defendant, PCIB (on its
counterclaim to crossclaim) the sum of P300,000.00 as
attorney's fees and costs of litigation, and pay the costs.
SO ORDERED."15
Both Ford and Citibank appealed to the Court of Appeals which
affirmed, in toto, the decision of the trial court. Hence, this petition.
Petitioner Ford prays that judgment be rendered setting aside the
portion of the Court of Appeals decision and its resolution dated
March 5, 1997, with respect to the dismissal of the complaint
against PCIBank and holding Citibank solely responsible for the
proceeds of Citibank Check Numbers SN-10597 and 16508 for
P5,851,706.73 and P6,311,591.73 respectively.
Ford avers that the Court of Appeals erred in dismissing the
complaint against defendant PCIBank considering that:
I. Defendant PCIBank was clearly negligent when it failed to
exercise the diligence required to be exercised by it as a
banking insitution.
II. Defendant PCIBank clearly failed to observe the diligence
required in the selection and supervision of its officers and
employees.
III. Defendant PCIBank was, due to its negligence, clearly
liable for the loss or damage resulting to the plaintiff Ford as
a consequence of the substitution of the check consistent
with Section 5 of Central Bank Circular No. 580 series of
1977.
IV. Assuming arguedo that defedant PCIBank did not accept,
endorse or negotiate in due course the subject checks, it is
liable, under Article 2154 of the Civil Code, to return the
money which it admits having received, and which was
credited to it its Central bank account. 16
The main issue presented for our consideration by these petitions
could be simplified as follows: Has petitioner Ford the right to
recover from the collecting bank (PCIBank) and the drawee bank
(Citibank) the value of the checks intended as payment to the
Commissioner of Internal Revenue? Or has Ford's cause of action
already prescribed?
Note that in these cases, the checks were drawn against the
drawee bank, but the title of the person negotiating the same was
allegedly defective because the instrument was obtained by fraud
and unlawful means, and the proceeds of the checks were not
remitted to the payee. It was established that instead of paying the
checks to the CIR, for the settlement of the approprite quarterly
percentage taxes of Ford, the checks were diverted and encashed
for the eventual distribution among the mmbers of the syndicate.
As to the unlawful negotiation of the check the applicable law is
Section 55 of the Negotiable Instruments Law (NIL), which provides:
"When title defective -- The title of a person who negotiates
an instrument is defective within the meaning of this Act
when he obtained the instrument, or any signature thereto,
by fraud, duress, or fore and fear, or other unlawful means,
or for an illegal consideration, or when he negotiates it in
breach of faith or under such circumstances as amount to a
fraud."
Pursuant to this provision, it is vital to show that the negotiation is
made by the perpetator in breach of faith amounting to fraud. The
person negotiating the checks must have gone beyond the
authority given by his principal. If the principal could prove that
there was no negligence in the performance of his duties, he may
set up the personal defense to escape liability and recover from
other parties who. Though their own negligence, alowed the
commission of the crime.
In this case, we note that the direct perpetrators of the offense,
namely the embezzlers belonging to a syndicate, are now fugitives
from justice. They have, even if temporarily, escaped liability for
the embezzlement of millions of pesos. We are thus left only with
the task of determining who of the present parties before us must
bear the burden of loss of these millions. It all boils down to
thequestion of liability based on the degree of negligence among
the parties concerned.
Foremost, we must resolve whether the injured party, Ford, is guilty
of the "imputed contributory negligence" that would defeat its
claim for reimbursement, bearing ing mind that its employees,
Godofredo Rivera and Alexis Marindo, were among the members of
the syndicate.
Citibank points out that Ford allowed its very own employee,
Godofredo Rivera, to negotiate the checks to his co-conspirators,
instead of delivering them to the designated authorized collecting
bank (Metrobank-Alabang) of the payee, CIR. Citibank bewails the
fact that Ford was remiss in the supervision and control of its own
employees, inasmuch as it only discovered the syndicate's
activities through the information given by the payee of the checks
after an unreasonable period of time.
PCIBank also blames Ford of negligence when it allegedly
authorized Godofredo Rivera to divert the proceeds of Citibank
Check No. SN-04867, instead of using it to pay the BIR. As to the
subsequent run-around of unds of Citibank Check Nos. SN-10597
and 16508, PCIBank claims that the proximate cause of the damge
to Ford lies in its own officers and employees who carried out the
fradulent schemes and the transactions. These circumstances were
not checked by other officers of the company including its
comptroller or internal auditor. PCIBank contends that the inaction
of Ford despite the enormity of the amount involved was a sheer
negligence and stated that, as between two innocent persons, one
of whom must suffer the consequences of a breach of trust, the one
who made it possible, by his act of negligence, must bear the loss.
For its part, Ford denies any negligence in the performance of its
duties. It avers that there was no evidence presented before the
trial court showing lack of diligence on the part of Ford. And, citing
the case of Gempesaw vs. Court of Appeals, 17 Ford argues that
even if there was a finding therein that the drawer was negligent,
the drawee bank was still ordered to pay damages.
Furthermore, Ford contends the Godofredo rivera was not
authorized to make any representation in its behalf, specifically, to
divert the proceeds of the checks. It adds that Citibank raised the
issue of imputed negligence against Ford for the first time on
appeal. Thus, it should not be considered by this Court.
On this point, jurisprudence regarding the imputed negligence of
employer in a master-servant relationship is instructive. Since a
master may be held for his servant's wrongful act, the law imputes
to the master the act of the servant, and if that act is negligent or
wrongful and proximately results in injury to a third person, the
negligence or wrongful conduct is the negligence or wrongful
conduct of the master, for which he is liable. 18 The general rule is
that if the master is injured by the negligence of a third person and
by the concuring contributory negligence of his own servant or
agent, the latter's negligence is imputed to his superior and will
defeat the superior's action against the third person, asuming, of
course that the contributory negligence was the proximate
cause of the injury of which complaint is made. 19
Accordingly, we need to determine whether or not the action of
Godofredo Rivera, Ford's General Ledger Accountant, and/or Alexis
Marindo, his assistant, was the proximate cause of the loss or
damage. AS defined, proximate cause is that which, in the natural
and continuous sequence, unbroken by any efficient, intervening
cause produces the injury and without the result would not have
occurred.20
It appears that although the employees of Ford initiated the
transactions attributable to an organized syndicate, in our view,
their actions were not the proximate cause of encashing the checks
payable to the CIR. The degree of Ford's negligence, if any, could
not be characterized as the proximate cause of the injury to the
parties.
The Board of Directors of Ford, we note, did not confirm the request
of Godofredo Rivera to recall Citibank Check No. SN-04867. Rivera's
instruction to replace the said check with PCIBank's Manager's
Check was not in theordinary course of business which could have
prompted PCIBank to validate the same.
As to the preparation of Citibank Checks Nos. SN-10597 and 16508,
it was established that these checks were made payable to the CIR.
Both were crossed checks. These checks were apparently turned
around by Ford's emploees, who were acting on their own personal
capacity.
Given these circumstances, the mere fact that the forgery was
committed by a drawer-payor's confidential employee or agent,
who by virtue of his position had unusual facilities for perpertrating
the fraud and imposing the forged paper upon the bank, does
notentitle the bank toshift the loss to the drawer-payor, in the
absence of some circumstance raising estoppel against the
drawer.21 This rule likewise applies to the checks fraudulently
negotiated or diverted by the confidential employees who hold
them in their possession.
With respect to the negligence of PCIBank in the payment of the
three checks involved, separately, the trial courts found variations
between the negotiation of Citibank Check No. SN-04867 and the
misapplication of total proceeds of Checks SN-10597 and 16508.
Therefore, we have to scrutinize, separately, PCIBank's share of
negligence when the syndicate achieved its ultimate agenda of
stealing the proceeds of these checks.
G.R. Nos. 121413 and 121479
Citibank Check No. SN-04867 was deposited at PCIBank through its
Ermita Branch. It was coursed through the ordinary banking
transaction, sent to Central Clearing with the indorsement at the
back "all prior indorsements and/or lack of indorsements
guaranteed," and was presented to Citibank for payment.
Thereafter PCIBank, instead of remitting the proceeds to the CIR,
prepared two of its Manager's checks and enabled the syndicate to
encash the same.
On record, PCIBank failed to verify the authority of Mr. Rivera to
negotiate the checks. The neglect of PCIBank employees to verify
whether his letter requesting for the replacement of the Citibank
Check No. SN-04867 was duly authorized, showed lack of care and
prudence required in the circumstances.
Furthermore, it was admitted that PCIBank is authorized to collect
the payment of taxpayers in behalf of the BIR. As an agent of BIR,
PCIBank is duty bound to consult its principal regarding the
unwarranted instructions given by the payor or its agent. As aptly
stated by the trial court, to wit:
"xxx. Since the questioned crossed check was deposited
with IBAA [now PCIBank], which claimed to be a
depository/collecting bank of BIR, it has the responsibility to
make sure that the check in question is deposited in Payee's
account only.
xxx xxx xxx
As agent of the BIR (the payee of the check), defendant
IBAA should receive instructions only from its principal BIR
and not from any other person especially so when that
person is not known to the defendant. It is very imprudent
on the part of the defendant IBAA to just rely on the alleged
telephone call of the one Godofredo Rivera and in his
signature considering that the plaintiff is not a client of the
defendant IBAA."
It is a well-settled rule that the relationship between the payee or
holder of commercial paper and the bank to which it is sent for
collection is, in the absence of an argreement to the contrary, that
of principal and agent.22 A bank which receives such paper for
collection is the agent of the payee or holder. 23
Even considering arguendo, that the diversion of the amount of a
check payable to the collecting bank in behalf of the designated
payee may be allowed, still such diversion must be properly
authorized by the payor. Otherwise stated, the diversion can be
justified only by proof of authority from the drawer, or that the
drawer has clothed his agent with apparent authority to receive the
proceeds of such check.
Citibank further argues that PCI Bank's clearing stamp appearing at
the back of the questioned checks stating that ALL PRIOR
INDORSEMENTS AND/OR LACK OF INDORSEMENTS GURANTEED
should render PCIBank liable because it made it pass through the
clearing house and therefore Citibank had no other option but to
pay it. Thus, Citibank had no other option but to pay it. Thus,
Citibank assets that the proximate cause of Ford's injury is the
gross negligence of PCIBank. Since the questione dcrossed check
was deposited with PCIBank, which claimed to be a
depository/collecting bank of the BIR, it had the responsibility to
make sure that the check in questions is deposited in Payee's
account only.
Indeed, the crossing of the check with the phrase "Payee's Account
Only," is a warning that the check should be deposited only in the
account of the CIR. Thus, it is the duty of the collecting bank
PCIBank to ascertain that the check be deposited in payee's
account only. Therefore, it is the collecting bank (PCIBank) which is
bound to scruninize the check and to know its depositors before it
could make the clearing indorsement "all prior indorsements and/or
lack of indorsement guaranteed".
In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking
Corporation,24 we ruled:
"Anent petitioner's liability on said instruments, this court is
in full accord with the ruling of the PCHC's Board of Directors
that:
'In presenting the checks for clearing and for payment, the
defendant made an express guarantee on the validity of "all
prior endorsements." Thus, stamped at the back of the
checks are the defedant's clear warranty: ALL PRIOR
ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS
GUARANTEED. Without such warranty, plaintiff would not
have paid on the checks.'
No amount of legal jargon can reverse the clear meaning of
defendant's warranty. As the warranty has proven to be
false and inaccurate, the defendant is liable for any damage
arising out of the falsity of its representation." 25
Lastly, banking business requires that the one who first cashes and
negotiates the check must take some percautions to learn whether
or not it is genuine. And if the one cashing the check through
indifference or othe circumstance assists the forger in committing
the fraud, he should not be permitted to retain the proceeds of the
check from the drawee whose sole fault was that it did not discover
the forgery or the defect in the title of the person negotiating the
instrument before paying the check. For this reason, a bank which
cashes a check drawn upon another bank, without requiring proof
as to the identity of persons presenting it, or making inquiries with
regard to them, cannot hold the proceeds against the drawee when
the proceeds of the checks were afterwards diverted to the hands
of a third party. In such cases the drawee bank has a right to
believe that the cashing bank (or the collecting bank) had, by the
usual proper investigation, satisfied itself of the authenticity of the
negotiation of the checks. Thus, one who encashed a check which
had been forged or diverted and in turn received payment thereon
from the drawee, is guilty of negligence which proximately
contributed to the success of the fraud practiced on the drawee
bank. The latter may recover from the holder the money paid on
the check.26
Having established that the collecting bank's negligence is the
proximate cause of the loss, we conclude that PCIBank is liable in
the amount corresponding to the proceeds of Citibank Check No.
SN-04867.
G.R. No. 128604
The trial court and the Court of Appeals found that PCIBank had no
official act in the ordinary course of business that would attribute to
it the case of the embezzlement of Citibank Check Numbers SN-
10597 and 16508, because PCIBank did not actually receive nor
hold the two Ford checks at all. The trial court held, thus:
"Neither is there any proof that defendant PCIBank
contributed any official or conscious participation in the
process of the embezzlement. This Court is convinced that
the switching operation (involving the checks while in transit
for "clearing") were the clandestine or hidden actuations
 performed by the members of the syndicate in their own
personl, covert and private capacity and done without the
knowledge of the defendant PCIBank"27
In this case, there was no evidence presented confirming the
conscious particiapation of PCIBank in the embezzlement. As a
general rule, however, a banking corporation is liable for the
wrongful or tortuous acts and declarations of its officers or agents
within the course and scope of their employment. 28 A bank will be
held liable for the negligence of its officers or agents when acting
within the course and scope of their employment. It may be liable
for the tortuous acts of its officers even as regards that species of
tort of which malice is an essential element. In this case, we find a
situation where the PCIBank appears also to be the victim of the
scheme hatched by a syndicate in which its own management
employees had particiapted.
The pro-manager of San Andres Branch of PCIBank, Remberto
Castro, received Citibank Check Numbers SN-10597 and 16508. He
passed the checks to a co-conspirator, an Assistant Manager of
PCIBank's Meralco Branch, who helped Castro open a Checking
account of a fictitious person named "Reynaldo Reyes." Castro
deposited a worthless Bank of America Check in exactly the same
amount of Ford checks. The syndicate tampered with the checks
and succeeded in replacing the worthless checks and the eventual
encashment of Citibank Check Nos. SN 10597 and 16508. The
PCIBank Ptro-manager, Castro, and his co-conspirator Assistant
Manager apparently performed their activities using facilities in
their official capacity or authority but for their personal and private
gain or benefit.
A bank holding out its officers and agents as worthy of confidence
will not be permitted to profit by the frauds these officers or agents
were enabled to perpetrate in the apparent course of their
employment; nor will t be permitted to shirk its responsibility for
such frauds, even though no benefit may accrue to the bank
therefrom. For the general rule is that a bank is liable for the
fraudulent acts or representations of an officer or agent acting
within the course and apparent scope of his employment or
authority.29 And if an officer or employee of a bank, in his official
capacity, receives money to satisfy an evidence of indebetedness
lodged with his bank for collection, the bank is liable for his
misappropriation of such sum.30
Moreover, as correctly pointed out by Ford, Section 5 31 of Central
Bank Circular No. 580, Series of 1977 provides that any theft
affecting items in transit for clearing, shall be for the account of
sending bank, which in this case is PCIBank.
But in this case, responsibility for negligence does not lie on
PCIBank's shoulders alone.
The evidence on record shows that Citibank as drawee bank was
likewise negligent in the performance of its duties. Citibank failed
to establish that its payment of Ford's checjs were made in due
course and legally in order. In its defense, Citibank claims the
genuineness and due execution of said checks, considering that
Citibank (1) has no knowledge of any informity in the issuance of
the checks in question (2) coupled by the fact that said checks
were sufficiently funded and (3) the endorsement of the Payee or
lack thereof was guaranteed by PCI Bank (formerly IBAA), thus, it
has the obligation to honor and pay the same.
For its part, Ford contends that Citibank as the drawee bank owes
to Ford an absolute and contractual duty to pay the proceeds of the
subject check only to the payee thereof, the CIR. Citing Section
6232 of the Negotiable Instruments Law, Ford argues that by
accepting the instrument, the acceptro which is Citibank engages
that it will pay according to the tenor of its acceptance, and that it
will pay only to the payee, (the CIR), considering the fact that here
the check was crossed with annotation "Payees Account Only."
As ruled by the Court of Appeals, Citibank must likewise answer for
the damages incurred by Ford on Citibank Checks Numbers SN
10597 and 16508, because of the contractual relationship existing
between the two. Citibank, as the drawee bank breached its
contractual obligation with Ford and such degree of culpability
contributed to the damage caused to the latter. On this score, we
agree with the respondent court's ruling.
Citibank should have scrutinized Citibank Check Numbers SN 10597
and 16508 before paying the amount of the proceeds thereof to the
collecting bank of the BIR. One thing is clear from the record: the
clearing stamps at the back of Citibank Check Nos. SN 10597 and
16508 do not bear any initials. Citibank failed to notice and verify
the absence of the clearing stamps. Had this been duly examined,
the switching of the worthless checks to Citibank Check Nos. 10597
and 16508 would have been discovered in time. For this reason,
Citibank had indeed failed to perform what was incumbent upon it,
which is to ensure that the amount of the checks should be paid
only to its designated payee. The fact that the drawee bank did not
discover the irregularity seasonably, in our view, consitutes
negligence in carrying out the bank's duty to its depositors. The
point is that as a business affected with public interest and because
of the nature of its functions, the bank is under obligation to treat
the accounts of its depositors with meticulous care, always having
in mind the fiduciary nature of their relationship. 33
Thus, invoking the doctrine of comparative negligence, we are of
the view that both PCIBank and Citibank failed in their respective
obligations and both were negligent in the selection and
supervision of their employees resulting in the encashment of
Citibank Check Nos. SN 10597 AND 16508. Thus, we are
constrained to hold them equally liable for the loss of the proceeds
of said checks issued by Ford in favor of the CIR.
Time and again, we have stressed that banking business is so
impressed with public interest where the trust and confidence of
the public in general is of paramount umportance such that the
appropriate standard of diligence must be very high, if not the
highest, degree of diligence.34 A bank's liability as obligor is not
merely vicarious but primary, wherein the defense of exercise of
due diligence in the selection and supervision of its employees is of
no moment.35
Banks handle daily transactions involving millions of pesos. 36 By the
very nature of their work the degree of responsibility, care and
trustworthiness expected of their employees and officials is far
greater than those of ordinary clerks and employees. 37 Banks are
expected to exercise the highest degree of diligence in the
selection and supervision of their employees.38
On the issue of prescription, PCIBank claims that the action of Ford
had prescribed because of its inability to seek judicial relief
seasonably, considering that the alleged negligent act took place
prior to December 19, 1977 but the relief was sought only in 1983,
or seven years thereafter.
The statute of limitations begins to run when the bank gives the
depositor notice of the payment, which is ordinarily when the check
is returned to the alleged drawer as a voucher with a statement of
his account,39 and an action upon a check is ordinarily governed by
the statutory period applicable to instruments in writing.40
Our laws on the matter provide that the action upon a written
contract must be brought within ten year from the time the right of
action accrues.41 hence, the reckoning time for the prescriptive
period begins when the instrument was issued and the
corresponding check was returned by the bank to its depositor
(normally a month thereafter). Applying the same rule, the cause of
action for the recovery of the proceeds of Citibank Check No. SN
04867 would normally be a month after December 19, 1977, when
Citibank paid the face value of the check in the amount of
P4,746,114.41. Since the original complaint for the cause of action
was filed on January 20, 1984, barely six years had lapsed. Thus,
we conclude that Ford's cause of action to recover the amount of
Citibank Check No. SN 04867 was seasonably filed within the period
provided by law.
Finally, we also find thet Ford is not completely blameless in its
failure to detect the fraud. Failure on the part of the depositor to
examine its passbook, statements of account, and cancelled checks
and to give notice within a reasonable time (or as required by
statute) of any discrepancy which it may in the exercise of due care
and diligence find therein, serves to mitigate the banks' liability by
reducing the award of interest from twelve percent (12%) to six
percent (6%) per annum. As provided in Article 1172 of the Civil
Code of the Philippines, respondibility arising from negligence in
the performance of every kind of obligation is also demandable, but
such liability may be regulated by the courts, according to the
circumstances. In quasi-delicts, the contributory negligence of the
plaintiff shall reduce the damages that he may recover. 42
WHEREFORE, the assailed Decision and Resolution of the Court of
Appeals in CA-G.R. CV No. 25017 areAFFIRMED. PCIBank, know
formerly as Insular Bank of Asia and America, id declared solely
responsible for the loss of the proceeds of Citibank Check No SN
04867 in the amount P4,746,114.41, which shall be paid together
with six percent (6%) interest thereon to Ford Philippines Inc. from
the date when the original complaint was filed until said amount is
fully paid.
However, the Decision and Resolution of the Court of Appeals in CA-
G.R. No. 28430 are MODIFIED as follows: PCIBank and Citibank are
adjudged liable for and must share the loss, (concerning the
proceeds of Citibank Check Numbers SN 10597 and 16508 totalling
P12,163,298.10) on a fifty-fifty ratio, and each bank is ORDEREDto
pay Ford Philippines Inc. P6,081,649.05, with six percent (6%)
interest thereon, from the date the complaint was filed until full
payment of said amount.1wphi1.nt

Costs against Philippine Commercial International Bank and

Citibank N.A.

SO ORDERED.

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

G.R. No. 105188 January 23, 1998

MYRON C. PAPA, Administrator of the Testate Estate of

Angela M. Butte, petitioner,
vs.
A.U. VALENCIA and CO. INC., FELIX PEARROYO, SPS.
ARSENIO B. REYES & AMANDA SANTOS, and DELFIN
JAO, respondents.

KAPUNAN, J.:

In this petition for review on certiorari under Rule 45 of the Rules of

Court, petitioner Myron C. Papa seeks to reverse and set aside 1)
the Decision dated 27 January 1992 of the Court of Appeals which
affirmed with modification the decision of the trial court; and 2) the
Resolution dated 22 April 1992 of the same court, which denied
petitioner's motion for reconsideration of the above decision.
The antecedent facts of this case are as follows:
Sometime in June 1982, herein private respondents A.U. Valencia
and Co., Inc. (hereinafter referred to as respondent Valencia, for
brevity) and Felix Pearroyo (hereinafter called respondent
Pearroyo), filed with the Regional Trial Court of Pasig, Branch 151,
a complaint for specific performance against herein petitioner
Myron C. Papa, in his capacity as administrator of the Testate Estate
of one Angela M. Butte.
The complaint alleged that on 15 June 1973, petitioner Myron C.
Papa, acting as attorney-in-fact of Angela M. Butte, sold to
respondent Pearroyo, through respondent Valencia, a parcel of
land, consisting of 286.60 square meters, located at corner Retiro
and Cadiz Streets, La Loma, Quezon City, and covered by Transfer
Certificate of Title No. 28993 of the Register of Deeds of Quezon
City; that prior to the alleged sale, the said property, together with
several other parcels of land likewise owned by Angela M. Butte,
had been mortgaged by her to the Associated Banking Corporation
(now Associated Citizens Bank); that after the alleged sale, but
before the title to the subject property had been released, Angela
M. Butte passed away; that despite representations made by herein
respondents to the bank to release the title to the property sold to
respondent Pearroyo, the bank refused to release it unless and
until all the mortgaged properties of the late Angela M. Butte were
also redeemed; that in order to protect his rights and interests over
the property, respondent Pearroyo caused the annotation on the
title of an adverse claim as evidenced by Entry No. P.E.-6118/T-
28993, inscribed on 18 January 1997.
The complaint further alleged that it was only upon the release of
the title to the property, sometime in April 1977, that respondents
Valencia and Pearroyo discovered that the mortgage rights of the
bank had been assigned to one Tomas L. Parpana (now deceased),
as special administrator of the Estate of Ramon Papa, Jr., on 12
April 1977; that since then, herein petitioner had been collecting
monthly rentals in the amount of P800.00 from the tenants of the
property, knowing that said property had already been sold to
private respondents on 15 June 1973; that despite repeated
demands from said respondents, petitioner refused and failed to
deliver the title to the property. Thereupon, respondents Valencia
and Pearroyo filed a complaint for specific performance, praying
that petitioner be ordered to deliver to respondent Pearroyo the
title to the subject property (TCT 28993); to turn over to the latter
the sum of P72,000.00 as accrued rentals as of April 1982, and the
monthly rental of P800.00 until the property is delivered to
respondent Pearroyo; to pay respondents the sum of P20,000.00
as attorney's fees; and to pay the costs of the suit.
In his Answer, petitioner admitted that the lot had been mortgaged
to the Associated Banking Corporation (now Associated Citizens
Bank). He contended, however, that the complaint did not state a
cause of action; that the real property in interest was the Testate
Estate of Angela M. Butte, which should have been joined as a
party defendant; that the case amounted to a claim against the
Estate of Angela M. Butte and should have been filed in Special
Proceedings No. A-17910 before the Probate Court in Quezon City;
and that, if as alleged in the complaint, the property had been
assigned to Tomas L. Parpana, as special administrator of the
Estate of Ramon Papa, Jr., said estate should be impleaded.
Petitioner, likewise, claimed that he could not recall in detail the
transaction which allegedly occurred in 1973; that he did not have
TCT No. 28993 in his possession; that he could not be held
personally liable as he signed the deed merely as attorney-in-fact
of said Angela M. Butte. Finally, petitioner asseverated that as a
result of the filing of the case, he was compelled to hire the
services of counsel for a fee of P20,000.00 for which respondents
should be held liable.
Upon his motion, herein private respondent Delfin Jao was allowed
to intervene in the case. Making common cause with respondents
Valencia and Pearroyo, respondent Jao alleged that the subject lot
which had been sold to respondent Pearroyo through respondent
Valencia was in turn sold to him on 20 August 1973 for the sum of
P71,500.00, upon his paying earnest money in the amount of
P5,000.00. He, therefore, prayed that judgment be rendered in
favor of respondents, the latter in turn be ordered to execute in his
favor the appropriate deed of conveyance covering the property in
question and to turn over to him the rentals which aforesaid
respondents sought to collect from petitioner Myron V. Papa.
Respondent Jao, likewise, averred that as a result of petitioner's
refusal to deliver the title to the property to respondents Valencia
and Pearroyo, who in turn failed to deliver the said title to him, he
suffered mental anguish and serious anxiety for which he sought
payment of moral damages; and, additionally, the payment of
attorney's fees and costs.
For his part, petitioner, as administrator of the Testate Estate of
Angela M. Butte, filed a third-party complaint against herein private
respondents, spouses Arsenio B. Reyes and Amanda Santos
(respondent Reyes spouses, for short). He averred, among other's
that the late Angela M. Butte was the owner of the subject
property; that due to non-payment of real estate tax said property
was sold at public auction the City Treasurer of Quezon City to the
respondent Reyes spouses on 21 January 1980 for the sum of
P14,000.00; that the one-year period of redemption had expired;
that respondents Valencia and Pearroyo had sued petitioner Papa
as administrator of the estate of Angela M. Butte, for the delivery of
the title to the property; that the same aforenamed respondents
had acknowledged that the price paid by them was insufficient, and
that they were willing to add a reasonable amount or a minimum of
P55,000.00 to the price upon delivery of the property, considering
that the same was estimated to be worth P143,000.00; that
petitioner was willing to reimburse respondents Reyes spouses
whatever amount they might have paid for taxes and other
charges, since the subject property was still registered in the name
of the late Angela M. Butte; that it was inequitable to allow
respondent Reyes spouses to acquire property estimated to be
worth P143,000.00, for a measly sum of P14,000.00. Petitioner
prayed that judgment be rendered canceling the tax sale to
respondent Reyes spouses; restoring the subject property to him
upon payment by him to said respondent Reyes spouses of the
amount of P14,000.00, plus legal interest; and, ordering
respondents Valencia and Pearroyo to pay him at least P55,000.00
plus everything they might have to pay the Reyes spouses in
recovering the property.
Respondent Reyes spouses in their Answer raised the defense of
prescription of petitioner's right to redeem the property.
At the trial, only respondent Pearroyo testified. All the other
parties only submitted documentary proof.
On 29 June 1987, the trial court rendered a decision, the dispositive
portion of which reads:
WHEREUPON, judgment is hereby rendered as follows:
1) Allowing defendant to redeem from third-party
defendants and ordering the latter to allow the former to
redeem the property in question, by paying the sum of
P14,000.00 plus legal interest of 12% thereon from January
21, 1980;
2) Ordering defendant to execute a Deed of Absolute Sale in
favor of plaintiff Felix Pearroyo covering the property in
question and to deliver peaceful possession and enjoyment
of the said property to the said plaintiff, free from any liens
and encumbrances;
Should this not be possible, for any reason not attributable
to defendant, said defendant is ordered to pay to plaintiff
Felix Pearroyo the sum of P45,000.00 plus legal interest of
12% from June 15, 1973;
3) Ordering plaintiff Felix Pearroyo to execute and deliver
to intervenor a deed of absolute sale over the same
property, upon the latter's payment to the former of the
balance of the purchase price of P71,500.00;
Should this not be possible, plaintiff Felix Pearroyo is
ordered to pay intervenor the sum of P5,000.00 plus legal
interest of 12% from August 23, 1973; and
4) Ordering defendant to pay plaintiffs the amount of
P5,000.00 for and as attorney's fees and litigation expenses.
SO ORDERED. 1
Petitioner appealed the aforesaid decision of the trial court to the
Court of Appeals, alleging among others that the sale was never
"consummated" as he did not encash the check (in the amount of
P40,000.00) given by respondents Valencia and Pearroyo in
payment of the full purchase price of the subject lot. He maintained
that what said respondent had actually paid was only the amount
of P5,000.00 (in cash) as earnest money.
Respondent Reyes spouses, likewise, appealed the above decision.
However, their appeal was dismissed because of failure to file their
appellant's brief.
On 27 January 1992, the Court of Appeals rendered a decision,
affirming with modification the trial court's decision, thus:
WHEREFORE, the second paragraph of the dispositive
portion of the appealed decision is MODIFIED, by ordering
the defendant-appellant to deliver to plaintiff-appellees the
owner's duplicate of TCT No. 28993 of Angela M. Butte and
the peaceful possession and enjoyment of the lot in
question or, if the owner's duplicate certificate cannot be
produced, to authorize the Register of Deeds to cancel it and
issue a certificate of title in the name of Felix Pearroyo. In
all other respects, the decision appealed from is AFFIRMED.
Costs against defendant-appellant Myron C. Papa.
SO ORDERED. 2
In affirming the trial court's decision, respondent court held that
contrary to petitioner's claim that he did not encash the aforesaid
check, and therefore, the sale was not consummated, there was no
evidence at all that petitioner did not, in fact, encash said check.
On the other hand, respondent Pearroyo testified in court that
petitioner Papa had received the amount of P45,000.00 and issued
receipts therefor. According to respondent court, the presumption is
that the check was encashed, especially since the payment by
check was not denied by defendant-appellant (herein petitioner)
who, in his Answer, merely alleged that he "can no longer recall the
transaction which is supposed to have happened 10 years ago." 3
On petitioner's claim that he cannot be held personally liable as he
had acted merely as attorney-in-fact of the owner, Angela M. Butte,
respondent court held that such contention is without merit. This
action was not brought against him in his personal capacity, but in
his capacity as the administrator of the Testate Estate of Angela M.
Butte. 4
On petitioner's contention that the estate of Angela M. Butte should
have been joined in the action as the real party in interest,
respondent court held that pursuant to Rule 3, Section 3 of the
Rules of Court, the estate of Angela M. Butte does not have to be
joined in the action. Likewise, the estate of Ramon Papa, Jr., is not
an indispensable party under Rule 3, Section 7 of the same Rules.
For the fact is that Ramon Papa, Jr., or his estate, was not a party to
the Deed of Absolute Sale, and it is basic law that contracts bind
only those who are parties thereto. 5
Respondent court observed that the conditions under which the
mortgage rights of the bank were assigned are not clear. In any
case, any obligation which the estate of Angela M. Butte might
have to the estate of Ramon Papa, Jr. is strictly between them.
Respondents Valencia and Pearroyo are not bound by any such
obligation.
Petitioner filed a motion for reconsideration of the above decision,
which motion was denied by respondent Court of Appeals.
Hence, this petition wherein petitioner raises the following issues:
I. THE CONCLUSION OR FINDING OF THE COURT OF APPEALS
THAT THE SALE IN QUESTION WAS CONSUMMATED IS
GROUNDED ON SPECULATION OR CONJECTURE, AND IS
CONTRARY TO THE APPLICABLE LEGAL PRINCIPLE.
II. THE COURT OF APPEALS, IN MODIFYING THE DECISION OF
THE TRIAL COURT, ERRED BECAUSE IT, IN EFFECT,
CANCELLED OR NULLIFIED AN ASSIGNMENT OF THE SUBJECT
PROPERTY IN FAVOR OF THE ESTATE OF RAMON PAPA, JR.
WHICH IS NOT A PARTY IN THIS CASE.
III. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT
THE ESTATE OF ANGELA M. BUTTE AND THE ESTATE OF
RAMON PAPA, JR. ARE INDISPENSABLE PARTIES IN THIS
CASE. 6
Petitioner argues that respondent Court of Appeals erred in
concluding that alleged sale of the subject property had been
consummated. He contends that such a conclusion is based on the
erroneous presumption that the check (in the amount of
P40,000.00) had been cashed, citing Art. 1249 of the Civil Code,
which provides, in part, that payment by checks shall produce the
effect of payment only when they have been cashed or when
through the fault of the creditor they have been
impaired. 7 Petitioner insists that he never cashed said check; and,
such being the case, its delivery never produced the effect of
payment. Petitioner, while admitting that he had issued receipts for
the payments, asserts that said receipts, particularly the receipt of
PCIB Check No. 761025 in the amount of P40,000.00, do not prove
payment. He avers that there must be a showing that said check
had been encashed. If, according to petitioner, the check had been
encashed, respondent Pearroyo should have presented PCIB
Check No. 761025 duly stamped received by the payee, or at least
its microfilm copy.
Petitioner finally avers that, in fact, the consideration for the sale
was still in the hands of respondents Valencia and Pearroyo, as
evidenced by a letter addressed to him in which said respondents
wrote, in part:
. . . Please be informed that I had been authorized by Dr.
Ramon Papa, Jr., heir of Mrs. Angela M. Butte to pay you the
aforementioned amount of P75,000.00 for the release and
cancellation of subject property's mortgage. The money is
with me and if it is alright with you, I would like to tender the
payment as soon as possible. . . . 8
We find no merit in petitioner's arguments.
It is an undisputed fact that respondents Valencia and Pearroyo
had given petitioner Myron C. Papa the amounts of Five Thousand
Pesos (P5,000.00) in cash on 24 May 1973, and Forty Thousand
Pesos (P40,000.00) in check on 15 June 1973, in payment of the
purchase price of the subject lot. Petitioner himself admits having
received said amounts, 9 and having issued receipts
10
therefor. Petitioner's assertion that he never encashed the
aforesaid check is not substantiated and is at odds with his
statement in his answer that "he can no longer recall the
transaction which is supposed to have happened 10 years ago."
After more than ten (10) years from the payment in party by cash
and in part by check, the presumption is that the check had been
encashed. As already stated, he even waived the presentation of
oral evidence.
Granting that petitioner had never encashed the check, his failure
to do so for more than ten (10) years undoubtedly resulted in the
impairment of the check through his unreasonable and unexplained
delay.
While it is true that the delivery of a check produces the effect of
payment only when it is cashed, pursuant to Art. 1249 of the Civil
Code, the rule is otherwise if the debtor is prejudiced by the
creditor's unreasonable delay in presentment. The acceptance of a
check implies an undertaking of due diligence in presenting it for
payment, and if he from whom it is received sustains loss by want
of such diligence, it will be held to operate as actual payment of the
debt or obligation for which it was given. 11 It has, likewise, been
held that if no presentment is made at all, the drawer cannot be
held liable irrespective of loss or injury 12 unless presentment is
otherwise excused. This is in harmony with Article 1249 of the Civil
Code under which payment by way of check or other negotiable
instrument is conditioned on its being cashed, except when through
the fault of the creditor, the instrument is impaired. The payee of a
check would be a creditor under this provision and if its no-
payment is caused by his negligence, payment will be deemed
effected and the obligation for which the check was given as
conditional payment will be discharged. 13
Considering that respondents Valencia and Pearroyo had fulfilled
their part of the contract of sale by delivering the payment of the
purchase price, said respondents, therefore, had the right to
compel petitioner to deliver to them the owner's duplicate of TCT
No. 28993 of Angela M. Butte and the peaceful possession and
enjoyment of the lot in question.
With regard to the alleged assignment of mortgage rights,
respondent Court of Appeals has found that the conditions under
which said mortgage rights of the bank were assigned are not clear.
Indeed, a perusal of the original records of the case would show
that there is nothing there that could shed light on the transactions
leading to the said assignment of rights; nor is there any evidence
on record of the conditions under which said mortgage rights were
assigned. What is certain is that despite the said assignment of
mortgage rights, the title to the subject property has remained in
the name of the late Angela M. Butte. 14 This much is admitted by
petitioner himself in his answer to respondent's complaint as well
as in the third-party complaint that petitioner filed against
respondent-spouses Arsenio B. Reyes and Amanda
Santos. 15 Assuming arquendo that the mortgage rights of the
Associated Citizens Bank had been assigned to the estate of Ramon
Papa, Jr., and granting that the assigned mortgage rights validly
exists and constitute a lien on the property, the estate may file the
appropriate action to enforce such lien. The cause of action for
specific performance which respondents Valencia and Pearroyo
have against petitioner is different from the cause of action which
the estate of Ramon Papa, Jr. may have to enforce whatever rights
or liens it has on the property by reason of its being an alleged
assignee of the bank's rights of mortgage.
Finally, the estate of Angela M. Butte is not an indispensable party.
Under Section 3 of Rule 3 of the Rules of Court, an executor or
administrator may sue or be sued without joining the party for
whose benefit the action is presented or defended, thus:
Sec. 3. Representative parties. A trustee of an express
trust, a guardian, executor or administrator, or a party
authorized by statute, may sue or be sued without joining
the party for whose benefit the action is presented or
defended; but the court may, at any stage of the
proceedings, order such beneficiary to be made a party. An
agent acting in his own name and for the benefit of an
undisclosed principal may sue or be sued without joining the
principal except when the contract involves things belonging
to the principal. 16
Neither is the estate of Ramon Papa, Jr. an indispensable party
without whom, no final determination of the action can be had.
Whatever prior and subsisting mortgage rights the estate of Ramon
Papa, Jr. has over the property may still be enforced regardless of
the change in ownership thereof.
WHEREFORE, the petition for review is hereby DENIED and the
Decision of the Court of Appeals, dated 27 January 1992 is
AFFIRMED.
SO ORDERED.
Davide, Jr., Bellosillo and Vitug, JJ., concur.
G.R. No. 141968 February 12, 2001
THE INTERNATIONAL CORPORATE BANK (now UNION BANK
OF THE PHILIPPINES), petitioner,
vs.
SPS. FRANCIS S. GUECO and MA. LUZ E. GUECO, respondents.
KAPUNAN, J.:
The respondent Gueco Spouses obtained a loan from petitioner
International Corporate Bank (now Union Bank of the Philippines) to
purchase a car - a Nissan Sentra 1600 4DR, 1989 Model. In
consideration thereof, the Spouses executed promissory notes
which were payable in monthly installments and chattel mortgage
over the car to serve as security for the notes.1wphi1.nt
The Spouses defaulted in payment of installments. Consequently,
the Bank filed on August 7, 1995 a civil action docketed as Civil
Case No. 658-95 for "Sum of Money with Prayer for a Writ of
Replevin"1 before the Metropolitan Trial Court of Pasay City, Branch
45.2 On August 25, 1995, Dr. Francis Gueco was served summons
and was fetched by the sheriff and representative of the bank for a
meeting in the bank premises. Desi Tomas, the Bank's Assistant
Vice President demanded payment of the amount of P184,000.00
which represents the unpaid balance for the car loan. After some
negotiations and computation, the amount was lowered to
P154,000.00, However, as a result of the non-payment of the
reduced amount on that date, the car was detained inside the
bank's compound.
On August 28, 1995, Dr. Gueco went to the bank and talked with its
Administrative Support, Auto Loans/Credit Card Collection Head,
Jefferson Rivera. The negotiations resulted in the further reduction
of the outstanding loan to P150,000.00.
On August 29, 1995, Dr. Gueco delivered a manager's check in
amount of P150,000.00 but the car was not released because of his
refusal to sign the Joint Motion to Dismiss. It is the contention of the
Gueco spouses and their counsel that Dr. Gueco need not sign the
motion for joint dismissal considering that they had not yet filed
their Answer. Petitioner, however, insisted that the joint motion to
dismiss is standard operating procedure in their bank to effect a
compromise and to preclude future filing of claims, counterclaims
or suits for damages.
After several demand letters and meetings with bank
representatives, the respondents Gueco spouses initiated a civil
action for damages before the Metropolitan Trial Court of Quezon
City, Branch 33. The Metropolitan Trial Court dismissed the
complaint for lack of merit.3
On appeal to the Regional Trial Court, Branch 227 of Quezon City,
the decision of the Metropolitan Trial Court was reversed. In its
decision, the RTC held that there was a meeting of the minds
between the parties as to the reduction of the amount of
indebtedness and the release of the car but said agreement did not
include the signing of the joint motion to dismiss as a
condition sine qua non for the effectivity of the compromise. The
court further ordered the bank:
1. to return immediately the subject car to the appellants in
good working condition; Appellee may deposit the
Manager's check - the proceeds of which have long been
under the control of the issuing bank in favor of the appellee
since its issuance, whereas the funds have long been paid
by appellants to .secure said Manager's Check, over which
appellants have no control;
2. to pay the appellants the sum of P50,000.00 as moral
damages; P25,000.00 as exemplary damages, and
P25,000.00 as attorney's fees, and
3. to pay the cost of suit.
In other respect, the decision of the Metropolitan Trial Court
Branch 33 is hereby AFFIRMED.4
The case was elevated to the Court of Appeals, which on February
17, 2000, issued the assailed decision, the decretal portion of which
reads:
WHEREFORE, premises considered, the petition for review
on certiorari is hereby DENIED and the Decision of the
Regional Trial Court of Quezon City, Branch 227, in Civil Case
No. Q-97-31176, for lack of any reversible error, is
AFFIRMED in toto. Costs against petitioner.
SO ORDERED.5
The Court of Appeals essentially relied on the respect accorded to
the finality of the findings of facts by the lower court and on the
latter's finding of the existence of fraud which constitutes the basis
for the award of damages.
The petitioner comes to this Court by way of petition for review
on certiorari under Rule 45 of the Rules of Court, raising the
following assigned errors:
I
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE
WAS NO AGREEMENT WITH RESPECT TO THE EXECUTION OF
THE JOINT MOTION TO DISMISS AS A CONDITION FOR THE
COMPROMISE AGREEMENT.
II
THE COURT OF APPEALS ERRED IN GRANTING MORAL AND
EXEMPLARY DAMAGES AND ATTORNEY'S FEES IN FAVOR OF
THE RESPONDENTS.
III
THE COURT OF APPEALS ERRED IN HOLDING THAT THE
PETITIONER RETURN THE SUBJECT CAR TO THE
RESPONDENTS, WITHOUT MAKING ANY PROVISION FOR THE
ISSUANCE OF THE NEW MANAGER'S/CASHIER'S CHECK BY
THE RESPONDENTS IN FAVOR OF THE PETITIONER IN LIEU OF
THE ORIGINAL CASHIER'S CHECK THAT ALREADY BECAME
STALE.6
As to the first issue, we find for the respondents. The issue as to
what constitutes the terms of the oral compromise or any
subsequent novation is a question of fact that was resolved by the
Regional Trial Court and the Court of Appeals in favor of
respondents. It is well settled that the findings of fact of the lower
court, especially when affirmed by the Court of Appeals, are binding
upon this Court.7 While there are exceptions to this rule, 8 the
present case does not fall under anyone of them, the petitioner's
claim to the contrary, notwithstanding.
Being an affirmative allegation, petitioner has the burden of
evidence to prove his claim that the oral compromise entered into
by the parties on August 28, 1995 included the stipulation that the
parties would jointly file a motion to dismiss. This petitioner failed
to do. Notably, even the Metropolitan Trial Court, while ruling in
favor of the petitioner and thereby dismissing the complaint, did
not make a factual finding that the compromise agreement
included the condition of the signing of a joint motion to dismiss.
The Court of Appeals made the factual findings in this wise:
In support of its claim, petitioner presented the testimony of
Mr. Jefferson Rivera who related that respondent Dr. Gueco
was aware that the signing of the draft of the Joint Motion to
Dismiss was one of the conditions set by the bank for the
acceptance of the reduced amount of indebtedness and the
release of the car. (TSN, October 23, 1996, pp. 17-21, Rollo,
pp. 18, 5). Respondents, however, maintained that no such
condition was ever discussed during their meeting of August
28, 1995 (Rollo, p. 32).
The trial court, whose factual findings are entitled to respect
since it has the 'opportunity to directly observe the
witnesses and to determine by their demeanor on the stand
the probative value of their testimonies' (People vs. Yadao,
et al. 216 SCRA 1, 7 [1992]), failed to make a categorical
finding on the issue. In dismissing the claim of damages of
the respondents, it merely observed that respondents are
not entitled to indemnity since it was their unjustified
reluctance to sign of the Joint Motion to Dismiss that
delayed the release of the car. The trial court opined, thus:
'As regards the third issue, plaintiffs' claim for
damages is unavailing. First, the plaintiffs could have
avoided the renting of another car and could have
avoided this litigation had he signed the Joint Motion
to Dismiss. While it is true that herein defendant can
unilaterally dismiss the case for collection of sum of
money with replevin, it is equally true that there is
nothing wrong for the plaintiff to affix his signature in
the Joint Motion to Dismiss, for after all, the dismissal
of the case against him is for his own good and
benefit. In fact, the signing of the Joint Motion to
Dismiss gives the plaintiff three (3) advantages. First,
he will recover his car. Second, he will pay his
obligation to the bank on its reduced amount of
P150,000.00 instead of its original claim of
P184,985.09. And third, the case against him will be
dismissed. Plaintiffs, likewise, are not entitled to the
award of moral damages and exemplary damages as
there is no showing that the defendant bank acted
fraudulently or in bad faith.' (Rollo, p. 15)
The Court has noted, however, that the trial court, in its
findings of facts, clearly indicated that the agreement of the
parties on August 28, 1995 was merely for the lowering of
the price, hence -
'xxx On August 28, 1995, bank representative
Jefferson Rivera and plaintiff entered into an oral
compromise agreement, whereby the original claim
of the bank of P184,985.09 was reduced to
P150,000.00 and that upon payment of which,
plaintiff was informed that the subject motor vehicle
would be released to him.' (Rollo, p. 12)
The lower court, on the other hand, expressly made a
finding that petitioner failed to include the aforesaid signing
of the Joint Motion to Dismiss as part of the agreement. In
dismissing petitioner's claim, the lower court declared, thus:
'If it is true, as the appellees allege, that the signing
of the joint motion was a condition sine qua nonfor
the reduction of the appellants' obligation, it is only
reasonable and logical to assume that the joint
motion should have been shown to Dr. Gueco in the
August 28, 1995 meeting. Why Dr. Gueco was not
given a copy of the joint motion that day of August
28, 1995, for his family or legal counsel to see to be
brought signed, together with the P150,000.00 in
manager's check form to be submitted on the
following day on August 29, 1995? (sic) [I]s a
question whereby the answer up to now eludes this
Court's comprehension. The appellees would like this
Court to believe that Dr Gueco was informed by Mr.
Rivera Rivera of the bank requirement of signing the
joint motion on August 28, 1995 but he did not
bother to show a copy thereof to his family or legal
counsel that day August 28, 1995. This part of the
theory of appellee is too complicated for any simple
oral agreement. The idea of a Joint Motion to Dismiss
being signed as a condition to the pushing through a
deal surfaced only on August 29, 1995.
 'This Court is not convinced by the appellees'
posturing. Such claim rests on too slender a frame,
being inconsistent with human experience.
Considering the effect of the signing of the Joint
Motion to Dismiss on the appellants' substantive
right, it is more in accord with human experience to
expect Dr. Gueco, upon being shown the Joint Motion
to Dismiss, to refuse to pay the Manager's Check and
for the bank to refuse to accept the manager's check.
The only logical explanation for this inaction is that
Dr. Gueco was not shown the Joint Motion to Dismiss
in the meeting of August 28, 1995, bolstering his
claim that its signing was never put into
consideration in reaching a compromise.' xxx.9
We see no reason to reverse.
Anent the issue of award of damages, we find the claim of
petitioner meritorious. In finding the petitioner liable for damages,
both .the Regional Trial Court and the Court of Appeals ruled that
there was fraud on the part of the petitioner. The CA thus declared:
The lower court's finding of fraud which became the basis of
the award of damages was likewise sufficiently proven.
Fraud under Article 1170 of the Civil Code of the Philippines,
as amended is the 'deliberate and intentional evasion of the
normal fulfillment of obligation' When petitioner refused to
release the car despite respondent's tender of payment in
the form of a manager's check, the former intentionally
evaded its obligation and thereby became liable for moral
and exemplary damages, as well as attorney's fees.10
We disagree.
Fraud has been defined as the deliberate intention to cause
damage or prejudice. It is the voluntary execution of a wrongful act,
or a willful omission, knowing and intending the effects which
naturally and necessarily arise from such act or omission; the fraud
referred to in Article 1170 of the Civil Code is the deliberate and
intentional evasion of the normal fulfillment of obligation. 11 We fail
to see how the act of the petitioner bank in requiring the
respondent to sign the joint motion to dismiss could constitute as
fraud. True, petitioner may have been remiss in informing Dr. Gueco
that the signing of a joint motion to dismiss is a standard operating
procedure of petitioner bank. However, this can not in anyway have
prejudiced Dr. Gueco. The motion to dismiss was in fact also for the
benefit of Dr. Gueco, as the case filed by petitioner against it before
the lower court would be dismissed with prejudice. The whole point
of the parties entering into the compromise agreement was in order
that Dr. Gueco would pay his outstanding account and in return
petitioner would return the car and drop the case for money and
replevin before the Metropolitan Trial Court. The joint motion to
dismiss was but a natural consequence of the compromise
agreement and simply stated that Dr. Gueco had fully settled his
obligation, hence, the dismissal of the case. Petitioner's act of
requiring Dr. Gueco to sign the joint motion to dismiss can not be
said to be a deliberate attempt on the part of petitioner to renege
on the compromise agreement of the parties. It should, likewise, be
noted that in cases of breach of contract, moral damages may only
be awarded when the breach was attended by fraud or bad
faith.12 The law presumes good faith. Dr. Gueco failed to present an
iota of evidence to overcome this presumption. In fact, the act of
petitioner bank in lowering the debt of Dr. Gueco from P184,000.00
to P150,000.00 is indicative of its good faith and sincere desire to
settle the case. If respondent did suffer any damage, as a result of
the withholding of his car by petitioner, he has only himself to
blame. Necessarily, the claim for exemplary damages must fait. In
no way, may the conduct of petitioner be characterized as "wanton,
fraudulent, reckless, oppressive or malevolent."13
We, likewise, find for the petitioner with respect to the third
assigned error. In the meeting of August 29, 1995, respondent Dr.
Gueco delivered a manager's check representing the reduced
amount of P150,000.00. Said check was given to Mr. Rivera, a
representative of respondent bank. However, since Dr. Gueco
refused to sign the joint motion to dismiss, he was made to execute
a statement to the effect that he was withholding the payment of
the check.14 Subsequently, in a letter addressed to Ms. Desi Tomas,
vice president of the bank, dated September 4, 1995, Dr. Gueco
instructed the bank to disregard the 'hold order" letter and
demanded the immediate release of his car, 15 to which the former
replied that the condition of signing the joint motion to dismiss
must be satisfied and that they had kept the check which could be
claimed by Dr. Gueco anytime.16 While there is controversy as to
whether the document evidencing the order to hold payment of the
check was formally offered as evidence by petitioners, 17 it appears
from the pleadings that said check has not been encashed.
The decision of the Regional Trial Court, which was affirmed in
toto by the Court of Appeals, orders the petitioner:
 1. to return immediately the subject car to the appellants in
good working condition. Appellee may deposit the
Manager's Check - the proceeds of which have long been
under the control of the issuing bank in favor of the appellee
since its issuance, whereas the funds have long been paid
by appellants to secure said Manager's Check over which
appellants have no control.18
Respondents would make us hold that petitioner should return the
car or its value and that the latter, because of its own negligence,
should suffer the loss occasioned by the fact that the check had
become stale.19 It is their position that delivery of the manager's
check produced the effect of payment 20 and, thus, petitioner was
negligent in opting not to deposit or use said check. Rudimentary
sense of justice and fair play would not countenance respondents'
position.
A stale check is one which has not been presented for payment
within a reasonable time after its issue. It is valueless and,
therefore, should not be paid. Under the negotiable instruments
law, an instrument not payable on demand must be presented for
payment on the day it falls due. When the instrument is payable on
demand, presentment must be made within a reasonable time after
its issue. In the case of a bill of exchange, presentment is sufficient
if made within a reasonable time after the last negotiation thereof. 21
A check must be presented for payment within a reasonable time
after its issue,22 and in determining what is a "reasonable time,"
regard is to be had to the nature of the instrument, the usage of
trade or business with respect to such instruments, and the facts of
the particular case.23 The test is whether the payee employed such
diligence as a prudent man exercises in his own affairs. 24 This is
because the nature and theory behind the use of a check points to
its immediate use and payability. In a case, a check payable on
demand which was long overdue by about two and a half (2-1/2)
years was considered a stale check.25 Failure of a payee to encash a
check for more than ten (10) years undoubtedly resulted in the
check becoming stale.26 Thus, even a delay of one (1) week 27 or two
(2) days,28 under the specific circumstances of the cited cases
constituted unreasonable time as a matter of law.
In the case at bar, however, the check involved is not an ordinary
bill of exchange but a manager's check. A manager's check is one
drawn by the bank's manager upon the bank itself. It is similar to a
cashier's check both as to effect and use. A cashier's check is a
check of the bank's cashier on his own or another check. In effect,
it is a bill of exchange drawn by the cashier of a bank upon the
bank itself, and accepted in advance by the act of its issuance. 29 It
is really the bank's own check and may be treated as a promissory
note with the bank as a maker. 30The check becomes the primary
obligation of the bank which issues it and constitutes its written
promise to pay upon demand. The mere issuance of it is considered
an acceptance thereof. If treated as promissory note, the drawer
would be the maker and in which case the holder need not prove
presentment for payment or present the bill to the drawee for
acceptance.31
Even assuming that presentment is needed, failure to present for
payment within a reasonable time will result to the discharge of the
drawer only to the extent of the loss caused by the delay. 32 Failure
to present on time, thus, does not totally wipe out all liability. In
fact, the legal situation amounts to an acknowledgment of liability
in the sum stated in the check. In this case, the Gueco spouses
have not alleged, much less shown that they or the bank which
issued the manager's check has suffered damage or loss caused by
the delay or non-presentment. Definitely, the original obligation to
pay certainly has not been erased.
It has been held that, if the check had become stale, it becomes
imperative that the circumstances that caused its non-presentment
be determined.33 In the case at bar, there is no doubt that the
petitioner bank held on the check and refused to encash the same
because of the controversy surrounding the signing of the joint
motion to dismiss. We see no bad faith or negligence in this
position taken by the Bank.1wphi1.nt
WHEREFORE, premises considered, the petition for review is given
due course. The decision of the Court of Appeals affirming the
decision of the Regional Trial Court is SET ASIDE. Respondents are
further ordered to pay the original obligation amounting to
P150,000.00 to the petitioner upon surrender or cancellation of the
manager's check in the latter's possession, afterwhich, petitioner is
to return the subject motor vehicle in good working condition.
SO ORDERED.
Davide, Jr., Puno, Pardo, and Ynares-Santiago, JJ., concur.
G.R. No. 170912 April 19, 2010
ROBERT DINO, Petitioner,
vs.
MARIA LUISA JUDAL-LOOT, joined by her husband VICENTE
LOOT, Respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for review1 of the 16 August 2005 Decision 2 and 30
November 2005 Resolution3 of the Court of Appeals in CA-G.R. CV
No. 57994. The Court of Appeals affirmed the decision of the
Regional Trial Court, 7th Judicial Region, Branch 56, Mandaue City
(trial court), with the deletion of the award of interest, moral
damages, attorneys fees and litigation expenses. The trial court
ruled that respondents Maria Luisa Judal-Loot and Vicente Loot are
holders in due course of Metrobank Check No. C-MA 142119406 CA
and ordered petitioner Robert Dino as drawer, together with co-
defendant Fe Lobitana as indorser, to solidarily pay respondents the
face value of the check, among others.
The Facts
Sometime in December 1992, a syndicate, one of whose members
posed as an owner of several parcels of land situated in Canjulao,
Lapu-lapu City, approached petitioner and induced him to lend the
group P3,000,000.00 to be secured by a real estate mortgage on
the properties. A member of the group, particularly a woman
pretending to be a certain Vivencia Ompok Consing, even offered to
execute a Deed of Absolute Sale covering the properties, instead of
the usual mortgage contract. 4 Enticed and convinced by the
syndicates offer, petitioner issued three Metrobank checks totaling
P3,000,000.00, one of which is Check No. C-MA-142119406-CA
postdated 13 February 1993 in the amount of P1,000,000.00
payable to Vivencia Ompok Consing and/or Fe Lobitana. 5
Upon scrutinizing the documents involving the properties,
petitioner discovered that the documents covered rights over
government properties. Realizing he had been deceived, petitioner
advised Metrobank to stop payment of his checks. However, only
the payment of Check No. C-MA- 142119406-CA was ordered
stopped. The other two checks were already encashed by the
payees.
Meanwhile, Lobitana negotiated and indorsed Check No. C-MA-
142119406-CA to respondents in exchange for cash in the sum of
P948,000.00, which respondents borrowed from Metrobank and
charged against their credit line. Before respondents accepted the
check, they first inquired from the drawee bank, Metrobank, Cebu-
Mabolo Branch which is also their depositary bank, if the subject
check was sufficiently funded, to which Metrobank answered in the
positive. However, when respondents deposited the check with
Metrobank, Cebu-Mabolo Branch, the same was dishonored by the
drawee bank for reason "PAYMENT STOPPED."
Respondents filed a collection suit6 against petitioner and Lobitana
before the trial court. In their Complaint, respondents alleged,
among other things, that they are holders in due course and for
value of Metrobank Check No. C-MA-142119406-CA and that they
had no prior information concerning the transaction between
defendants.
In his Answer, petitioner denied respondents allegations that "on
the face of the subject check, no condition or limitation was
imposed" and that respondents are holders in due course and for
value of the check. For her part, Lobitana denied the allegations in
the complaint and basically claimed that the transaction leading to
the issuance of the subject check is a sale of a parcel of land by
Vivencia Ompok Consing to petitioner and that she was made a
payee of the check only to facilitate its discounting.
The trial court ruled in favor of respondents and declared them due
course holders of the subject check, since there was no privity
between respondents and defendants. The dispositive portion of
the 14 March 1996 Decision of the trial court reads:
In summation, this Court rules for the Plaintiff and against the
Defendants and hereby orders:
1.) defendants to pay to Plaintiff, and severally, the amount
of P1,000,000.00 representing the face value of subject
Metrobank check;
2.) to pay to Plaintiff herein, jointly and severally, the sum of
P101,748.00 for accrued and paid interest;
 3.) to pay to Plaintiff, jointly and severally, moral damages
in the amount of P100,000.00;
4.) to pay to Plaintiff, jointly and severally, the sum of
P200,000.00 for attorneys fees; and
5.) to pay to Plaintiff, jointly and severally, litigation
expenses in the sum of P10,000.00 and costs of the suit.
SO ORDERED.7
Only petitioner filed an appeal. Lobitana did not appeal the trial
courts judgment.
The Ruling of the Court of Appeals
The Court of Appeals affirmed the trial courts finding that
respondents are holders in due course of Metrobank Check No. C-
MA- 142119406-CA. The Court of Appeals pointed out that
petitioners own admission that respondents were never parties to
the transaction among petitioner, Lobitana, Concordio Toring,
Cecilia Villacarlos, and Consing, proved respondents lack of
knowledge of any infirmity in the instrument or defect in the title of
the person negotiating it. Moreover, respondents verified from
Metrobank whether the check was sufficiently funded before they
accepted it. Therefore, respondents must be excluded from the
ambit of petitioners stop payment order.
The Court of Appeals modified the trial courts decision by deleting
the award of interest, moral damages, attorneys fees and litigation
expenses. The Court of Appeals opined that petitioner "was only
exercising (although incorrectly), what he perceived to be his right
to stop the payment of the check which he rediscounted." The
Court of Appeals ruled that petitioner acted in good faith in
ordering the stoppage of payment of the subject check and thus,
he must not be made liable for those amounts.
In its 16 August 2005 Decision, the Court of Appeals affirmed the
trial courts decision with modifications, thus:
WHEREFORE, premises considered, finding no reversible error in
the decision of the lower court, WE hereby DISMISS the appeal and
AFFIRM the decision of the court a quo with modifications that the
award of interest, moral damages, attorneys fees and litigation
expenses be deleted.
No pronouncement as to costs.
SO ORDERED.8
In its 30 November 2005 Resolution, the Court of Appeals denied
petitioners motion for reconsideration.
In denying the petitioners motion for reconsideration, the Court of
Appeals noted that petitioner raised the defense that the check is a
crossed check for the first time on appeal (particularly in the
motion for reconsideration). The Court of Appeals rejected such
defense considering that to entertain the same would be offensive
to the basic rules of fair play, justice, and due process.
Hence, this petition.
The Issues
Petitioner raises the following issues:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT THE
RESPONDENTS WERE HOLDERS IN DUE COURSE. THE FACT
THAT METROBANK CHECK NO. 142119406 IS A CROSSED
CHECK CONSTITUTES SUFFICIENT WARNING TO THE
RESPONDENTS TO EXERCISE EXTRAORDINARY DILIGENCE TO
DETERMINE THE TITLE OF THE INDORSER.
II. THE COURT OF APPEALS ERRED IN DENYING PETITIONERS
MOTION FOR RECONSIDERATION UPON THE GROUND THAT
THE ARGUMENTS RELIED UPON HAVE ONLY BEEN RAISED
FOR THE FIRST TIME. EQUITY DEMANDS THAT THE COURT OF
APPEALS SHOULD HAVE MADE AN EXCEPTION TO PREVENT
THE COMMISSION OF MANIFEST WRONG AND INJUSTICE
UPON THE PETITIONER.9
The Ruling of this Court
The petition is meritorious.
Respondents point out that petitioner raised the defense that
Metrobank Check No. C-MA-142119406-CA is a crossed check for
the first time in his motion for reconsideration before the Court of
Appeals. Respondents insist that issues not raised during the trial
cannot be raised for the first time on appeal as it would be
offensive to the elementary rules of fair play, justice and due
process. Respondents further assert that a change of theory on
appeal is improper.
In his Answer, petitioner specifically denied, among others, (1)
Paragraph 4 of the Complaint, concerning the allegation that on the
face of the subject check, no condition or limitation was imposed,
and (2) Paragraph 8 of the Complaint, regarding the allegation that
respondents were holders in due course and for value of the subject
check. In his "Special Affirmative Defenses," petitioner claimed that
"for want or lack of the prestation," he could validly stop the
payment of his check, and that by rediscounting petitioners check,
respondents "took the risk of what might happen on the check."
Essentially, petitioner maintained that respondents are not holders
in due course of the subject check, and as such, respondents could
not recover any liability on the check from petitioner.
Indeed, petitioner did not expressly state in his Answer or raise
during the trial that Metrobank Check No. C-MA-142119406-CA is a
crossed check. It must be stressed, however, that petitioner
consistently argues that respondents are not holders in due course
of the subject check, which is one of the possible effects of crossing
a check. The act of crossing a check serves as a warning to the
holder that the check has been issued for a definite purpose so that
the holder thereof must inquire if he has received the check
pursuant to that purpose; otherwise, he is not a holder in due
course.10 Contrary to respondents view, petitioner never changed
his theory, that respondents are not holders in due course of the
subject check, as would violate fundamental rules of justice, fair
play, and due process. Besides, the subject check was presented
and admitted as evidence during the trial and respondents did not
and in fact cannot deny that it is a crossed check.
In any event, the Court is clothed with ample authority to entertain
issues or matters not raised in the lower courts in the interest of
substantial justice.11 In Casa Filipina Realty v. Office of the
President,12 the Court held:
[T]he trend in modern-day procedure is to accord the courts broad
discretionary power such that the appellate court may consider
matters bearing on the issues submitted for resolution which the
parties failed to raise or which the lower court ignored. Since rules
of procedure are mere tools designed to facilitate the attainment of
justice, their strict and rigid application which would result in
technicalities that tend to frustrate rather than promote substantial
justice, must always be avoided. Technicality should not be allowed
to stand in the way of equitably and completely resolving the rights
and obligations of the parties.13
Having disposed of the procedural issue, the Court shall now
proceed to the merits of the case. The main issue is whether
respondents are holders in due course of Metrobank Check No. C-
MA 142119406 CA as to entitle them to collect the face value of the
check from its drawer or petitioner herein.
Section 52 of the Negotiable Instruments Law defines a 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 has been previously dishonored, if
such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no
notice of any infirmity in the instrument or defect in the title
of the person negotiating it.
In the case of a crossed check, as in this case, the following
principles must additionally be considered: A crossed check (a) may
not be encashed but only deposited in the bank; (b) may be
negotiated only once to one who has an account with a bank;
and (c) warns the holder that it has been issued for a definite
purpose so that the holder thereof must inquire if he has received
the check pursuant to that purpose; otherwise, he is not a holder in
due course.14
Based on the foregoing, respondents had the duty to ascertain the
indorsers, in this case Lobitanas, title to the check or the nature of
her possession. This respondents failed to do. Respondents
verification from Metrobank on the funding of the check does not
amount to determination of Lobitanas title to the check. Failing in
this respect, respondents are guilty of gross negligence amounting
to legal absence of good faith, 15 contrary to Section 52(c) of the
Negotiable Instruments Law. Hence, respondents are not deemed
holders in due course of the subject check.16
State Investment House v. Intermediate Appellate Court 17 squarely
applies to this case. There, New Sikatuna Wood Industries, Inc. sold
at a discount to State Investment House three post-dated crossed
checks, issued by Anita Pea Chua naming as payee New Sikatuna
Wood Industries, Inc. The Court found State Investment House not a
holder in due course of the checks. The Court also expounded on
the effect of crossing a check, thus:
Under usual practice, crossing a check is done by placing two
parallel lines diagonally on the left top portion of the check. The
crossing may be special wherein between the two parallel lines is
written the name of a bank or a business institution, in which case
the drawee should pay only with the intervention of that bank or
company, or crossing may be general wherein between two parallel
diagonal lines are written the words "and Co." or none at all as in
the case at bar, in which case the drawee should not encash the
same but merely accept the same for deposit.
The effect therefore of crossing a check relates to the mode of its
presentment for payment. Under Section 72 of the Negotiable
Instruments Law, presentment for payment to be sufficient must be
made (a) by the holder, or by some person authorized to receive
payment on his behalf x x x As to who the holder or authorized
person will be depends on the instructions stated on the face of the
check.
The three subject checks in the case at bar had been crossed
generally and issued payable to New Sikatuna Wood Industries, Inc.
which could only mean that the drawer had intended the same for
deposit only by the rightful person, i.e., the payee named therein.
Apparently, it was not the payee who presented the same for
payment and therefore, there was no proper presentment, and the
liability did not attach to the drawer.
Thus, in the absence of due presentment, the drawer did not
become liable. Consequently, no right of recourse is available to
petitioner against the drawer of the subject checks, private
respondent wife, considering that petitioner is not the proper party
authorized to make presentment of the checks in question.
In this case, there is no question that the payees of the check,
Lobitana or Consing, were not the ones who presented the check
for payment. Lobitana negotiated and indorsed the check to
respondents in exchange for P948,000.00. It was respondents who
presented the subject check for payment; however, the check was
dishonored for reason "PAYMENT STOPPED." In other words, it was
not the payee who presented the check for payment; and thus,
there was no proper presentment. As a result, liability did not
attach to the drawer. Accordingly, no right of recourse is available
to respondents against the drawer of the check, petitioner herein,
since respondents are not the proper party authorized to make
presentment of the subject check.
However, the fact that respondents are not holders in due course
does not automatically mean that they cannot recover on the
check.18 The Negotiable Instruments Law does not provide that a
holder who is not a holder in due course may not in any case
recover on the instrument. The only disadvantage of a holder who
is not in due course is that the negotiable instrument is subject to
defenses as if it were non-negotiable. 19 Among such defenses is the
absence or failure of consideration,20 which petitioner sufficiently
established in this case. Petitioner issued the subject check
supposedly for a loan in favor of Consings group, who turned out to
be a syndicate defrauding gullible individuals. Since there is in fact
no valid loan to speak of, there is no consideration for the issuance
of the check. Consequently, petitioner cannot be obliged to pay the
face value of the check.1avvphi1
Respondents can collect from the immediate indorser, 21 in this case
Lobitana. Significantly, Lobitana did not appeal the trial courts
decision, finding her solidarily liable to pay, among others, the face
value of the subject check. Therefore, the trial courts judgment has
long become final and executory as to Lobitana.
WHEREFORE, we GRANT the petition. We SET ASIDE the 16
August 2005 Decision and 30 November 2005 Resolution of the
Court of Appeals in CA-G.R. CV No. 57994.
SO ORDERED.
 The sole issue raised in this case is whether or not the private
respondent has a cause of action against the petitioners for their
encashment and payment to another person of certain crossed
checks issued in her favor.

The private respondent is engaged in the business of ready-to-wear

garments under the firm name "Melissa's RTW." She deals with,
among other customers, Robinson's Department Store, Payless
Department Store, Rempson Department Store, and the Corona
Bazaar.

These companies issued in payment of their respective accounts

crossed checks payable to Melissa's RTW in the amounts and on the
dates indicated below:

PAYOR BANK AMOUNT DATE

Payless Solid Bank P3,960.00 January 19, 1982

Robinson's FEBTC 4,140.00 December 18, 1981
Robinson's FEBTC 1,650.00 December 24, 1981
Robinson's FEBTC 1,980.00 January 12, 1982
Rempson TRB 1,575.00 January 9, 1982
Corona RCBC 2,500.00 December 22, 1981

When she went to these companies to collect on what she thought

were still unpaid accounts, she was informed of the issuance of the
above-listed crossed checks. Further inquiry revealed that the said
checks had been deposited with the Associated Bank (hereinafter,
"the Bank") and subsequently paid by it to one Rafael Sayson, one
of its "trusted depositors," in the words of its branch manager and
co-petitioner, Conrado Cruz, Sayson had not been authorized by
the private respondent to deposit and encash the said checks.

The private respondent sued the petitioners in the Regional Trial

G.R. No. 89802 May 7, 1992 Court of Quezon City for recovery of the total value of the checks
plus damages. After trial, judgment was rendered requiring them to
ASSOCIATED BANK and CONRADO CRUZ, petitioners, pay the private respondent the total value of the subject checks in
vs. the amount of P15,805.00 plus 12% interest, P50,000.00 actual
HON. COURT OF APPEALS, and MERLE V. REYES, doing damages, P25,000.00 exemplary damages, P5,000.00 attorney's
business under the name and style "Melissa's RTW," fees, and the costs of the suit. 1
respondents.
The petitioners appealed to the respondent court, reiterating their
CRUZ, J.: argument that the private respondent had no cause of action
against them and should have proceeded instead against the
companies that issued the checks. In disposing of this contention,
the Court of Appeals 2 said:
The cause of action of the appellee in the case at bar arose
from the illegal, anomalous and irregular acts of the
appellants in violating common banking practices to the
damage and prejudice of the appellees, in allowing to be
deposited and encashed as well as paying to improper
parties without the knowledge, consent, authority or
endorsement of the appellee which totalled P15,805.00, the
six (6) checks in dispute which were "crossed checks" or "for
payee's account only," the appellee being the payee.
The three (3) elements of a cause of action are present in
the case at bar, namely: (1) a right in favor of the plaintiff by
whatever means and under whatever law it arises or is
created; (2) an obligation on the part of the named
defendant to respect or not to violate such right; and (3) an
act or omission on the part of such defendant violative of
the right of the plaintiff or constituting a breach thereof.
(Republic Planters Bank vs. Intermediate Appellate Court,
131 SCRA 631).
And such cause of action has been proved by evidence of
great weight. The contents of the said checks issued by the
customers of the appellee had not been questioned. There is
no dispute that the same are crossed checks or for payee's
account only, which is Melissa's RTW. The appellee had
clearly shown that she had never authorized anyone to
deposit the said checks nor to encash the same; that the
appellants had allowed all said checks to be deposited,
cleared and paid to one Rafael Sayson in violation of the
instructions in the said crossed checks that the same were
for payee's account only; and that the appellee maintained
a savings account with the Prudential Bank, Cubao Branch,
Quezon City which never cleared the said checks and the
appellee had been damaged by such encashment of the
same.
We affirm.
Under accepted banking practice, crossing a check is done by
writing two parallel lines diagonally on the left top portion of the
checks. The crossing is special where the name of a bank or a
business institution is written between the two parallel lines, which
means that the drawee should pay only with the intervention of
that company. 3 The crossing is general where the words written
between the two parallel lines are "and Co." or "for payee's account
only," as in the case at bar. This means that the drawee bank
should not encash the check but merely accept it for deposit. 4
In State Investment House vs. IAC, 5 this Court declared that "the
effects of crossing a check are: (1) that the check may not be
encashed but only deposited in the bank; (2) that the check may be
negotiated only once to one who has an account with a bank;
and (3) that the act of crossing the check serves as a warning to
the holder that the check has been issued for a definite purpose so
that he must inquire if he has received the check pursuant to that
purpose."
The effects therefore of crossing a check relate to the mode of its
presentment for payment. Under Sec. 72 of the Negotiable
Instruments Law, presentment for payment, to be sufficient, must
be made by the holder or by some person authorized to receive
payment on his behalf. Who the holder or authorized person is
depends on the instruction stated on the face of the check.
The six checks in the case at bar had been crossed and issued "for
payee's account only." This could only signify that the drawers had
intended the same for deposit only by the person indicated, to wit,
Melissa's RTW.
The petitioners argue that the cause of action for violation of the
common instruction found on the face of the checks exclusively
belongs to the issuers thereof and not to the payee. Moreover,
having acted in good faith as they merely facilitated the
encashment of the checks, they cannot be made liable to the
private respondent.
The subject checks were accepted for deposit by the Bank for the
account of Rafael Sayson although they were crossed checks and
the payee was not Sayson but Melissa's RTW. The Bank stamped
thereon its guarantee that "all prior endorsements and/or lack of
endorsements (were) guaranteed." By such deliberate and positive
act, the Bank had for all legal intents and purposes treated the said
checks as negotiable instruments and, accordingly, assumed the
warranty of the endorser.
The weight of authority is to the effect that "the possession of
check on a forged or unauthorized indorsement is wrongful, and
when the money is collected on the check, the bank can be held
'for moneys had and received." 6 The proceeds are held for the
rightful owner of the payment and may be recovered by him. The
position of the bank taking the check on the forged or unauthorized
indorsement is the same as if it had taken the check and collected
without indorsement at all. The act of the bank amounts to
conversion of the check. 7
It is not disputed that the proceeds of the subject checks belonged
to the private respondent. As she had not at any time authorized
Rafael Sayson to endorse or encash them, there was conversion of
the funds by the Bank.
When the Bank paid the checks so endorsed notwithstanding that
title had not passed to the endorser, it did so at its peril and
became liable to the payee for the value of the checks. This liability
attached whether or not the Bank was aware of the unauthorized
endorsement. 8
The petitioners were negligent when they permitted the
encashment of the checks by Sayson. The Bank should have first
verified his right to endorse the crossed checks, of which he was
not the payee, and to deposit the proceeds of the checks to his own
account. The Bank was by reason of the nature of the checks put
upon notice that they were issued for deposit only to the private
respondent's account. Its failure to inquire into Sayson's authority
was a breach of a duty it owed to the private respondent.
As the Court stressed in Banco de Oro Savings and Mortgage Bank
vs. Equitable Banking Corp., 9 "the law imposes a duty of diligence
on the collecting bank to scrutinize checks deposited with it, for the
purpose of determining their genuineness and regularity. The
collecting bank, being primarily engaged in banking, holds itself out
to the public as the expert on this field, and the law thus holds it to
a high standard of conduct."
The petitioners insist that the private respondent has no cause of
action against them because they have no privity of contract with
her. They also argue that it was Eddie Reyes, the private
respondent's own husband, who endorsed the checks.
Assuming that Eddie Reyes did endorse the crossed checks, we
hold that the Bank would still be liable to the private respondent
because he was not authorized to make the endorsements. And
even if the endorsements were forged, as alleged, the Bank would
still be liable to the private respondent for not verifying the
endorser's authority. There is no substantial difference between an
actual forging of a name to a check as an endorsement by a person
not authorized to make the signature and the affixing of a name to
a check as an endorsement by a person not authorized to endorse
it. 10
The Bank does not deny collecting the money on the endorsement.
It was its responsibility to inquire as to the authority of Rafael
Sayson to deposit crossed checks payable to Melissa's RTW upon a
prior endorsement by Eddie Reyes. The failure of the Bank to make
this inquiry was a breach of duty that made it liable to the private
respondent for the amount of the checks.
There being no evidence that the crossed checks were actually
received by the private respondent, she would have a right of
action against the drawer companies, which in turn could go
against their respective drawee banks, which in turn could sue the
herein petitioner as collecting bank. In a similar situation, it was
held that, to simplify proceedings, the payee of the illegally
encashed checks should be allowed to recover directly from the
bank responsible for such encashment regardless of whether or not
the checks were actually delivered to the payee. 11 We approve
such direct action in the case at bar.
It is worth repeating that before presenting the checks for clearing
and for payment, the Bank had stamped on the back thereof the
words: "All prior endorsements and/or lack of endorsements
guaranteed," and thus made the assurance that it had ascertained
the genuineness of all prior endorsements.
We find that the respondent court committed no reversible error in
holding that the private respondent had a valid cause of action
against the petitioners and that the latter are indeed liable to her
for their unauthorized encashment of the subject checks. We also
agree with the reduction of the award of the exemplary damages
for lack of sufficient evidence to support them.
WHEREFORE, the petition is DENIED, with costs against the
petitioner. It is so ordered.