G.R. No.

L-1405

July 31, 1948

BENJAMIN ABUBAKAR, petitioner, vs. THE AUDITOR GENERAL, respondent.

FACTS:
We are asked to overrule the decision of the Auditor General refusing to authorize the payment of
Treasury warrant No. A-2867376 for P1,000 which was issued in favor of Placido S. Urbanes on
December 10, 1941, but is now in the hands of herein petitioner Benjamin Abubakar.
For his refusal the respondent gave two reasons: first, because the money available for the
redemption of treasury warrants issued before January 2, 1942, is appropriated by Republic Act
No. 80 (Item F-IV-8) and this warrant does not come within the purview of said appropriation; and
second, because on of the requirements of his office had not been complied with, namely, that it
must be shown that the holders of warrants covering payment or replenishment of cash advances
for official expenditures (as this warrant is) received them in payment of definite government
obligations.
ISSUE: Whether or not payment from a particular fund is unconditional. (NO)
HELD:
There is no doubt as to the authenticity and date of the treasury warrant. There is no question
that it was regularly indorsed by the payee and is now in the custody of the herein petitioner who
is a private individual. On the other hand, it is admitted that the warrant was originally made
payable to Placido S. Urbanes in his capacity as disbursing officer of the Food Administration for
"additional cash advance for Food Production Campaign in La Union". It is thus apparent that
this is a treasury warrant issued in favor of a public officer or employee and held in
possession by a private individual. Such being the case, the Auditor General can hardly be
blamed for not authorizing its redemption out of an appropriation specifically for "treasury
warrants issued ... in favor of and held in possession by private individuals." (Republic Act No. 80,
Item F-IV-8.) This warrant was not issued in favor of a private individual. It was issued in
favor of a government employee.
The petitioner argues that he is a holder in good faith and for value of a negotiable instrument an
dis entitled to the rights and privileges of a holder in due course, free from defenses. But this
treasury warrant is not within the scope of the negotiable instruments law. For one thing,
the document bearing on its face the words "payable from the appropriation for food
administration," is actually an order for payment out of "a particular fund," and is not
unconditional, and does not fulfill one of the essential requirements of a negotiable
instrument. (Section 3 last sentenced and section 1[b] of the Negotiable Instruments Law.) In the
United States, government warrants for the payment of money are not negotiable instruments nor
commercial proper1
Anyway the question here is not whether the Government should eventually pay this warrant, or
is ultimately responsible for it, but whether the Auditor General erred in refusing to permit
payment out of the particular appropriation in Item F-IV-8 of Republic Act No. 80. We think that he
did not. Petition dismissed, with costs.

G.R. No. L-22405 June 30, 1971

PHILIPPINE EDUCATION CO., INC., plaintiff-appellant, vs. MAURICIO A. SORIANO, ET AL.,
defendant-appellees.
FACTS:
An appeal from a decision of the Court of First Instance of Manila dismissing the complaint filed
by the Philippine Education Co., Inc. against Mauricio A. Soriano, Enrico Palomar and Rafael
Contreras.
On April 18, 1958 Enrique Montinola sought to purchase from the Manila Post Office ten (10)
money orders of P200.00 each payable to E.P. Montinola. After the postal teller had made out
money orders numbered 124685, 124687-124695, Montinola offered to pay for them with a
private checks were not generally accepted in payment of money orders, the teller advised him to
see the Chief of the Money Order Division, but instead of doing so, Montinola managed to leave
building with his own check and the ten(10) money orders without the knowledge of the teller.
On the same date, April 18, 1958, upon discovery of the disappearance of the unpaid money
orders, an urgent message was sent to all postmasters, and the following day notice was likewise
served upon all banks, instructing them not to pay anyone of the money orders aforesaid if
presented for payment.
On April 23, 1958 one of the above-mentioned money orders numbered 124688 was received by
appellant as part of its sales receipts. The following day it deposited the same with the Bank of
America, and one day thereafter the latter cleared it with the Bureau of Posts and received from
the latter its face value of P200.00.
On September 27, 1961, appellee Mauricio A. Soriano, Chief of the Money Order Division of the
Manila Post Office, acting for and in behalf of his co-appellee, Postmaster Enrico Palomar,
notified the Bank of America that money order No. 124688 attached to his letter had been found
to have been irregularly issued and that, in view thereof, the amount it represented had been
deducted from the bank's clearing account. For its part, on August 2 of the same year, the Bank
of America debited appellant's account with the same amount and gave it advice thereof by
means of a debit memo.
On October 12, 1961 appellant requested the Postmaster General to reconsider the action taken
by his office deducting the sum of P200.00 from the clearing account of the Bank of America, but
his request was denied. So was appellant's subsequent request that the matter be referred to the
Secretary of Justice for advice. Thereafter, appellant elevated the matter to the Secretary of
Public Works and Communications, but the latter sustained the actions taken by the postal
officers.
In connection with the events set forth above, Montinola was charged with theft in the Court of
First Instance of Manila (Criminal Case No. 43866) but after trial he was acquitted on the ground
of reasonable doubt.
On January 8, 1962 appellant filed an action against appellees in the Municipal Court of Manila.
On November 17, 1962, after the parties had submitted the stipulation of facts reproduced at
pages 12 to 15 of the Record on Appeal, the above-named court rendered a decision in favor of
appellant.
The case was appealed to the Court of First Instance of Manila where, after the parties had
resubmitted the same stipulation of facts, the appealed decision dismissing the complaint, with
costs, was rendered.
ISSUE: Whether or not the postal money order in question is a negotiable instrument; that its
nature as such is not in anyway affected by the letter dated October 26, 1948 signed by the
Director of Posts and addressed to all banks with a clearing account with the Post Office, and that
money orders, once issued, create a contractual relationship of debtor and creditor, respectively,
between the government, on the one hand, and the remitters payees or endorses, on the other.

(NO, Postal Money Order is not a Negotiable Instrument)

HELD:
It is not disputed that our postal statutes were patterned after statutes in force in the United
States. For this reason, ours are generally construed in accordance with the construction given in
the United States to their own postal statutes, in the absence of any special reason justifying a
departure from this policy or practice. The weight of authority in the United States is that
postal money orders are not negotiable instruments, the reason behind this rule being
that, in establishing and operating a postal money order system, the government is not
engaging in commercial transactions but merely exercises a governmental power for the
public benefit.
Moreover, some of the restrictions imposed upon money orders by postal laws and regulations
are inconsistent with the character of negotiable instruments. For instance, such laws and
regulations usually provide for not more than one endorsement; payment of money orders may
be withheld under a variety of circumstances
Of particular application to the postal money order in question are the conditions laid down in the
letter of the Director of Posts of October 26, 1948 (Exhibit 3) to the Bank of America for the
redemption of postal money orders received by it from its depositors. Among others, the condition
is imposed that "in cases of adverse claim, the money order or money orders involved will be
returned to you (the bank) and the, corresponding amount will have to be refunded to the
Postmaster, Manila, who reserves the right to deduct the value thereof from any amount due you
if such step is deemed necessary."
The conditions thus imposed in order to enable the bank to continue enjoying the facilities
theretofore enjoyed by its depositors, were accepted by the Bank of America. The latter is
therefore bound by them. That it is so is clearly referred from the fact that, upon receiving advice
that the amount represented by the money order in question had been deducted from its clearing
account with the Manila Post Office, it did not file any protest against such action.
WHEREFORE, the appealed decision being in accordance with law, the same is hereby affirmed
with costs.

G.R. No. L-49494 May 31, 1979

NELIA G. PONCE and VICENTE C. PONCE, petitioners, vs. THE HONORABLE COURT OF
APPEALS, and JESUSA B. AFABLE, respondents.
FACTS:
On June 3, 1969, private respondent Jesusa B. Afable, together with Felisa L. Mendoza and Ma.
Aurora C. Dio executed a promissory note in favor of petitioner Nelia G. Ponce in the sum of
P814,868.42, Philippine Currency, payable, without interest, on or before July 31, 1969.
Upon the failure of the debtors to comply with the terms of the promissory note, petitioners (Nelia
G. Ponce and her husband) filed, on July 27, 1970, a Complaint against them with the Court of
First Instance of Manila for the recovery of the principal sum of P814,868.42, plus interest and
damages.
On March 9, 1972, the trial Court rendered judgment ordering respondent Afable and her codebtors, Felisa L. Mendoza and Ma. Aurora C. Dio , to pay petitioners, jointly and severally.
From said Decision, by respondent Afable appealed to the Court of Appeals. She argued that the
contract under consideration involved the payment of US dollars and was, therefore, illegal; and
that under the in pari delicto rule, since both parties are guilty of violating the law, neither one can
recover. It is to be noted that said defense was not raised in her Answer.
On December 13, 1977, the Court of Appeals reversed the judgment of the trial Court and
dismissed the Complaint. The Court of Appeals opined that the intent of the parties was that the
promissory note was payable in US dollars, and, therefore, the transaction was illegal with neither
party entitled to recover under the in pari delicto rule.
ISSUE: Whether or not the Promissory Note is legal despite it being payable in US Dollars.
HELD:
In the Resolution dated June 8, 1978, the Court of Appeals made the following observations:

We are constrained to reverse our December 13, 1977 decision. While it is true that
the promissory note does not mention any obligation to pay in dollars, plaintiffappellee Ponce himself admitted that there was an agreement that he would be
paid in dollars by the defendants. The promissory note is payable in U.S.
currency. The intent of the parties prevails over the bare words of the written
contracts.

We are constrained to disagree.

It is to be noted that while an agreement to pay in dollars is declared as null and void and of no
effect, what the law specifically prohibits is payment in currency other than legal tender. It
does not defeat a creditor's claim for payment, as it specifically provides that "every other
domestic obligation ... whether or not any such provision as to payment is contained
therein or made with respect thereto, shall be discharged upon payment in any coin or
currency which at the time of payment is legal tender for public and private debts." A
contrary rule would allow a person to profit or enrich himself inequitably at another's expense.
As the Court of Appeals itself found, the promissory note in question provided on its face for
payment of the obligation in Philippine currency, i.e., P814,868.42. So that, while the agreement
between the parties originally involved a dollar transaction and that petitioners expected
to be paid in the amount of US$194,016.29, petitioners are not now insisting on their
agreement with respondent Afable for the payment of the obligation in dollars.
On the contrary, they are suing on the basis of the promissory note whereby the parties have
already agreed to convert the dollar loan into Philippine currency at the rate of P4.20 to $1.00. It
may likewise be pointed out that the Promissory Note contains no provision "giving the obligee
the right to require payment in a particular kind of currency other than Philippine currency, " which
is what is specifically prohibited by RA No. 529.

At any rate, even if we were to disregard the promissory note providing for the payment of the
obligation in Philippine currency and consider that the intention of the parties was really to provide
for payment of the obligation would be made in dollars, petitioners can still recover the amount of
US$194,016.29, which respondent Afable and her co-debtors do not deny having received, in its
peso equivalent.
As held in Eastboard Navigation, Ltd. vs. Juan Ysmael & Co. Inc., 102 Phil. 1 (1957), and Arrieta
vs. National Rice & Corn Corp., if there is any agreement to pay an obligation in a currency other
than Philippine legal tender, the same is nun and void as contrary to public policy, pursuant to
Republic Act No. 529, and the most that could be demanded is to pay said obligation in Philippine
currency. In other words, what is prohibited by RA No. 529 is the payment of an obligation
in dollars, meaning that a creditor cannot oblige the debtor to pay him in dollars, even if
the loan were given in said currency. In such a case, the indemnity to be allowed should
be expressed in Philippine currency on the basis of the current rate of exchange at the
time of payment.
The foregoing premises considered, we deem it unnecessary to discuss the other errors assigned
by petitioners.
WHEREFORE, the Resolutions of the Court of Appeals dated June 8, 1978, July 6, 1978 and
November 27, 1978 are hereby set aside, and judgment is hereby rendered reinstating the
Decision of the Court of First Instance of Manila.
No pronouncement as to costs.
SO ORDERED.

G.R. No. L-15645

January 31, 1964

PAZ P. ARRIETA and VITALIADO ARRIETA, plaintiffs-appellees, vs. NATIONAL RICE AND
CORN CORPORATION, defendant-appellant, MANILA UNDERWRITERS INSURANCE CO.,
INC., defendant-appellee.
FACTS:
On May 19, 1952, plaintiff-appellee participated in the public bidding called by the NARIC for the
supply of 20,000 metric tons of Burmese rice.
As her bid of $203.00 per metric ton was the lowest, she was awarded the contract for the same.
Accordingly, on July 1, 1952, plaintiff-appellee Paz P. Arrieta and the appellant corporation
entered into a Contract of Sale of Rice, under the terms of which the former obligated herself to
deliver to the latter 20,000 metric tons of Burmess Rice at $203.00 per metric ton, CIF Manila.
In turn, the defendant corporation committed itself to pay for the imported rice "by means of an
irrevocable, confirmed and assignable letter of credit in U.S. currency in favor of the plaintiffappellee and/or supplier in Burma, immediately."
Despite the commitment to pay immediately "by means of an irrevocable, confirmed and
assignable Letter of Credit," however, it was only on July 30, 1952, or a full month from the
execution of the contract, that the defendant corporation, thru its general manager, took the first
to open a letter of credit by forwarding to the Philippine National Bank its Application for
Commercial Letter Credit. The application was accompanied by a transmittal letter, the relevant
paragraphs of which read:
In view of the fact that we do not have sufficient deposit with your institution with which to cover
the amount required to be deposited as a condition for the opening of letters of credit, we
will appreciate it if this application could be considered special case.
We understand that our supplier, Mrs. Paz P. Arrieta, has a deadline to meet which is August
4, 1952, and in order to comply therewith, it is imperative that the L/C be opened prior to
that date. We would therefore request your full cooperation on this matter.
On the same day, Mrs. Paz P. Arrieta, advised the appellant corporation of the extreme necessity
for the immediate opening of the letter credit since she had by then made a tender to her supplier
in Rangoon, Burma, "equivalent to 5% of the F.O.B. price of 20,000 tons at $180.70 and in
compliance with the regulations in Rangoon this 5% will be confiscated if the required letter of
credit is not received by them before August 4, 1952."
On August 4, 1952, the Philippine National Bank informed the appellant corporation that its
application, "for a letter of credit for $3,614,000.00 in favor of Thiri Setkya has been approved by
the Board of Directors with the condition that marginal cash deposit be paid and that drafts are to
be paid upon presentment." Furthermore, the Bank represented that it "will hold your application
in abeyance pending compliance with the above stated requirement."
As it turned out, however, the appellant corporation was not in any financial position to meet the
condition. As matter of fact, in a letter dated August 2, 1952, the NARIC bluntly confessed to the
appellee its dilemma: "In this connection, please be advised that our application for opening of
the letter of credit has been presented to the bank since July 30th but the latter requires that we
first deposit 50% of the value of the letter amounting to aproximately $3,614,000.00 which we are
not in a position to meet."
Consequently, the credit instrument applied for was opened only on September 8, 1952 "in favor
of Thiri Setkya, Rangoon, Burma, and/or assignee for $3,614,000.00," (which is more than two
months from the execution of the contract) the party named by the appellee as beneficiary of the
letter of credit.
As a result of the delay, the allocation of appellee's supplier in Rangoon was cancelled and the
5% deposit, amounting to 524,000 kyats or approximately P200,000.00 was forfeited. In this
connection, it must be made of record that although the Burmese authorities had set August 4,

1952, as the deadline for the remittance of the required letter of credit, the cancellation of the
allocation and the confiscation of the 5% deposit were not effected until August 20, 1952, or, a full
half month after the expiration of the deadline. And yet, even with the 15-day grace, appellant
corporation was unable to make good its commitment to open the disputed letter of credit.
The appellee endeavored, but failed, to restore the cancelled Burmese rice allocation. When the
futility of reinstating the same became apparent, she offered to substitute Thailand rice instead to
the defendant NARIC. This offer for substitution, however, was rejected by the appellant in a
resolution dated November 15, 1952.
On the foregoing, the appellee sent a letter to the appellant, demanding compensation for the
damages caused her in the sum of $286,000.00, U.S. currency, representing unrealized profit.
The demand having been rejected she instituted this case now on appeal.
At the instance of the NARIC, a counterclaim was filed and the Manila Underwriters Insurance
Company was brought to the suit as a third party defendant to hold it liable on the performance
bond it executed in favor of the plaintiff-appellee.
ISSUE: Whether or not the following: (1) the amount of the letter of credit, (2) the person,
company or corporation in whose favor it is to be opened, and (3) the place and bank where it
may be negotiated, were complied with by the Appellee. (YES)
HELD:
We find for the appellee.
It is clear upon the records that the sole and principal reason for the cancellation of the allocation
contracted by the appellee herein in Rangoon, Burma, was the failure of the letter of credit to be
opened with the contemplated period. This failure must, therefore, be taken as the immediate
cause for the consequent damage which resulted. As it is then, the disposition of this case
depends on a determination of who was responsible for such failure. Stated differently, the issue
is whether appellant's failure to open immediately the letter of credit in dispute amounted to a
breach of the contract of July 1, 1952 for which it may be held liable in damages.
Appellant corporation disclaims responsibility for the delay in the opening of the letter of credit.
On the contrary, it insists that the fault lies with the appellee. Appellant contends that the disputed
negotiable instrument was not promptly secured because the appellee, failed to seasonably
furnish data necessary and required for opening the same, namely, "(1) the amount of the letter
of credit, (2) the person, company or corporation in whose favor it is to be opened, and (3)
the place and bank where it may be negotiated." Appellant would have this Court believe,
therefore, that had these informations been forthwith furnished it, there would have been no delay
in securing the instrument.
Appellant's explanation has neither force nor merit.
In the first place, the explanation reaches into an area of the proceedings into which We are not
at liberty to encroach. The explanation refers to a question of fact. Nothing in the record suggests
any arbitrary or abusive conduct on the part of the trial judge in the formulation of the ruling. His
conclusion on the matter is sufficiently borne out by the evidence presented. We are denied,
therefore, the prerogative to disturb that finding, consonant to the time-honored tradition of this
Tribunal to hold trial judges better situated to make conclusions on questions of fact. For the
record, We quote hereunder the lower court's ruling on the point:
The defense that the delay, if any in opening the letter of credit was due to the failure of plaintiff
to name the supplier, the amount and the bank is not tenable. Plaintiff stated in Court that
these facts were known to defendant even before the contract was executed because
these facts were necessarily revealed to the defendant before she could qualify as a
bidder. She stated too that she had given the necessary data immediately after the
execution of Ethe contract of July 1, 1952 to Mr. GABRIEL BELMONTE, General
Manager of the NARIC, both orally and in writing and that she also pressed for the
opening of the letter of credit on these occasions. These statements have not been

controverted and defendant NARIC, notwithstanding its previous intention to do so, failed
to present Mr. Belmonte to testify or refute this. ...
Secondly, from the correspondence and communications which form part of the record of this
case, it is clear that what singularly delayed the opening of the stipulated letter of credit and
which, in turn, caused the cancellation of the allocation in Burma, was the inability of the appellant
corporation to meet the condition importation by the Bank for granting the same.
We do not think the appellant corporation can refute the fact that had it been able to put up the
50% marginal cash deposit demanded by the bank, then the letter of credit would have been
approved, opened and released as early as August 4, 1952. The letter of the Philippine National
Bank to the NARIC was plain and explicit that as of the said date, appellant's "application for a
letter of credit ... has been approved by the Board of Directors with the condition that 50%
marginal cash deposit be paid and that drafts are to be paid upon presentment." (Emphasis
supplied)
The liability of the appellant, however, stems not alone from this failure or inability to satisfy the
requirements of the bank. Its culpability arises from its willful and deliberate assumption of
contractual obligations even as it was well aware of its financial incapacity to undertake
the prestation. We base this judgment upon the letter which accompanied the application filed
by the appellant with the bank, a part of which letter was quoted earlier in this decision. In the
said accompanying correspondence, appellant admitted and owned that it did "not have sufficient
deposit with your institution (the PNB) with which to cover the amount required to be deposited as
a condition for the opening of letters of credit. ... .
A number of logical inferences may be drawn from the aforementioned admission. First, that the
appellant knew the bank requirements for opening letters of credit; second, that appellant also
knew it could not meet those requirement.
When, therefore, despite this awareness that was financially incompetent to open a letter of credit
immediately, appellant agreed in paragraph 8 of the contract to pay immediately "by means of an
irrevocable, confirm and assignable letter of credit," it must be similarly held to have bound itself
to answer for all and every consequences that would result from the representation.
We would like to make reference also to Article 11 of the Civil Code which provides:
Those who in the performance of their obligation are guilty of fraud, negligence, or delay, and
those who in any manner contravene the tenor thereof, are liable in damages.
Under this provision, not only debtors guilty of fraud, negligence or default in the performance of
obligations a decreed liable; in general, every debtor who fails in performance of his obligations is
bound to indemnify for the losses and damages caused thereby. The phrase "any manner
contravene the tenor" of the obligation includes any illicit act which impairs the strict and faithful
fulfillment of the obligation or every kind or defective performance.
The NARIC would also have this Court hold that the subsequent offer to substitute Thailand rice
for the originally contracted Burmese rice amounted to a waiver by the appellee of whatever
rights she might have derived from the breach of the contract. We disagree. Waivers are not
presumed, but must be clearly and convincingly shown, either by express stipulation or acts
admitting no other reasonable explanation. (Ramirez v. Court of Appeals, 52 O.G. 779.) In the
case at bar, no such intent to waive has been established.
UPON ALL THE FOREGOING, the decision appealed from is hereby affirmed, with the sole
modification that the award should be converted into the Philippine peso at the rate of exchange
prevailing at the time the obligation was incurred or on July 1, 1952 when the contract was
executed. The appellee insurance company, in the light of this judgment, is relieved of any liability
under this suit. No pronouncement as to costs.


G.R. No. L-27782 July 31, 1970
OCTAVIO A. KALALO, plaintiff-Kalalo, vs. ALFREDO J. LUZ, defendant-Luz.
FACTS:
On November 17, 1959, plaintiff-Kalalo Octavio A. Kalalo (hereinafter referred to as Kalalo), a
licensed civil engineer doing business under the firm name of O. A. Kalalo and Associates,
entered into an agreement with defendant-Luz Alfredo J . Luz (hereinafter referred to as Luz), a
licensed architect, doing business under firm name of A. J. Luz and Associates, whereby the
former was to render engineering design services to the latter for fees, as stipulated in the
agreement.
The services included design computation and sketches, contract drawing and technical
specifications of all engineering phases of the project designed by O. A. Kalalo and Associates
bill of quantities and cost estimate, and consultation and advice during construction relative to the
work.
The fees agreed upon were percentages of the architect's fee. The agreement was subsequently
supplemented by a "clarification to letter-proposal" which provided, among other things, that "the
schedule of engineering fees in this agreement does not cover the following: ... D. Foundation soil
exploration, testing and evaluation; E. Projects that are principally engineering works such as
industrial plants, ..." and "O. A. Kalalo and Associates reserve the right to increase fees on
projects ,which cost less than P100,000 ...."
On December 11, 1961, Kalalo sent to Luz a statement of account to which was attached an
itemized statement of defendant-Luz's account, according to which the total engineering fee
asked by Kalalo for services rendered amounted to P116,565.00 from which sum was to be
deducted the previous payments made in the amount of P57,000.00, thus leaving a balance due
in the amount of P59,565.00.
On May 18, 1962 Luz sent Kalalo a resume of fees due to the latter. Said fees, according to Luz.
amounted to P10,861.08 instead of the amount claimed by the Kalalo. On June 14, 1962 Luz sent
Kalalo a check for said amount, which Kalalo refused to accept as full payment of the balance of
the fees due him.
On August 10, 1962, Kalalo filed a complaint against Luz, containing four causes of action. In the
first cause of action, Kalalo alleged that for services rendered in connection with the different
projects, there was due him fees in sum s consisting of $28,000 (U.S.) and P100,204.46,
excluding interests, of which sums only P69,323.21 had been paid, thus leaving unpaid the
$28,000.00 and the balance of P30,881.25. In the second cause of action, Kalalo claimed
P17,000.00 as consequential and moral damages; in the third cause of action claimed
P55,000.00 as moral damages, attorney's fees and expenses of litigation; and in the fourth cause
of action he claimed P25,000.00 as actual damages, and also for attorney's fees and expenses of
litigation.
In his answer, Luz admitted that Kalalo rendered engineering services, as alleged in the first
cause of action, but averred that some of Kalalo's services were not in accordance with the
agreement and Kalalo's claims were not justified by the services actually rendered, and that the
aggregate amount actually due to Kalalo was only P80,336.29, of which P69,475.21 had already
been paid, thus leaving a balance of only P10,861.08.
Inasmuch as the pleadings showed that the Kalalo's right to certain fees for services rendered
was not denied, the only question being the assessment of the proper fees and the balance
due to Kalalo after deducting the admitted payments made by Luz, the trial court, upon
agreement of the parties, authorized the case to be heard before a Commissioner.
The Commissioner rendered a report which, in resume, states that the amount due to Kalalo was
$28,000.00 (U.S.) as his fee in the International Research Institute Project which was twenty
percent (20%) of the $140,000.00 that was paid to Luz, and P51,539.91 for the other projects,

less the sum of P69,475.46 which was already paid by the Luz. The Commissioner also
recommended the payment to Kalalo of the sum of P5,000.00 as attorney's fees.
At the hearing on the Report of the Commissioner, the respective counsel of the parties
manifested to the court that they had no objection to the findings of fact of the Commissioner
contained in the Report, and they agreed that the said Report posed only two legal issues,
namely: (1) whether under the facts stated in the Report, the doctrine of estoppel would apply;
and (2) whether the recommendation in the Report that the payment of the amount. due to the
plaintiff in dollars was legally permissible, and if not, at what rate of exchange it should be paid in
pesos.
After the parties had submitted their respective memorandum on said issues, the trial court
rendered its decision dated February 10, 1967 in favor of Kalalo and ordering the defendant to
pay plaintiff the sum of P51,539.91 and $28,000.00, the latter to be converted into the Philippine
currency from which shall be deducted the sum of P69,475.46.
ISSUE: Whether or not Kalalo be paid in US Currency
HELD:
In support of the second assignment of error, that the lower court erred in holding that the
balance from Luz on the IRRI project should be paid on the basis of the rate of exchange of the
U.S. dollar to the Philippine peso at the time of payment of the judgment,
Luz contends: first, that the official rate at the time Luz received his architect's fees for the IRRI
project, and correspondingly his obligation to Kalalo's fee on August 25, 1961, was P2.00 to
$1.00, and cites in support thereof Section 1612 of the Revised Administrative Code, Section 48
of Republic Act 265 and Section 6 of Commonwealth Act No. 699;
second, that the lower court's conclusion that the rate of exchange to be applied in the conversion
of the $28,000.00 is the current rate of exchange at the time the judgment shall be satisfied was
based solely on a mere presumption of the trial court that the defendant did not convert, there
being no showing to that effect, the dollars into Philippine currency at the official rate, when the
legal presumption should be that the dollars were converted at the official rate of $1.00 to P2.00
because on August 25, 1961, when the IRRI project became due and payable, foreign exchange
controls were in full force and effect, and partial decontrol was effected only afterwards, during
the Macapagal administration;
third, that the other ground advanced by the lower court for its ruling, to wit, that Luz committed a
breach of his obligation to turn over to the Kalalo the engineering fees received in U.S. dollars for
the IRRI project, cannot be upheld, because there was no such breach, as proven by the fact that
Kalalo never claimed in Exhibit 1-A that he should be paid in dollars; and there was no provision
in the basic contract that he should be paid in dollars;
Finally, even if there were such provision, it would have no binding effect under the provision of
Republic Act 529; that, moreover, it cannot really be said that no payment was made on that
account for Luz had already paid P57,000.00 to Kalalo, and under Article 125 of the Civil Code,
said payment could be said to have been applied to the fees due from the IRRI project, this
project being the biggest and this debt being the most onerous.
In refutation of Luz's argument in support of the second assignment of error, Kalalo argues that
notwithstanding Republic Act 529, Luz can be compelled to pay the Kalalo in dollars in view of the
fact that Luz received his fees in dollars, and Kalalo's fee is 20% of Luz's fees; and that if said
amount is be converted into Philippine Currency, the rate of exchange should be that at the time
of the execution of the judgment.
We have taken note of the fact that on August 25, 1961, the date when Luz said his obligation to
pay Kalalo's fees became due, there was two rates of exchange, to wit: the preferred rate of
P2.00 to $1.00, and the free market rate. It was so provided in Circular No. 121 of the Central
Bank of the Philippines, dated March 2, 1961. amending an earlier Circular No. 117, and in force
until January 21, 1962 when it was amended by Circular No. 133.

The amount of $140,000.00 received by Luz for the International Rice Research Institute project
is not within the scope of sub-paragraph (a) of paragraph No. 1 of Circular No. 121. Luz has not
shown that 25% of said amount had to be surrendered to the Central Bank at the preferred rate
because it was either export proceeds, or U.S. Government expenditures, or invisibles not
included in sub-paragraph (b). Hence, it cannot be said that the trial court erred in presuming that
Luz converted said amount at the free market rate. It is hard to believe that a person possessing
dollars would exchange his dollars at the preferred rate of P2.00 to $1.00, when he is not
obligated to do so, rather than at the free market rate which is much higher. A person is
presumed to take ordinary care of his concerns, and that the ordinary course of business has
been followed.
Under the agreement, Exhibit A, Kalalo was entitled to 20% of $140,000.00, or the amount of
$28,000.00. Kalalo, however, cannot oblige the Luz to pay him in dollars, even if Luz himself had
received his fee for the IRRI project in dollars. This payment in dollars is prohibited by Republic
Act 529 which was enacted on June 16, 1950.
Under the above-quoted provision of Republic Act 529, if the obligation was incurred prior
to the enactment of the Act and require payment in a particular kind of coin or currency
other than the Philippine currency the same shall be discharged in Philippine currency
measured at the prevailing rate of exchange at the time the obligation was incurred. As We
have adverted to, Republic Act 529 was enacted on June 16, 1950. In the case now before Us
the obligation of Luz to pay Kalalo the 20% of $140,000.00, or the sum of $28,000.00, accrued on
August 25, 1961, or after the enactment of Republic Act 529. It follows that the provision of
Republic Act 529 which requires payment at the prevailing rate of exchange when the obligation
was incurred cannot be applied.
Republic Act 529 does not provide for the rate of exchange for the payment of obligation
incurred after the enactment of said Act. The logical Conclusion, therefore, is that the rate
of exchange should be that prevailing at the time of payment.
This view finds support in the ruling of this Court in the case of Engel vs. Velasco & Co. where
this Court held that even if the obligation assumed by the defendant was to pay the plaintiff a sum
of money expressed in American currency, the indemnity to be allowed should be expressed in
Philippine currency at the rate of exchange at the time of judgment rather than at the rate
of exchange prevailing on the date of defendant's breach.
It is Our considered view, therefore, that Luz should pay the Kalalo the equivalent in pesos of the
$28,000.00 at the free market rate of exchange at the time of payment. And so the trial court did
not err when it held that herein Luz should pay Kalalo $28,000.00 "to be converted into the
Philippine currency on the basis of the current rate of exchange at the time of payment of this
judgment, as certified to by the Central Bank of the Philippines,
Luz also contends that the P57,000.00 that he had paid to Kalalo should have been applied to the
due to the latter on the IRRI project because such debt was the most onerous to Luz. This
contention is untenable. The Commissioner who was authorized by the trial court to receive
evidence in this case, however, reports that the Kalalo had not been paid for the account of the
$28,000.00 which represents the fees of Kalalo equivalent to 20% of the $140,000.00 that the Luz
received as fee for the IRRI project. This is a finding of fact by the Commissioner which was
adopted by the trial court. The parties in this case have agreed that they do not question the
finding of fact of the Commissioner.
In the Commissioner's report, it is spetifically recommended that the Luz be ordered to pay the
plaintiff the sum of "$28,000. 00 or its equivalent as the fee of the plaintiff under Exhibit A on the
IRRI project." It is clear from this report of the Commissioner that no payment for the account of
this $28,000.00 had been made. Indeed, it is not shown in the record that the peso equivalent of
the $28,000.00 had been fixed or agreed upon by the parties at the different times when the Luz
had made partial payments to the Kalalo.
WHEREFORE, the decision appealed from is affirmed, with costs against the defendant-Luz. It is
so ordered.

NOTE: RA 529 has already been repealed by Republic Act 8183 which provides that every
monetary obligation must be paid in Philippine currency which is legal tender in the Philippines.
However, the parties may agree that the obligation or transaction shall be settled in any other
currency at the time of payment.

G.R. Nos. L-25836-37 January 31, 1981
THE PHILIPPINE BANK OF COMMERCE, plaintiff-appellee, vs. JOSE M. ARUEGO, defendantappellant.
FACTS:
On December 1, 1959, the Philippine Bank of Commerce instituted against Jose M. Aruego Civil
Case.
The complaint filed by the Philippine Bank of Commerce contains twenty-two (22) causes of
action referring to twenty-two (22) transactions entered into by the said Bank and Aruego on
different dates covering the period from August 28, 1950 to March 14, 1951.
The sum sought to be recovered represents the cost of the printing of "World Current Events," a
periodical published by the defendant. To facilitate the payment of the printing the defendant
obtained a credit accommodation from the plaintiff. Thus, for every printing of the "World
Current Events," the printer, Encal Press and Photo Engraving, collected the cost of printing by
drawing a draft against the plaintiff, said draft being sent later to the defendant for acceptance.
As an added security for the payment of the amounts advanced to Encal Press and PhotoEngraving, the plaintiff bank also required defendant Aruego to execute a trust receipt in favor
of said bank wherein said defendant undertook to hold in trust for plaintiff the periodicals and to
sell the same with the promise to turn over to the plaintiff the proceeds of the sale of said
publication to answer for the payment of all obligations arising from the draft.
Aruego received a copy of the complaint together with the summons on December 2, 1959.
December 14, 1959 defendant filed an urgent motion for extension of time to plead, and set
hearing on December 16, 1959. At the hearing, the court denied defendant's motion
extension. Whereupon, the defendant filed a motion to dismiss the complaint on December
1959 on the ground that the complaint states no cause of action because:

On
the
for
17,

a) The amounts thereof had already been paid by the plaintiff to the drawer (Encal Press and
Photo Engraving), without knowledge or consent of the defendant drawee.
b) In the case of a bill of exchange, like those involved in the case at bar, the defendant
drawee is an accommodating party only for the drawer (Encal Press and Photo-Engraving)
and will be liable in the event that the accommodating party (drawer) fails to pay its obligation to
the plaintiff.
The complaint was dismissed in an order dated December 22, 1959/
On January 13, 1960, the plaintiff filed a motion for reconsideration which was granted by the trial
court.
On March 12, 1960, the defendant filed his answer to the complaint interposing the following
defenses: That he signed the document upon which the plaintiff sues in his capacity as President
of the Philippine Education Foundation; that his liability is only secondary; and that he believed
that he was signing only as an accommodation party.
On May 6, 1960, the trial court rendered judgment sentencing the defendant to pay to the plaintiff
the sum of P35,444.35 representing the total amount of his obligation to the said plaintiff under
the twenty-two (22) causes of action alleged in the complaint as of November 15, 1957 and the
sum of P10,000.00 as attorney's fees.
ISSUE:

Whether or not Aruego should be held personally liable (YES)

Whether or not the instrument is a Bill of Exchange (YES)
HELD:
The defendant does not have a good and substantial defense.
The first defense of the defendant is that he signed the supposed bills of exchange as an agent of
the Philippine Education Foundation Company where he is president. Section 20 of the
Negotiable Instruments Law provides that "Where the instrument contains or a person adds to his
signature words indicating that he signs for or on behalf of a principal or in a representative
capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of
words describing him as an agent or as filing a representative character, without disclosing his
principal, does not exempt him from personal liability."
An inspection of the drafts accepted by the defendant shows that nowhere has he
disclosed that he was signing as a representative of the Philippine Education Foundation
Company. He merely signed as follows: "JOSE ARUEGO (Acceptor) (SGD) JOSE
ARGUEGO For failure to disclose his principal, Aruego is personally liable for the drafts he
accepted.
The defendant also contends that he signed the drafts only as an accommodation party and as
such, should be made liable only after a showing that the drawer is incapable of paying. This
contention is also without merit.
An accommodation party is one who has signed the instrument as maker, drawer, indorser,
without receiving value therefore and for the purpose of lending his name to some other person.
Such person is liable on the instrument to a holder for value, notwithstanding such holder, at the
time of the taking of the instrument knew him to be only an accommodation party. In lending his
name to the accommodated party, the accommodation party is in effect a surety for the
latter. He lends his name to enable the accommodated party to obtain credit or to raise
money. He receives no part of the consideration for the instrument but assumes liability to
the other parties thereto because he wants to accommodate another. In the instant case,
the defendant signed as a drawee/acceptor. Under the Negotiable Instrument Law, a
drawee is primarily liable. Thus, if the defendant who is a lawyer, he should not have
signed as an acceptor/drawee. In doing so, he became primarily and personally liable for
the drafts.
The defendant also contends that the drafts signed by him were not really bills of exchange but
mere pieces of evidence of indebtedness because payments were made before acceptance. This
is also without merit. Under the Negotiable Instruments Law, a bill of exchange is an
unconditional order in writting addressed by one person to another, signed by the person
giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or
determinable future time a sum certain in money to order or to bearer.
As long as a commercial paper conforms with the definition of a bill of exchange, that paper is
considered a bill of exchange. The nature of acceptance is important only in the determination of
the kind of liabilities of the parties involved, but not in the determination of whether a commercial
paper is a bill of exchange or not.
It is evident then that the defendant's appeal can not prosper. To grant the defendant's prayer will
result in a new trial which will serve no purpose and will just waste the time of the courts as well
as of the parties because the defense is nil or ineffective.
WHEREFORE, the order appealed from in Civil Case No. 42066 of the Court of First Instance of
Manila denying the petition for relief from the judgment rendered in said case is hereby affirmed,
without pronouncement as to costs.
SO ORDERED.

G.R. No. L-10221

February 28, 1958

Intestate of Luther Young and Pacita Young, spouses. PACIFICA JIMENEZ, petitionerappellee, vs. DR. JOSE BUCOY, administrator-appellant.
FACTS:
In this intestate of Luther Young and Pacita Young who died in 1954 and 1952 respectively,
Pacifica Jimenez presented for payment four promissory notes signed by Pacita for different
amounts totalling twenty-one thousand pesos (P21,000).
Acknowledging receipt by Pacita during the Japanese occupation, in the currency then prevailing,
the administrator manifested willingness to pay provided adjustment of the sums be made in line
with the Ballantyne schedule.
The claimant objected to the adjustment insisting on full payment in accordance with the notes.
Applying doctrines of this Court on the matter, the Hon. Primitive L. Gonzales, Judge, held that
the notes should be paid in the currency prevailing after the war, and that consequently plaintiff
was entitled to recover P21,000 plus attorneys fees for the sum of P2,000.
ISSUE:
Whether or not the Notes are mere Acknowledgement of Debts or Promises to Pay. (The notes
are Promises to pay)
When does an Acknowledgement becomes a promise to pay? (It becomes a promise to pay if the
acknowledgement of the debt is accompanied by words by which promise of payment is naturally
implied,)
HELD:
Executed in the month of August 1944, the first promissory note read as follows:
Received from Miss Pacifica Jimenez the total amount of (P10,000) ten thousand pesos
payable six months after the war, without interest.
The other three notes were couched in the same terms, except as to amounts and dates.
This matter of payment of loans contracted during the Japanese occupation has received our
attention in many litigations after the liberation. The gist of our adjudications, in so far as material
here, is that if the loan should be paid during the Japanese occupation, the Ballantyne schedule
should apply with corresponding reduction of the amount. However, if the loan was expressly
agreed to be payable only after the war or after liberation, or became payable after those dates,
no reduction could be effected, and peso-for-peso payment shall be ordered in Philippine
currency.
Now then, as in the case before us, the debtor undertook to pay "six months after the war," peso
for peso payment is indicated.
The appellant administrator calls attention to the fact that the notes contained no express
promise to pay a specified amount. We declare the point to be without merit. In accordance
with doctrines on the matter, the note herein-above quoted amounted in effect to "a promise to
pay ten thousand pesos six months after the war, without interest." And so of the other notes.
"An acknowledgment may become a promise by the addition of words by which a promise
of payment is naturally implied, such as, "payable," "payable" on a given day, "payable on
demand," "paid . . . when called for," . . .
"To constitute a good promissory note, no precise words of contract are necessary, provided they
amount, in legal effect, to a promise to pay. In other words, if over and above the mere
acknowledgment of the debt there may be collected from the words used a promise to pay
it, the instrument may be regarded as a promissory note. "Due A. B. $325, payable on
demand," or, "I acknowledge myself to be indebted to A in $109, to be paid on demand, for value

received," or, "I. O. U. $85 to be paid on May 5th," are held to be promissory notes, significance
being given to words of payment as indicating a promise to pay."
Another argument of appellant is that as the deceased Luther Young did not sign these notes, his
estate is not liable for the same. This defense, however, was not interposed in the lower court.
There the only issue related to the amount to be amount, considering that the money had been
received in Japanese money. It is now unfair to put up this new defense, because had it been
raised in the court below, appellees could have proved, what they now alleged that Pacita
contracted the obligation to support and maintain herself, her son and her husband (then
concentrated at Santo Tomas University) during the hard days of the occupation.
It is now settled practice that on appeal a change of theory is not permitted.
Wherefore, in view of the foregoing considerations, the appealed decision is affirmed, except as
to the attorney's fees which are hereby disapproved. So ordered.

G.R. No. 111190 June 27, 1995

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

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

reason. Proof to the contrary is its own finding that the checks were in the custody of
petitioner. Inasmuch as said checks had not yet been delivered to Mabanto, Jr., they did
not belong to him and still had the character of public funds. In Tiro v. Hontanosas we ruled
that

The salary check of a government officer or employee such as a teacher does

not belong to him before it is physically delivered to him. Until that time the
check belongs to the government. Accordingly, before there is actual
delivery of the check, the payee has no power over it; he cannot assign it
without the consent of the Government.

As a necessary consequence of being public fund, the checks may not be garnished to
satisfy the judgment. The rationale behind this doctrine is obvious consideration of public
policy. The Court succinctly stated in Commissioner of Public Highways v. San Diego that
The functions and public services rendered by the State cannot be allowed to be
paralyzed or disrupted by the diversion of public funds from their
legitimate and specific objects, as appropriated by law.
In denying petitioner's motion for reconsideration, the trial court expressed the additional
ratiocination that it was not the duty of the garnishee to inquire or judge for himself whether the
issuance of the order of execution, the writ of execution, and the notice of garnishment was
justified, citing our ruling in Philippine Commercial Industrial Bank v. Court of Appeals.
Our precise ruling in that case was that "[I]t is not incumbent upon the garnishee to inquire or to
judge for itself whether or not the order for the advance execution of a judgment is valid." But that
is invoking only the general rule. We have also established therein the compelling reasons, as
exceptions thereto, which were not taken into account by the trial court, e.g., a defect on the face
of the writ or actual knowledge by the garnishee of lack of entitlement on the part of the garnisher.
It is worth to note that the ruling referred to the validity of advance execution of judgments, but a
careful scrutiny of that case and similar cases reveals that it was applicable to a notice of
garnishment as well.
In the case at bench, it was incumbent upon petitioner to inquire into the validity of the
notice of garnishment as he had actual knowledge of the non-entitlement of private
respondent to the checks in question. Consequently, we find no difficulty concluding that
the trial court exceeded its jurisdiction in issuing the notice of garnishment concerning
the salary checks of Mabanto, Jr., in the possession of petitioner.
WHEREFORE, the petition is GRANTED. The orders of 9 March 1993 and 20 April 1993 of the
Regional Trial Court of Cebu City, Br. 17, subject of the petition are SET ASIDE. The notice of
garnishment served on petitioner dated 3 February 1992 is ordered DISCHARGED.
SO ORDERED.
Quiason and Kapunan, JJ., concur.

[G.R. No. 97753. August 10, 1992.] CALTEX (PHILIPPINES), INC., Petitioner, v. COURT OF
APPEALS and SECURITY BANK AND TRUST COMPANY, Respondents. FACTS:
1. On various dates, defendant, a commercial banking institution, through its Sucat Branch issued
280 certificates of time deposit (CTDs) in favor of one Angel dela Cruz who deposited with herein
defendant the aggregate amount of P1,120,000.00. "2. Angel dela Cruz delivered the said
certificates of time deposit (CTDs) to herein plaintiff in connection with his purchase of fuel
products from the latter (Original Record, p. 208). "3. Sometime in March 1982, Angel dela Cruz
informed Mr. Timoteo Tiangco, the Sucat Branch Manager, that he lost all the certificates of time
deposit in dispute. Mr. Tiangco advised said depositor to execute and submit a notarized Affidavit
of Loss if he desired to have them replaced. "4. On March 18, 1982, Angel dela Cruz executed
and delivered to defendant bank the required Affidavit of Loss (Defendants Exhibit 281). On the

basis of said affidavit of loss, 280 replacement CTDs were issued in favor of said depositor
(Defendants Exhibits 282-561). "5. On March 25, 1982, Angel dela Cruz negotiated and
obtained a loan from defendant bank in the amount of P875,000.00 where he executed a Deed of
Assignment of Time Deposit which stated that he (dela Cruz) surrenders to defendant bank the
CTDs (allegedly lost CTDs) to cover the amount of his loan upon maturity. "6. Sometime in
November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.) Inc. went to the defendant
banks Sucat branch and presented for verification the CTDs declared lost by Angel dela Cruz
alleging that the same were delivered to herein plaintiff `as security for purchases made with
Caltex Philippines, Inc. by said depositor. "7. On November 26, 1982, defendant received a
letter from herein plaintiff formally informing it of its possession of the CTDs in question and of its
decision to preterminate the same. "8. On December 8, 1982, Caltex was requested by herein
defendant Bank to furnish the former a copy of the document evidencing the guarantee
agreement with Mr. Angel dela Cruz as well as the details of Mr. Angel dela Cruz obligations
against which plaintiff proposed to apply the time deposits. No copy of the requested documents
was furnished herein defendant. "10. Accordingly, defendant bank rejected the plaintiffs demand
and claim for payment of the value of the CTD. "11. In April 1983, the loan of Angel dela Cruz
with the defendant bank matured and fell due and on August 5, 1983, the latter set-off and
applied the time deposits in question to the payment of the matured loan. "12. In view of the
foregoing, plaintiff filed the instant complaint. 13. After trial, the court a quo rendered its decision
dismissing the instant complaint." 14. On appeal, respondent court affirmed the lower courts
dismissal of the complaint, hence this petition.
ISSUE:
1. Whether or not the CTDs are Negotiable Instruments (YES because all the elements of Section
1 are present)
2. Whether or not Caltex can recover the CTDs (NO because it was not transferred to them as a
Negotiable Instrument but merely as a security)
HELD:
ISSUE 1
Respondent court ruled that the CTDs in question are non-negotiable instruments. But we
disagree with these findings and conclusions, and hereby hold that the CTDs in question are
negotiable instruments. Section 1 of Act No. 2031, otherwise known as the Negotiable
Instruments Law, enumerates the requisites for an instrument to become negotiable. The CTDs
in question undoubtedly meet the requirements of the law for negotiability. The parties
bone of contention is with regard to requisite (d) Must be payable to order or to bearer. It
is noted that Mr. Timoteo P. Tiangco, Security Banks Branch Manager way back in 1982,
testified in open court that the depositor referred to in the CTDs is no other than Mr. Angel
de la Cruz.
On this score, the accepted rule is that the negotiability or non-negotiability of an
instrument is determined from the writing, that is, from the face of the instrument itself. In
the construction of a bill or note, the intention of the parties is to control, if it can be
legally ascertained. While the writing may be read in the light of surrounding
circumstances in order to more perfectly understand the intent and meaning of the parties,
yet as they have constituted the writing to be the only outward and visible expression of
their meaning, no other words are to be added to it or substituted in its stead. The duty of
the court in such case is to ascertain, not what the parties may have secretly intended as
contradistinguished from what their words express, but what is the meaning of the words
they have used. What the parties meant must be determined by what they said. Contrary
to what respondent court held, the CTDs are negotiable instruments. The documents
provide that the amounts deposited shall be repayable to the depositor. And who,
according to the document, is the depositor? It is the "bearer." The documents do not say
that the depositor is Angel de la Cruz and that the amounts deposited are repayable
specifically to him. Rather, the amounts are to be repayable to the bearer of the
documents or, for that matter, whosoever may be the bearer at the time of presentment.

ISSUE 2
The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer is
in the negative. The records reveal that Angel de la Cruz, whom petitioner chose not to implead in
this suit for reasons of its own, delivered the CTDs amounting to P1,120,000.00 to petitioner
without informing respondent bank thereof at any time.
Unfortunately for petitioner, although the CTDs are bearer instruments, a valid negotiation
thereof for the true purpose and agreement between it and De la Cruz, as ultimately
ascertained, requires both delivery and indorsement. For, although petitioner seeks to
deflect this fact, the CTDs were in reality delivered to it as a security for De la Cruz
purchases of its fuel products. Any doubt as to whether the CTDs were delivered as payment
for the fuel products or as a security has been dissipated and resolved in favor of the latter by
petitioners own authorized and responsible representative himself.cralawnad In a letter dated
November 26, 1982 addressed to respondent Security Bank, J. Q. Aranas, Jr., Caltex Credit
Manager, wrote: ". . . These certificates of deposit were negotiated to us by Mr. Angel dela Cruz
to guarantee his purchases of fuel products" (Underscoring ours.) This admission is conclusive
upon petitioner, its protestations notwithstanding. Under the foregoing circumstances, this
disquisition in Integrated Realty Corporation, Et. Al. v. Philippine National Bank, Et. Al. 20 is
apropos: ". . . Adverting again to the Courts pronouncements in Lopez, supra, we quote
therefrom:aw library
The character of the transaction between the parties is to be determined by their
intention, regardless of what language was used or what the form of the transfer
was. If it was intended to secure the payment of money, it must be construed as a
pledge; but if there was some other intention, it is not a pledge.
Petitioners insistence that the CTDs were negotiated to it begs the question. Under the
Negotiable Instruments Law, an instrument is negotiated when it is transferred from one
person to another in such a manner as to constitute the transferee the holder thereof, and
a holder may be the payee or indorsee of a bill or note, who is in possession of it, or the
bearer thereof.
In the present case, however, there was no negotiation in the sense of a transfer of the
legal title to the CTDs in favor of petitioner in which situation, for obvious reasons, mere
delivery of the bearer CTDs would have sufficed. Here, the delivery thereof only as
security for the purchases of Angel de la Cruz could at the most constitute petitioner only
as a holder for value by reason of his lien. Accordingly, a negotiation for such purpose
cannot be effected by mere delivery of the instrument since, necessarily, the terms thereof
and the subsequent disposition of such security, in the event of non-payment of the
principal obligation, must be contractually provided for. The pertinent law on this point is
that where the holder has a lien on the instrument arising from contract, he is deemed a
holder for value to the extent of his lien. As such holder of collateral security, he would be a
pledgee but the requirements therefor and the effects thereof, not being provided for by the
Negotiable Instruments Law, shall be governed by the Civil Code provisions on pledge of
incorporeal rights.irtua1aw library Aside from the fact that the CTDs were only delivered but
not indorsed, the factual findings of respondent court quoted at the start of this opinion
show that petitioner failed to produce any document evidencing any contract of pledge or
guarantee agreement between it and Angel de la Cruz. Consequently, the mere delivery of the
CTDs did not legally vest in petitioner any right effective against and binding upon respondent
bank. On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of
respondent bank was embodied in a public instrument. Respondent bank duly complied with this
statutory requirement Contrarily, Petitioner, whether as purchaser, assignee or lienholder of the
CTDs, neither proved the amount of its credit or the extent of its lien nor the execution of any
public instrument which could affect or bind private Respondent. Necessarily, therefore, as
between petitioner and respondent bank, the latter has definitely the better right over the CTDs in
question.chanrobles.com:cralaw:red WHEREFORE, on the modified premises above set forth,
the petition is DENIED and the appealed decision is hereby AFFIRMED. SO ORDERED.

[G.R. No. 93073. December 21, 1992.] REPUBLIC PLANTERS BANK, Petitioner, v. COURT OF
APPEALS and FERMIN CANLAS, Respondents.
FACTS:
We find merit in this appeal. From the records, these facts are established: Defendant Shozo
Yamaguchi and private respondent Fermin Canlas were President/Chief Operating Officer and
Treasurer respectively, of Worldwide Garment Manufacturing, Inc.
By virtue of Board Resolution No. 1 dated August 1, 1979, defendant Shozo Yamaguchi and
private respondent Fermin Canlas were authorized to apply for credit facilities with the petitioner
Republic Planters Bank in the forms of export advances and letters of credit/trust receipts
accommodations. Petitioner bank issued nine promissory notes, marked as Exhibits A to I
inclusive, each of which were uniformly worded in the following manner: " _____________, after
date, for value received, I/we, jointly and severally promise to pay to the ORDER of the REPUBLIC
PLANTERS BANK, at its office in Manila, Philippines, the sum of __________ PESOS (), Philippine
Currency . . . ."cralaw virtua1aw library On the right bottom margin of the promissory notes appeared

the signatures of Shozo Yamaguchi and Fermin Canlas above their printed names with the
phrase "and (in) his personal capacity" typewritten below. At the bottom of the promissory notes
appeared: "Please credit proceeds of this note to:chanrob1es virtual 1aw library _____ Savings Account
_____XX Current Account No. 1372-00257-6 of WORLDWIDE GARMENT MFG. CORP.

These entries were separated from the text of the notes with a bold line which ran horizontally
across the pages. On December 20, 1982, Worldwide Garment Manufacturing, Inc. voted to
change its corporate name to Pinch Manufacturing Corporation. On February 5, 1982, petitioner
bank filed a complaint for the recovery of sums of money covered among others, by the nine
promissory notes.
Defendants Pinch Manufacturing Corporation and Shozo Yamaguchi did not file an Amended
Answer and failed to appear at the scheduled pre-trial conference despite due notice. Only
private respondent Fermin Canlas filed an Amended Answer wherein he denied having issued
the promissory notes in question since according to him, he was not an officer of Pinch
Manufacturing Corporation, but instead of Worldwide Garment Manufacturing, Inc., and that when
he issued said promissory notes in behalf of Worldwide Garment Manufacturing, Inc., the same
were in blank, the typewritten entries not appearing therein prior to the time he affixed his
signature. ISSUE:
Whether private respondent Fermin Canlas is solidarily liable with the other defendants, namely
Pinch Manufacturing Corporation and Shozo Yamaguchi, on the nine promissory notes.
HELD: (YES) We hold that private respondent Fermin Canlas is solidarily liable on each of the
promissory notes bearing his signature for the following reasons:chanrob1es virtual 1aw
library The promissory notes are negotiable instruments and must be governed by the
Negotiable Instruments Law. Under the Negotiable Instruments Law, persons who write
their names on the face of promissory notes are makers and are liable as such. 3 By
signing the notes, the maker promises to pay to the order of the payee or any holder 4
according to the tenor thereof. 5 Based on the above provisions of law, there is no
denying that private respondent Fermin Canlas is one of the co-makers of the promissory
notes. As such, he cannot escape liability arising therefrom. Where an instrument
containing the words "I promise to pay" is signed by two or more persons, they are
deemed to be jointly and severally liable thereon. An instrument which begins with "I",
"We", or "Either of us" promise to pay, when signed by two or more persons, makes them
solidarily liable. The fact that the singular pronoun is used indicates that the promise is
individual as to each other; meaning that each of the co-signers is deemed to have made
an independent singular promise to pay the notes in full. In the case at bar, the solidary
liability of private respondent Fermin Canlas is made clearer and certain, without reason
for ambiguity, by the presence of the phrase "Joint and several" as describing the
unconditional promise to pay to the order of Republic Planters Bank.
A joint and several note is one in which the makers bind themselves both jointly and

individually to the payee so that all may be sued together for its enforcement, or the
creditor may select one or more as the object of the suit.
A joint and several obligation in common law corresponds to a civil law solidary
obligation; that is, one of several debtors bound in such wise that each is liable for the
entire amount, and not merely for his proportionate share.
By making a joint and several promise to pay to the order of Republic Planters Bank,
private respondent Fermin Canlas assumed the solidary liability of a debtor and the payee
may choose to enforce the notes against him alone or jointly with Yamaguchi and Pinch
Manufacturing Corporation as solidary debtors. Liability of an Agent where the principal is
not disclosed:
Under the Negotiable Instruments Law, the liability of a person signing as an agent is specifically
provided for as follows:
SECTION 20. Liability of a person signing as agent and so forth. Where the instrument
contains or a person adds to his signature words indicating that he signs for or on behalf
of a principal, or in a representative capacity, he is not liable on the instrument if he was
duly authorized; but the mere addition of words describing him as an agent, or as filling a
representative character, without disclosing his principal, does not exempt him from
personal liability.
Where the agent signs his name but nowhere in the instrument has he disclosed the fact
that he is acting in a representative capacity or the name of the third party for whom he
might have acted as agent, the agent is personally liable to the holder of the instrument
and cannot be permitted to prove that he was merely acting as agent of another and parol
or extrinsic evidence is not admissible to avoid the agents personal liability. On the
private respondents contention that the promissory notes were delivered to him in blank for his
signature, we rule otherwise. A careful examination of the notes in question shows that they are
the stereotype printed form of promissory notes generally used by commercial banking
institutions to be signed by their clients in obtaining loans. Such printed notes are incomplete
because there are blank spaces to be filled up on material particulars such as payees name,
amount of the loan, rate of interest, date of issue and the maturity date. The terms and conditions
of the loan are printed on the note for the borrower-debtors perusal. An incomplete instrument
which has been delivered to the borrower for his signature is governed by Section 14 of the
Negotiable Instruments Law which provides, in so far as relevant to this case, thus:chanrob1es
virtual 1aw library SECTION 14. Blanks; when may be filled. Where the instrument is wanting
in any material particular, the person in possession thereof has a prima facie authority to
complete it by filling up the blanks therein. . . . In order, however, that any such instrument when
completed may be enforced against any person who became a party thereto prior to its
completion, it must be filled up strictly in accordance with the authority given and within a
reasonable time. . . . In the light of the foregoing analysis and under the plain language of the
statute and jurisprudence on the matter, the decision of the respondent Court of Appeals
absolving private respondent Fermin Canlas is REVERSED and SET ASIDE. Judgment is hereby
rendered declaring private respondent Fermin Canlas jointly and severally liable on all the nine
promissory notes with the following sums and at 16% interest per annum from the dates
indicated. The liabilities of defendants Pinch Manufacturing Corporation (formerly Worldwide
Garment Manufacturing, Inc.) and Shozo Yamaguchi, for not having appealed from the decision
of the trial court, shall be adjudged in accordance with the judgment rendered by the Court a
quo. With respect to attorneys fees, and penalty and service charges, the private respondent
Fermin Canlas is hereby held jointly and solidarily liable with defendants for the amounts found by
the Court a quo. With costs against private Respondent. SO ORDERED.

[G.R. No. L-40796. July 31, 1975.] REPUBLIC BANK, Plaintiff-Appellee, v. MAURICIA T.
EBRADA, Defendant-Appellant. SYNOPSIS

A check with a face value of P1,246.08 was issued to one Martin Lorenzo who turned out to have
been dead almost eleven years before it was issued. It was encashed by Mauricia Ebrada at the
Republic Banks main office at the Escolta. Informing the Bank that the payees (Lorenzo)
indorsement on the reverse side of the check was a forgery, the Bureau of Treasury requested
the Bank to refund the amount. The Bank sued Mauricia Ebrada before the city court when she
refused to return the money. The court ruled for the Bank, so the case was elevated to the Court
of First Instance which likewise rendered an adverse decision against Mauricia Ebrada. An
appeal was filed. The Supreme Court upheld the lower court. Although Mauricia Ebrada was not
the author of the forgery, as the last indorser of the check, she warranted good title to it. The
negotiation from Martin Lorenzo, the original payee, to Ramon Lorenzo is of no effect but the
negotiation from Ramon Lorenzo to Adelaida Dominguez and from her to Mauricia Ebrada who
did not know of the forgery is valid and enforceable. The bank can recover from her the money
paid on the forged check. Judgment affirmed.
FACTS:
On or about February 27, 1963 defendant Mauricia T. Ebrada, encashed Back Pay Check No.
508060 dated January 15, 1963 for P1,246.08 at the main office of the plaintiff Republic Bank at
Escolta, Manila.
The check was issued by the Bureau of Treasury. Plaintiff Bank was later advised by the said
bureau that the alleged indorsement on the reverse side of the aforesaid check by the payee,
"Martin Lorenzo" was a forgery since the latter had allegedly died as of July 14, 1952.
Plaintiff Bank was then requested by the Bureau of Treasury to refund the amount of P1,246.08.
To recover what it had refunded to the Bureau of Treasury, plaintiff Bank made verbal and formal
demands upon defendant Ebrada to account for the sum of P1,246.08, but said defendant
refused to do so. So plaintiff Bank sued defendant Ebrada before the City Court of Manila. On
July 11, 1966, defendant Ebrada filed her answer denying the material allegations of the
complaint and as affirmative defenses alleged that she was a holder in due course of the check in
question, or at the very least, has acquired her rights from a holder in due course and therefore
entitled to the proceeds thereof. About the same day, July 11, 1966 defendant Ebrada filed a
Third-Party complaint against Adelaida Dominguez who, in turn, filed on September 14, 1966 a
Fourth-Party complaint against Justina Tinio. On March 21, 1967, the City Court of Manila
rendered judgment for the plaintiff Bank against defendant Ebrada; for Third-Party plaintiff against
Third-Party defendant, Adelaida Dominguez, and for Fourth-Party plaintiff against Fourth-Party
defendant, Justina Tinio. From the judgment of the City Court, defendant Ebrada took an appeal
to the Court of First Instance of Manila where the parties submitted a partial stipulation of
facts. Based on the foregoing stipulation of facts and the documentary evidence presented, the
trial court rendered a decision against the defendants. ISSUE:
Whether or not the Defendant Ebrada is liable to pay the bank the amount she has received from
the Check with the forged signature.
HELD: (YES, as last indorser of the check, she has warranted that she has good title to it
even if in fact she did not have it)
From the stipulation of facts it is admitted that the check in question was delivered to defendantappellant by Adelaida Dominguez for the purpose of encashment and that her signature was
affixed on said check when she cashed it with the plaintiff Bank. Likewise it is admitted that
defendant-appellant was the last indorser of the said check. As such indorser, she was supposed
to have warranted that she has good title to said check; for under Section 5 of the Negotiable
Instruments Law: "Every person negotiating an instrument by delivery or by qualified
indorsement, warrants: (a) That the instrument is genuine and in all respects what it purports to
be. (b) That she has good title to it."cralaw virtua1aw library
and under Section 65 of the same Act:jgc:chanrobles.com.ph "Every indorser who indorses
without qualification warrants to all subsequent holders in due course: (a) The matters and things

mentioned in subdivisions (a), (b), and (c) of the next preceding sections; (b) That the instrument
is at the time of his indorsement valid and subsisting."cralaw virtua1aw library It turned out,
however, that the signature of the original payee of the check, Martin Lorenzo was a forgery
because he was already dead almost 11 years before the check in question was issued by the
Bureau of Treasury. Under Section 23 of the Negotiable Instruments Law (Act 2031): "When a
signature is forged or made without the authority of the person whose signature it purports to be,
it is wholly inoperative, and no right to retain the instruments, or to give a discharge thereof
against any party thereto, can be acquired through or under such signature unless the party
against whom it is sought to enforce such right is precluded from setting up the forgery or want of
authority."cralaw virtua1aw library It is clear from the provision that where the signature on a
negotiable instrument if forged, the negotiation of the check is without force or effect. But
the existence of the forged signature therein will not render void all the other negotiations
of the check with respect to the other parties whose signatures are genuine. It is only the
negotiation predicated on the forged indorsement that should be declared
inoperative. Where after the drawee bank has paid the amount of the check to the holder
thereof, it was discovered that the signature of the payee was forged, the bank can still
recover from the one who encashed the check.
In the case of Great Eastern Life Insurance Company v. Hongkong and Shanghai Banking
Corporation, it was held "where a check is drawn payable to the order of one person and
is presented to a bank by another and purports upon its face to have been duly indorsed
by the payee of the check, it is the duty of the bank to know that the check was duly
indorsed by the original payee, and where the Bank pays the amount of the check to a
third person, who has forged the signature of the payee, the loss falls upon the bank who
cashed the check, and its only remedy is against the person to whom it paid the
money."c Similarly, in the case before Us, the defendant-appellant, upon receiving the check in
question from Adelaida Dominguez, was duty-bound to ascertain whether the check in question
was genuine before presenting it to plaintiff Bank for payment. Her failure to do so makes her
liable for the loss and the plaintiff Bank may recover from her the money she received for the
check. As reasoned out above, had she performed the duty of ascertaining the genuineness of
the check, in all probability the forgery would have been detected and the fraud defeated.
It is not supposed to be the duty of a drawee bank to ascertain whether the signatures of
the payee or indorsers are genuine or not. This is because the indorser is supposed to
warrant to the drawee that the signatures of the payee and previous indorsers are genuine,
warranty not extending only to holders in due course. With the foregoing doctrine We are
to concede that the plaintiff Bank should suffer the loss when it paid the amount of the
check in question to defendant-appellant, but it has the remedy to recover from the latter
the amount it paid to her.
Although the defendant-appellant to whom the plaintiff Bank paid the check was not
proven to be the author of the supposed forgery, yet as last indorser of the check, she has
warranted that she has good title to it even if in fact she did not have it because the payee
of the check was already dead 11 years before the check was issued.
The fact that immediately after receiving the cash proceeds of the check in question in the
amount of P1,246.08 from the plaintiff Bank, Defendant-Appellant immediately turned over said
amount to Adelaida Dominguez (Third-Party defendant and the Fourth-Party plaintiff) who in turn
handed the amount to Justina Tinio on the same date would not exempt her from liability because
by doing so, she acted as an accommodation party in the check for which she is also liable under
Section 29 of the Negotiable Instruments Law (Act 231), thus:jgc:chanrobles.com.ph "An
accommodation party is one who has signed the instrument as maker, drawer, acceptor,
or indorser, without receiving value therefor, and for the purpose of lending his name to
some other person. Such a person is liable on the instrument to a holder for value,
notwithstanding such holder at the time of taking the instrument knew him to be only an

accommodation party." IN VIEW OF THE FOREGOING, the judgment appealed from is

hereby affirmed in toto with costs against defendant-appellant. SO ORDERED.

G. R. No. 107382/G.R. No. 107612 - January 31, 1996
ASSOCIATED BANK, Petitioner, v. HON. COURT OF APPEALS, PROVINCE OF TARLAC
and PHILIPPINE NATIONAL BANK, Respondents.
xxxxxxxxx
G.R. No. 107612 - January 31, 1996
PHILIPPINE NATIONAL BANK, Petitioner, v. HONORABLE COURT OF APPEALS,
PROVINCE OF TARLAC, and ASSOCIATED BANK, Respondents.
FACTS:
The Province of Tarlac maintains a current account with the Philippine National Bank (PNB)
Tarlac Branch where the provincial funds are deposited. Checks issued by the Province are
signed by the Provincial Treasurer and countersigned by the Provincial Auditor or the Secretary
of the Sangguniang Bayan.
A portion of the funds of the province is allocated to the Concepcion Emergency Hospital. The
allotment checks for said government hospital are 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.
It was then discovered that the hospital did not receive several allotment checks drawn by the
Province.
On February 19, 1981, the Provincial Treasurer requested the manager of the PNB to return all of
its cleared checks which were issued from 1977 to 1980 in order to verify the regularity of their
encashment.
After the checks were examined, the Provincial Treasurer learned that 30 checks amounting to
P203,300.00 were encashed by one Fausto Pangilinan, with the Associated Bank acting as
collecting bank.
It turned out that Fausto Pangilinan, who was the administrative officer and cashier of payee
hospital until his retirement on February 28, 1978, collected the questioned checks from the office
of the Provincial Treasurer. He claimed to be assisting or helping the hospital follow up the
release of the checks and had official receipts.
Pangilinan sought to encash the first check with Associated Bank. However, the manager of
Associated Bank refused and suggested that Pangilinan deposit the check in his personal
savings account with the same bank. Pangilinan was able to withdraw the money when the check
was cleared and paid by the drawee bank, PNB.
After forging the signature of Dr. Adena Canlas who was chief of the payee hospital, Pangilinan
followed the same procedure for the second check, in the amount of P5,000.00 and dated April
20, 1978, as well as for twenty-eight other checks of various amounts and on various dates. The
last check negotiated by Pangilinan was for P8,000.00 and dated February 10, 1981. All the
checks bore the stamp of Associated Bank which reads "All prior endorsements guaranteed
ASSOCIATED BANK."
Jesus David, 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 did not find as irregular the fact
that the checks were not payable to Pangilinan but to the Concepcion Emergency Hospital. While

he admitted that his wife and Pangilinan's wife are first cousins, the manager denied having given
Pangilinan preferential treatment on this account.
On February 26, 1981, the Provincial Treasurer wrote the manager of the PNB seeking the
restoration of the various amounts debited from the current account of the Province.
In turn, the PNB manager demanded reimbursement from the Associated Bank on May 15, 1981.
As both banks resisted payment, the Province of Tarlac brought suit against PNB which, in turn,
impleaded Associated Bank as third-party defendant. The latter then filed a fourth-party complaint
against Adena Canlas and Fausto Pangilinan.
After trial on the merits, the lower court rendered its decision in favor of plaintiff Province of Tarlac
PNB and Associated Bank appealed to the Court of Appeals. Respondent court affirmed the trial
court's decision in toto on September 30, 1992.
Hence these consolidated petitions which seek a reversal of respondent appellate court's
decision.
ISSUE:
Where thirty checks bearing forged endorsements are paid, who bears the loss, the drawer, the
drawee bank or the collecting bank?
HELD: (Collecting Bank)
The case at bench concerns checks payable to the order of Concepcion Emergency Hospital or
its Chief. They were properly issued and bear the genuine signatures of the drawer, the Province
of Tarlac. The infirmity in the questioned checks lies in the payee's (Concepcion Emergency
Hospital) indorsements which are forgeries. At the time of their indorsement, the checks were
order instruments.
Checks having forged indorsements should be differentiated from forged checks or checks
bearing the forged signature of the drawer.
Section 23 of the Negotiable Instruments Law (NIL) provides:
Sec. 23. FORGED SIGNATURE, EFFECT OF. When a signature is forged or made without
authority of the person whose signature it purports to be, it is wholly inoperative, and no right to
retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any
party thereto, can be acquired through or under such signature unless the party against whom it is
sought to enforce such right is precluded from setting up the forgery or want of authority.

A forged signature, whether it be that of the drawer or the payee, is wholly inoperative and
no one can gain title to the instrument through it. A person whose signature to an
instrument was forged was never a party and never consented to the contract which
allegedly gave rise to such instrument. Section 23 does not avoid the instrument but only
the forged signature. Thus, a forged indorsement does not operate as the payee's
indorsement.
The exception to the general rule in Section 23 is where "a party against whom it is sought
to enforce a right is precluded from setting up the forgery or want of authority." Parties
who warrant or admit the genuineness of the signature in question and those who, by their
acts, silence or negligence are estopped from setting up the defense of forgery, are
precluded from using this defense. Indorsers, persons negotiating by delivery and

acceptors are warrantors of the genuineness of the signatures on the instrument.

In bearer instruments, the signature of the payee or holder is unnecessary to pass title to
the instrument. Hence, when the indorsement is a forgery, only the person whose
signature is forged can raise the defense of forgery against a holder in due course.
The checks involved in this case are order instruments, hence, the following discussion is made
with reference to the effects of a forged indorsement on an instrument payable to order.
Where the instrument is payable to order at the time of the forgery, such as the checks in this
case, the signature of its rightful holder (here, the payee hospital) is essential to transfer title to
the same instrument. When the holder's indorsement is forged, all parties prior to the forgery may
raise the real defense of forgery against all parties subsequent thereto.
An indorser of an order instrument warrants "that the instrument is genuine and in all respects
what it purports to be; that he has a good title to it; that all prior parties had capacity to contract;
and that the instrument is at the time of his indorsement valid and subsisting." He cannot
interpose the defense that signatures prior to him are forged.
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's 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.
The bank on which a check is drawn, known as the drawee bank, is under strict liability to pay the
check to the order of the payee. The drawer's instructions are reflected on the face and by the
terms of the check. Payment under a forged indorsement is not to the drawer's order. When the
drawee bank pays a person other than the payee, it does not comply with the terms of the check
and violates its duty to charge its customer's (the drawer) account only for properly payable
items. Since the drawee bank did not pay a holder or other person entitled to receive payment, it
has no right to reimbursement from the drawer. The general rule then is that the drawee bank
may not debit the drawer's account and is not entitled to indemnification from the drawer. The risk
of loss must perforce fall on the drawee bank.
However, if the drawee bank can prove a failure by the customer/drawer to exercise ordinary care
that substantially contributed to the making of the forged signature, the drawer is precluded from
asserting the forgery.
If at the same time the drawee bank was also negligent to the point of substantially contributing to
the loss, then such loss from the forgery can be apportioned between the negligent drawer and
the negligent bank.
In cases involving a forged check, where the drawer's signature is forged, the drawer can recover
from the drawee bank. No drawee bank has a right to pay a forged check. If it does, it shall have
to recredit the amount of the check to the account of the drawer. The liability chain ends with
the drawee bank whose responsibility it is to know the drawer's signature since the latter
is its customer.
In cases involving checks with forged indorsements, such as the present petition, the chain of
liability does not end with the drawee bank. The drawee bank may not debit the account of the
drawer but may generally pass liability back through the collection chain to the party who took
from the forger and, of course, to the forger himself, if available. In other words, the drawee bank
can seek reimbursement or a return of the amount it paid from the presentor bank or person.

Theoretically, the latter can demand reimbursement from the person who indorsed the check to it
and so on. The loss falls on the party who took the check from the forger, or on the forger himself.
In this case, the checks were indorsed by the collecting bank (Associated Bank) to the drawee
bank (PNB). The former will necessarily be liable to the latter for the checks bearing forged
indorsements. If the forgery is that of the payee's or holder's indorsement, the collecting bank is
held liable, without prejudice to the latter proceeding against the forger.
Since a forged indorsement is inoperative, the collecting bank had no right to be paid by the
drawee bank. The former must necessarily return the money paid by the latter because it was
paid wrongfully.
More importantly, by reason of the statutory warranty of a general indorser in section 66 of
the Negotiable Instruments Law, 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. I
It warrants that the instrument is genuine, and that it is valid and subsisting at the time of his
indorsement. Because the indorsement is a forgery, the collecting bank commits a breach of this
warranty and will be accountable to the drawee bank. This liability scheme operates without
regard to fault on the part of the collecting/presenting bank. Even if the latter bank was not
negligent, it would still be liable to the drawee bank because of its indorsement.
The Court has consistently ruled that "the collecting bank or last endorser generally suffers the
loss because it has the duty to ascertain the genuineness of all prior endorsements 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 endorsements."
The drawee bank is not similarly situated as the collecting bank because the former makes no
warranty as to the genuineness of any indorsement. The drawee bank's duty is but to verify 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. It
has taken a risk on his deposit. The bank is also in a better position to detect forgery, fraud or
irregularity in the indorsement.
Hence, the drawee bank can recover the amount paid on the check bearing a forged indorsement
from the collecting bank. However, a drawee bank has the duty to promptly inform the presentor
of the forgery upon discovery. If the drawee bank delays in informing the presentor of the forgery,
thereby depriving said presentor of the right to recover from the forger, the former is deemed
negligent and can no longer recover from the presentor.
Applying these rules to the case at bench, PNB, 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 bankPNB and drawer-Province of Tarlac were negligent, the loss should be properly apportioned
between them.
The loss incurred by drawee bank-PNB can be passed on to the collecting bank-Associated Bank
which presented and indorsed the checks to it. Associated Bank can, in turn, hold the forger,
Fausto Pangilinan, liable.
If PNB negligently delayed in informing Associated Bank of the forgery, thus depriving the latter of

the opportunity to recover from the forger, it forfeits its right to reimbursement and will be made to
bear the loss.
After careful examination of the records, the Court finds that the Province of Tarlac was equally
negligent and should, therefore, share the burden of loss from the checks bearing a forged
indorsement.
The failure of the Province of Tarlac to exercise due care contributed to a significant degree to the
loss tantamount to negligence. Hence, the Province of Tarlac should be liable for part of the total
amount paid on the questioned checks.
The drawee bank PNB also breached its duty to pay only according to the terms of the check.
Hence, it cannot escape liability and should also bear part of the loss.
As earlier stated, PNB can recover from the collecting bank.
The Court finds as reasonable, the proportionate sharing of fifty percent - fifty percent (50%50%). Due to the negligence of the Province of Tarlac in releasing the checks to an unauthorized
person (Fausto Pangilinan), in allowing the retired hospital cashier to receive the checks for the
payee hospital for a period close to three years and in not properly ascertaining why the retired
hospital cashier was collecting checks for the payee hospital in addition to the hospital's real
cashier, respondent Province contributed to the loss amounting to P203,300.00 and shall be
liable to the PNB for fifty (50%) percent thereof. In effect, the Province of Tarlac can only recover
fifty percent (50%) of P203,300.00 from PNB.
The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%) percent of
P203,300.00. It is liable on its warranties as indorser of the checks which were deposited by
Fausto Pangilinan, having guaranteed the genuineness of all prior indorsements, including that of
the chief of the payee hospital, Dr. Adena Canlas. Associated Bank was also remiss in its duty to
ascertain the genuineness of the payee's indorsement.
IN VIEW OF THE FOREGOING, the petition for review filed by the Philippine National Bank (G.R.
No. 107612) is hereby PARTIALLY GRANTED. The petition for review filed by the Associated
Bank (G.R. No. 107382) is hereby DENIED. The decision of the trial court is MODIFIED. The
Philippine National Bank shall pay fifty percent (50%) of P203,300.00 to the Province of Tarlac,
with legal interest from March 20, 1981 until the payment thereof. Associated Bank shall pay fifty
percent (50%) of P203,300.00 to the Philippine National Bank, likewise, with legal interest from
March 20, 1981 until payment is made.
SO ORDERED.

G.R. No. L-53194 March 14, 1988
PHILIPPINE NATIONAL BANK petitioner, vs. HON. ROMULO S. QUIMPO, Presiding Judge,
Court of First Instance of Rizal, Branch XIV, and FRANCISCO S. GOZON II, respondents.
FACTS:
On July 3, 1973, Francisco S. Gozon II, who was a depositor of the Caloocan City Branch of the
Philippine National Bank, went to the bank in his car accompanied by his friend Ernesto Santos
whom he left in the car while he transacted business in the bank.
When Santos saw that Gozon left his check book he took a check therefrom, filled it up for the
amount of P5,000.00, forged the signature of Gozon, and thereafter he encashed the check in the
bank on the same day. The account of Gozon was debited the said amount.
Upon receipt of the statement of account from the bank, Gozon asked that the said amount of
P5,000.00 should be returned to his account as his signature on the check was forged but the
bank refused.

Upon complaint of private respondent on February 1, 1974 Ernesto Santos was apprehended by
the police authorities and upon investigation he admitted that he stole the check of Gozon, forged
his signature and encashed the same with the Bank.
Hence Gozon filed the complaint for recovery of the amount of P5,000.00, plus interest,
damages, attorney's fees and costs against the bank in the Court of First Instance of Rizal. After
the issues were joined and the trial on the merits ensued, a decision was rendered in favor of
Gozon.
Not satisfied therewith, the bank now filed this petition for review on certiorari in this Court raising
the sole legal issue that

THE ACT OF RESPONDENT FRANCISCO GOZON, II IN PUTTING HIS CHECK

BOOK CONTAINING THE CHECK IN QUESTION INTO THE HANDS OF
ERNESTO SANTOS WAS INDEED THE PROXIMATE CAUSE OF THE LOSS,
THEREBY PRECLUDING HIM FROM SETTING UP THE DEFENSE OF
FORGERY OR WANT 0F AUTHORITY UNDER SECTION 23 OF THE
NEGOTIABLE INSTRUMENTS LAW, ACT NO. 3201

ISSUE: Whether or not there was contributory negligence on the part of Gozon when he
negligently left his chect at the hands of Ernesto Santos.
HELD: (NO, The bank was the one negligent for not verifying the signature of the check)
The petition is devoid of merit.
This Court reproduces with approval the disquisition of the court a quo as follows:
A bank is bound to know the signatures of its customers; and if it pays a forged check,
it must be considered as making the payment out of its own funds, and cannot
ordinarily change the amount so paid to the account of the depositor whose
name was forged' (San Carlos Milling Co. vs. Bank of the P.I., 59 Phil. 59).
This rule is absolutely necessary to the circulation of drafts and checks, and is based
upon the presumed negligence of the drawee in failing to meet its obligation to
know the signature of its correspondent. ... There is nothing inequitable in such a
rule. If the paper comes to the drawee in the regular course of business, and he,
having the opportunity ascertaining its character, pronounces it to be valid and
pays it, it is not only a question of payment under mistake, but payment in
neglect of duty which the commercial law places upon him, and the result of his
negligence must rest upon him (12 ALR 1901, citing many cases found in I
Agbayani, supra).
Defendant, however, interposed the defense that it exercised diligence in accordance
with the accepted norms of banking practice when it accepted and paid Exhibit
"A". It presented evidence that the check had to pass scrutiny by a signature
verifier as well as an officer of the bank.
A comparison of the signature (Exhibit "A-l") on the forged check (Exhibit "A") with
plaintiffs exemplar signatures (Exhibits "5-N" and "5-B") found in the PNB Form
35-A would immediately show the negligence of the employees of the defendant
bank. Even a not too careful comparison would immediately arrest one's attention
and direct it to the graceful lines of plaintiffs exemplar signatures found in
Exhibits "5-A" and "5-B". The formation of the first letter "F" in the exemplars,
which could be regarded as artistic, is completely different from the way the
same letter is formed in Exhibit "A-l". That alone should have alerted a more
careful and prudent signature verifier.
The prime duty of a bank is to ascertain the genuineness of the signature of the drawer or
the depositor on the check being encashed. It is expected to use reasonable business
prudence in accepting and cashing a check presented to it.

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

G.R. No. L-62943 July 14, 1986
METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner, vs. COURT OF
APPEALS (Now INTERMEDIATE APPELLATE COURT) and THE PHILIPPINE NATIONAL
BANK, respondents.
FACTS:
Metropolitan Waterworks and Sewerage System (hereinafter referred to as MWSS) is a
government owned and controlled corporation created under Republic Act No. 6234 as the
successor-in- interest of the defunct NWSA. The Philippine National Bank (PNB for short), on the
other hand, is the depository bank of MWSS and its predecessor-in-interest NWSA.
Among the several accounts of NWSA with PNB is NWSA Account No. 6, otherwise known as
Account No. 381-777 and which is presently allocated No. 010-500281.
The authorized signature for said Account No. 6 were those of MWSS treasurer Jose Sanchez,
its auditor Pedro Aguilar, and its acting General Manager Victor L. Recio. Their respective
specimen signatures were submitted by the MWSS to and on file with the PNB.

By special arrangement with the PNB, the MWSS used personalized checks in drawing from
this account. These checks were printed for MWSS by its printer, F. Mesina Enterprises, located
at 1775 Rizal Extension, Caloocan City.
During the months of March, April and May 1969, twenty-three (23) checks were prepared,
processed, issued and released by NWSA, all of which were paid and cleared by PNB and
debited by PNB against NWSA Account No. 6.
During the same months of March, April and May 1969, twenty-three (23) checks bearing the
same numbers as the NWSA checks were likewise paid and cleared by PNB and debited against
NWSA Account No. 6, to wit:
The foregoing checks were deposited by the payees Raul Dizon, Arturo Sison and Antonio
Mendoza in their respective current accounts with the Philippine Commercial and Industrial Bank
(PCIB) and Philippine Bank of Commerce (PBC) in the months of March, April and May 1969.
Thru the Central Bank Clearing, these checks were presented for payment by PBC and PCIB to
the defendant PNB, and paid, also in the months of March, April and May 1969. At the time of
their presentation to PNB these checks bear the standard indorsement which reads 'all prior
indorsement and/or lack of endorsement guaranteed.'
Subsequent investigation however, conducted by the NBI showed that Raul Dizon, Arturo Sison
and Antonio Mendoza were all fictitious persons. The respective balances in their current account
with the PBC and/or PCIB stood as follows: Raul Dizon P3,455.00 as of April 30, 1969; Antonio
Mendoza P18,182.00 as of May 23, 1969; and Arturo Sison P1,398.92 as of June 30, 1969.
On June 11, 1969, NWSA addressed a letter to PNB requesting the immediate restoration to its
Account No. 6, of the total sum of P3,457,903.00 corresponding to the total amount of these
twenty-three (23) checks claimed by NWSA to be forged and/or spurious checks.
In view of the refusal of PNB to credit back to Account No. 6 the said total sum of P3,457,903.00
MWSS filed the instant complaint on November 10, 1972 before the Court of First Instance of
Manila and docketed thereat as Civil Case No. 88950.
In its answer, PNB contended among others, that the checks in question were regular on its face
in all respects, including the genuineness of the signatures of authorized NWSA signing officers
and there was nothing on its face that could have aroused any suspicion as to its genuineness
and due execution and; that NWSA was guilty of negligence which was the proximate cause of
the loss.
PNB also filed a third party complaint against the negotiating banks PBC and PCIB on the ground
that they failed to ascertain the Identity of the payees and their title to the checks which were
deposited in the respective new accounts of the payees with them.
On February 6, 1976, the Court of First Instance of Manila rendered judgment in favor of the
MWSS.
The Court of Appeals reversed the decision of the Court of First Instance of Manila and rendered
judgment in favor of the respondent Philippine National Bank. A motion for reconsideration filed
by the petitioner MWSS was denied by the respondent court.
ISSUE: Whether or not the NWSA (MWSS) was negligent it not providing security measures to its
own checks.
HELD: (YES, Where a depositor is using its own personalized checks, its failure to provide
adequate security measures to prevent forgeries of its checks constitutes gross
negligence and bars it from setting up the defense of forgery)
The appellate court applied Section 24 of the Negotiable Instruments Law which provides:

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

The petitioner submits that the above provision does not apply to the facts of the instant case
because the questioned checks were not those of the MWSS and neither were they drawn by its
authorized signatories. The petitioner states that granting that Section 24 of the Negotiable
Instruments Law is applicable, the same creates only a prima facie presumption which was
overcome by the following documents, to wit: (1) the NBI Report of November 2, 1970; (2) the
NBI Report of November 21, 1974; (3) the NBI Chemistry Report No. C-74891; (4) the
Memorandum of Mr. Juan Dino, 3rd Assistant Auditor of the respondent drawee bank addressed
to the Chief Auditor of the petitioner; (5) the admission of the respondent bank's counsel in open
court that the National Bureau of Investigation found the signature on the twenty-three (23)
checks in question to be forgeries; and (6) the admission of the respondent bank's witness, Mr.
Faustino Mesina, Jr. that the checks in question were not printed by his printing press.
The petitioner contends that since the signatures of the checks were forgeries, the respondent
drawee bank must bear the loss.
We have carefully reviewed the documents cited by the petitioner. There is no express and
categorical finding in these documents that the twenty-three (23) questioned checks were
indeed signed by persons other than the authorized MWSS signatories. On the contrary,
the findings of the National Bureau of Investigation in its Report dated November 2, 1970
show that the MWSS fraud was an "inside job" and that the petitioner's delay in the
reconciliation of bank statements and the laxity and loose records control in the printing
of its personalized checks facilitated the fraud. Likewise, the questioned Documents
Report No. 159-1074 dated November 21, 1974 of the National Bureau of Investigation does
not declare or prove that the signatures appearing on the questioned checks are forgeries.
The report merely mentions the alleged differences in the type face, checkwriting, and
printing characteristics appearing in the standard or submitted models and the questioned
typewritings. The NBI Chemistry Report No. C-74-891 merely describes the inks and pens
used in writing the alleged forged signatures.
It is clear that these three (3) NBI Reports relied upon by the petitioner are inadequate to
sustain its allegations of forgery. These reports did not touch on the inherent qualities of
the signatures which are indispensable in the determination of the existence of forgery.
There must be conclusive findings that there is a variance in the inherent characteristics
of the signatures and that they were written by two or more different persons.
Forgery cannot be presumed (Siasat, et al. v. Intermediate Appellate Court, et al, 139 SCRA
238). It must be established by clear, positive, and convincing evidence. This was not done in the
present case.
The cases of San Carlos Milling Co. Ltd. v. Bank of the Philippine Islands, et al. (59 Phil. 59) and
Great Eastern Life Ins., Co. v. Hongkong and Shanghai Bank (43 Phil. 678) relied upon by the
petitioner are inapplicable in this case because the forgeries in those cases were either clearly
established or admitted while in the instant case, the allegations of forgery were not clearly
established during trial.
Considering the absence of sufficient security in the printing of the checks coupled with
the very close similarities between the genuine signatures and the alleged forgeries, the
twenty-three (23) checks in question could have been presented to the petitioner's
signatories without their knowing that they were bogus checks. Indeed, the cashier of the
petitioner whose signatures were allegedly forged was unable to tell the difference
between the allegedly forged signature and his own genuine signature. On the other hand,
the MWSS officials admitted that these checks could easily be passed on as genuine.
Moreover, the petitioner is barred from setting up the defense of forgery under Section 23 of the
Negotiable Instruments Law which provides that:
SEC. 23. FORGED SIGNATURE; EFFECT OF.- When the signature is forged or made
without authority of the person whose signature it purports to be, it is wholly
inoperative, and no right to retain the instrument, or to give a discharge therefor,
or to enforce payment thereof against any party thereto can be acquired through

or under such signature unless the party against whom it is sought to enforce
such right is precluded from setting up the forgery or want of authority.
because it was guilty of negligence not only before the questioned checks were negotiated but
even after the same had already been negotiated. The records show that at the time the twentythree (23) checks were prepared, negotiated, and encashed, the petitioner was using its own
personalized checks, instead of the official PNB Commercial blank checks. In the exercise of
this special privilege, however, the petitioner failed to provide the needed security
measures. That there was gross negligence in the printing of its personalized checks is
shown by the following uncontroverted facts.
Another factor which facilitated the fraudulent encashment of the twenty-three (23) checks in
question was the failure of the petitioner to reconcile the bank statements with its own records.
This failure of the petitioner to reconcile the bank statements with its cancelled checks was noted
by the National Bureau of Investigation in its report dated November 2, 1970:
58. One factor which facilitate this fraud was the delay in the reconciliation of bank
(PNB) statements with the NAWASA bank accounts. x x x. Had the NAWASA
representative come to the PNB early for the statements and had the bank been
advised promptly of the reported bogus check, the negotiation of practically all of
the remaining checks on May, 1969, totalling P2,224,736.00 could have been
prevented.
The records likewise show that the petitioner failed to provide appropriate security measures over
its own records thereby laying confidential records open to unauthorized persons. The petitioner's
own Fact Finding Committee, in its report submitted to their General manager underscored this
laxity of records control. It observed that the "office of Mr. Ongtengco (Cashier No. VI of the
Treasury Department at the NAWASA) is quite open to any person known to him or his staff
members and that the check writer is merely on top of his table."
Relying on the foregoing statement of Mr. Ongtengco, the National Bureau of Investigation
concluded in its Report dated November 2, 1970 that the fraudulent encashment of the twentythree (23)cheeks in question was an "inside job". Thus

We have all the reasons to believe that this fraudulent act was an inside job or one
pulled with inside connivance at NAWASA. As pointed earlier in this report, the
serial numbers of these checks in question conform with the numbers in current
use of NAWASA, aside from the fact that these fraudulent checks were found to
be of the same kind and design as that of NAWASA's own checks. While
knowledge as to such facts may be obtained through the possession of a
NAWASA check of current issue, an outsider without information from the inside
can not possibly pinpoint which of NAWASA's various accounts has sufficient
balance to cover all these fraudulent checks. None of these checks, it should be
noted, was dishonored for insufficiency of funds. . .

Even if the twenty-three (23) checks in question are considered forgeries, considering the
petitioner's gross negligence, it is barred from setting up the defense of forgery under
Section 23 of the Negotiable Instruments Law.
Nonetheless, the petitioner claims that it was the negligence of the respondent Philippine National
Bank that was the proximate cause of the loss. The petitioner relies on our ruling in Philippine
National Bank v. Court of Appeals (25 SCRA 693) that.

Thus, by not returning the check to the PCIB, by thereby indicating that the PNB had
found nothing wrong with the check and would honor the same, and by actually
paying its amount to the PCIB, the PNB induced the latter, not only to believe
that the check was genuine and good in every respect, but, also, to pay its
amount to Augusto Lim. In other words, the PNB was the primary or proximate
cause of the loss, and, hence, may not recover from the PCIB.

The argument has no merit. The records show that the respondent drawee bank, had taken the
necessary measures in the detection of forged checks and the prevention of their fraudulent
encashment. In fact, long before the encashment of the twenty-three (23) checks in question, the
respondent Bank had issued constant reminders to all Current Account Bookkeepers informing
them of the activities of forgery syndicates.
We cannot fault the respondent drawee Bank for not having detected the fraudulent encashment
of the checks because the printing of the petitioner's personalized checks was not done under the
supervision and control of the Bank. There is no evidence on record indicating that because of
this private printing the petitioner furnished the respondent Bank with samples of checks, pens,
and inks or took other precautionary measures with the PNB to safeguard its interests.
Under the circumstances, therefore, the petitioner was in a better position to detect and prevent
the fraudulent encashment of its checks.
WHEREFORE, the petition for review on certiorari is hereby DISMISSED for lack of merit. The
decision of the respondent Court of Appeals dated October 29, 1982 is AFFIRMED. No
pronouncement as to costs.
SO ORDERED.
G.R. No. 92244 February 9, 1993
NATIVIDAD GEMPESAW, petitioner, vs. THE HONORABLE COURT OF APPEALS and
PHILIPPINE BANK OF COMMUNICATIONS, respondents.
FACTS:
Petitioner Natividad O. Gempesaw (petitioner) owns and operates four grocery stores located at
Rizal Avenue Extension and at Second Avenue, Caloocan City.
Among these groceries are D.G. Shopper's Mart and D.G. Whole Sale Mart. Petitioner maintains
a checking account numbered 13-00038-1 with the Caloocan City Branch of the respondent
drawee Bank (PBC).
To facilitate payment of debts to her suppliers, petitioner draws checks against her checking
account with the respondent bank as drawee. Her customary practice of issuing checks in
payment of her suppliers was as follows:
(1)The checks were prepared and filled up as to all material particulars by her trusted
bookkeeper, Alicia Galang, an employee for more than eight (8) years.
(2)After the bookkeeper prepared the checks, the completed checks were submitted to the
petitioner for her signature, together with the corresponding invoice receipts which indicate the
correct obligations due and payable to her suppliers.
Petitioner signed each and every check without bothering to verify the accuracy of the checks
against the corresponding invoices because she reposed full and implicit trust and confidence on
her bookkeeper.
The issuance and delivery of the checks to the payees named therein were left to the
bookkeeper. Petitioner admitted that she did not make any verification as to whether or not the
checks were delivered to their respective payees. Although the respondent drawee Bank notified
her of all checks presented to and paid by the bank, petitioner did not verify the correctness of the
returned checks, much less check if the payees actually received the checks in payment for the
supplies she received.
In the course of her business operations covering a period of two years, petitioner issued,
following her usual practice stated above, a total of eighty-two (82) checks in favor of several
suppliers.
Practically, all the checks issued and honored by the respondent drawee bank were crossed

checks. Aside from the daily notice given to the petitioner by the respondent drawee Bank, the
latter also furnished her with a monthly statement of her transactions, attaching thereto all the
cancelled checks she had issued and which were debited against her current account. It was only
after the lapse of more two (2) years that petitioner found out about the fraudulent manipulations
of her bookkeeper.
All the eighty-two (82) checks with forged signatures of the payees were brought to Ernest L.
Boon, Chief Accountant of respondent drawee Bank at the Buendia branch, who, without
authority therefor, accepted them all for deposit at the Buendia branch to the credit and/or in the
accounts of Alfredo Y. Romero and Benito Lam.
Ernest L. Boon was a very close friend of Alfredo Y. Romero. Sixty-three (63) out of the eightytwo (82) checks were deposited in Savings Account No. 00844-5 of Alfredo Y. Romero at the
respondent drawee Bank's Buendia branch, and four (4) checks in his Savings Account No. 3281-9 at its Ongpin branch. The rest of the checks were deposited in Account No. 0443-4, under
the name of Benito Lam at the Elcao branch of the respondent drawee Bank.
About thirty (30) of the payees whose names were specifically written on the checks testified that
they did not receive nor even see the subject checks and that the indorsements appearing at the
back of the checks were not theirs.
The team of auditors from the main office of the respondent drawee Bank which conducted
periodic inspection of the branches' operations failed to discover, check or stop the unauthorized
acts of Ernest L. Boon.
Under the rules of the respondent drawee Bank, only a Branch Manager and no other official of
the respondent drawee bank, may accept a second indorsement on a check for deposit. In the
case at bar, all the deposit slips of the eighty-two (82) checks in question were initialed and/or
approved for deposit by Ernest L. Boon. The Branch Managers of the Ongpin and Elcao
branches accepted the deposits made in the Buendia branch and credited the accounts of Alfredo
Y. Romero and Benito Lam in their respective branches.
On November 7, 1984, petitioner made a written demand on respondent drawee Bank to credit
her account with the money value of the eighty-two (82) checks totalling P1,208.606.89 for having
been wrongfully charged against her account. Respondent drawee Bank refused to grant
petitioner's demand. On January 23, 1985, petitioner filed the complaint with the Regional Trial
Court.
ISSUE: Whether or not there is contributory negligence on the part of the Petitioner
HELD: (YES)
This is not a suit by the party whose signature was forged on a check drawn against the drawee
bank. The payees are not parties to the case. Rather, it is the drawer, whose signature is
genuine, who instituted this action to recover from the drawee bank the money value of eightytwo (82) checks paid out by the drawee bank to holders of those checks where the indorsements
of the payees were forged.
How and by whom the forgeries were committed are not established on the record, but the
respective payees admitted that they did not receive those checks and therefore never indorsed
the same. The applicable law is the Negotiable Instruments Law (heretofore referred to as the
NIL). Section 23 of the NIL provides:

When a signature is forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce payment thereof against
any party thereto, can be acquired through or under such signature, unless the
party against whom it is sought to enforce such right is precluded from setting up
the forgery or want of authority.

Under the aforecited provision, forgery is a real or absolute defense by the party whose
signature is forged. A party whose signature to an instrument was forged was

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

the
the
the
the

Petitioner completed the checks by signing them as drawer and thereafter authorized her
employee Alicia Galang to deliver the eighty-two (82) checks to their respective payees. Instead
of issuing the checks to the payees as named in the checks, Alicia Galang delivered them to the
Chief Accountant of the Buendia branch of the respondent drawee Bank, a certain Ernest L.
Boon.
It was established that the signatures of the payees as first indorsers were forged. The record
fails to show the identity of the party who made the forged signatures.
As a rule, a drawee bank who has paid a check on which an indorsement has been forged
cannot charge the drawer's account for the amount of said check. An exception to this rule

is where the drawer is guilty of such negligence which causes the bank to honor such a
check or checks.
The negligence of a depositor which will prevent recovery of an unauthorized payment is based
on failure of the depositor to act as a prudent businessman would under the circumstances. In the
case at bar, the petitioner relied implicitly upon the honesty and loyalty of her bookkeeper, and
did not even verify the accuracy of amounts of the checks she signed against the invoices
attached thereto. Furthermore, although she regularly received her bank statements, she
apparently did not carefully examine the same nor the check stubs and the returned checks, and
did not compare them with the same invoices.
It is highly improbable that in a period of two years, not one of Petitioner's suppliers complained
of non-payment. Assuming that even one single complaint had been made, petitioner would have
been duty-bound, as far as the respondent drawee Bank was concerned, to make an adequate
investigation on the matter. Had this been done, the discrepancies would have been discovered,
sooner or later.
Petitioner's failure to make such adequate inquiry constituted negligence which resulted in the
bank's honoring of the subsequent checks with forged indorsements. On the other hand, since
the record mentions nothing about such a complaint, the possibility exists that the checks
in question covered inexistent sales.
One thing is clear from the records that the petitioner failed to examine her records with
reasonable diligence whether before she signed the checks or after receiving her bank
statements. Thus, petitioner's negligence was the proximate cause of her loss. And since it was
her negligence which caused the respondent drawee Bank to honor the forged checks or
prevented it from recovering the amount it had already paid on the checks, petitioner cannot now
complain should the bank refuse to recredit her account with the amount of such checks. Under
Section 23 of the NIL, she is now precluded from using the forgery to prevent the bank's debiting
of her account.
Petitioner argues that respondent drawee Bank should not have honored the checks because
they were crossed checks. Issuing a crossed check imposes no legal obligation on the drawee
not to honor such a check. It is more of a warning to the holder that the check cannot be
presented to the drawee bank for payment in cash. Instead, the check can only be deposited with
the payee's bank which in turn must present it for payment against the drawee bank in the course
of normal banking transactions between banks. The crossed check cannot be presented for
payment but it can only be deposited and the drawee bank may only pay to another bank in the
payee's or indorser's account.
Petitioner likewise contends that banking rules prohibit the drawee bank from having checks with
more than one indorsement. The banking rule banning acceptance of checks for deposit or cash
payment with more than one indorsement unless cleared by some bank officials does not
invalidate the instrument; neither does it invalidate the negotiation or transfer of the said check. In
effect, this rule destroys the negotiability of bills/checks by limiting their negotiation by
indorsement of only the payee. Under the NIL, the only kind of indorsement which stops the
further negotiation of an instrument is a restrictive indorsement which prohibits the further
negotiation thereof.
Sec. 36. When indorsement restrictive. An indorsement is restrictive which either
(a) Prohibits further negotiation of the instrument; or
xxx xxx xxx
In this kind of restrictive indorsement, the prohibition to transfer or negotiate must be written in
express words at the back of the instrument, so that any subsequent party may be forewarned
that ceases to be negotiable. However, the restrictive indorsee acquires the right to receive
payment and bring any action thereon as any indorser, but he can no longer transfer his rights as
such indorsee where the form of the indorsement does not authorize him to do so.

Although the holder of a check cannot compel a drawee bank to honor it because there is no
privity between them, as far as the drawer-depositor is concerned, such bank may not legally
refuse to honor a negotiable bill of exchange or a check drawn against it with more than one
indorsement if there is nothing irregular with the bill or check and the drawer has sufficient funds.
The drawee cannot be compelled to accept or pay the check by the drawer or any holder
because as a drawee, he incurs no liability on the check unless he accepts it. But the drawee will
make itself liable to a suit for damages at the instance of the drawer for wrongful dishonor of the
bill or check.
Thus, it is clear that under the NIL, petitioner is precluded from raising the defense of
forgery by reason of her gross negligence. But under Section 196 of the NIL, any case not
provided for in the Act shall be governed by the provisions of existing legislation. Under
the laws of quasi-delict, she cannot point to the negligence of the respondent drawee Bank
in the selection and supervision of its employees as being the cause of the loss because
negligence is the proximate cause thereof and under Article 2179 of the Civil Code, she
may not be awarded damages. However, under Article 1170 of the same Code the
respondent drawee Bank may be held liable for damages. The article provides
Those who in the performance of their obligations are guilty of fraud, negligence
or delay, and those who in any manner contravene the tenor thereof, are
liable for damages.
The fact that the respondent drawee Bank did not discover the irregularity with respect to the
acceptance of checks with second indorsement for deposit even without the approval of the
branch manager despite periodic inspection conducted by a team of auditors from the main office
constitutes negligence on the part of the bank in carrying out its obligations to its depositors.
Article 1173 provides

The fault or negligence of the obligor consists in the omission of that diligence which is
required by the nature of the obligation and corresponds with the circumstance of
the persons, of the time and of the place. . . .

Surely, respondent drawee Bank cannot claim it exercised such a degree of diligence that is
required of it. There is no way We can allow it now to escape liability for such negligence. Its
liability as obligor is not merely vicarious but primary wherein the defense of exercise of due
diligence in the selection and supervision of its employees is of no moment.
Premises considered, respondent drawee Bank is adjudged liable to share the loss with the
petitioner on a fifty-fifty ratio in accordance with Article 172 which provides:

Responsibility arising from negligence in the performance of every kind of obligation is

also demandable, but such liability may be regulated by the courts according to
the circumstances.

With the foregoing provisions of the Civil Code being relied upon, it is being made clear
that the decision to hold the drawee bank liable is based on law and substantial justice
and not on mere equity. And although the case was brought before the court not on breach of
contractual obligations, the courts are not precluded from applying to the circumstances of the
case the laws pertinent thereto. Thus, the fact that petitioner's negligence was found to be
the proximate cause of her loss does not preclude her from recovering damages. The
reason why the decision dealt on a discussion on proximate cause is due to the error pointed out
by petitioner as allegedly committed by the respondent court. And in breaches of contract under
Article 1173, due diligence on the part of the defendant is not a defense.
PREMISES CONSIDERED, the case is hereby ordered REMANDED to the trial court for the
reception of evidence to determine the exact amount of loss suffered by the petitioner,
considering that she partly benefited from the issuance of the questioned checks since the
obligation for which she issued them were apparently extinguished, such that only the excess
amount over and above the total of these actual obligations must be considered as loss of which
one half must be paid by respondent drawee bank to herein petitioner.

SO ORDERED.
[G.R. No. 42725. April 22, 1991.] REPUBLIC BANK, Petitioner, v. COURT OF APPEALS and
FIRST NATIONAL CITY BANK, Respondents.
FACTS:
On January 25, 1966, San Miguel Corporation (SMC for short), drew a dividend Check No.
108854 for P240, Philippine currency, on its account in the respondent First National City Bank
("FNCB" for brevity) in favor of J. Roberto C. Delgado, a stockholder. After the check had been
delivered to Delgado, the amount on its face was fraudulently and without authority of the drawer
(SMC), altered by increasing it from P240 to P9,240. The check was indorsed and deposited on
March 14, 1966 by Delgado in his account with the petitioner Republic Bank (hereafter
"Republic"). Republic accepted the check for deposit without ascertaining its genuineness and
regularity.
Later, Republic endorsed the check to FNCB by stamping on the back of the check "all prior
and/or lack of indorsement guaranteed" and presented it to FNCB for payment through the
Central Bank Clearing House. Believing the check was genuine, and relying on the guaranty and
endorsement of Republic appearing on the back of the check, FNCB paid P9,240 to Republic
through the Central Bank Clearing House on March 15, 1966. On April 19, 1966, SMC notified
FNCB of the material alteration in the amount of the check in question. FNCB lost no time in
recrediting P9,240 to SMC. On May 19, 1966, FNCB informed Republic in writing of the alteration
and the forgery of the endorsement of J. Roberto C. Delgado. By then, Delgado had already
withdrawn his account from Republic. On August 15, 1966, FNCB demanded that Republic
refund the P9,240 on the basis of the latters endorsement and guaranty. Republic refused,
claiming there was delay in giving it notice of the alteration; that it was not guilty of negligence;
that it was the drawers (SMCs) fault in drawing the check in such a way as to permit the
insertion of numerals increasing the amount; that FNCB, as drawee, was absolved of any liability
to the drawer (SMC), thus, FNCB had no right of recourse against Republic. On April 8, 1968,
the trial court rendered judgment ordering Republic to pay P9,240 to FNCB. The Court of Appeals
affirmed that decision.
ISSUE: Whether Republic, as the collecting bank, is protected, by the 24-hour clearing house
rule, found in CB Circular No. 9, as amended, from liability to refund the amount paid by FNCB,
as drawee of the SMC dividend check.
HELD: (YES) The petition for review is meritorious and must be granted. The 24-hour clearing
house rule embodied in Section 4(c) of Central Bank Circular No. 9, as amended and is a valid
rule applicable to commercial banks. It is true that when an endorsement is forged, the
collecting bank or last endorser, as a general rule, bears the loss (Banco de Oro Savings &
Mortgage Bank v. Equitable Banking Corp., 167 SCRA 188). But the unqualified endorsement
of the collecting bank on the check should be read together with the 24-hour regulation on
clearing house operation (Metropolitan Bank & Trust Co. v. First National City Bank,
supra). Thus, when the drawee bank fails to return a forged or altered check to the
collecting bank within the 24-hour clearing period, the collecting bank is absolved from
liability. The following decisions of this Court are also relevant and persuasive: In
Hongkong & Shanghai Banking Corp. v. Peoples Bank & Trust Co. (35 SCRA 140), a check for
P14,608.05 was drawn by the Philippine Long Distance Telephone Company on the Hongkong &
Shanghai Banking Corporation payable to the same bank. It was mailed to the payee but fell into
the hands of a certain Florentino Changco who erased the name of the payee, typed his own
name, and thereafter deposited the altered check in his account in the Peoples Bank & Trust Co.
which presented it to the drawee bank with the following indorsement: "For clearance, clearing
office. All prior endorsements and or lack of endorsements guaranteed. Peoples Bank and Trust
Company." The check was cleared by the drawee bank (Hongkong & Shanghai Bank),
whereupon the Peoples Bank credited Changco with the amount of the check. Changco
thereafter withdrew the contents of his bank account. A month later, when the check was returned
to PLDT, the alteration was discovered. The Hongkong & Shanghai Bank sued to recover from
the Peoples Bank the sum of P14,608.05. The complaint was dismissed. Affirming the decision

of the trial court, this Court held: "The entire case of plaintiff is based on the indorsement that
has been heretofore copied namely, a guarantee of all prior indorsement, made by Peoples
Bank and since such an indorsement carries with it a concomitant guarantee of genuineness, the
Peoples Bank is liable to the Hongkong Shanghai Bank for alteration made in the name of payee.
On the other hand, the Peoples Bank relies on the 24-hour regulation of the Central Bank that
requires after a clearing, that all cleared items must be returned not later than 3:00 P.M. of the
following business day. And since the Hongkong Shanghai Bank only advised the Peoples Bank
as to the alteration on April 12, 1965 or 27 days after clearing, the Peoples Bank claims that it is
now too late to do so. This regulation of the Central Bank as to 24 hours is challenged by
Plaintiff Bank as being merely part of an ingenious device to facilitate banking
transactions. Be that what it may as both Plaintiff as well as Defendant Banks are part
of our banking system and both are subject to regulations of the Central Bank they are
both bound by such regulations. . . . But Plaintiff Bank insists that Defendant Bank is liable on
its indorsement during clearing house operations. The indorsement, itself, is very clear when it
begins with the words `For clearance, clearing office . . . In other words, such an indorsement
must be read together with the 24-hour regulation on clearing House Operations of the Central
Bank. Once that 24-hour period is over, the liability on such an indorsement has ceased. This
being so, Plaintiff Bank has not made out a case for relief."cralaw virtua1aw library "Moreover, in
one of the very cases relied upon by plaintiff, as appellant, mention is made of a principle on
which defendant Bank could have acted without incurring the liability now sought to be imposed
by plaintiff. Thus: It is a settled rule that a person who presents for payment checks such
as are here involved guarantees the genuineness of the check, and the drawee bank need
concern itself with nothing but the genuineness of the signature, and the state of the
account with it of the drawee. (Interstate Trust Co. v. United States National Bank, 185 Pac.
260 [1919]). If at all, then, whatever remedy the plaintiff has would lie not against defendant Bank
but as against the party responsible for changing the name of the payee. Its failure to call the
attention of defendant Bank as to such alteration until after the lapse of 27 days would, in the light
of the above Central Bank circular, negate whatever right it might have had against defendant
Bank. . . ." (35 SCRA 140, 142-143; 145-146.) Every bank that issues checks for the use of
its customers should know whether or not the drawers signature thereon is genuine,
whether there are sufficient funds in the drawers account to cover checks issued, and it
should be able to detect alterations, erasures, superimpositions or intercalations thereon,
for these instruments are prepared, printed and issued by itself, it has control of the
drawers account, and it is supposed to be familiar with the drawers signature. It should
possess appropriate detecting devices for uncovering forgeries and/or alterations on
these instruments. Unless an alteration is attributable to the fault or negligence of the
drawer himself, such as when he leaves spaces on the check which would allow the
fraudulent insertion of additional numerals in the amount appearing thereon, the remedy
of the drawee bank that negligently clears a forged and/or altered check for payment is
against the party responsible for the forgery or alteration (Hongkong & Shanghai Banking
Corp. v. Peoples Bank & Trust Co., 35 SCRA 140), otherwise, it bears the loss. It may not
charge the amount so paid to the account of the drawer, if the latter was free from blame,
nor recover it from the collecting bank if the latter made payment after proper clearance
from the drawee. As this Court pointed out in Philippine National Bank v. Quimpo, Et Al., 158
SCRA 582, 584: "There is nothing inequitable in such a rule for if in the regular course of
business the check comes to the drawee bank which, having the opportunity to ascertain
its character, pronounces it to be valid and pays it, it is not only a question of payment
under mistake, but payment in neglect of duty which the commercial law places upon it,
and the result of its negligence must rest upon it." The Court of Appeals erred in laying upon
Republic, instead of on FNCB the drawee bank, the burden of loss for the payment of the altered
SMC check, the fraudulent character of which FNCB failed to detect and warn Republic about,
within the 24-hour clearing house rule. The Court of Appeals departed from the ruling of this
Court in an earlier PNB case, that: "Where a loss, which must be borne by one of two parties
alike innocent of forgery, can be traced to the neglect or fault of either, it is reasonable that it
would be borne by him, even if innocent of any intentional fraud, through whose means it has
succeeded. (Phil. National Bank v. National City Bank of New York, 63 Phil. 711, 733.)"

WHEREFORE, the petition for review is granted. The decision of the Court of Appeals is hereby
reversed and set aside, and another is entered absolving the petitioner Republic Bank from
liability to refund to the First National City Bank the sum of P9,240, which the latter paid on the
check in question. No costs. SO ORDERED.
G.R. No. L-50373 February 15, 1990
MANILA LIGHTER TRANSPORTATION, INC., petitioner, vs. COURT OF APPEALS AND
CHINA BANKING CORPORATION, respondents.
FACTS:
A complaint for recovery of the value of forty-nine (49) checks with alleged forged/unauthorized
indorsements of the payee of which 26 were paid to the petitioner or order and twenty-three (23)
to petitioner or bearer, was filed by herein petitioner against private respondent China Banking
Corporation on May 22, 1962.
The complaint alleged that the checks were issued by customers of the petitioner in payment of
brokerage/lighterage services and were all delivered, without petitioner's knowledge, to its
collector, Augusto Perez.
Upon forged indorsements of the petitioner's general manager, the checks found their way into
the accounts of third persons in the respondent bank and the proceeds were later withdrawn, to
the damage of the petitioner who sought reimbursement or restoration by said bank of the value
of the checks.
Respondent Bank denied liability for the petitioner's loss which was due to its own negligence. It
alleged that petitioner is estopped from denying its collector's authority to receive the checks from
the drawers/customers; that petitioner failed to give defendant Bank and the drawee Banks notice
of the alleged forged or unauthorized indorsements within a reasonable time; and that its loss
was occasioned by its own failure to observe the proper degree of diligence in the supervision of
its employees, particularly its collector, Augusta Perez.
Upon leave of court, respondent Bank filed a third-party complaint against Cao Pek & Co. and Ko
Lit who had deposited the checks in question in their respective accounts with the former and had
thereafter withdrawn the proceeds thereof.
The trial court, in its decision dated January 22, 1972, made the following findings of facts:
... . Over a period of eighteen months, from January 29, 1960 (Exh. B) to June 22, 1961 (Exh.
B-11), Augusto Perez collected from different clients of plaintiff company some 49 checks
(Exhs. A to E-2) with a total value of P91,153.11. The endorsement of the payee, plaintiff
Manila Lighter Transportation, Inc., by its general manager, Luis Gaskell appear on the
checks.
The latter disclaimed such signatures and presented a handwriting expert who gave the
opinion that the signatures "L. Gaskell" on the indorsement were indeed forgeries. The
checks as thus endorsed were negotiated by Wilfredo Lagamon, accountant of the
plaintiff company and relative of Luis Gaskell with Cao Pek and Co., an electronic store,
whose treasurer is Ko Lit.
Most of the checks, with a total amount of P90,500.24, were deposited by Ko Lit in his account
with defendant bank (Exh. 4). Three checks with a total amount of P1,115.05 were
deposited in the account of Cao Pek & Co. while one check for P2,735.19 was deposited
in the accounts of Lu Siu Po, manager of Cao Pek & Co. These accounts have no more
balances at present.
As late as July 21, 1961, plaintiff apparently did not know what was happening because on that
date it sent S. Quintos Transportation, Inc., one of its clients whose checks were
collected by Augusto Perez, the following letter:

"Upon a detailed examination of our records, we found out that various jobs
undertaking (sic) by us in your behalf in 1960 and 1961 are still pending
payment as of this date.
We are sending you herewith our statement covering these jobs which amount
to P23,520.30 and would request you to kindly confirm its correctness at
your earliest."
It may be assumed that similar letters were sent to other clients of plaintiff in a similar situation.
"Another client, Cia. Gral. de Tabacos de Filipinas, had also paid plaintiff four
checks in the total amount of P3,453.53 all drawn against Hongkong and
Shanghai Banking Corp. (Exhs. 2-a to 2-d). Upon complaint of the
drawer after the anomalies were discovered (Exhs. 2-F, 2) defendant
bank refunded the amount to drawee bank (Exh. 3) and the amount is
not included in the complaint, although defendant bank has entered a
counterclaim for the amount against plaintiff.
Plaintiff made its initial demand against defendant bank for the refund of the
amount of the checks on September 9, 1961 (Exh T). There were some
attempts made to negotiate an amicable settlement, but nothing came of
it."
On May 30, 1962, the defendant Bank filed a third-party complaint against Cao Pek and Co.
and Ko Lit. Cao Pek and Co., in turn, filed a cross-claim against Ko Lit. (pp. 38-40, Rollo.)
The lower court found both parties equally negligent, the plaintiff (herein petitioner), for
allowing a state of affairs in which its employees could appropriate the checks and falsify
the indorsement thereon of its manager with impunity, and the defendant (private
respondent herein), for not detecting the falsification made by the plaintiffs employees
when the checks were presented to it.
Both petitioner and private respondent appealed to the Court of Appeals, contending that the
other should be entirely liable. Ko Lit and Cao Pek also appealed but their appeal was dismissed
for failure to pay the docket fee and to file the record on appeal.
On January 18, 1979, the Court of Appeals rendered judgment modified such that the
complaint is dismissed and the defendant-appellant is freed from any liability to the
plaintiff-appellant.
Petitioner filed a motion for reconsideration of the decision but it was denied., hence, this petition
for review, alleging that the Court of Appeals erred:
ISSUE:
1. in finding that the petitioner was negligent;
2. in holding that said negligence constituted sufficient ground to preclude it from
alleging forgery or want of authority;
3. in not ruling that the proximate cause for the loss was the respondent Bank's failure
in its duty to ascertain the genuineness of the signatures appearing in the
checks;
4. in not ruling that the respondent Bank should have been held entirely liable for the
loss; and
5. in not condemning respondent Bank to pay petitioner damages, attorney's fees,
expenses and costs.
HELD:
The instant petition for review must necessarily fail. The issues raised therein are factual. The
main issue of petitioner's negligence had already been determined by the trial court against

petitioner and affirmed by the Court of Appeals after examining the evidence in the records.
Since the petitioner was not a client of respondent Bank, i.e., did not maintain an account
in said Bank, the latter had no way of ascertaining the authenticity of its indorsements on
the checks which were deposited in the accounts of the third-party defendants in said
Bank. Respondent Bank was not negligent because, in accordance with banking practice,
it caused the checks to pass through the clearing house before it allowed their proceeds
to be withdrawn by the depositors (third-party defendants in the lower court).
The Supreme Court decides appeals which only involve questions of law. It is not the function of
the Supreme Court to analyze or weigh the evidence all over again, its jurisdiction being limited to
resolving errors of law that might have been committed by the lower court. (Dihiansan vs. Court of
Appeals, 153 SCRA 712; Francisco vs. Mandi, 152 SCRA 711; Director of Lands vs. Funtilar 142
SCRA 57).
WHEREFORE, the petition for review is denied for lack of merit. Costs against the petitioner.
SO ORDERED.
G.R. No. L-26001

October 29, 1968

PHILIPPINE NATIONAL BANK, petitioner, vs. THE COURT OF APPEALS and PHILIPPINE
COMMERCIAL AND INDUSTRIAL BANK, respondents.
FACTS:
On about January 15, 1962, one Augusto Lim deposited in his current account with the PCIB
branch at Padre Faura, Manila, GSIS Check No. 645915- B, in the sum of P57,415.00, drawn
against the PNB;
That, following an established banking practice in the Philippines, the check was, on the same
date, forwarded, for clearing, through the Central Bank, to the PNB, which did not return said
check the next day, or at any other time, but retained it and paid its amount to the PCIB, as well
as debited it against the account of the GSIS in the PNB;
That, subsequently, or on January 31, 1962, upon demand from the GSIS, said sum of
P57,415.00 was re-credited to the latter's account, for the reason that the signatures of its officers
on the check were forged; and that, thereupon, or on February 2, 1962, the PNB demanded from
the PCIB the refund of said sum, which the PCIB refused to do. Hence, the present action against
the PCIB, which was dismissed by the Court of First Instance of Manila, whose decision was, in
turn, affirmed by the Court of Appeals.
It is not disputed that the signatures of the General Manager and the Auditor of the GSIS on the
check, as drawer thereof, are forged;
That the person named in the check as its payee was one Mariano D. Pulido, who purportedly
indorsed it to one Manuel Go; that the check purports to have been indorsed by Manuel Go to
Augusto Lim, who, in turn, deposited it with the PCIB, on January 15, 1962; that, thereupon, the
PCIB stamped the following on the back of the check: "All prior indorsements and/or Lack of
Endorsement Guaranteed, Philippine Commercial and Industrial Bank," Padre Faura Branch,
Manila; that, on the same date, the PCIB sent the check to the PNB, for clearance, through the
Central Bank; and that, over two (2) months before, or on November 13, 1961, the GSIS had
notified the PNB, which acknowledged receipt of the notice, that said check had been lost, and,
accordingly, requested that its payment be stopped.
In its brief, the PNB maintains that the lower court erred:
ISSUES:
in not finding the PCIB guilty of negligence;
in not finding that the indorsements at the back of the check are forged;

 in not finding the PCIB liable to the PNB by virtue of the former's warranty on the back of the
check;
in not holding that "clearing" is not "acceptance", in contemplation of the Negotiable
Instruments law;
in not finding that, since the check had not been accepted by the PNB, the latter is entitled to
reimbursement therefor; and
in denying the PNB's right to recover from the PCIB.
HELD:
The first assignment of error will be discussed later, together with the last,with which it is
interrelated.
As regards the second assignment of error, the PNB argues that, since the signatures of the
drawer are forged, so must the signatures of the supposed indorsers be; but this conclusion does
not necessarily follow from said premise. Besides, there is absolutely no evidence, and the PNB
has not even tried to prove that the aforementioned indorsements are spurious. Again, the PNB
refunded the amount of the check to the GSIS, on account of the forgery in the signatures, not of
the indorsers or supposed indorsers, but of the officers of the GSIS as drawer of the instrument.
In other words, the question whether or not the indorsements have been falsified is
immaterial to the PNB's liability as a drawee, or to its right to recover from the PCIB, for, as
against the drawee, the indorsement of an intermediate bank does not guarantee the
signature of the drawer, since the forgery of the indorsement is not the cause of the loss.
With respect to the warranty on the back of the check, to which the third assignment of
error refers, it should be noted that the PCIB thereby guaranteed "all prior indorsements,"
not the authenticity of the signatures of the officers of the GSIS who signed on its behalf,
because the GSIS is not an indorser of the check, but its drawer. Said warranty is
irrelevant, therefore, to the PNB's alleged right to recover from the PCIB.
It could have been availed of by a subsequent indorsee or a holder in due course
subsequent to the PCIB, but, the PNB is neither. Indeed, upon payment by the PNB, as
drawee, the check ceased to be a negotiable instrument, and became a mere voucher or
proof of payment.
Referring to the fourth and fifth assignments of error, we must bear in mind that, in general,
"acceptance", in the sense in which this term is used in the Negotiable Instruments Law is
not required for checks, for the same are payable on demand. Indeed, "acceptance" and
"payment" are, within the purview of said Law, essentially different things, for the former is
"a promise to perform an act," whereas the latter is the "actual performance" thereof.
In the words of the Law, "the acceptance of a bill is the signification by the drawee of his assent
to the order of the drawer," which, in the case of checks, is the payment, on demand, of a given
sum of money. Upon the other hand, actual payment of the amount of a check implies not only an
assent to said order of the drawer and a recognition of the drawer's obligation to pay the
aforementioned sum, but, also, a compliance with such obligation.
Let us now consider the first and the last assignments of error. The PNB maintains that the lower
court erred in not finding that the PCIB had been guilty of negligence in not discovering that the
check was forged. Assuming that there had been such negligence on the part of the PCIB, it
is undeniable, however, that the PNB has, also, been negligent, with the particularity that
the PNB had been guilty of a greater degree of negligence, because it had a previous and
formal notice from the GSIS that the check had been lost, with the request that payment
thereof be stopped. Just as important, if not more important and decisive, is the fact that the
PNB's negligence was the main or proximate cause for the corresponding loss.
In this connection, it will be recalled that the PCIB did not cash the check upon its presentation by
Augusto Lim; that the latter had merely deposited it in his current account with the PCIB; that, on
the same day, the PCIB sent it, through the Central Bank, to the PNB, for clearing; that the PNB

did not return the check to the PCIB the next day or at any other time; that said failure to return
the check to the PCIB implied, under the current banking practice, that the PNB
considered the check good and would honor it; that, in fact, the PNB honored the check
and paid its amount to the PCIB; and that only then did the PCIB allow Augusto Lim to
draw said amount from his aforementioned current account.
Thus, by not returning the check to the PCIB, by thereby indicating that the PNB had found
nothing wrong with the check and would honor the same, and by actually paying its amount to the
PCIB, the PNB induced the latter, not only to believe that the check was genuine and good in
every respect, but, also, to pay its amount to Augusto Lim. In other words, the PNB was the
primary or proximate cause of the loss, and, hence, may not recover from the PCIB.
It is a well-settled maxim of law and equity that when one of two (2) innocent persons must suffer
by the wrongful act of a third person, the loss must be borne by the one whose negligence was
the proximate cause of the loss or who put it into the power of the third person to perpetrate the
wrong.
Then, again, it has, likewise, been held that, where the collecting (PCIB) and the drawee (PNB)
banks are equally at fault, the court will leave the parties where it finds them.
Lastly, Section 62 of Act No. 2031 provides:
The acceptor by accepting the instrument engages that he will pay it according to the tenor of
his acceptance; and admits:
(a) The existence of the drawer, the genuineness of his signature, and his capacity and
authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
The prevailing view is that the same rule applies in the case of a drawee who pays a bill without
having previously accepted it.
WHEREFORE, the decision appealed from is hereby affirmed, with costs against the Philippine
National Bank. It is so ordered.
G.R. No. L-43596

October 31, 1936

PHILIPPINE NATIONAL BANK, plaintiff-appellee, vs. THE NATIONAL CITY BANK OF NEW
YORK, and MOTOR SERVICE COMPANY, INC., defendants. MOTOR SERVICE COMPANY,
INC., appellant.
FACTS:
This case was submitted for decision to the court below on the following stipulation of facts:
1. That plaintiff is a banking corporation organized and existing under and by virtue of a special
act of the Philippine Legislature.
That the defendant National City Bank of New York is a foreign banking corporation with a
branch office duly authorized and licensed to carry and engage in banking business in
the Philippine Islands.
And that the defendant Motor Service Company, Inc., is a corporation organized and existing
under and by virtue of the general corporation law of the Philippine Islands engaged in
the purchase and sale of automobile spare parts and accessories.
2. That on April 7 and 9, 1933, an unknown person negotiated with defendant Motor Service
Company, Inc., the checks which were in payment for automobile tires purchased from
said defendant's stores.
The checks were allegedly issued by the "Pangasinan Transportation Co., Inc. by J. L. Klar,
Manager and Treasurer", against the Philippine National Bank and in favor of the

International Auto Repair Shop; and said checks were indorsed by said unknown persons
in the manner indicated at the back thereof, the Motor Service Co., Inc., believing at the
time that the signature of J. L. Klar, Manager and Treasurer of the Pangasinan
Transportation Co., Inc., on both checks were genuine.
3. The checks Exhibits A and A-1 were then indorsed for deposit by the defendant Motor
Service Company, Inc, at the National City Bank of New York and the former was
accordingly credited with the amounts thereof.
4. On April 8 and 10, 1933, the said checks were cleared at the clearing house and the
Philippine National Bank credited the National City Bank of New York for the amounts
thereof, believing at the time that the signatures of the drawer were genuine, that the
payee is an existing entity and the endorsement at the back thereof regular and genuine.
5. The Philippine National Bank then found out that the purported signatures of J. L. Klar, as
Manager and Treasurer of the Pangasinan Transportation Company, Inc., in said Exhibits
A and A-1 were forged when so informed by the said Company, and it accordingly
demanded from the defendants the reimbursement of the amounts for which it credited
the National City Bank of New York at the clearing house and for which the latter credited
the Motor Service Co., but the defendants refused, and continue to refuse, to make such
reimbursements.
6. The Pangasinan Transportation Co., Inc., objected to have the proceeds of said check
deducted from their deposit.
Upon plaintiff's motion, the case was dismissed before trial as to the defendant National City
Bank of New York. a decision was thereafter rendered giving plaintiff judgment for the total
amount of P360.25, with interest and costs. From this decision the instant appeal was taken.
ISSUE:
Whether the appellee has the right to recover from the appellant the value of the checks on which
the signatures of the drawer were forged.
HELD: (NO)
A check is a bill of exchange payable on demand and only the rules
governing bills of exchanges payable on demand are applicable to it. in view of the fact
that acceptance is a step necessary insofar as negotiable
instruments are concerned, it follows that the provisions relative to
acceptance are without application to checks.
Acceptance implies subsequent
negotiation of the instrument, which is not true in the case of
checks because from the moment it is paid, it is withdrawn from circulation. When the
drawee banks cashes or pays a check, the cycle of
negotiation is terminated and it is illogical thereafter to speak of subsequent holders who
can invoke the warrant against the drawee.
Further, in determining the relative rights of a
drawee who under a mistake of fact, has paid, a holder who has received such payment, upon a
check to which the name of the drawer has been forged, it is only fair to consider the question of
diligence and negligence of the parties in respect
thereto. The responsibility of the drawee who pays a forged check, for the genuineness of
the drawers signature is absolute only in favor of one who has not, by his own fault or
negligence, contributed to the success of the fraud or to mislead the
drawee.
According to the undisputed facts, National City Bank in purchasing the papers
in question from unknown persons without making any inquiry as to the identity and authority of
said persons negotiating and indorsing them, acted negligently and contributed to the
constructive loss of PNB in failing to detect the forgery. Under the circumstances of the case, if
the appellee bank is allowed to recover, there will be no change in position as to the
injury or prejudice of the appellant.
In the light of the foregoing discussion, we

conclude:

 1. That where a check is accepted or certified by the bank on which it is drawn, the bank is
estopped to deny the genuineness of the drawer's signature and his capacity to issue the
instrument;
2. That if a drawee bank pays a forged check which was previously accepted or certified by the
said bank it cannot recover from a holder who did not participate in the forgery and did
not have actual notice thereof;
3. That the payment of a check does not include or imply its acceptance in the sense that this
word is used in section 62 of the Negotiable Instruments Law;
4. That in the case of the payment of a forged check, even without former acceptance, the
drawee can not recover from a holder in due course not chargeable with any act of
negligence or disregard of duty;
5. That to entitle the holder of a forged check to retain the money obtained thereon, there must
be a showing that the duty to ascertain the genuineness of the signature rested entirely
upon the drawee, and that the constructive negligence of such drawee in failing to detect
the forgery was not affected by any disregard of duty on the part of the holder, or by
failure of any precaution which, from his implied assertion in presenting the check as a
sufficient voucher, the drawee had the right to believe he had taken;
6. That in the absence of actual fault on the part of the drawee, his constructive fault in not
knowing the signature of the drawer and detecting the forgery will nor preclude his
recovery from one who took the check under circumstances of suspicion and without
proper precaution, or whose conduct has been such as to mislead the drawee or induce
him to pay the check without the usual scrutiny or other precautions against mistake or
fraud;
7. That on who purchases a check or draft is bound to satisfy himself that the paper is genuine,
and that by indorsing it or presenting it for payment or putting it into circulation before
presentation he impliedly asserts that he performed his duty;
8. That while the foregoing rule, chosen from a welter of decisions on the issue as the correct
one, will not hinder the circulation of two recognized mediums of exchange by which the
great bulk of business is carried on, namely, drafts and checks, on the other hand, it will
encourage and demand prudent business methods on the part of those receiving such
mediums of exchange;
9. That it being a matter of record in the present case, that the appellee bank in no more
chargeable with the knowledge of the drawer's signature than the appellant is, as the
drawer was as much the customer of the appellant as of the appellee, the presumption
that a drawee bank is bound to know more than any indorser the signature of its
depositor does not hold;
10. That according to the undisputed facts of the case the appellant in purchasing the papers in
question from unknown persons without making any inquiry as to the identity and
authority of the said persons negotiating and indorsing them, acted negligently and
contributed to the appellee's constructive negligence in failing to detect the forgery;
11. That under the circumstances of the case, if the appellee bank is allowed to recover, there
will be no change of position as to the injury or prejudice of the appellant.
Wherefore, the assignments of error are overruled, and the judgment appealed from must be, as
it is hereby, affirmed, with costs against the appellant. So ordered.

G.R. No. L-37467

December 11, 1933

SAN CARLOS MILLING CO., LTD., plaintiff-appellant, vs. BANK OF THE PHILIPPINE
ISLANDS and CHINA BANKING CORPORATION, defendants-appellees.

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

bank, an amended complaint was filed by plaintiff against both the Bank of the Philippine Islands
and the China Banking Corporation.
At the trial the China Banking Corporation contended that they had drawn a check to the credit of
the plaintiff company, that the check had been endorsed for deposit, and that as the prior
endorsement had in law been guaranteed by the Bank of the Philippine Islands, when they
presented the cashier's check to it for payment, the China Banking Corporation was absolved
even if the endorsement of Newland Baldwin on the check was a forgery.
The Bank of the Philippine Islands' main contentions were that they had been guilty of no
negligence, that they had dealt with the accredited representatives of the company in the due
course of business, and that the loss was due to the dishonesty of plaintiff's employees and the
negligence of plaintiff's general agent.
In plaintiff's Manila office, besides the general agent, Wilson, and Dolores, most of the time there
was employed a woman stenographer and cashier. The agent did not keep in his personal
possession either the code-book or the blank checks of either the Bank of the Philippine Islands
or the China Banking Corporation. Baldwin was authorized to draw checks on either of the
depositaries. Wilson could draw checks in the name of the plaintiff on the China Banking
Corporation.
The trial court held that the deposit of P201,000 in the Bank of the Philippine Islands being the
result of a forged endorsement, the relation of depositor and banker did not exist, but the bank
was only a gratuitous bailee; that the Bank of the Philippine Islands acted in good faith in the
ordinary course of its business, was not guilty of negligence, and therefore under article 1902 of
the Civil Code which should control the case, plaintiff could not recover; and that as the cause of
loss was the criminal actions of Wilson and Dolores, employees of plaintiff, and as Newland
Baldwin, the agent, had not exercised adequate supervision over plaintiff's Manila office,
therefore plaintiff was guilty of negligence, which ground would likewise defeat recovery.
ISSUE:
HELD:
From the decision of the trial court absolving the defendants, plaintiff brings this appeal and
makes nine assignments of error which we do not deem it necessary to discuss in detail.
There is a mild assertion on the part of the defendant bank that the disputed signatures of
Newland Baldwin were genuine and that he had been in the habit of signing checks in blank and
turning the checks so signed over to Wilson.
The proof as to the falsity of the questioned signatures of Baldwin places the matter beyond
reasonable doubt, nor is it believed that Baldwin signed checks in blank and turned them over to
Wilson.
As to the China Banking Corporation, it will be seen that it drew its check payable to the order of
plaintiff and delivered it to plaintiff's agent who was authorized to receive it. A bank that cashes
a check must know to whom it pays. In connection with the cashier's check, this duty was
therefore upon the Bank of the Philippine Islands, and the China Banking Corporation was
not bound to inspect and verify all endorsements of the check, even if some of them were
also those of depositors in that bank.
It had a right to rely upon the endorsement of the Bank of the Philippine Islands when it gave the
latter bank credit for its own cashier's check. Even if we would treat the China Banking
Corporation's cashier's check the same as the check of a depositor and attempt to apply the
doctrines of the Great Eastern Life Insurance Co. vs. Hongkong & Shanghai Banking Corporation
and National Bank (43 Phil., 678), and hold the China Banking Corporation indebted to plaintiff,
we would at the same time have to hold that the Bank of the Philippine Islands was indebted to
the China Banking Corporation in the same amount. As, however, the money was in fact paid
to plaintiff corporation, we must hold that the China Banking Corporation is indebted
neither to plaintiff nor to the Bank of the Philippine Islands, and the judgment of the lower

court far as it absolves the China Banking Corporation from responsibility is affirmed.
Returning to the relation between plaintiff and the Bank of the Philippine Islands, we will now
consider the effect of the deposit of P201,000. It must be noted that this was not a presenting of
the check for cash payment but for deposit only.
It is a matter of general knowledge that most endorsements for deposit only, are informal. Most
are by means of a rubber stamp. The bank would have been justified in accepting the check for
deposit even with only a typed endorsement. It accepted the check and duly credited plaintiff's
account with the amount on the face of the check. Plaintiff was not harmed by the transaction as
the only result was the removal of that sum of money from a bank from which Wilson could have
drawn it out in his own name to a bank where Wilson would not have authority to draw checks
and where funds could only be drawn out by the check of Baldwin.
The contention of the bank that it was a gratuitous bailee is without merit. In the first place, it is
absolutely contrary to what the bank did. It did not take it up as a separate account but it
transferred the credit to plaintiff's current account as a depositor of that bank. Furthermore,
banks are not gratuitous bailees of the funds deposited with them by their customers.
Banks are run for gain, and they solicit deposits in order that they can use the money for
that very purpose. In this case the action was neither gratuitous nor was it a bailment.
On the other hand, we cannot agree with the theory of plaintiff that the Bank of the Philippine
Islands was an intermeddling bank. In the many cases cited by plaintiff where the bank that
cashed the forged endorsement was held as an intermeddler, in none was the claimant a regular
depositor of the bank, nor in any of the cases cited, was the endorsement for deposit only. It is
therefore clear that the relation of plaintiff with the Bank of the Philippine Islands in regard
to this item of P201,000 was that of depositor and banker, creditor and debtor.
We now come to consider the legal effect of payment by the bank to Dolores of the sum of
P201,000, on two checks on which the name of Baldwin was forged as drawer. As above stated,
the fact that these signatures were forged is beyond question. It is an elementary principle both
of banking and of the Negotiable Instruments Law that
A bank is bound to know the signatures of its customers; and if it pays a forged check,
it must be considered as making the payment out of its own funds, and cannot
ordinarily charge the amount so paid to the account of the depositor whose name
was forged. (7 C.J., 683.)
There is no act of the plaintiff that led the Bank of the Philippine Islands astray. If it was in fact
lulled into a false sense of security, it was by the effrontery of Dolores, the messenger to whom it
entrusted this large sum of money.
The bank paid out its money because it relied upon the genuineness of the purported signatures
of Baldwin. These, they never questioned at the time its employees should have used care. In
fact, even today the bank represents that it has a relief that they are genuine signatures.
The signatures to the check being forged, under section 23 of the Negotiable Instruments
Law they are not a charge against plaintiff nor are the checks of any value to the
defendant.
It must therefore be held that the proximate cause of loss was due to the negligence of the
Bank of the Philippine Islands in honoring and cashing the two forged checks.
The judgment absolving the Bank of the Philippine Islands must therefore be reversed, and a
judgment entered in favor of plaintiff-appellant and against the Bank of the Philippine Islands,
defendant-appellee, for the sum of P200,001, with legal interest thereon from December 23,1928,
until payment, together with costs in both instances. So ordered.

[G.R. No. L-40796. July 31, 1975.] REPUBLIC BANK, Plaintiff-Appellee, v. MAURICIA T.

EBRADA, Defendant-Appellant. SYNOPSIS

A check with a face value of P1,246.08 was issued to one Martin Lorenzo who turned out to have
been dead almost eleven years before it was issued. It was encashed by Mauricia Ebrada at the
Republic Banks main office at the Escolta. Informing the Bank that the payees (Lorenzo)
indorsement on the reverse side of the check was a forgery, the Bureau of Treasury requested
the Bank to refund the amount. The Bank sued Mauricia Ebrada before the city court when she
refused to return the money. The court ruled for the Bank, so the case was elevated to the Court
of First Instance which likewise rendered an adverse decision against Mauricia Ebrada. An
appeal was filed. The Supreme Court upheld the lower court. Although Mauricia Ebrada was not
the author of the forgery, as the last indorser of the check, she warranted good title to it. The
negotiation from Martin Lorenzo, the original payee, to Ramon Lorenzo is of no effect but the
negotiation from Ramon Lorenzo to Adelaida Dominguez and from her to Mauricia Ebrada who
did not know of the forgery is valid and enforceable. The bank can recover from her the money
paid on the forged check. Judgment affirmed.
FACTS:
On or about February 27, 1963 defendant Mauricia T. Ebrada, encashed Back Pay Check No.
508060 dated January 15, 1963 for P1,246.08 at the main office of the plaintiff Republic Bank at
Escolta, Manila.
The check was issued by the Bureau of Treasury. Plaintiff Bank was later advised by the said
bureau that the alleged indorsement on the reverse side of the aforesaid check by the payee,
"Martin Lorenzo" was a forgery since the latter had allegedly died as of July 14, 1952.
Plaintiff Bank was then requested by the Bureau of Treasury to refund the amount of P1,246.08.
To recover what it had refunded to the Bureau of Treasury, plaintiff Bank made verbal and formal
demands upon defendant Ebrada to account for the sum of P1,246.08, but said defendant
refused to do so. So plaintiff Bank sued defendant Ebrada before the City Court of Manila. On
July 11, 1966, defendant Ebrada filed her answer denying the material allegations of the
complaint and as affirmative defenses alleged that she was a holder in due course of the check in
question, or at the very least, has acquired her rights from a holder in due course and therefore
entitled to the proceeds thereof. About the same day, July 11, 1966 defendant Ebrada filed a
Third-Party complaint against Adelaida Dominguez who, in turn, filed on September 14, 1966 a
Fourth-Party complaint against Justina Tinio. On March 21, 1967, the City Court of Manila
rendered judgment for the plaintiff Bank against defendant Ebrada; for Third-Party plaintiff against
Third-Party defendant, Adelaida Dominguez, and for Fourth-Party plaintiff against Fourth-Party
defendant, Justina Tinio. From the judgment of the City Court, defendant Ebrada took an appeal
to the Court of First Instance of Manila where the parties submitted a partial stipulation of
facts. Based on the foregoing stipulation of facts and the documentary evidence presented, the
trial court rendered a decision against the defendants. ISSUE:
Whether or not the Defendant Ebrada is liable to pay the bank the amount she has received from
the Check with the forged signature.
HELD: (YES, as last indorser of the check, she has warranted that she has good title to it
even if in fact she did not have it)
From the stipulation of facts it is admitted that the check in question was delivered to defendantappellant by Adelaida Dominguez for the purpose of encashment and that her signature was
affixed on said check when she cashed it with the plaintiff Bank. Likewise it is admitted that
defendant-appellant was the last indorser of the said check. As such indorser, she was supposed
to have warranted that she has good title to said check; for under Section 5 of the Negotiable
Instruments Law: "Every person negotiating an instrument by delivery or by qualified
indorsement, warrants: (a) That the instrument is genuine and in all respects what it purports to
be. (b) That she has good title to it."cralaw virtua1aw library
and under Section 65 of the same Act:jgc:chanrobles.com.ph "Every indorser who indorses

without qualification warrants to all subsequent holders in due course: (a) The matters and things
mentioned in subdivisions (a), (b), and (c) of the next preceding sections; (b) That the instrument
is at the time of his indorsement valid and subsisting."cralaw virtua1aw library It turned out,
however, that the signature of the original payee of the check, Martin Lorenzo was a forgery
because he was already dead almost 11 years before the check in question was issued by the
Bureau of Treasury. Under Section 23 of the Negotiable Instruments Law (Act 2031): "When a
signature is forged or made without the authority of the person whose signature it purports to be,
it is wholly inoperative, and no right to retain the instruments, or to give a discharge thereof
against any party thereto, can be acquired through or under such signature unless the party
against whom it is sought to enforce such right is precluded from setting up the forgery or want of
authority."cralaw virtua1aw library It is clear from the provision that where the signature on a
negotiable instrument if forged, the negotiation of the check is without force or effect. But
the existence of the forged signature therein will not render void all the other negotiations
of the check with respect to the other parties whose signatures are genuine. It is only the
negotiation predicated on the forged indorsement that should be declared
inoperative. Where after the drawee bank has paid the amount of the check to the holder
thereof, it was discovered that the signature of the payee was forged, the bank can still
recover from the one who encashed the check.
In the case of Great Eastern Life Insurance Company v. Hongkong and Shanghai Banking
Corporation, it was held "where a check is drawn payable to the order of one person and
is presented to a bank by another and purports upon its face to have been duly indorsed
by the payee of the check, it is the duty of the bank to know that the check was duly
indorsed by the original payee, and where the Bank pays the amount of the check to a
third person, who has forged the signature of the payee, the loss falls upon the bank who
cashed the check, and its only remedy is against the person to whom it paid the
money."c Similarly, in the case before Us, the defendant-appellant, upon receiving the check in
question from Adelaida Dominguez, was duty-bound to ascertain whether the check in question
was genuine before presenting it to plaintiff Bank for payment. Her failure to do so makes her
liable for the loss and the plaintiff Bank may recover from her the money she received for the
check. As reasoned out above, had she performed the duty of ascertaining the genuineness of
the check, in all probability the forgery would have been detected and the fraud defeated.
It is not supposed to be the duty of a drawee bank to ascertain whether the signatures of
the payee or indorsers are genuine or not. This is because the indorser is supposed to
warrant to the drawee that the signatures of the payee and previous indorsers are genuine,
warranty not extending only to holders in due course. With the foregoing doctrine We are
to concede that the plaintiff Bank should suffer the loss when it paid the amount of the
check in question to defendant-appellant, but it has the remedy to recover from the latter
the amount it paid to her.
Although the defendant-appellant to whom the plaintiff Bank paid the check was not
proven to be the author of the supposed forgery, yet as last indorser of the check, she has
warranted that she has good title to it even if in fact she did not have it because the payee
of the check was already dead 11 years before the check was issued.
The fact that immediately after receiving the cash proceeds of the check in question in the
amount of P1,246.08 from the plaintiff Bank, Defendant-Appellant immediately turned over said
amount to Adelaida Dominguez (Third-Party defendant and the Fourth-Party plaintiff) who in turn
handed the amount to Justina Tinio on the same date would not exempt her from liability because
by doing so, she acted as an accommodation party in the check for which she is also liable under
Section 29 of the Negotiable Instruments Law (Act 231), thus:jgc:chanrobles.com.ph "An
accommodation party is one who has signed the instrument as maker, drawer, acceptor,
or indorser, without receiving value therefor, and for the purpose of lending his name to
some other person. Such a person is liable on the instrument to a holder for value,

notwithstanding such holder at the time of taking the instrument knew him to be only an
accommodation party." IN VIEW OF THE FOREGOING, the judgment appealed from is
hereby affirmed in toto with costs against defendant-appellant. SO ORDERED.
G.R. No. L-28226 September 30, 1970
HONGKONG & SHANGHAI BANKING CORPORATION, plaintiff-appellant, vs. PEOPLES
BANK & TRUST COMPANY, defendant-appellee.
FACTS:
On March 8, 1965, the Philippine Long Distance Telephone Company drew the check on the
Hongkong & Shanghai Banking Corporation and in favor of the same bank in the sum of
P14,608.05.
This check was sent by mail to the Payee. Somehow or other, the check fell in the hands of a
certain Florentino Changco, who was able to erase the name of the payee Bank and instead
typed his own name on the check.
Four days before, Changco had opened a current account with Defendant Peoples Bank and
Trust Company and on March 16, 1965, he deposited the altered check in his name.
This check was presented by the Peoples Bank for clearing wherein the Peoples Bank made the
following indorsement: "For clearance, clearing office. All prior endorsements and/or lack of
endorsements guaranteed. Peoples Bank and Trust Company."
The check was duly cleared by the Hongkong Shanghai Bank, so that the Peoples Bank credited
Changco with the amount of the check. Beginning March 17, 1965, Changco began to withdraw
from his account and on March 31, 1965 he closed his account. In the meantime, the cancelled
check went the route of the regular routine and on April 12, 1965 it was returned to the Philippine
Long Distance Telephone Company when the alteration in the name of the payee was
discovered.
On that same date, Peoples Bank was notified of the alteration, so that the Hongkong Shanghai
Bank requested Peoples Bank to refund to it the sum of P14,608.05 which had been previously
credited by Plaintiff Bank in favor of Defendant Bank. Upon its refusal to do so, this case has
been filed."
ISSUE: Whether or not HSBC should bear the loss due its non-conformity with the 24-hour period
in returning of all cleared items rule.
HELD: (YES)
Why the complaint had to be dismissed was made clear in such decision. Thus: "The entire case
of Plaintiff is based on the indorsement that has been heretofore copied namely, a guarantee
of all prior indorsements made by Peoples Bank and since such an indorsement carries with it a
concomitant guarantee of genuineness, the Peoples Bank is liable to the Hongkong Shanghai
Bank for alteration made in the name of payee.
On the other hand, the People Bank relies on the "24 hour" regulation of the Central Bank that
requires after a clearing, that all cleared items must be returned not later than 3:00 PM of the
following business day. And since the Hongkong Shanghai Bank only advised the Peoples Bank
as to the alteration on April 12, 1965 or 27 days after clearing, the Peoples Bank claims that it is
now too late to do so.
This regulation of the Central Bank as to 24 hours is challenged by Plaintiff Bank as being
merely part of an ingenious device to facilitate banking transactions. Be that what it may
as both Plaintiff as well as Defendant Banks are part of our banking system and both
are subject to regulations of the Central Bank they are both bound by such regulations.
In fact, our Supreme Court has already held that the 24-hour regulation of the Central Bank
in clearing house operations is valid and if banks feel the 24-hour period is unwise, they
should make proper representations with the Central Bank. But until they do so, they are

bound by such 24-hour period (Republic v. Equitable Banking Corporation, GR No. L-15894;
January 30, 1964).
Plaintiff Bank insists that Defendant Bank is liable on its indorsement during clearing house
operations. The indorsement, itself, is very clear when it begins with the words "For clearance,
clearing office ...". In other words, such an indorsement must be read together with the 24-hour
regulation on clearing House Operations of the Central Bank. Once that 24-hour period is over,
the liability on such an indorsement has ceased. This being so, Plaintiff Bank has not made out a
case for relief."
The complaint was therefore dismissed, resulting in this appeal to us on a question of law, which,
as set forth in the principal assigned error is predicated on the inapplicability of the 24-hour
clearing house rule of the Central Bank.
Plaintiff does not deny that in Republic v. Equitable Banking Corporation, this Honorable Court,
through the then Justice, now Chief Justice Concepcion, applied the "24-hour" clearing house
rule issued by the Central Bank in accordance with its rule-making authority. As noted in the
aforesaid decision, its adoption came after a conference with representatives and officials of
different banking institutions in the Philippines. It is embodied in section 4, subsection (c) of
Circular No. 9 of the Central Bank dated February 17, 1949, as amended by the then Governor of
the Central Bank on June 4, 1949, and reads thus:
"xxx All items cleared at 11:00 o'clock a.m. shall be returned not later than 2:00 o'clock
p.m. on the same day and all items cleared at 3:00 o'clock p.m. shall be returned not later
than 8:30 a.m. of the following business day, except for items cleared on Saturday which
may be returned not later than 8:30 of the following day. (Emphasis supplied)"
It is apparent from the above that the attempted distinction sought to be made by plaintiff to the
effect that it refers to forged, but not to altered checks is not warranted. The circular is clear and
comprehensive; the facts of the present case fall within it. The lower court acted correctly in
relying on the doctrine announced in the above Republic v. Equitable Banking Corporation
decision.
Moreover, in one of the very cases relied upon by plaintiff, as appellant, mention is made of a
principle on which defendant Bank could have acted without incurring the liability now sought to
be imposed by plaintiff. Thus: "It is a settled rule that a person who presents for payment
checks such as are here involved guarantees the genuineness of the check, and the
drawee bank need concern itself with nothing but the genuineness of the signature, and
the state of the account with it of the drawee."
It at all, then, whatever remedy the plaintiff has would lie not against defendant Bank but as
against the party responsible for changing the name of the payee. Its failure to call the attention of
defendant Bank as to such alteration until after the lapse of 27 days would, in the light of the
above Central Bank circular, negate whatever right it might have had against defendant Bank.
While not exactly in point, a later decision of the Chief Justice announced in 1968, involving a
forged check, argues for the correctness of the conclusion reached by the lower court even
assuming that a fault could be imputed to defendant Bank. Thus: "Then, again, it has, likewise,
been held that, where the collecting (PCIB) and the drawee (PNB) banks are equally at fault, the
court will leave the parties where it finds them."
WHEREFORE, the appealed decision of April 24, 1967, dismissing the complaint, is affirmed.
With costs against plaintiff Hongkong & Shanghai Banking Corporation.

G.R. No. L-31831 April 28, 1983

JESUS PINEDA, petitioner, vs. JOSE V. DELA RAMA and COURT OF APPEALS,
respondents.
FACTS:

Dela Rama is a practising lawyer whose services were retained by Pineda for the purpose of
making representations with the chairman and general manager of the National Rice and Corn
Administration (NARIC) to stop or delay the institution of criminal charges against Pineda who
allegedly misappropriated 11,000 cavans of palay deposited at his ricemill in Concepcion, Tarlac.
The NARIC general manager was allegedly an intimate friend of Dela Rama.
According to Dela Rama, petitioner Pineda has used up all his funds to buy a big hacienda in
Mindoro and, therefore, borrowed the P9,300.00 subject of his complaint for collection. In addition
to filling the suit to collect the loan evidenced by the matured promissory note, Dela Rama also
sued to collect P5,000.00 attorney's fees for legal services rendered as Pineda's counsel in the
case being investigated by NARIC.
The Court of First Instance of Manila decided Civil Case No. 45762 in favor of petitioner Pineda.
The court believed the evidence of Pineda that he signed the promissory note for P9,300.00 only
because Dela Rama had told him that this amount had already been advanced to grease the
palms of the 'Chairman and General Manager of NARIC in order to save Pineda from criminal
prosecution.
The Court of Appeals reversed the decision of the trial court on a finding that Pineda, being a
person of more than average intelligence, astute in business, and wise in the ways of men would
not "sign any document or paper with his name unless he was fully aware of the contents and
important thereof, knowing as he must have known that the language and practices of business
and of trade and commerce call to account every careless or thoughtless word or deed."
The appellate court stated:

No rule is more fundamental and by men of honor and goodwill more dearly cherished,
than that which declares that obligations arising from contracts have the force of
law between the contracting parties and should be complied with in good faith.
Corollary to and in furtherance of this principle, Section 24 of the Negotiable
instruments Law (Act No. 2031) explicitly provides that every negotiable
instrument is deemed prima facie to have been issued for a valuable
consideration, and every person whose signature appears thereon to have
become a party thereto for value.

ISSUE: Whether or not Dela Rama is entitled to collect the amount stated in the Promissory Note
executed by Pineda
HELD: (NO)
We find this petition meritorious.
The Court of Appeals relied on the efficacy of the promissory note for its decision, citing Section
24 of the Negotiable Instruments Law which reads:
SECTION 24. Presumption of consideration.Every negotiable instrument is deemed
prima facie to have been issued for a valuable consideration; and every person
whose signature appears thereon to have become a party thereto for value.
The Court of Appeals' reliance on the above provision is misplaced. The presumption that
a negotiable instrument is issued for a valuable consideration is only puma facie. It can be
rebutted by proof to the contrary. (Bank of the Philippine Islands v. Laguna Coconut Oil Co. et
al., 48 Phil. 5).
According to Dela Rama, he loaned the P9,300.00 to Pineda in two installments on two occasions
five days apart - first loan for P5,000.00 and second loan for P4,300.00, both given in cash. He
also alleged that previously he loaned P3,000.00 but Pineda paid this other loan two days
afterwards.
These allegations of Dela Rama are belied by the promissory note itself. The second sentence of
the note reads - "This represents the cash advances made by him in connection with my case for
which he is my attorney-in- law."

The terms of the note sustain the version of Pineda that he signed the P9,300.00 promissory note
because he believed Dela Rama's story that these amounts had already been advanced by Dela
Rama and given as gifts for NARIC officials.
We agree with the trial court which believed Pineda. It is indeed unusual for a lawyer to
lend money to his client whom he had known for only three months, with no security for
the loan and on interest. Dela Rama testified that he did not even know what Pineda was
going to do with the money he borrowed from him. The petitioner had just purchased a
hacienda in Mindoro for P210,000.00, owned sugar and rice lands in Tarlac of around 800
hectares, and had P60,000.00 deposits in three banks when he executed the note. It is
more logical to believe that Pineda would not borrow P5,000.00 and P4,300.00 five days
apart from a man whom he calls a "fixer" and whom he had known for only three months.
Considering the foregoing, we agree with the trial court that the promissory note was executed for
an illegal consideration. Articles 1409 and 1412 of the Civil Code in part, provide:
Art. 1409. The following contracts are inexistent and void from the beginning:
(1) Those whose cause, object or purpose is contrary to law, morals, good customs,
public order and public policy;
xxx xxx xxx
Art. 1412. If the act in which the unlawful or forbidden cause consists does not
constitute a criminal offense, the following rules shall be observed:
(1) When the fault is on the part of both contracting parties, neither may recover what
he has given by virtue of the contract, or demand the performance of the other's
undertaking.
xxx xxx xxx
Whether or not the supposed cash advances reached their destination is of no moment. The
consideration for the promissory note - to influence public officers in the performance of their
duties - is contrary to law and public policy. The promissory note is void ab initio and no cause of
action for the collection cases can arise from it.
WHEREFORE, the decision of the Court of Appeals is SET ASIDE. The complaint and the
counterclaim in Civil Case No. 45762 are both DISMISSED.
SO ORDERED.