SALAS V.

CA
181 SCRA 296

FACTS:
Petitioner bought a car from Viologo Motor Sales Company, which was
secured by a promissory note, which was later on indorsed to Filinvest
Finance, which financed the transaction. Petitioner later on defaulted in
her installment payments, allegedly due to the fraud imputed by VMS in
selling her a different vehicle from what was agreed upon. This default in
payment prompted Filinvest Finance to initiate a case against petitioner. The trial cour
t decided in favor of Filinvest, to which the appellate court upheld by increasing the
amount to be paid.
It is the contention of petitioner that since the agreement between her and
the motor company was inexistent, none had been assigned in favor of private
respondent.

HELD:
Petitioner’s liability on the promissory note, the due execution and genuineness of
which she never denied under oath, is under the foregoing factual milieu, as inevitable as it is
clearly established.

The records reveal that involved herein is not a simple case of assignment
of credit as petitioner would have it appear, where the assignee merely
steps into the shoes of, is open to all defenses available against and can enforce
payment only to the same extent as, the assignor-vendor.

The instrument to be negotiable must contain the so-called words of

negotiability. There are only 2 ways for an instrument to be payable to order. There
must always be a specified person named in the instrument and the bill or note is to be paid to
the person designated in the instrument
or to any person to whom he has indorsed and delivered the same. Without the words
“or order” or “to the order of”, the instrument is payable
only to the person designated therein and is thus non-negotiable. Any
subsequent purchaser thereof will not enjoy the advantages of being a
holder in due course but will merely step into the shoes of the person
designated in the instrument and will thus be open to the defenses available against the
latter.

In the case at bar, the promissory notes is earmarked with negotiability and Filinvest is
a holder in due course.
 International Corporate Bank, Inc vs Court of Appeals
501 SCRA 20 [G.R. No. 129910 September 5, 2006]

Facts: The Ministry of Education and Culture issued 15 checks drawn against respondent
which petitioner accepted for deposit on various dates. After 24 hours from submission of the
checks to respondent for clearing, petitioner paid the value of the checks and allowed the
withdrawals of the deposits. However, on 14 October 1981, respondent returned all the
checks to petitioner without clearing them on the ground that they were materially altered.
Thus, petitioner instituted an action for collection of sums of money against respondent to
recover the value of the checks.

Issue: Whether the alterations in the serial numbers of the check is a material alteration.

Held: No. Sections 124 and 125 of Act No. 2031, otherwise known as the Negotiable
Instruments Law, provide:

SEC. 124. Alteration of instrument; effect of. ― Where a negotiable instrument is

materially altered without the assent of all parties liable thereon, it is avoided, except as
against a party who has himself made, authorized, or assented to the alteration and
subsequent indorsers. But when an instrument has been materially altered and is in the hands
of a holder in due course, not a party to the alteration, he may enforce payment thereof
according to its original tenor.

SEC. 125. What constitutes a material alteration. ― Any alteration which changes: (a)
The date; (b) The sum payable, either for principal or interest; (c) The time or place of
payment; (d) The number or the relations of the parties; (e) The medium or currency in which
payment is to be made; 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.

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

The case at the 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.
Jai-Alai Corp. of the Phil. vs. Bank of the Phil. Islands
G.R. No. L-29432 August 6, 1975 66 SCRA 29
-forgery

FACTS:
Petitioner deposited 10 checks in its current account with BPI. The checks which
were acquired by petitioner from Ramirez, a sales agent of the Inter-Island Gas were
all payable to Inter-Island Gas Service, Inc. or order. After the checks had been
submitted to Inter-bank clearing, Inter-Island Gas discovered that all the
indorsements made on the checks purportedly by its cashiers were forgeries. BPI
thus debited the value of the checks against petitioner's current account and
forwarded to the latter the checks containing the forged indorsements which
petitioner refused to accept.

ISSUE:
Whether BPI had the right to debit from petitioner's current account the value of the
checks with the forged indorsements.

RULING:
BPI acted within legal bounds when it debited the petitioner's account. Having
indorsed the checks to respondent bank, petitioner is deemed to have given the
warranty prescribed in Section 66 of the NIL that every single one of those checks "is
genuine and in all respects what it purports to be." Respondent which relied upon
the petitioner's warranty should not be held liable for the resulting loss.

**The depositor of a check as indorser warrants that it is genuine and in all respects what it
purports to be. Having indorsed the checks to respondent bank, petitioner is deemed to have
given the warranty prescribed in Section 66 of the NIL that every single one of those checks "
is genuine and in all respects what it purports to be."
Philippine National Bank vs Romulo Quimpo

158 SCRA 582 – Mercantile Law – Negotiable Instruments Law – Liabilities of Parties –
Forgery – Liability of the Drawee Bank
In June 1973, Francisco Gozon II went to the Philippine National Bank (Caloocan City)
accompanied by his friend Ernesto Santos. Gozon left Santos in his car and while
Gozon was at the bank, Santos took a check from Gozon’s checkbook. Santos forged
Gozon’s signature and filled out the check with the amount of P5,000.00. Santos was
able to encash the check that day with PNB. Gozon learned of this when his statement
arrived. Santos eventually admitted to forging Gozon’s signature. Gozon then demanded
the PNB to refund him the amount. PNB refused. Judge Romulo Quimpo ruled in favor
of Gozon.
ISSUE: Whether or not PNB is liable.
HELD: Yes. A bank is bound to know the signatures of its customers; and if it pays a
forged check, it must be considered as making the payment out of its own funds, and
cannot ordinarily change the amount so paid to the account of the depositor whose
name was forged. PNB failed to meet its obligation to know the signature of its
correspondent (Gozon). Further, it was found by the court that there are glaring
differences between Gozon’s authentic specimen signatures and that of the forged
check.
Philippine Commercial International Bank vs Court of Appeals
(2001)
350 SCRA 446 – Mercantile Law – Negotiable Instruments Law – Rights of the Holder –
What Constitutes a Holder in Due Course – Negligence of the Collecting Bank and the
Drawee Bank
There are three cases consolidated here: G.R. No. 121413 (PCIB vs CA and Ford and
Citibank), G.R. No. 121479 (Ford vs CA and Citibank and PCIB), and G.R. No. 128604
(Ford vs Citibank and PCIB and CA).
G.R. No. 121413/G.R. No. 121479
In October 1977, Ford Philippines drew a Citibank check in the amount of P4,746,114.41
in favor of the Commissioner of the Internal Revenue (CIR). The check represents
Ford’s tax payment for the third quarter of 1977. On the face of the check was written
“Payee’s account only” which means that the check cannot be encashed and can only
be deposited with the CIR’s savings account (which is with Metrobank). The said check
was however presented to PCIB and PCIB accepted the same. PCIB then indorsed the
check for clearing to Citibank. Citibank cleared the check and paid PCIB P4,746,114.41.
CIR later informed Ford that it never received the tax payment.
An investigation ensued and it was discovered that Ford’s accountant Godofredo Rivera,
when the check was deposited with PCIB, recalled the check since there was allegedly
an error in the computation of the tax to be paid. PCIB, as instructed by Rivera, replaced
the check with two of its manager’s checks.
It was further discovered that Rivera was actually a member of a syndicate and the
manager’s checks were subsequently deposited with the Pacific Banking Corporation by
other members of the syndicate. Thereafter, Rivera and the other members became
fugitives of justice.
G.R. No. 128604
In July 1978 and in April 1979, Ford drew two checks in the amounts of P5,851,706.37
and P6,311,591.73 respectively. Both checks are again for tax payments. Both checks
are for “Payee’s account only” or for the CIR’s bank savings account only with
Metrobank. Again, these checks never reached the CIR.
In an investigation, it was found that these checks were embezzled by the same
syndicate to which Rivera was a member. It was established that an employee of PCIB,
also a member of the syndicate, created a PCIB account under a fictitious name upon
which the two checks, through high end manipulation, were deposited. PCIB unwittingly
endorsed the checks to Citibank which the latter cleared. Upon clearing, the amount was
withdrawn from the fictitious account by syndicate members.

ISSUE: What are the liabilities of each party?

HELD: G.R. No. 121413/G.R. No. 121479
PCIB is liable for the amount of the check (P4,746,114.41). PCIB, as a collecting bank
has been negligent in verifying the authority of Rivera to negotiate the check. It failed to
ascertain whether or not Rivera can validly recall the check and have them be replaced
with PCIB’s manager’s checks as in fact, Ford has no knowledge and did not authorize
such. A bank (in this case PCIB) which cashes a check drawn upon another bank (in this
case Citibank), 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.
Hence, PCIB is liable for the amount of the embezzled check.
G.R. No. 128604
PCIB and Citibank are liable for the amount of the checks on a 50-50 basis.
As a general rule, a bank is liable for the negligent or tortuous act of its employees within
the course and apparent scope of their employment or authority. Hence, PCIB is liable
for the fraudulent act of its employee who set up the savings account under a fictitious
name.
Citibank is likewise liable because it was negligent in the performance of its obligations
with respect to its agreement with Ford. The checks which were drawn against Ford’s
account with Citibank clearly states that they are payable to the CIR only yet Citibank
delivered said payments to PCIB. Citibank however argues that the checks were
indorsed by PCIB to Citibank and that the latter has nothing to do but to pay it. The
Supreme Court cited Section 62 of the Negotiable Instruments Law which mandates the
Citibank, as an acceptor of the checks, to engage in paying the checks according to the
tenor of the acceptance which is to deliver the payment to the “payee’s account only”.
But the Supreme Court ruled that in the consolidated cases, that PCIB and Citibank are
not the only negligent parties. Ford is also negligent for failing to examine its passbook
in a timely manner which could have avoided further loss. But this negligence is not the
proximate cause of the loss but is merely contributory. Nevertheless, this mitigates the
liability of PCIB and Citibank hence the rate of interest, with which PCIB and Citibank is
to pay Ford, is lowered from 12% to 6% per annum.
Metropolitan Waterworks and Sewerage
System vs Court of Appeals (July 1986)
143 SCRA 20 – Mercantile Law – Negotiable Instruments Law – Liabilities of Parties –
Forgery – Negligence of Drawer
Metropolitan Waterworks and Sewerage System (MWSS) had an account with PNB.
When it was still called NAWASA, MWSS made a special arrangement with PNB so that
it may have personalized checks to be printed by Mesina Enterprises. These
personalized checks were the ones being used by MWSS in its business transactions.
From March to May 1969, MWSS issued 23 checks to various payees in the aggregate
amount of P320,636.26. During the same months, another set of 23 checks containing
the same check numbers earlier issued were forged. The aggregate amount of the
forged checks amounted to P3,457,903.00. This amount was distributed to the bank
accounts of three persons: Arturo Sison, Antonio Mendoza, and Raul Dizon.
MWSS then demanded PNB to restore the amount of P3,457,903.00. PNB refused. The
trial court ruled in favor of MWSS but the Court of Appeals reversed the trial court’s
decision.
ISSUE: Whether or not PNB should restore the said amount.
HELD: No. MWSS is precluded from setting up the defense of forgery. It has been
proven that MWSS has been negligent in supervising the printing of its personalized
checks. It failed to provide security measures and coordinate the same with PNB.
Further, the signatures in the forged checks appear to be genuine as reported by the
National Bureau of Investigation so much so that the MWSS itself cannot tell the
difference between the forged signature and the genuine one. The records likewise
show that MWSS failed to provide appropriate security measures over its own records
thereby laying confidential records open to unauthorized persons. Even if the twenty-
three (23) checks in question are considered forgeries, considering the MWSS’s gross
negligence, it is barred from setting up the defense of forgery under Section 23 of the
Negotiable Instruments Law.
The Supreme Court further emphasized that forgery cannot be presumed. It must be
established by clear, positive, and convincing evidence. This was not done in the
present case.
Bank of America v. PRC Digest
Bank of America vs. Philippine Racing Club
G.R. 150228 July 30, 2009
Ponente: Leonardo-De Castro, J:

Facts:

1. Plaintiff PRCI is a domestic corporation which maintains a current account with petitioner
Bank of America. Its authorized signatories are the company President and Vice-President.
By virtue of a travel abroad for these officers, they pre-signed checks to accommodate any
expenses that may come up while they were abroad for a business trip. The said pre-signed
checks were left for safekeeping by PRCs accounting officer. Unfortunately, the two (2) of
said checks came into the hands of one of its employees who managed to encash it with
petitioner bank. The said check was filled in with the use of a check-writer, wherein in the
blank for the 'Payee', the amount in words was written, with the word 'Cash' written above it.

2. Clearly there was an irregularity with the filling up of the blank checks as both showed
similar infirmities and irregularities and yet, the petitioner bank did not try to verify with the
corporation and proceeded to encash the checks.

3. PRC filed an action for damages against the bank. The lower court awarded actual and
exemplary damages. On appeal, the CA affirmed the lower court's decision and held that the
bank was negligent. Hence this appeal. Petitioner contends that it was merely doing its
obligation under the law and contract in encashing the checks, since the signatures in the
checks are genuine.

Issue: Whether or not the petitioner can be held liable for negligence and thus should
pay damages to PRC

Both parties are held to be at fault but the bank has the last clear chance to prevent the
fraudulent encashment hence it is the one foremost liable .

1. There was no dispute that the signatures in the checks are genuine but the presence of
irregularities on the face of the check should have alerted the bank to exercise caution before
encashing them. It is well-settled that banks are in the business impressed with public interest
that they are duty bound to protect their clients and their deposits at all times. They must
treat the accounts of these clients with meticulousness and a highest degree of care
considering the fiduciary nature of their relationship. The diligence required of banks are
more than that of a good father of a family.

2. The PRC officers' practice of pre-signing checks is a seriously negligent and highly risky
behavior which makes them also contributor to the loss. It's own negligence must therefore
mitigate the petitioner's liability. Moreover, the person who stole the checks is also an
employee of the plaintiff, a cleck in its accounting department at that. As the employer, PRC
supposedly should have control and supervision over its own employees.

3. The court held that the petitioner is liable for 60% of the total amount of damages while
PRC should shoulder 40% of the said amount.