PNB V.

CA

Summary: The Province of Tarlac discovered the Concepcion Emergency Hospital did not receive allotment
checks drawn by the province. It turns out that Pangilinan, an admin officer of the hospital, encashed the
checks with Associated Bank as collecting agent. He did this by forging the signature of Dr. Canlas, the
hospital chief. The province filed a case against PNB who impleaded Associated Bank as 3 rd party
complainant.

Facts:
 Consolidated petitions for review
 The Province of Tarlac maintains a current account with PNB Tarlac Branch where the provincial funds
are deposited.
o Checks issued are signed by: Provincial Treasurer; countersigned by: Provincial Auditor or
Secretary of the Sangguniang Bayan
 The province funds the Concepcion Emergency Hospital through allotment checks drawn to the order
of “Concepcion Emergency Hospital, Concepcion, Tarlac” or “The Chief, Concepcion Emergency
Hospital, Concepcion, Tarlac.” The checks are released by the Office of the Provincial Treasurer and
received for the hospital by its administrative officer and cashier.
 During a post-audit by the Provincial Auditor, it was found that the hospital did not receive several
allotment checks drawn by the province.
 The checks were examined and it was found that 30 checks amounting to Php 203,300 were encashed
by one Fausto Pangilinan, with the Associated Bank acting as collecting bank.
o Pangilinan, an administrative officer and cashier of the hospital collected the questioned checks
from the office of the Provincial Treasurer. He claimed to be assisting the hospital follow up the
release of the checks and had official receipts.
o The manager of Associated Bank refused and suggested that Pangilinan deposit the check in
his personal savings account with the same bank. He was only able to withdraw the money
when the check was cleared and paid by the drawee bank, PNB.
o After forging the signature of Dr. Adena Canlas, the chief of the payee hospital, Pangilinan
followed the same procedure for the second check as well as for the 28 other checks of various
amounts and on various dates. All the checks bore the stamp of Associated Bank which reads
“All prior endorsements guaranteed ASSOCIATED BANK.”
o The manager of Associated Bank testified that Pangilinan made it appear that the checks were
paid to him for certain projects with the hospital. He admitted that his wife and Pangilinan are
first cousins but denied giving him preferential treatment.
 Provincial Treasurer wrote PNB seeking the restoration of the various amounts debited from the current
account of the Province. PNB in turn demanded reimbursement from Associated Bank.
 Both banks resisted, so the Province of Tarlac brought suit against PNB, which in turn impleaded
Associated Bank as 3rd party defendant. The latter filed a 4 th party complaint against Canlas and
Pangilinan.
 TC: Ruled in favor of the Province of Tarlac; in the 3 rd party complaint, ruled in favor of PNB; dismissed
4th party complaint.
 CA: affirmed the TC decision. Hence, these petitions.

Issue and Held:

 Who should bear the loss- PNB AND THE HOSPITAL SHOULD BEAR THE LOSS 50-50, BUT PNB
CAN RECOVER FROM ASSOCIATED BANK.
o General Rules:
 The collecting bank or last indorser generally suffers the loss because it has the duty to
ascertain the genuineness of all prior indorsements considering that the act of
presenting the check for payment to the drawee is an assertion that the party making the
presentment has done its duty to ascertain the genuineness of the indorsements.
 The drawee bank is not similarly situated as the collecting bank because the former
makes no warranty as to the genuiness of the indorsement. The drawee bank’s duty is
but to verity the genuineness of the drawer’s signature and not of the indorsement
because the drawer is its client.
  Moreover, the collecting bank is made liable because it is privy to the depositor who
negotiated the check. The bank knows him, his address and history because he is a
client.
o Applying these rules to the case at bar:
 The drawee bank cannot debit the current account of the Province of Tarlac because it
paid checks which bore forged indorsements. However, if the Province of Tarlac as
drawer was negligent to the point of substantially contributing to the loss, then the
drawee bank PNB can charge its account. If both drawee bank-PNB and drawer-
Province of Tarlac were negligent, the loss should be properly apportioned between
them.
 Is Province of Tarlac liable? YES. Failed to exercise due care as revealed by
the fact that there were 2 persons collecting the checks for the hospital, which is
an unmistakable sign of an irregularity which should have alerted employees in
the Treasurer's office of the fraud being committed. Therefore, Province of
Tarlac can only collect 50% of Php 203, 300 from PNB.
 PNB can collect from the collecting bank, unless it was guilty of delay in informing the
collecting bank of the forgery, which deprives it of the opportunity to go after the forger.
This signifies delay on the part of the drawee bank and will preclude it from claiming
reimbursement.
 Did PNB commit delay? NO.
o Associated Bank: YES. The Court should have applied CB Circular No.
580 (states that items bearing a forged endorsement shall be returned
within 24 hours after discovery of the forgery but in no event beyond the
period fixed or provided by law for filing of a legal action by the returning
bank), not Sec. 23 of the Philippine Clearing House Rules (which deleted
the requirement that items bearing a forged endorsement should be
returned within 24 hours). The former is an administrative regulation,
while the latter is merely a contractual stipulation between member-
banks, which cannot prevail over law.
o NO. Unnecessary to discuss the contention that CB prevails over PCHC
rule since it is an administrative regulation. Banks in Metro Manila were
covered by the PCHC while banks located elsewhere still had to go
through CB Clearing. The contending banks therein, both in Tarlac
province, are therefore not covered by PCHC rules, but by CB Circular
580.
o The court finds that even if PNB did not return the questioned checks to
Associated Bank within 24 hours as mandated by the clearing house rule,
it did not commit negligible delay. Under the circumstances, PNB gave
prompt notice to Associated Bank and the latter was not prejudiced in
going after Pangilinan. After it was informed of the forgeries, PNB
necessarily had to inspect the checks and conduct its own investigation.
 Did PNB’s payment and clearing of the check preclude it from claiming
reimbursement? NO.
o Associated Bank: YES. Since PNB already cleared and paid the value
of the forged checks, it is now estopped from asserting the defense that
Associated Bank guaranteed prior indorsements. The drawee bank has
the primary duty to verify the genuiness of payee’s indorsement before
paying the check.
o Even if it did, it can still recover because PNB’s duty is to verify the
genuineness of the drawer’s signature and not the genuineness of the
payee’s indorsement. Associated Bank, as the collecting bank, is the
entity with the duty to verify the genuineness of the payee’s indorsement.
 Since PNB is not guilty of delay, nor is it estopped from claiming
reimbursement, it can go after Associated Bank for reimbursement for the
50% of Php 203, 300 which it will pay to the hospital.
 Is this mode of award circuitous and improper? NO.
  PNB: YES. The court should have directed Associated Bank to pay directly to the
Province of Tarlac to avoid circuity.
 Court: NO. The province of Tarlac is a clientor customer of PNB, not of
Associated Bank. There is no privity of contract between the drawer and the
collecting bank.

WESTMONT v. ONG
GR No. 132560, 30 January 2002
Negotiable Instruments

FACTS
 Eugene Ong maintained a current account with PET Bank and sometime in May 1976, he sold certain
shares of stocks through Island Securities Corporation. The latter purchased 2 Pacific Banking Corp.
Manager’s checks with the total face value of P1.75M, dated May 4, 1976 and issued in the name of
Ong.
 Before Ong could get hold of the said checks, his friend Faciano Tanlimco got hold of them, forged
Ong’s signature and deposited such with PET, where Tanlimco was also a depositor.
 Despite the fact that Ong’s signature was on file, PET accepted and credited both checks to the
account of Tanlimco, without verifying the signature indorsements appearing at the back thereof.
Hence, Tanlimco immediately withdrew the money and absconded.
 Ong first sought the help of Tanlimco’s family, but failed in recovering the amount. He then reported the
incident to the Central Bank but was still unable to recover the amount.
 It was only 5 months from the discovery of the fraud that Ong demanded from PET the payment of the
value of the 2. He claimed that he did not deliver, negotiate, endorse or transfer to any person/entity the
said checks and that the signatures on the back were spurious.
 PET’s argument: Since Ong admitted to have never received the 2 checks from Island Securities, he
never acquired ownership of these checks. Hence, he had no legal personality to sue as he is not a real
party-in-interest.
 RTC ruled in favor of RESP. CA affirmed.
 Hence this petition.
 PET’s arguments
 Under Sec. 51 of the NIL, it is only when a person becomes a holder of a negotiable
instrument that he can sue in his own name. While Ong was the named payee, he did
not have actual or physical possession of the two checks, and thus did not become a
holder and cannot sue in his own name.
 NCC Art. 1249 - check is not a legal tender. Thus, for all intents and purposes, Island
Securities has not yet tendered payment to respondent.
 If it were to be liable to anyone, it would be to the drawee bank and not to Ong, since
latter has no cause of action.
 RESP’s arguments
 Associated Bank v. Court of Appeals - the collecting bank or last endorser generally
suffers the loss because it has the duty to ascertain the genuineness of all prior
endorsements. The bank is also made liable because it is privy to the depositor who
negotiated the check. The bank knows him, his address and history because he is a
client. Hence, it is in a better position to detect forgery, fraud or irregularity in the
indorsement.

ISSUES & HOLDING

WON PET Bank is liable to RESP ONG for the value of the 2 checks? – NO.

RATIO
RE: CAUSE OF ACTION
 There is a cause of action because the followring are at issue: RESP’s right as payee of the manager's
checks to receive the amount involved, PET’s correlative duty as collecting bank to ensure that the
 amount gets to the rightful payee or his order, and a breach of that duty because of a blatant act of
negligence on the part of PET which violated RESP's rights.

 Under Sec. 23 of the NIL — 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.
o CAB: Since Ong’s signature was forged to make it appear that he had made an endorsement in
favor of Tanlimco, such signature should be deemed as inoperative and ineffectual. Westmont
as the collecting bank grossly erred in making payment by virtue of said forged signature. Ong,
as payee, should be allowed to recover from the collecting bank.

GENERAL RULE: A BANK OR A CORPORATION WHO HAS OBTAINED POSSESSION OF A CHECK

UPON AN UNAUTHORIZED OR FORGED INDORSEMENT OF THE PAYEE'S SIGNATURE AND WHO
COLLECTS THE AMOUNT OF THE CHECK FROM THE DRAWEE, IS LIABLE FOR THE PROCEEDS
THEREOF TO THE PAYEE OR OTHER OWNER, NOTWITHSTANDING THAT THE AMOUNT HAS BEEN
PAID TO THE PERSON FROM WHOM THE CHECK WAS OBTAINED.
 The possession of the check on the forged or unauthorized indorsement is wrongful; and when the
money had been collected on the check, the bank or some other person or corporation can be held
liable for money had and received, and the proceeds are held for the rightful owners who may recover
them.
 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 the money without indorsement at all. The act of the bank amounts
to conversion of the check.
 PET relies on the view that where there is no delivery to the payee and no title vests in him, he ought
not to be allowed to recover on the ground that he lost nothing because he never became the owner of
the check and still retained his claim of debt against the drawer.
o SC: Even if the absence of delivery is considered, such consideration is not material. The
plaintiff uses one action to reach, by a desirable shortcut, the person who ought in any event to
be ultimately liable among the innocent persons involved in the transaction. In other words, the
payee ought to be allowed to recover directly from the collecting bank regardless of whether the
check was delivered to the payee or not.
 PET could not escape liability for its negligent acts. Banks are engaged in a business impressed with
public interest, and it is their duty to protect in return their many clients and depositors who transact
business with them. They have the obligation to treat their client's account meticulously and with the
highest degree of care, considering the fiduciary nature of their relationship. The diligence required of
banks, therefore, is more than that of a good father of a family.
o CAB: Westmont was grossly negligent in performing its duties since it failed to make a
verification or, worse, did so but chose to disregard the obvious dissimilarity of the signatures.
The first omission makes it guilty of gross negligence; the second of bad faith.

ONG DID NOT SIT ON HIS RIGHTS.

 He pursued remedies available to him and exhausted all possible remedies before bringing the matter
to the Central Bank and then to the courts.
 These acts cannot be construed as undue delay in or abandonment of the assertion of his rights.
 Moreover, it is PET who had the last clear chance to stop the fraudulent encashment of the subject
checks had it exercised due diligence and followed the proper and regular banking procedures in
clearing checks. The one who had the last clear opportunity to avoid the impending harm but
failed to do so is chargeable with the consequences thereof.

DISPOSITIVE
Petition DENIED.
 Traders Royal Bank v RPN

Facts:
 BIR assessed Radio Philippines Network (RPN), Intercontinental Broadcasting Corporation (IBC), and
Banahaw Broadcasting Corporation (BBC) [together, plaintiffs] their tax obligations for years 1978 to 198
 Mrs. Lourdes C. Vera, plaintiffs’ comptroller, sent a letter to the BIR requesting settlement of plaintiffs’ tax
obligations.The BIR granted the request
 Plaintiffs purchased from Traders Royal Bank (TRB) 3 managers checks to be used as payment for their
tax liabilities: 1) Check No. 30652 for P4,155.835, 2) Check No. 30650 for P3,949,406.12, and 3) Check
No. 30796 for P1,685,475.75
 TRB, through Aida Nuñez, TRB Branch Manager at Broadcast City Branch, turned over the checks to Vera
who was supposed to deliver the same to the BIR
 BIR again assessed plaintiffs for their tax liabilities for the years 1979-82. It was then they discovered that
the the above mentioned managers checks were never delivered nor paid to the BIR by Vera. Instead, the
checks were presented for payment by unknown persons to Security Bank and Trust Company (SBTC),
Taytay Branch
 For failure of the plaintiffs to settle their obligations, the BIR issued warrants of levy, distraint and
garnishment. Thus, they entered into a compromise and paid BIR P18,962,225.25
 Plaintiffs sent letters to both SBTC and TRB [together, defendants], demanding that the amounts covered
by the checks be reimbursed or credited to their account.
 The defendants refused so plaintiffs sued defendants
 RTC rendered a decision favor of the plaintiffs and against the defendants:
o TRB to pay actual damages of P9,790,716.87 (value of the checks) plus legal interest
o SBTC to reimburse TRB all the amounts which the latter would pay to the plaintiffs
o Defendants to pay to each of the plaintiffs P300k as exeplary damages, atty’s fees equivalent to 25% of
the total amount recovered and costs of suit.
 Defendants appealed to the CA
 The CA absolved SBTC from any liability and held TRB solely liable to plaintiffs

Issue: WoN 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 BIR – YES
 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. 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.
 Here, the checks were payable to the BIR. However, the 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, TRB paid the 3 checks.
o TRB 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 its [TRB’s] primary 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 it who cashed the check. Its only remedy is against the person to whom it paid
 One of the subject checks was crossed. The crossing of one of the subject checks should have put TRB on
guard; it was duty-bound to ascertain the indorsers title to the check or the nature of his possession.P,
knowing the effects of a crossed check as follows: (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
 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, TRB did so at its peril and must suffer the
consequences of the unauthorized or wrongful endorsement. TRB cannot exculpate itself from liability by
claiming that plaintiffs 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
 TRB argues that SBTC, as the collecting bank and indorser, should be held responsible instead. It is true
that 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 correctly found and held by the CA:
o 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 SBTC liable, it is necessary to determine
whether it is a party to the disputed transactions:
 Sec. 63, NIL – When person deemed indorser
 Sec. 17, Philippine Clearing House Corporation (PCHC) Rules:
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 PCHC. All prior endorsements and/or lack of endorsement guaranteed. NAME
OF BANK/BRANCH BRSTN (Date of clearing).
 HERE, not one of the checks bears the requisite endorsement of SBTC. What appears to be a
guarantee stamped at the back of the checks is that of the PNB Buendia Branch, thereby indicating
that it was the latter Bank which received the same.
 FURTHER, whenever SBTC receives a check for deposit, its practice is to stamp on its face the
words, non-negotiable. Such words do not appear on the face of either of the checks.
 ALSO, the aggregate amount of the checks is not reflected in the clearing documents of SBTC
 Sec. 19, PCHC Rules:
Sec. 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.
 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 SBTC together with the checks it presented for clearing on
Aug. 3, 1987 does not show that Check No. 306502 was among those that passed for clearing
with the PCHC on that date. The same is true with Check No. 30652 presented for clearing on
Aug. 11, 1987 and Check No. 30796
 Since TRB did not pay the rightful holder or other person or entity entitled to receive payment, it has no
right to reimbursement. 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.
 TRB, however, should not be made to pay exemplary damages because its wrongful act was not done in
bad faith, and it did not act in a wanton, fraudulent, reckless or malevolent manner. The atty’s fees
awarded are also manifestly exorbitant. Considering the nature and extent of the services rendered by
plaintiffs counsel, however, it is appropriate to award the amount of P100k as atty’s fees.
 Allied Banking Corporation vs Lim Sio Wan
March 27, 2008 | Liability of Parties | Liability of Secondary Parties | Liability of General Indorser

PETITIONER: Allied Banking Corporation

RESPONDENT: Lim Sio Wan, Metropolitan Bank and Trust Co., and Producers Bank
SUMMARY: The case involves 3 banks: Allied Banking, the issuing (drawer) and drawee bank; Metropolitan
Bank and Trust Co., the collecting bank (general indorser); and Producers Bank, the bank who unjustly
benefitted from the proceeds of the check. Lim Sio Wan deposited with Allied money market placement of PhP
1,152,597.35. Before its maturity, someone called Allied claiming to be Lim Sio Wan and instructed Allied to
pre-terminate his money market placement, to issue a manager's check representing the proceeds of the
placement, and to give the check to one Ms. Santos who would pick up the check. Santos, who is an employee
of Producers Bank, then picked up from Allied the manager’s check which was crossed. Thereafter, the
crossed manager's check was deposited in the account of Filipinas Cement Corporation (FCC) (creditor of
Producer’s Bank) at respondent Metropolitan Bank and Trust Co. (Metrobank), with the forged signature of Lim
Sio Wan as indorser. Metrobank stamped a guaranty on the check, which reads: "All prior endorsements
and/or lack of endorsement guaranteed”. Then Allied funded the check without investigating the veracity of the
indorsement. When Lim Sio Wan later found out this transactions, she denied authorizing any of it and claimed
that she did not receive the proceeds. She filed an action against Allied and Metrobank to recover the
proceeds of the check.
DOCTRINE: Allied Banking [issuing (drawer) and drawee bank] is liable for the 60% of the amount while
Metrobank (general indorser) is liable for 40%. The warranty "that the instrument is genuine and in all respects
what it purports to be" covers all the defects in the instrument affecting the validity thereof, including a forged
indorsement. Thus, the last indorser will be liable for the amount indicated in the negotiable instrument even if
a previous indorsement was forged. We held in a line of cases that "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, this general rule is
subject to exceptions. One such exception is when the issuance of the check itself was attended with
negligence or in other words, the drawer was also negligent. In sum, because both Allied and Metrobank are
negligent, their liability is concurrent. But Allied and Metrobank can recover from Producers Bank, the bank
who unjustly benefitted from the proceeds of the manager’s check, based on the principle of unjust enrichment.

FACTS:
1. Lim Sio Wan deposited with Allied money market placement of PhP 1,152,597.35.
2. Before its maturity, someone called Allied claiming to be Lim Sio Wan and instructed Allied to pre-
terminate his money market placement, to issue a manager's check representing the proceeds of the
placement, and to give the check to one Ms. Santos who would pick up the check. Person claiming to be Lim
Sio Wan described the appearance of Santos so that the employee of Allied could easily identify her.
3. Ms. Santos went to Allied to pick up the check. The bank issued Manager's Check No. 035669 for PhP
1,158,648.49, representing the proceeds of Lim Sio Wan's money market placement in the name of Lim Sio
Wan, as payee. The check was cross-checked "For Payee's Account Only" and given to Santos, an employee
of Producer’s Bank.
4. Thereafter, the manager's check was deposited in the account of Filipinas Cement Corporation (FCC)
at respondent Metropolitan Bank and Trust Co. (Metrobank), with the forged signature of Lim Sio Wan as
indorser.
5. It appeared that earlier, FCC deposited money market placement to Producer’s Bank where Santos
acted as the trader. The date of maturity of this money market placement is the same day when Allied Banking
received a call from one claiming to be Lim Sio Wan requesting pre-termination of his money market
placement and the issuance of manager’s check and also the same day when the manager’s check issued by
Allied was deposited to the account of FCC, purportedly representing the proceeds of FCC's money market
placement with Producers Bank.
6. To clear the check, Metrobank stamped a guaranty on the check, which reads: "All prior endorsements
and/or lack of endorsement guaranteed.” in accordance with Philippine Clearing House Corporation (PCHC)
rules.
7. The check was sent to Allied through PCHC. Upon the presentment of the check, Allied funded the
check even without checking the authenticity of Lim Sio Wan's purported indorsement. Thus, the amount on
the face of the check was credited to the account of FCC.
8. Lim Sio Wan, upon the maturity of his money market placement went to Allied to withdraw it. She was
then informed that the placement had been pre-terminated upon her instructions. She denied giving any
instructions and receiving the proceeds thereof. She desisted from further complaints when she was assured
by the bank's manager that her money would be recovered.
9. When she failed to recover, she filed a case against Allied Banking and Metrobank.

ISSUE:
WON Metrobank as general indorser should be solely liable to Lim Sio Wan for the proceeds of the
manager’s check
RULING: WHEREFORE, judgment is rendered ordering and sentencing defendant-appellant Allied Banking
Corporation to pay sixty (60%) percent and defendant-appellee Metropolitan Bank and Trust Company forty
(40%) of the amount of P1,158,648.49 plus 12% interest per annum from March 16, 1984 until fully paid.
Producers Bank is hereby ordered to pay Allied and Metrobank the aforementioned amounts. The liabilities of
the parties are concurrent and independent of each other.
RATIO:
1. A general indorsement which includes a warranty "that the instrument is genuine and in all respects
what it purports to be" covers all the defects in the instrument affecting the validity thereof, including a forged
indorsement. Thus, the last indorser will be liable for the amount indicated in the negotiable instrument even if
a previous indorsement was forged. We held in a line of cases that "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.”
2. However, this general rule is subject to exceptions. One such exception is when the issuance of the
check itself was attended with negligence.
3. In the instant case, the trial court correctly found Allied negligent in issuing the manager's check and in
transmitting it to Santos without even a written authorization. In fact, Allied did not even ask for the certificate
evidencing the money market placement or call up Lim Sio Wan at her residence or office to confirm her
instructions. Both actions could have prevented the whole fraudulent transaction from unfolding. Allied's
negligence must be considered as the proximate cause of the resulting loss.
4. The liability of Allied, however, is concurrent with that of Metrobank as the last indorser (or general
indorser) of the check. When Metrobank indorsed the check in compliance with the PCHC Rules and
Regulations without verifying the authenticity of Lim Sio Wan's indorsement and when it accepted the check
despite the fact that it was cross-checked payable to payee's account only, its negligent and cavalier
indorsement contributed to the easier release of Lim Sio Wan's money and perpetuation of the fraud. Given the
relative participation of Allied and Metrobank to the instant case, both banks cannot be adjudged as equally
liable. Hence, the 60:40 ratio of the liabilities of Allied and Metrobank, as ruled by the CA, must be upheld.

(56 MISSING)

PCIB v CA

FACTS:
This case is a consolidation of 2 cases for recovery filed by Ford against drawee bank CITIBANK and
collecting bank INSULAR (later merged with PCIB, with PCIB as the surviving entity) for three (3) crossed
checks, the proceeds of which were embezzled by a syndicate composed of managerial employees from
FORD, INSULAR, and the BIR.
These 3 Citibank checks were drawn by Ford to pay its percentage taxes, and had notations indicating
that these were payable only to CIR. The checks are as follows:

Case Amount Purpose Date of Issuance

rd
G.R. 121413 & 121479 P4.7M 1977, 3 Qtr Percentage Tax Oct 19, 1977
P5.8M 1978, 2nd Qtr Percentage Tax July 19, 1978
G.R. 128604
P6.3M 1979, 1st Qtr Percentage Tax Apr 20, 1979

1st recovery case (G.R. 121413 & 121479)

1. The P4.7M check was deposited with INSULAR -> INSULAR stamped “all prior indorsements and/or lack
of indorsements guaranteed”, then sent it to CENTRAL BANK for clearing -> after clearing, INSULAR
presented the check to CITIBANK, which paid the P4.7M by debiting FORD’s account
2. While the CIR was indicated as the payee, it didn’t receive the P4.7M proceeds of the check
3. After an NBI investigation, it was revealed that after CITIBANK paid, INSULAR replaced the check with 2
manager’s checks pursuant to FORD’s General Ledger Accountant RIVERA’s instructions purporting to
recall it because of “computation error”. These 2 checks were then deposited by syndicate members with
PACIFIC BANK.
4. After learning of the non-payment to CIR, Ford paid its taxes the 2 nd time, but sued INSULAR and
CITIBANK on the first check’s amount
5. RTC dismissed FORD’s 3rd party cocmplaints against PACIFIC and RIVERA. However, it held CITIBANK
and INSULAR solidarily liable, and allowed CITIBANK’s cross-claim against INSULAR.
6. CA modified decision and held only INSULAR liable.
7. INSULAR is the one seeking petition for review in this case, as it seeks to hold CITIBANK liable as well.
2nd recovery case (G.R. 128604)
1. The two checks involved were also for tax payments. BIR issued revenue tax receipts for these checks.
The checks were also crossed checks and were annotated with “payable to payee’s account only”.
2. However, the checks never reached the CIR as well, so BIR demanded for the tax payments.
3. Later, the NBI discovered the tax receipts were fake and spurious, so FORD paid its taxes anew, but also
sued CITIBANK and PCIB (the surviving entity as INSULAR merged with PCIB)
4. The syndicate’s modus was as follows:
i. RIVERA (FORD accountant) prepared the checks for payment to BIR and then passed them to
INSULAR’s Pro-Manager CASTRO, instead of to the payee CIR.
ii. CASTRO has already opened a checking account in a fictitious person’s name at the same INSULAR
branch.
iii. The Pro-Manager then deposited a worthless Bank of America check in the same amount as the valid,
Citibank check. This worthless check was coursed through INSULAR then to CENTRAL BANK for
clearing, BUT before it reached CENTRAL BANK, it was replaced with the Citibank check and the
accompanying documents were tampered.
iv. The Citibank check was cleared, and the fictitious account was later credited with the total amount.
v. The fictitious account was drawn from to distribute the proceeds.
5. The RTC rule for FORD, but held only CITIBANK liable, while absolving INSULAR.
6. CA affirmed this decision in toto
8. CITIBANK is the one seeking petition for review in this case, as it seeks to hold INSULAR liable as well.

FORD (drawer) arguments:

- Claims it was not negligent, b/c no evidence
- Assuming it was liable, CITIBANK is liable for damages, despite FORD’s negligence based on Gempesaw
case ruling
CITIBANK (drawee) arguments:
- FORD allowed its own employee (RIVERA) to negotiate the checks to his co-conspirators instead of
delivering them to INSULAR.
- FORD was remiss in the supervision and control of its own employees, as shown by its detection of the
syndicate only after an unreasonable length of time has elapsed and upon CIR’s information
INSULAR (collecting) arguments:
- FORD negligent when it authorized accountant RIVERA to divert the 1 st check’s proceeds instead of using
it to pay CIR
- FORD’s own officers were the proximate cause of the damage as regards the 2 checks
- FORD’s inaction despite the amount involved amounted to negligence, and hence it should beer its own
loss
- Such negligent act took place before Dec. 17, 1977, but the relief was sought only 7 years later.

ISSUE/S + RULING + RATIO:

On NIL Sec. 55, SC stated that:

1. What is required is that the perpetrator negotiates in breach of faith amounting to fraud. This means the
person negotiating the checks must have gone beyond his authority as given by the principal.
2. If the principal proves that he was not negligent in performing his duties, he can set up the defense to avoid
liability and even recover from the other parties whose negligence allowed the crime’s commission.
3. Since the syndicate/perpetrators are at large, what remains to be done is to deermine the liability based on
the parties’ negligence.

As to FORD, it is NOT guilty of imputed contributory negligence because the actions of its officers
were not the proximate cause of the injury.
1. Ford’s Board of Directors did not confirm their General Ledger Accountant’s request to recall the 1977
Check. Therefore, the request was not one in the ordinary course of business, which should have
prompted IBAA to validate the request.
2. The 1978 and 1979 checks were crossed but turned around by Ford’s employees, who were acting in their
own personal capacities.
3. The mere fact that it was the Drawer’s employees that committed the forgery (case does not say what the
forgery was exactly) generally does not mean that the Drawer bears the loss. (Exception: Where a
circumstance estops the Drawer. (Citing Am Jur on Banks))

As to 1977 check, INSULAR’s (now PCIB) negligence was the proximate cause
1. The Collecting Bank failed to verify the General Ledger Accountant’s authority to negotiate the checks. His
authority to request for 2 manager’s checks through a letter and phone call was not verified.
2. It was admitted that the Collecting Bank was authorized to collect taxpayers’ payments on the BIR’s behalf.
Therefore, as an agent, the Collecting Bank should have at least consulted with its Principal (the BIR)
regarding the payor’s/payor’s agent’s unwarranted instructions.
3. A crossed check was involved so the Collecting Bank had the duty to ensure that the check was deposited
in the payee’s account only.
4. Even if the diversion was actually allowed, it should have been authorized by the payor (Drawer.)
5. The Drawee-Bank had no option but to pay the check since it went through the clearing house thanks to
the Collecting Bank’s indorsement (all prior indorsements and/or lack of indorsements guaranteed.) The
Collecting Bank is liable on its guarantee. (Citing BDO v. Equitable, 1988).
6. The one who first cashes and negotiates the check must take some precautions to ascertain its
genuineness. Drawee-Banks have the right to believe that the Collecting Banks were satisfied of the
authenticity based on their own inverstigation.
o The one cashing the check through indifference or otherwise assists the forger should not retain the
proceeds where the drawee’s only fault was that it did not discover the forgery or title defect before
paying.
o Likewise, a bank that cashes a check drawn upon another bank without requiring proof of the identity of
the persons presenting the check, or at least making inquiries, cannot hold the proceeds against the
drawee where such monies were diverted to a third party.

As to the 1978 and 1979 checks, based on comparative negligence, both banks should be liable to
drawer

1. As to the Collecting Bank…

o Even if the Collecting Bank was not shown to have consciously participated in the embezzlement, the
general rule that banks are liable for their officers’ or agents’ wrongful or tortuous acts and declarations,
or negligence, within the course and scope of their employment applies.
o In this case, the acts of the Collecting Bank’s officers were performed using facilities in their official
capacity/authority but for their own gain.
o Banks are liable for their officers’/agents’ fraudulent acts or representations when they act within the
course and apparent scope of their authority.
o Sending banks are liable for any theft affect items in transit for clearing. (CB Circ. 580, 1977).
2. As to the Drawee Bank…
o It did not establish that the payment was made in due course and legally in order.
o It should have scrutinized the clearing stamps, which apparently did not contain any initials. This
constitutes negligence.
HOWEVER, FORD also failed to detect the fraud, due to some fault on its part. It should have been
examining its passbook, statements of account, and cancelled checks.

Re: prescription, FORD’s claim is NOT barred by prescription as the original complaint was filed 6
years when the right of action accrued, hence within the 10-year prescriptive period for actions based
on written contracts.

1. The statute of limitations begins to run when the bank gives the depositor notice of payment.
o This is usually when the check is returned to the drawer as a voucher or with a statement of account.
o Actions on checks are generally governed by the statutory period applying to written instruments.
o Actions upon written instruments should be brought within 10 years from accrual of the right of action.
(CC 1144)
2. In this case, the reckoning begins from when the instrument was issued and the check was returned by
the bank to the depositor, usually 1 month.
o Therefore, the period begins a month after December 19, 1977, when the Drawee-Bank paid the face
value.
o The original complaint was filed January 20, 1983, barely 6 years later.

PNB v CA (April 25, 1996)

Kapunan, J.
DOCTRINE: 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.
DRAWER: Ministry of Education and Culture | DRAWEE: PNB | PAYEE: F. Abante Marketing
FACTS:
 A check in the amount of P97,650 was issued by the Ministry of Education and Culture (became DECS)
payable to F. Abante Marketing and drawn against PNB.
 Abante deposited the check in its savings account with Capitol City Development Bank. Capitol then
deposited the check in its account with the Philippine Bank of Commnications (PBCom). PBCom then
sent the check to PNB for clearing.
 ONB cleared the check so PBCom credited Capitol’s account for the amount of the check. However.
PNB returned the check and debited PBCom’s account for the same amount – there was a material
alteration on the check number.
 PBCom (as collecting agent of Capitol) debited its principal’s account and sent the check to PNB. This
was returned by PNB again.
 Capitol, however, could not debit Abante’s account since the latter already withdrew the amount of the
check. Capitol demanded the re-crediting of the amount.
 Since its demands were not heeded, Capitol filed a suit against PBCom. PBCom filed a third-party
complaint against PNB for reimbursement/indemnity with respect to Capitol’s claims. PNB filed a fourth-
party complaint against Abante.
 RTC: PBCom ordered to re-credit/reimburse Capitol for the amount of the check
o PNB ordered to reimburse/indemnify PBCom
o Abante ordered to reimburse/indemnify PNB
 CA: judgment modified – PBCom exempted from liability to Capitol; PNB to honor the check for
P97,650
ISSUE/S:
 WoN an alteration of the serial number of a check is a material alteration under the NIL: NO
o 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.
o PNB anchors its position on Sec. 125 of the NIL. Justice Vitug in his book opines that an
innocent alteration (changes other than those required in Sec. 1) and spoliation (alterations
done by a stranger) will not avoid the instrument, but the holder may enforce it only according
to its original tenor.
 The checks serial number is not the sole indication of its origin. As succinctly found by
the CA, the name of the government agency which issued the subject check was
prominently printed therein. The checks issuer was therefore sufficiently identified,
rendering the referral to the serial number redundant and inconsequential.
 PNB cannot refuse to accept the check on the ground that the serial number was
altered, since the same is an immaterial or innocent one.
HELD: CA decision AFFIRMED.

International Corporate Bank, Inc. v. CA

G. R. No. 129910

FACTS:
The Ministry of Education and Culture issued 15 checks drawn against PNB which International Corp. Bank
accepted for deposit on various dates. After 24 hours from submission of the checks to International Corp.
Bank for clearing, it paid the value of the checks and allowed the withdrawals of the deposits. However, on
October 14, 1981, PNB returned all the checks to International Corp. Bank without clearing them on the ground
that they were materially altered which led to the institution of an action for collection of sums of money against
PNB to recover the value of the checks. RTC dismissed the case but was reversed by the Court of Appeals
which applied Section 4(c) of Central Bank Circular No. 580, series of 1977. The Court of Appeals held that
checks that have been materially altered shall be returned within 24 hours after discovery of the alteration.

ISSUE:
Whether or not the alteration is material.

HELD:
The alterations in the checks were made on their serial numbers, thus, it is not material.
Section 125 of Act No. 2031, otherwise known as the Negotiable Instruments Law, provides: 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; xxxx

The question on whether an alteration of the serial number of a check is a material alteration under the
Negotiable Instruments Law is already a settled matter. In Philippine National Bank v. Court of Appeals, this
Court ruled that the alteration on the serial number of a check is not a material alteration. A material alteration
is one which changes the items which are required to be stated under Section 1 of the Negotiable Instrument[s]
Law. Section 1 of the Negotiable Instruments Law provides: ― Form of negotiable instruments. An instrument
to be negotiable must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with
reasonable certainty.
The 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.

MBTC v CABILZO December 6, 2006

Lessons Applicable: Discharge of instrument and persons secondarily liable (Negotiable Instruments Law)

FACTS:
 November 12,1994: Renato D. Cabilzo (Cabilzo) issued a Metrobank Check payable to "CASH" and
postdated on November 24, 1994 in the amount of P1,000 drawn against his Metrobank account to Mr.
Marquez, as his sales commission
 check was presented to Westmont Bank for payment who indorsed it to Metrobank for appropriate
clearing
 After the entries thereon were examined, including the availability of funds and the authenticity of the
signature of the drawer, Metrobank cleared the check for encashment in accordance with the Philippine
Clearing House Corporation (PCHC) Rules
 November 16, 1994: Cabilzo’s representative was at Metrobank when he was asked by a bank
personnel if Cabilzo had issued a check in the amount of P91K to which he replied in negative
 That afternoon: Cabilzo called Metrobank to reiterate that he did not issue the check
o He later discovered that the check of P1K was altered to P91K and date was changed from Nov
24 to Nov 14.
o Cabilzo demanded that Metrobank re-credit the amount of P91,000.00 to his account
 June 30, 1995: Through counsel sent a letter-demand for the amount of P90K
 CA affirmed RTC: Favored Cablizo
ISSUE: W/N Cablizo can recover from Metrobank

HELD: YES. CA Affirmed

 material alteration
o changes the items which are required to be stated under Section 1 of the Negotiable
Instruments Law
 Section 1. Form of negotiable instruments. - An instrument to be negotiable must
conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand or at a fixed 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.
o changes the effect of the instrument
 Section 125. What constitutes 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 relation 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.
 In the case at bar, the check was altered so that the amount was increased from P1,000.00
to P91,000.00 and the date was changed from 24 November 1994 to 14 November 1994.
 Section 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,and assented to the alteration and subsequent indorsers.
But when the 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 the payment thereof according to its original tenor.
 Cabilzo was not the one who made nor authorized the alteration. Neither did he assent to the alteration
by his express or implied acts
o There is no showing that he failed to exercise such reasonable degree of diligence required of a
prudent man which could have otherwise prevented the loss.
 bank must be a high degree of diligence, if not the utmost diligence
o Surprisingly, however, Metrobank failed to detect the above alterations which could not escape
the attention of even an ordinary person
 "NINETY" is also typed differently and with a lighter ink
 only 2 asterisks were placed before the amount in figures, while 3 asterisks were placed
after such amount
 "NINETY" are likewise a little bigger when compared with the letters of the words "ONE
THOUSAND PESOS ONLY"
 When the drawee bank pays a materially altered check, it violates the terms of the check, as well as its
duty to charge its client’s account only for bona fide disbursements he had made.
 The corollary liability of Westmont Ban's indorsement, if any, is separate and independent from the
liability of Metrobank to Cabilzo.

METROPOLITAN BANK AND TRUST COMPANY (MBTC) vs. Cabilzo

G.R. No. 154469 510 SCRA 259 (December 6, 2006)
FACTS:
Herein respondent Cabilzo is one of MBTC's clients who maintained a current account with the latter. On 12
November 1994, Cabilzo issued a Metrobank Check payable to "CASH" and postdated on November 24, 1994
in the amount of One Thousand Pesos (P1,000.00). The check was drawn against
Cabilzo’s Account with Metrobank and was paid by Cabilzo to a certain Mr. Marquez, as his sales commission.
Subsequently, the check was presented to Westmont Bank for payment. Westmont Bank, in turn, indorsed the
check to Metrobank for appropriate clearing. After the entries thereon were examined, including the availability
of funds and the authenticity of the signature of the drawer, Metrobank cleared the check for encashment.
On November 16, 1994, Cabilzo’s representative was at Metrobank to make some transaction when he was
asked by a bank personne
l if Cabilzo had issued a check in the amount of P91,000.00 to which the former replied in the negative. On the
afternoon of the same date, Cabilzo himself called Metrobank to reiterate that he did not issue a check in the
amount of P91,000.00 and requested that the questioned check be returned to him for verification, to which
Metrobank complied. Upon receipt of the check, Cabilzo discovered that Metrobank Check which he issued on
12 November 1994 in the amount of P1,000.00 was altered to P91,000.00 and the date 24 November 1994
was changed to 14 November 1994. Hence, Cabilzo demanded that Metrobank re-credit the amount of
P91,000.00 to his account. Metrobank, however, refused reasoning that it has to refer the matter first to its
Legal Division for appropriate action. Repeated verbal demands followed but Metrobank still failed to re-credit
the amount of P91,000.00 to Cabilz
o’s account.
Cabilzo instituted a civil action for damages against Metrobank before the RTC of Manila Cabilzo prayed that in
addition to his claim for reimbursement, actual and moral damages plus costs of the suit be awarded in his
favor. RTC ruled in favor of Cabilzo stressing the fiduciary nature of the relationship between the bank and its
clients and the negligence of the drawee bank in failing to detect an apparent alteration on the check. CA
affirmed, hence this petition;
ISSUE:
WON Drawee bank is primarily liable for THE ALTERATIONS ON THE SUBJECT CHECK BEARING THE
AUTHENTIC SIGNATURE OF THE DRAWER THEREOF.
HELD:
Yes. The court resolved the issue by determining first what constitutes a material alteration. An alteration is
said to be material if it changes the effect of the instrument. 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:
Section 1.
 Form of negotiable instruments. - An instrument to be negotiable must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order
to pay a sum certain in money; (c) Must be payable on demand or at a fixed 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. Also pertinent is the following provision in the Negotiable
Instrument Law which states:
Section 125
. What constitutes 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 relation 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. In the
case at bar, the check was altered so that the amount was increased from P1,000.00 to P91,000.00 and the
date was changed from 24 November 1994 to 14 November 1994. Apparently, since the entries altered were
among those enumerated under Section 1 and 125, namely, the sum of money payable and the date of the
check, the instant controversy therefore squarely falls within the purview of material alteration. Having laid the
premise that the present petition is a case of material alteration, it is now necessary to determine the effect of a
materially altered instrument, as well as the rights and obligations of the parties thereunder. The following
provision of the Negotiable Instrument Law will shed us some light in threshing out this issue:
Section 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, and assented to the alteration and
subsequent indorsers. But when the 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 the payment thereof according to its original tenor.
Cabilzo was not the one who made nor authorized the alteration. Neither did he assent to the alteration by his
express or implied acts. There is no showing that he failed to exercise such reasonable degree of diligence
required of a prudent man which could have otherwise prevented the loss. As correctly ruled by the appellate
court, Cabilzo was never remiss in the preparation and issuance of the check, and there were no indicia of
evidence that would prove otherwise. Indeed, Cabilzo placed asterisks before and after the amount in words
and figures in order to forewarn the subsequent holders that nothing follows before and after the amount
indicated other than the one specified between the asterisks.
PETITION DENIED

WESTMONT BANK formerly ASSOCIATED BANK, now UNITED OVERSEAS BANK OF THE
PHILIPPINES v MYRNA DELA ROSA-RAMOS, DOMINGO TAN, and WILLIAM CO
Summary:
Myrna Dela Rosa-Ramos maintained a current account with the United Overseas Bank Philippines Sto. Cristo
Branch. Dela Rosa-Ramos got acquainted with the Bank’s Signature Verifier, Domingo Tan.

Tan offered Dela Rosa-Ramos a “special arrangement” wherein he would finance or place sufficient funds in
her current account whenever there would be an overdraft. In order to guarantee payment for such funding,
Dela Rosa-Ramos issued and delivered to Tan the following checks drawn against her current account and
payable to “cash,” to wit:

CHECK NO CURRENT DATE AMOUNT

ACCT
467322 1008-08341-0 May 8, 1988 P200,000.00
510290 1008-08734-3 June 10, 1988 232,500.00
613307 1008-08734-3 June 14, 1988 200,000.00
 613306 1008-08734-3 July 4, 1988 290,595.00

Claiming that the four checks mentioned were deposited by Tan in the account of William Co without her
consent, Dela Rosa-Ramos instituted a complaint against Tan, Co and the Bank before the RTC seeking,
among other things, to recover from the Bank the sum of P754,689.66 representing the total amount charged
or withdrawn from her current account.

RTC ruled in favor of dela Rosa-Ramos, and ordered the Bank and defendants – DOMINGO TAN and
WILLIAM CO, to pay her, jointly and severally: P754,689.66, representing her lost deposit, plus legal interest.

CA AFFIRMED with the MODIFICATION- the defendants are liable only for the amount of ₱521,989.00
covering Check Nos. 467322, 613307 and ₱121,989.66 covered by Check No. 613306.

SC found the Bank liable only for Check No 467322 and only for half of its amount because of dela Rosa-
Ramos’ contributory negligence. SC, adopting the findings of the RTC and the CA, opined that:
(1) The Bank should have readily rejected the obviously altered P200k.
A careful scrutiny of the evidence shows that indeed the date of Check No. 467322 had been materially
altered from August 1987 to May 8, 1988 in accordance with Section 125 of the Negotiable Instruments Law. It
is worthy to take note of the fact that such alteration was not countersigned by the drawer to make it a valid
correction of its date as consented by its drawer as the standard operating procedure of the Bank.
(2) Dela Rosa-Ramos exposed herself to risk when she entered into that “special arrangement” with Tan.
While the Bank reneged on its responsibility to Dela Rosa-Ramos, she is nevertheless equally guilty of
contributory negligence.

DOCTRINE: Where the bank and a depositor are equally negligent, they should equally suffer the loss. The
two must both bear the consequences of their mistakes.

FACTS
Myrna Dela Rosa-Ramos maintained a current account with the United Overseas Bank Philippines Sto. Cristo
Branch, Binondo, Manila. Dela Rosa-Ramos got acquainted with the Bank’s Signature Verifier, Domingo Tan.

Tan offered Dela Rosa-Ramos a “special arrangement” wherein he would finance or place sufficient funds in
her current account whenever there would be an overdraft. It was their arrangement to make sure that the
checks she would issue would not be dishonored. Tan offered the service for a fee of P50 a day for every P40k
he would finance.

In order to guarantee payment for such funding, Dela Rosa-Ramos issued postdated checks covering the
principal amount plus interest as computed by Tan on specified date. There were also times when she just
paid in cash.

Dela Rosa-Ramos issued and delivered to Tan the following Associated Bank checks drawn against her
current account and payable to “cash,” to wit:

CHECK NO CURRENT DATE AMOUNT

ACCT
467322 1008-08341-0 May 8, 1988 P200,000.00
510290 1008-08734-3 June 10, 1988 232,500.00
613307 1008-08734-3 June 14, 1988 200,000.00
613306 1008-08734-3 July 4, 1988 290,595.00

Claiming that the four checks mentioned were deposited by Tan in the account of William Co without her
consent, Dela Rosa-Ramos instituted a complaint against Tan, Co and the Bank before the RTC seeking,
among other things, to recover from the Bank the sum of P754,689.66 representing the total amount charged
or withdrawn from her current account.
Allegations:
Check No. 467322 was a stale guarantee check. The check was dated Aug 28, 1987 but was altered to May 8,
1988. Tan then deposited the check in the account of the Co, despite the obvious superimposed date. As a
result, the amount of P200k was charged against her checking account.

Check No. 510290 was issued in payment of cigarettes that she bought from Co. This check bounced so she
replaced it with her good customer’s check and cash and gave it to Tan. The latter, however, did not return the
bounced check to her. Instead, he “redeposited” it in Co’s account.

Check No. 613307 was another guarantee check that was also undated. It was Tan who placed the date June
14, 1988. For this check, an order to stop payment was issued because of insufficient funds. Expectedly, the
words “PAYMENT STOPPED” were stamped on both sides of the check. This check was not returned to her
either and, instead, it was “redeposited” in Co’s account.

Check Nos. 510290 and 613307 were both dishonored for insufficient funds. When she got the opportunity to
confront Co regarding their deposit of the two checks, the latter disclosed that her two checks were deposited
in his account to cover for his P432,500 cash which was taken by Tan. Then, with a threat to expose her
relationship with a married man, Tan and Co were able to coerce her to replace the two above-mentioned
checks with Check No. 598648 in the amount of P432,500.

Check No. 613306 for P290,595, was also undated. Tan placed the date, July 4, 1988. As of July 5, 1988, her
checking account had P121,989.66 which was insufficient to answer for the value of said check. A check of a
certain Lee See Bin in the amount of P170k was, however, deposited in her account. As a result, Tan was able
to encash Check No. 613306 and withdrew her P121,989.66 balance. Later, she found out that the Lee See
Bin Check was not funded because the Bank’s bookkeeper demanded from her the return of the deficiency.

RTC ruled in favor of dela Rosa-Ramos, and ordered the Bank and defendants – DOMINGO TAN and
WILLIAM CO, to pay the plaintiff, jointly and severally: P754,689.66, representing her lost deposit, plus legal
interest; damages and costs.

Co and the Bank appealed their cases to the CA. As Co failed to file a brief within the period prescribed, his
appeal was dismissed. The CA then proceeded to resolve the appeal of the Bank.

CA AFFIRMED with the MODIFICATION that: (a) the defendants are liable only for the amount of ₱521,989.00
covering Check Nos. 467322, 613307 and ₱121,989.66 covered by Check No. 613306 and (b) deleting the
award for moral damages and attorney’s fees.
Still not satisfied, the Bank moved for partial reconsideration. CA denied it for lack of merit. Hence this petition.
-----------------------------------------
WON the Bank should be held liable for Check Nos. 467322, 613307 and 613306
Held: liable only for check no 437322
(1) Bank’s liability is solidary
It must be remembered that public interest is intimately carved into the banking industry because the primordial
concern here is the trust and confidence of the public. This fiduciary nature of every bank’s relationship with its
clients/depositors impels it to exercise the highest degree of care, definitely more than that of a reasonable
man or a good father of a family. It is, therefore, required to treat the accounts and deposits of these individuals
with meticulous care.

Considering that banks can only act through their officers and employees, the fiduciary obligation laid down for
these institutions necessarily extends to their employees. It has been repeatedly held that “a bank’s liability as
an obligor is not merely vicarious, but primary” since they are expected to observe an equally high degree of
diligence, not only in the selection, but also in the supervision of its employees. Thus, even if it is their
employees who are negligent, the bank’s responsibility to its client remains paramount making its liability to the
same to be a direct one.

Guided by the following standard, the Bank, given the fiduciary nature of its relationship with Dela Rosa-
Ramos, should have exerted every effort to safeguard and protect her money which was deposited and
entrusted with it. As found by both the RTC and the CA, Ramos was defrauded and she lost her money
because of the negligence attributable to the Bank and its employees. Indeed, it was the employees who
directly dealt with Dela Rosa-Ramos, but the Bank cannot distance itself from them. That they were the ones
who gained at the expense of Dela Rosa-Ramos will not excuse it of its fundamental responsibility to her. As
stated by the RTC,

The factual circumstances attending the repeated irregular entries and transactions involving the current
account of the plaintiff-appellee is evidently due to, if not connivance, gross negligence of other bank officers
since the repeated assailed transactions could not possibly be committed by defendant Tan alone considering
the fact that the processing of the questioned checks would pass the hands of various bank officers who
positively identified their initials therein. Having a number of employees commit mistake or gross negligence at
the same situation is so puzzling and obviates the appellant bank’s laxity in hiring and supervising its
employees. Hence, this Court is of the opinion that the appellant bank should be held liable for the damages
suffered by the plaintiff-appellee in the case at bench.

(2) Liable only for Check no 437322

As regards Check No. 467322, the Bank avers that Dela Rosa- Ramos’ acquiesced to the change of the date
in the said check. It argues that her continued acts of dealing and transacting with the Bank like subsequently
issuing checks despite her experience with this check only shows her acquiescence which is tantamount to
giving her consent.

Obviously, the Bank has not taken to heart its fiduciary responsibility to its clients. Rather than ask and wonder
why there were indeed subsequent transactions, the more paramount issue is why the Bank through its several
competent employees and officers, did not stop, double check and ascertain the genuineness of the date of the
check which displayed an obvious alteration. This failure on the part of the Bank makes it liable for that loss.

As the RTC held:

x x x defendant-bank is not faultless in the irregularities of its signature-verifier. In the first place, it should have
readily rejected the obviously altered plaintiff’s ₱200,000.00-check, thus, avoid its unwarranted deposit in
defendant-Co’s account and its corollary loss from plaintiff’s deposit, had its other employees, even excepting
TAN, performed their duties efficiently and well. x x x

The glaring error did not escape the observation of the CA either. On the matter, it hastened to add:

A careful scrutiny of the evidence shows that indeed the date of Check No. 467322 had been materially altered
from August 1987 to May 8, 1988 in accordance with Section 125 of the Negotiable Instruments Law. It is
worthy to take note of the fact that such alteration was not countersigned by the drawer to make it a valid
correction of its date as consented by its drawer as the standard operating procedure of the appellant bank in
such situation as admitted by its Sto. Cristo Branch manager, Mabini Z. Mil(l)an. x x x.

On Check Nos. 613307 and 510290, the admission made by Dela Rosa-Ramos that she had to issue a
replacement check for Check No. 613307 and 510290 only proves that these checks were never paid and
charged or debited against her account. The replacement check is, of course, a totally different matter and is
not covered as an issue in this case.

Lastly, with respect to Check No. 613306, no manifest irregularity exists as shown from the Statement of
Accounts - as of July 4, 1988, dela Rosa-Ramos had an outstanding deposit of P121,989.66. On July 5, 1988,
P170k, through the check of Lee See Bin with the same Bank, was deposited on her account and on the very
same day Check No. 613306 in the amount of P290,595 was approved and processed and its equivalent was
debited from her account. Since the check is an ‘on-us’ check which is deposited to an account of another with
the same branch as that of the drawer of the said check, it is considered as good as cash if funded, and hence,
may be withdrawn on the very same day it was deposited.

The burden of proof was on Dela Rosa-Ramos to establish that Lee See Bin was fictitious and that the money
which purportedly came from him was merely simulated. She unfortunately failed to discharge this burden.
Withal, the Bank should only be made to answer the value of Check No. 467322 in the amount of P200k plus
the legal rate of interest. This must be further tempered down for there is no denying that it was Dela Rosa-
Ramos who exposed herself to risk when she entered into that “special arrangement” with Tan. While the Bank
reneged on its responsibility to Dela Rosa-Ramos, she is nevertheless equally guilty of contributory negligence.

It has been held that where the bank and a depositor are equally negligent, they should equally suffer the loss.
The two must both bear the consequences of their mistakes. Thus, the Bank should only pay 50% of the actual
damages while Dela Rosa-Ramos should have to shoulder the remaining 50%.

Considering that Tan was primarily responsible for the damages caused to dela Rosa-Ramos, the Bank should
seek compensation from this estate, subject to the applicable laws and rules.

WHEREFORE, the petition is partially granted. The Decision and Resolution of the CA are modified. United
Overseas Bank is ordered to pay dela Rosa Ramos P100k representing 50% of the actual damages awarded
plus interest.

FEBTC BANK & TRUST COMPANY v. GOLD PALACE JEWELLERY CO.

GR 168274 / August 20, 2008 / Nachura, J. / NEGO – Defective Instruments

SUMMARY. A foreigner purchases jewelry pieces from Gold Palace using a draft. The draft was deposited by
Gold Palace as the payee to FEBTC (collecting bank). The draft was submitted by the collecting bank to LBP
(drawee bank) for clearing and LBP subsequently paid the amount as stated in the draft. Drawee bank was
then notified by United Overseas Bank (drawer) that the draft was materially altered as to the amount stated
therein. The drawee bank then returned the amount debited from the drawer and notified the collecting bank
as to the material alteration. The collecting bank returned the amount paid by the drawee bank and then
partially debited the account of the payee (the amount was not enough to cover the amount paid under the
draft). The collecting bank subsequently demanded that the payee return the rest of the amount paid to it.
The payee refused to do so. SC held that the acceptance of the drawee bank was according to the tenor of
the altered obligation (altered amount) and could no longer recover.
DOCTRINE. Act No. 2031, or the Negotiable Instruments Law (NIL), explicitly provides that the acceptor, by
accepting the instrument, engages that he will pay it according to the tenor of his acceptance. This provision
applies with equal force in case the drawee pays a bill without having previously accepted it. His actual
payment of the amount in the check implies not only his assent to the order of the drawer and a recognition of
his corresponding obligation to pay the aforementioned sum, but also, his clear compliance with that
obligation.

FACTS.
 A foreigner, identified as Samuel Tagoe, purchased from the respondent Gold Palace Jewellery
Corporation’s (Gold Palace) store at SM­North EDSA several pieces of jewelry valued at P258,000. In
payment of the same, he offered Foreign Draft No. M-069670 issued by the United Overseas Bank
(Malaysia) BHD Medan Pasar, Kuala Lumpur Branch (UOB) [drawer] addressed to the Land Bank of the
Philippines, Manila (LBP) [drawee bank] and payable to the Gold Palace [payee] for P380,000.
 Before receiving the draft, respondent Judy Yang, the assistant general manager of Gold Palace, inquired
from petitioner Far East Bank & Trust Companys (FEBTC) [collecting bank] SM North EDSA Branch, its
neighbor mall tenant, the nature of the draft. The teller informed her that the same was similar to a
manager’s check, but advised her not to release the pieces of jewelry until the draft had been cleared.
 Respondent Julie Yang, the manager of Gold Palace, consequently deposited the draft in the company’s
account with the aforementioned FEBTC branch on June 2, 1998.
 On June 26, 1998, or after around three weeks, LBP informed FEBTC that the amount in Foreign Draft No.
M-069670 had been materially altered from P300 to P380,000 and that it was returning the same. Intending
to debit the amount from respondents account, FEBTC subsequently refunded the P380,000 earlier paid by
LBP. FEBTC was able to debit only P168,053.36 from Gold Palace's account but this was done without a
prior written notice to the account holder. FEBTC only notified by phone the representatives of the
respondent company.
 On August 12, 1998, FEBTC demanded from Gold Palace the payment of P211,946.64 or the difference
between the amount in the materially altered draft and the amount debited from the respondent company’s
account. Because Gold Palace did not heed the demand, FEBTC consequently instituted Civil Case No.
99-296 for sum of money and damages before the Regional Trial Court (RTC), Branch 64 of Makati City.
 The RTC rendered its July 30, 2001 Decision in favor of FEBTC, ordering Gold Palace to pay the
former P211,946.64 as actual damages andP50,000 as attorney’s fees.
 On appeal, the CA, in the assailed March 15, 2005 Decision, reversed the ruling of the trial court.

ISSUES & RATIO.

1 WON the drawee LBP may recover from payment mistakenly paid on the basis of the altered draft –
NO
 Act No. 2031, or the Negotiable Instruments Law (NIL), explicitly provides that the acceptor, by
accepting the instrument, engages that he will pay it according to the tenor of his acceptance. This
provision applies with equal force in case the drawee pays a bill without having previously
accepted it. His actual payment of the amount in the check implies not only his assent to the order
of the drawer and a recognition of his corresponding obligation to pay the aforementioned sum, but
also, his clear compliance with that obligation. Actual payment by the drawee is greater than his
acceptance, which is merely a promise in writing to pay. The payment of a check includes its acceptance.
 Unmistakable herein is the fact that the drawee bank cleared and paid the subject foreign draft and
forwarded the amount thereof to the collecting bank. The latter then credited to Gold Palaces account the
payment it received. Following the plain language of the law, the drawee, by the said payment, recognized
and complied with its obligation to pay in accordance with the tenor of his acceptance. The tenor of the
acceptance is determined by the terms of the bill as it is when the drawee accepts. Stated simply, LBP was
liable on its payment of the check according to the tenor of the check at the time of payment, which was the
raised amount.
 Because of that engagement, LBP could no longer repudiate the payment it erroneously made to a due
course holder. We note at this point that Gold Palace was not a participant in the alteration of the draft, was
not negligent, and was a holder in due course it received the draft complete and regular on its face, before
it became overdue and without notice of any dishonor, in good faith and for value, and absent any
knowledge of any infirmity in the instrument or defect in the title of the person negotiating it. Having relied
on the drawee banks clearance and payment of the draft and not being negligent (it delivered the
purchased jewelry only when the draft was cleared and paid), respondent is amply protected by the said
Section 62. Commercial policy favors the protection of any one who, in due course, changes his position on
the faith of the drawee banks clearance and payment of a check or draft.

2. WON FEBTC, as the collecting bank, can debit the amount mistakenly paid from Gold Palace, the
holder in due course – NO
 Thus, considering that, in this case, Gold Palace is protected by Section 62 of the NIL, its collecting agent,
FEBTC, should not have debited the money paid by the drawee bank from respondent company’s account.
When Gold Palace deposited the check with FEBTC, the latter, under the terms of the deposit and the
provisions of the NIL, became an agent of the former for the collection of the amount in the draft. The
subsequent payment by the drawee bank and the collection of the amount by the collecting bank closed
the transaction insofar as the drawee and the holder of the check or his agent are concerned, converted
the check into a mere voucher, and, as already discussed, foreclosed the recovery by the drawee of the
amount paid. This closure of the transaction is a matter of course; otherwise, uncertainty in commercial
transactions, delay and annoyance will arise if a bank at some future time will call on the payee for the
return of the money paid to him on the check.

DECISION.
CA AFFIRMED with modification that the award of exemplary damages and attorney’s fees DELETED.
(Affirmed to the extent that FEBTC could not debit the account of Gold Palace, and for doing so, it must
return what it had erroneously taken. FEBTC’s remedy under the law is not against Gold Palace but against
the drawee-bank or the person responsible for the alteration. That, however, is another issue which we do not
find necessary to discuss in this case. [Note: LBP as the drawee-bank and Tagoe were not parties to this
case.])
 Areza v. Express Savings Bank
Instrument:
Maker: Mambuay | Drawee: PVAO | Payee: Areza (Eventually) | Amount: P200k x 9checks
Summary:
Areza presented the checks to ESB (their bank), ESB presented to Equitable, Equitable presented to PVAO.
PVAO approved (follow the chain back) so ESB credited the amount to Areza’s savings. PVAO eventually
informed Equitable that they are dishonoring the checks because it was altered. Equitable debited ESB’s
account, ESB also debited Arezas’ account.
Ruling:
ESB cannot debit from Arezas’ account. The collecting banks are ultimately liable for the amount of the
materially altered check. It cannot further pass the liability back to the petitioners absent any showing of
petitioners’ the negligence which substantially contributed to the loss from alteration.

FACTS
 PETS Cesar Areza and Lolita Areza maintained bank deposits with Express Savings Bank (ESB).
 They received a purchase order for 2 vehicles from Mambuay.
 Mambuay paid them with 9 PH Veterans Affairs Office (PVAO) checks drawn against PH Veterans
Bank, each valued at P200k.
 PET Claims: Michael Potenciano, branch manager of ESB offered the services of the bank to process
and eventually credit the checks to petitioner’s account.
 Potenciano claims: He accepted the checks by way of accommodation
 ESB deposited the checks with its depositary bank, Equitable-PCI.
o Equitable presented the checks to PVAO – which honored the same.
 The entire amount was credited to the PETS’ savings account so PETS released the vehicles.
 PVAO returned the checks to Equitable on the ground that the amount on the face was altered from
P4k to P200k.
o Equitable told ESB that the checks were dishonored and debited their deposit account.
 PETs issued a check which was dishonored by ESB for the reason “Deposit Under Hold”
 ESB closed the petitioner’s account and transferred the funds therein (1,179,659.69) to their own
account.

ISSUES & HOLDING

 WON ESB had the right to debit the amount from the Petitioner’s account without their knowledge? –
NO.

RATIO
 NIL. Sec. 63. - the acceptor, by accepting the instrument, engages that he will pay it according to the
tenor of his acceptance. The acceptor is a drawee who accepts the bill.
 PNB v. CA - the payment of the amount of a check implies not only acceptance but also compliance
with the drawee’s obligation.
 If the instrument is altered before acceptance, is the drawee liable for the original or the altered tenor of
acceptance?
o National City Bank of Chicago v. Bank of the Republic - it was not the legislative intent that the
obligation of the acceptor should be limited to the tenor of the instrument as drawn by the
maker, as was the rule at common law, but that it should be enforceable in favor of a holder in
due course against the acceptor according to its tenor at the time of its acceptance or
certification.
o NIL Sec. 124 - a material alteration avoids an instrument except as against an assenting party
and subsequent indorsers, but a holder in due course may enforce payment according to its
original tenor.
 DEPOSITARY BANK – first bank to take an item even though it is also the payor bank, unless the item
is presented for immediate payment over the counter.
 COLLECTING BANK – any bank handling an item for collection except the bank on which the check is
drawn.
 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 and the law holds it to a high standard of conduct.
 As collecting banks, the Bank and Equitable-PCI Bank are both liable for the amount of the materially
altered checks. Since Equitable-PCI Bank is not a party to this case and the Bank allowed its account
with Equitable- PCI Bank to be debited, it has the option to seek recourse against the latter in another
forum.
 A depositary/collecting bank may resist or defend against a claim for breach of warranty if the drawer,
the payee, or either the drawee bank or depositary bank was negligent and such negligence
substantially contributed to the loss from alteration.
o In this case, there is no negligence on the part of PETS.
o The bank manager offered their services. The check was cleared and credited to their account.
 ESB cannot set-off the amount it paid to Equitable with petitioners’ savings account.
o While it is true that the bank and the petitioners have a debtor-creditor relationship, petitioners
are not liable for the deposit of the altered checks. The Bank, as the depositary and collecting
bank ultimately bears the loss. Thus, there being no indebtedness to the Bank on the part of
petitioners, legal compensation cannot take place.

DISPOSITIVE
Petition Granted.