You are on page 1of 193

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 113236 March 5, 2001
FIRESTONE TIRE & RUBBER COMPANY OF THE PHILIPPINES, petitioner,
vs.
COURT OF APPEALS and LUZON DEVELOPMENT BANK, respondents.
QUISUMBING, J.:
This petition assails the decision 1 dated December 29, 1993 of the Court of Appeals in CA-G.R. CV No. 29546, which affirmed the
judgment 2 of the Regional Trial Court of Pasay City, Branch 113 in Civil Case No. PQ-7854-P, dismissing Firestone's complaint for
damages.
The facts of this case, adopted by the CA and based on findings by the trial court, are as follows:
. . . [D]efendant is a banking corporation. It operates under a certificate of authority issued by the Central Bank of the
Philippines, and among its activities, accepts savings and time deposits. Said defendant had as one of its client-depositors the
Fojas-Arca Enterprises Company ("Fojas-Arca" for brevity). Fojas-Arca maintaining a special savings account with the
defendant, the latter authorized and allowed withdrawals of funds therefrom through the medium of special withdrawal slips.
These are supplied by the defendant to Fojas-Arca.
In January 1978, plaintiff and Fojas-Arca entered into a "Franchised Dealership Agreement" (Exh. B) whereby Fojas-Arca has
the privilege to purchase on credit and sell plaintiff's products.
On January 14, 1978 up to May 15, 1978. Pursuant to the aforesaid Agreement, Fojas-Arca purchased on credit Firestone
products from plaintiff with a total amount of P4,896,000.00. In payment of these purchases, Fojas-Arca delivered to plaintiff
six (6) special withdrawal slips drawn upon the defendant. In turn, these were deposited by the plaintiff with its current account
with the Citibank. All of them were honored and paid by the defendant. This singular circumstance made plaintiff believe [sic]
and relied [sic] on the fact that the succeeding special withdrawal slips drawn upon the defendant would be equally sufficiently
funded. Relying on such confidence and belief and as a direct consequence thereof, plaintiff extended to Fojas-Arca other
purchases on credit of its products.
On the following dates Fojas-Arca purchased Firestone products on credit (Exh. M, I, J, K) and delivered to plaintiff the
corresponding special withdrawal slips in payment thereof drawn upon the defendant, to wit:

WITHDRAWAL SLIP
DATE AMOUNT
NO.

June 15, 1978 42127 P1,198,092.80

July 15, 1978 42128 940,190.00

Aug. 15, 1978 42129 880,000.00

Sep. 15, 1978 42130 981,500.00

These were likewise deposited by plaintiff in its current account with Citibank and in turn the Citibank forwarded it [sic] to the
defendant for payment and collection, as it had done in respect of the previous special withdrawal slips. Out of these four (4)
withdrawal slips only withdrawal slip No. 42130 in the amount of P981,500.00 was honored and paid by the defendant in
October 1978. Because of the absence for a long period coupled with the fact that defendant honored and paid withdrawal
slips No. 42128 dated July 15, 1978, in the amount of P981,500.00 plaintiff's belief was all the more strengthened that the
other withdrawal slips were likewise sufficiently funded, and that it had received full value and payment of Fojas-Arca's credit
purchased then outstanding at the time. On this basis, plaintiff was induced to continue extending to Fojas-Arca further
purchase on credit of its products as per agreement (Exh. "B").
However, on December 14, 1978, plaintiff was informed by Citibank that special withdrawal slips No. 42127 dated June 15,
1978 for P1,198,092.80 and No. 42129 dated August 15, 1978 for P880,000.00 were dishonored and not paid for the reason
'NO ARRANGEMENT.' As a consequence, the Citibank debited plaintiff's account for the total sum of P2,078,092.80
representing the aggregate amount of the above-two special withdrawal slips. Under such situation, plaintiff averred that the
pecuniary losses it suffered is caused by and directly attributable to defendant's gross negligence.
On September 25, 1979, counsel of plaintiff served a written demand upon the defendant for the satisfaction of the damages
suffered by it. And due to defendant's refusal to pay plaintiff's claim, plaintiff has been constrained to file this complaint,
thereby compelling plaintiff to incur litigation expenses and attorney's fees which amount are recoverable from the defendant.
Controverting the foregoing asseverations of plaintiff, defendant asserted, inter alia that the transactions mentioned by plaintiff
are that of plaintiff and Fojas-Arca only, [in] which defendant is not involved; Vehemently, it was denied by defendant that the
special withdrawal slips were honored and treated as if it were checks, the truth being that when the special withdrawal slips
1 Negotiable Instruments – Negotiable Insrturments
were received by defendant, it only verified whether or not the signatures therein were authentic, and whether or not the
deposit level in the passbook concurred with the savings ledger, and whether or not the deposit is sufficient to cover the
withdrawal; if plaintiff treated the special withdrawal slips paid by Fojas-Arca as checks then plaintiff has to blame itself for
being grossly negligent in treating the withdrawal slips as check when it is clearly stated therein that the withdrawal slips are
non-negotiable; that defendant is not a privy to any of the transactions between Fojas-Arca and plaintiff for which reason
defendant is not duty bound to notify nor give notice of anything to plaintiff. If at first defendant had given notice to plaintiff it is
merely an extension of usual bank courtesy to a prospective client; that defendant is only dealing with its depositor Fojas-Arca
and not the plaintiff. In summation, defendant categorically stated that plaintiff has no cause of action against it (pp. 1-3, Dec.;
pp. 368-370, id).3
Petitioner's complaint4 for a sum of money and damages with the Regional Trial Court of Pasay City, Branch 113, docketed as Civil
Case No. 29546, was dismissed together with the counterclaim of defendant.
Petitioner appealed the decision to the Court of Appeals. It averred that respondent Luzon Development Bank was liable for damages
under Article 21765 in relation to Articles 196 and 207 of the Civil Code. As noted by the CA, petitioner alleged the following tortious acts
on the part of private respondent: 1) the acceptance and payment of the special withdrawal slips without the presentation of the
depositor's passbook thereby giving the impression that the withdrawal slips are instruments payable upon presentment; 2) giving the
special withdrawal slips the general appearance of checks; and 3) the failure of respondent bank to seasonably warn petitioner that it
would not honor two of the four special withdrawal slips.
On December 29, 1993, the Court of Appeals promulgated its assailed decision. It denied the appeal and affirmed the judgment of the
trial court. According to the appellate court, respondent bank notified the depositor to present the passbook whenever it received a
collection note from another bank, belying petitioner's claim that respondent bank was negligent in not requiring a passbook under the
subject transaction. The appellate court also found that the special withdrawal slips in question were not purposely given the
appearance of checks, contrary to petitioner's assertions, and thus should not have been mistaken for checks. Lastly, the appellate
court ruled that the respondent bank was under no obligation to inform petitioner of the dishonor of the special withdrawal slips, for to
do so would have been a violation of the law on the secrecy of bank deposits.
Hence, the instant petition, alleging the following assignment of error:
25. The CA grievously erred in holding that the [Luzon Development] Bank was free from any fault or negligence regarding the
dishonor, or in failing to give fair and timely advice of the dishonor, of the two intermediate LDB Slips and in failing to award
damages to Firestone pursuant to Article 2176 of the New Civil Code.8
The issue for our consideration is whether or not respondent bank should be held liable for damages suffered by petitioner, due to its
allegedly belated notice of non-payment of the subject withdrawal slips.
The initial transaction in this case was between petitioner and Fojas-Arca, whereby the latter purchased tires from the former with
special withdrawal slips drawn upon Fojas-Arca's special savings account with respondent bank. Petitioner in turn deposited these
withdrawal slips with Citibank. The latter credited the same to petitioner's current account, then presented the slips for payment to
respondent bank. It was at this point that the bone of contention arose.
On December 14, 1978, Citibank informed petitioner that special withdrawal slips Nos. 42127 and 42129 dated June 15, 1978 and
August 15, 1978, respectively, were refused payment by respondent bank due to insufficiency of Fojas-Arca's funds on deposit. That
information came about six months from the time Fojas-Arca purchased tires from petitioner using the subject withdrawal slips. Citibank
then debited the amount of these withdrawal slips from petitioner's account, causing the alleged pecuniary damage subject of
petitioner's cause of action.
At the outset, we note that petitioner admits that the withdrawal slips in question were non-negotiable.9 Hence, the rules governing the
giving of immediate notice of dishonor of negotiable instruments do not apply in this case.10 Petitioner itself concedes this point.11 Thus,
respondent bank was under no obligation to give immediate notice that it would not make payment on the subject withdrawal slips.
Citibank should have known that withdrawal slips were not negotiable instruments. It could not expect these slips to be treated as
checks by other entities. Payment or notice of dishonor from respondent bank could not be expected immediately, in contrast to the
situation involving checks.
In the case at bar, it appears that Citibank, with the knowledge that respondent Luzon Development Bank, had honored and paid the
previous withdrawal slips, automatically credited petitioner's current account with the amount of the subject withdrawal slips, then
merely waited for the same to be honored and paid by respondent bank. It presumed that the withdrawal slips were "good."
It bears stressing that Citibank could not have missed the non-negotiable nature of the withdrawal slips. The essence of negotiability
which characterizes a negotiable paper as a credit instrument lies in its freedom to circulate freely as a substitute for money. 12 The
withdrawal slips in question lacked this character.
A bank is under obligation to treat the accounts of its depositors with meticulous care, whether such account consists only of a few
hundred pesos or of millions of pesos.13 The fact that the other withdrawal slips were honored and paid by respondent bank was no
license for Citibank to presume that subsequent slips would be honored and paid immediately. By doing so, it failed in its fiduciary duty
to treat the accounts of its clients with the highest degree of care.14
In the ordinary and usual course of banking operations, current account deposits are accepted by the bank on the basis of deposit slips
prepared and signed by the depositor, or the latter's agent or representative, who indicates therein the current account number to which
the deposit is to be credited, the name of the depositor or current account holder, the date of the deposit, and the amount of the deposit
either in cash or in check.15
The withdrawal slips deposited with petitioner's current account with Citibank were not checks, as petitioner admits. Citibank was not
bound to accept the withdrawal slips as a valid mode of deposit. But having erroneously accepted them as such, Citibank — and

2 Negotiable Instruments – Negotiable Insrturments


petitioner as account-holder — must bear the risks attendant to the acceptance of these instruments. Petitioner and Citibank could not
now shift the risk and hold private respondent liable for their admitted mistake.
WHEREFORE, the petition is DENIED and the decision of the Court of Appeals in CA-G.R. CV No. 29546 is AFFIRMED. Costs against
petitioner.
SO ORDERED.

3 Negotiable Instruments – Negotiable Insrturments


Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 101163 January 11, 1993


STATE INVESTMENT HOUSE, INC., petitioner,
vs.
COURT OF APPEALS and NORA B. MOULIC, respondents.
Escober, Alon & Associates for petitioner.
Martin D. Pantaleon for private respondents.

BELLOSILLO, J.:
The liability to a holder in due course of the drawer of checks issued to another merely as security, and the right of a real estate
mortgagee after extrajudicial foreclosure to recover the balance of the obligation, are the issues in this Petition for Review of the
Decision of respondent Court of Appeals.
Private respondent Nora B. Moulic issued to Corazon Victoriano, as security for pieces of jewelry to be sold on commission, two (2)
post-dated Equitable Banking Corporation checks in the amount of Fifty Thousand Pesos (P50,000.00) each, one dated 30 August
1979 and the other, 30 September 1979. Thereafter, the payee negotiated the checks to petitioner State Investment House. Inc.
(STATE).
MOULIC failed to sell the pieces of jewelry, so she returned them to the payee before maturity of the checks. The checks, however,
could no longer be retrieved as they had already been negotiated. Consequently, before their maturity dates, MOULIC withdrew her
funds from the drawee bank.
Upon presentment for payment, the checks were dishonored for insufficiency of funds. On 20 December 1979, STATE allegedly notified
MOULIC of the dishonor of the checks and requested that it be paid in cash instead, although MOULIC avers that no such notice was
given her.
On 6 October 1983, STATE sued to recover the value of the checks plus attorney's fees and expenses of litigation.
In her Answer, MOULIC contends that she incurred no obligation on the checks because the jewelry was never sold and the checks
were negotiated without her knowledge and consent. She also instituted a Third-Party Complaint against Corazon Victoriano, who later
assumed full responsibility for the checks.
On 26 May 1988, the trial court dismissed the Complaint as well as the Third-Party Complaint, and ordered STATE to pay MOULIC
P3,000.00 for attorney's fees.
STATE elevated the order of dismissal to the Court of Appeals, but the appellate court affirmed the trial court on the ground that the
Notice of Dishonor to MOULIC was made beyond the period prescribed by the Negotiable Instruments Law and that even if STATE did
serve such notice on MOULIC within the reglementary period it would be of no consequence as the checks should never have been
presented for payment. The sale of the jewelry was never effected; the checks, therefore, ceased to serve their purpose as security for
the jewelry.
We are not persuaded.
The negotiability of the checks is not in dispute. Indubitably, they were negotiable. After all, at the pre-trial, the parties agreed to limit the
issue to whether or not STATE was a holder of the checks in due course. 1
In this regard, Sec. 52 of the Negotiable Instruments Law provides —
Sec. 52. What constitutes a holder in due course. — A holder in due course is a holder who has taken the instrument
under the following conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of it
before it was overdue, and without notice that it was previously dishonored, if such was the fact; (c) That he took it in
good faith and for value; (d) That at the time it was negotiated to him he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.
Culled from the foregoing, a prima facie presumption exists that the holder of a negotiable instrument is a holder in due course. 2
Consequently, the burden of proving that STATE is not a holder in due course lies in the person who disputes the presumption. In this
regard, MOULIC failed.
The evidence clearly shows that: (a) on their faces the post-dated checks were complete and regular: (b) petitioner bought these
checks from the payee, Corazon Victoriano, before their due dates; 3 (c) petitioner took these checks in good faith and for value, albeit
at a discounted price; and, (d) petitioner was never informed nor made aware that these checks were merely issued to payee as
security and not for value.
Consequently, STATE is indeed a holder in due course. As such, it holds the instruments free from any defect of title of prior parties,
and from defenses available to prior parties among themselves; STATE may, therefore, enforce full payment of the checks. 4

4 Negotiable Instruments – Negotiable Insrturments


MOULIC cannot set up against STATE the defense that there was failure or absence of consideration. MOULIC can only invoke this
defense against STATE if it was privy to the purpose for which they were issued and therefore is not a holder in due course.
That the post-dated checks were merely issued as security is not a ground for the discharge of the instrument as against a holder in
due course. For the only grounds are those outlined in Sec. 119 of the Negotiable Instruments Law:
Sec. 119. Instrument; how discharged. — A negotiable instrument is discharged: (a) By payment in due course by or
on behalf of the principal debtor; (b) By payment in due course by the party accommodated, where the instrument is
made or accepted for his accommodation; (c) By the intentional cancellation thereof by the holder; (d) By any other
act which will discharge a simple contract for the payment of money; (e) When the principal debtor becomes the
holder of the instrument at or after maturity in his own right.
Obviously, MOULIC may only invoke paragraphs (c) and (d) as possible grounds for the discharge of the instrument. But, the intentional
cancellation contemplated under paragraph (c) is that cancellation effected by destroying the instrument either by tearing it up, 5 burning
it, 6 or writing the word "cancelled" on the instrument. The act of destroying the instrument must also be made by the holder of the
instrument intentionally. Since MOULIC failed to get back possession of the post-dated checks, the intentional cancellation of the said
checks is altogether impossible.
On the other hand, the acts which will discharge a simple contract for the payment of money under paragraph (d) are determined by
other existing legislations since Sec. 119 does not specify what these acts are, e.g., Art. 1231 of the Civil Code 7 which enumerates the
modes of extinguishing obligations. Again, none of the modes outlined therein is applicable in the instant case as Sec. 119
contemplates of a situation where the holder of the instrument is the creditor while its drawer is the debtor. In the present action, the
payee, Corazon Victoriano, was no longer MOULIC's creditor at the time the jewelry was returned.
Correspondingly, MOULIC may not unilaterally discharge herself from her liability by the mere expediency of withdrawing her funds
from the drawee bank. She is thus liable as she has no legal basis to excuse herself from liability on her checks to a holder in due
course.
Moreover, the fact that STATE failed to give Notice of Dishonor to MOULIC is of no moment. The need for such notice is not absolute;
there are exceptions under Sec. 114 of the Negotiable Instruments Law:
Sec. 114. When notice need not be given to drawer. — Notice of dishonor is not required to be given to the drawer in
the following cases: (a) Where the drawer and the drawee are the same person; (b) When the drawee is a fictitious
person or a person not having capacity to contract; (c) When the drawer is the person to whom the instrument is
presented for payment: (d) Where the drawer has no right to expect or require that the drawee or acceptor will honor
the instrument; (e) Where the drawer had countermanded payment.
Indeed, MOULIC'S actuations leave much to be desired. She did not retrieve the checks when she returned the jewelry. She simply
withdrew her funds from her drawee bank and transferred them to another to protect herself. After withdrawing her funds, she could not
have expected her checks to be honored. In other words, she was responsible for the dishonor of her checks, hence, there was no
need to serve her Notice of Dishonor, which is simply bringing to the knowledge of the drawer or indorser of the instrument, either
verbally or by writing, the fact that a specified instrument, upon proper proceedings taken, has not been accepted or has not been paid,
and that the party notified is expected to pay it. 8
In addition, the Negotiable Instruments Law was enacted for the purpose of facilitating, not hindering or hampering transactions in
commercial paper. Thus, the said statute should not be tampered with haphazardly or lightly. Nor should it be brushed aside in order to
meet the necessities in a single case. 9
The drawing and negotiation of a check have certain effects aside from the transfer of title or the incurring of liability in regard to the
instrument by the transferor. The holder who takes the negotiated paper makes a contract with the parties on the face of the instrument.
There is an implied representation that funds or credit are available for the payment of the instrument in the bank upon which it is
drawn. 10 Consequently, the withdrawal of the money from the drawee bank to avoid liability on the checks cannot prejudice the rights of
holders in due course. In the instant case, such withdrawal renders the drawer, Nora B. Moulic, liable to STATE, a holder in due course
of the checks.
Under the facts of this case, STATE could not expect payment as MOULIC left no funds with the drawee bank to meet her obligation on
the checks, 11 so that Notice of Dishonor would be futile.
The Court of Appeals also held that allowing recovery on the checks would constitute unjust enrichment on the part of STATE
Investment House, Inc. This is error.
The record shows that Mr. Romelito Caoili, an Account Assistant, testified that the obligation of Corazon Victoriano and her husband at
the time their property mortgaged to STATE was extrajudicially foreclosed amounted to P1.9 million; the bid price at public auction was
only P1 million. 12 Thus, the value of the property foreclosed was not even enough to pay the debt in full.
Where the proceeds of the sale are insufficient to cover the debt in an extrajudicial foreclosure of mortgage, the mortgagee is entitled to
claim the deficiency from the debtor. 13 The step thus taken by the mortgagee-bank in resorting to an extra-judicial foreclosure was
merely to find a proceeding for the sale of the property and its action cannot be taken to mean a waiver of its right to demand payment
for the whole debt. 14 For, while Act 3135, as amended, does not discuss the mortgagee's right to recover such deficiency, it does not
contain any provision either, expressly or impliedly, prohibiting recovery. In this jurisdiction, when the legislature intends to foreclose the
right of a creditor to sue for any deficiency resulting from foreclosure of a security given to guarantee an obligation, it so expressly
provides. For instance, with respect to pledges, Art. 2115 of the Civil Code 15 does not allow the creditor to recover the deficiency from
the sale of the thing pledged. Likewise, in the case of a chattel mortgage, or a thing sold on installment basis, in the event of
foreclosure, the vendor "shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement
to the contrary will be void". 16

5 Negotiable Instruments – Negotiable Insrturments


It is clear then that in the absence of a similar provision in Act No. 3135, as amended, it cannot be concluded that the creditor loses his
right recognized by the Rules of Court to take action for the recovery of any unpaid balance on the principal obligation simply because
he has chosen to extrajudicially foreclose the real estate mortgage pursuant to a Special Power of Attorney given him by the mortgagor
in the contract of mortgage. 17
The filing of the Complaint and the Third-Party Complaint to enforce the checks against MOULIC and the VICTORIANO spouses,
respectively, is just another means of recovering the unpaid balance of the debt of the VICTORIANOs.
In fine, MOULIC, as drawer, is liable for the value of the checks she issued to the holder in due course, STATE, without prejudice to any
action for recompense she may pursue against the VICTORIANOs as Third-Party Defendants who had already been declared as in
default.
WHEREFORE, the petition is GRANTED. The decision appealed from is REVERSED and a new one entered declaring private
respondent NORA B. MOULIC liable to petitioner STATE INVESTMENT HOUSE, INC., for the value of EBC Checks Nos. 30089658
and 30089660 in the total amount of P100,000.00, P3,000.00 as attorney's fees, and the costs of suit, without prejudice to any action
for recompense she may pursue against the VICTORIANOs as Third-Party Defendants.
Costs against private respondent.
SO ORDERED.

6 Negotiable Instruments – Negotiable Insrturments


Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 141278 March 23, 2004
MICHAEL A. OSMEÑA, petitioner,
vs.
CITIBANK, N.A., ASSOCIATED BANK and FRANK TAN, respondents.

DECISION

CALLEJO, SR., J.:


This is a petition for review on certiorari under Rule 45 of the Rules of Court, as amended, of the Decision1 of the Court of Appeals in
CA-G.R. CV No. 49529 which affirmed in toto the Decision2 of the Regional Trial Court of Makati City, Branch 38, in Civil Case No. 91-
538.
As culled from the records, the appeal at bench stemmed from the following factual backdrop:
On February 22, 1991, the petitioner filed with the Regional Trial Court of Makati an action for damages against the respondents
Citibank, N.A. and Associated Bank.3 The case was docketed as Civil Case No. 91-538. The complaint materially alleged that, on or
about August 25, 1989, the petitioner purchased from the Citibank Manager’s Check No. 20-015301 (the check for brevity) in the
amount of P1,545,000 payable to respondent Frank Tan; the petitioner later received information that the aforesaid manager’s check
was deposited with the respondent Associated Bank, Rosario Branch, to the account of a certain Julius Dizon under Savings Account
No. 19877; the clearing and/or payment by the respondents of the check to an improper party and the absence of any indorsement by
the payee thereof, respondent Frank Tan, is a clear violation of the respondents’ obligations under the Negotiable Instruments Law and
standard banking practice; considering that the petitioner’s intended payee for the check, the respondent Frank Tan, did not receive the
value thereof, the petitioner demanded from the respondents Citibank and the Associated Bank the payment or reimbursement of the
value of the check; the respondents, however, obstinately refused to heed his repeated demands for payment and/or reimbursement of
the amount of the check; hence, the petitioner was compelled to file this complaint praying for the restitution of the amount of the check,
and for moral damages and attorney’s fees.
On June 17, 1991, the petitioner, with leave of court, filed an Amended Complaint4 impleading Frank Tan as an additional defendant.
The petitioner averred therein that the check was purchased by him as a demand loan to respondent Frank Tan. Since apparently
respondent Frank Tan did not receive the proceeds of the check, the petitioner might have no right to collect from respondent Frank
Tan and is consequently left with no recourse but to seek payment or reimbursement from either or both respondents Citibank and/or
Associated Bank.
In its answer to the amended complaint,5 the respondent Associated Bank alleged that the petitioner was not the real party-in-interest
but respondent Frank Tan who was the payee of the check. The respondent also maintained that the check was deposited to the
account of respondent Frank Tan, a.k.a. Julius Dizon, through its Ayala Head Office and was credited to the savings account of Julius
Dizon; the Ayala office confirmed with the Rosario Branch that the account of Julius Dizon is also in reality that of respondent Frank
Tan; it never committed any violation of its duties and responsibilities as the proceeds of the check went and was credited to
respondent Frank Tan, a.k.a. Julius Dizon; the petitioner’s affirmative allegation of non-payment to the payee is self-serving; as such,
the petitioner’s claim for damages is baseless, unfounded and without legal basis.
On the other hand, the respondent Citibank, in answer to the amended complaint,6 alleged that the payment of the check was made by
it in due course and in the exercise of its regular banking function. Since a manager’s check is normally purchased in favor of a third
party, the identity of whom in most cases is unknown to the issuing bank, its only responsibility when paying the check was to examine
the genuineness of the check. It had no way of ascertaining the genuineness of the signature of the payee respondent Frank Tan who
was a total stranger to it. If at all, the petitioner had a cause of action only against the respondent Associated Bank which, as depository
or collecting bank, was obliged to make sure that the check in question was properly endorsed by the payee. It is not expected of the
respondent Citibank to ascertain the genuineness of the indorsement of the payee or even the lack of indorsement by him, most
especially when the check was presented for payment with the respondent Associated Bank’s guaranteeing all prior indorsements or
lack thereof.
On March 16, 1992, the trial court declared Frank Tan in default for failure to file his answer.7 On June 10, 1992, the pre-trial
conference was concluded without the parties reaching an amicable settlement.8 Hence, trial on the merits ensued.
After evaluating the evidence adduced by the parties, the trial court resolved that the preponderance of evidence supports the claim of
the petitioner as against respondent Frank Tan only but not against respondents Banks. Hence, on February 21, 1995, the trial court
rendered judgment in favor of the petitioner and against respondent Frank Tan. The complaints against the respondents Banks were
dismissed. The dispositive portion of the decision reads:
WHEREFORE, judgment is hereby rendered as follows :

7 Negotiable Instruments – Negotiable Insrturments


1. Ordering defendant Frank Tan to pay plaintiff Michael Osmeña the amount of One Million Five Hundred Forty-Five
Thousand (P1,545,000.00) Pesos, Philippine Currency, with interest thereon at 12% per annum from January 1990, date of
extra-judicial demand until the full amount is paid;
2. Dismissing the complaint against defendants Citibank and Associated Bank;
3. Dismissing the counter-claims and the cross-claim of Citibank against Associated Bank for lack of merit.
With costs against defendant Frank Tan.9
The petitioner appealed the decision,10 while respondent Frank Tan did not. On November 26, 1999, the appellate court rendered
judgment affirming in toto the decision of the trial court. Aggrieved, the petitioner assailed the decision in his petition at bar.
The petitioner contends that:
I. RESPONDENT COURT ERRED IN NOT HOLDING CITIBANK AND ASSOCIATED BANK LIABLE TO PETITIONER FOR
THE ENCASHMENT OF CITIBANK MANAGER’S CHECK NO. 20015301 BY JULIUS DIZON.
II. RESPONDENT COURT ERRED IN HOLDING THAT FRANK TAN AND JULIUS DIZON ARE ONE AND THE SAME
PERSON.
III. THE IDENTITY OF FRANK TAN AS JULIUS DIZON WAS KNOWN ONLY TO ASSOCIATED BANK AND WAS NOT
BINDING ON PETITIONER.11
The petition is denied.
The petitioner asserts that the check was payable to the order of respondent Tan. However, the respondent Associated Bank ordered
the check to be deposited to the account of one Julius Dizon, although the check was not endorsed by respondent Tan. As Julius Dizon
was not a holder of the check in due course, he could not validly negotiate the check. The latter was not even a transferee in due
course because respondent Tan, the payee, did not endorse the said check. The position of the respondent Bank is akin to that of a
bank accepting a check for deposit wherein the signature of the payee or endorsee has been forged.
The contention of the petitioner does not hold water.
The fact of the matter is that the check was endorsed by "Julius Dizon" and was deposited and credited to Savings Account No. 19877
with the respondent Associated Bank. But the evidence on record shows that the said account was in the name of Frank Tan Guan
Leng, which is the Chinese name of the respondent Frank Tan, who also uses the alias "Julius Dizon." As correctly ruled by the Court
of Appeals:
On the other hand, Associated satisfactorily proved that Tan is using and is also known by his alias of Julius Dizon. He signed
the Agreement On Bills Purchased (Exh. "1") and Continuing Suretyship Agreement (Exh. "2) both acknowledged on January
16, 1989, where his full name is stated to be "FRANK Tan Guan Leng (aka JULIUS DIZON)." Exh. "1" also refers to his
"Account No. SA#19877," the very same account to which the P1,545,000.00 from the manager’s check was deposited.
Osmeña countered that such use of an alias is illegal. That is but an irrelevant casuistry that does not detract from the fact that
the payee Tan as Julius Dizon has encashed and deposited the P1,545,000.00.12
The respondent Associated Bank presented preponderant evidence to support its assertion that respondent Tan, the payee of the
check, did receive the proceeds of the check. It adduced evidence that "Julius Dizon" and "Frank Tan" are one and the same person.
Respondent Tan was a regular and trusted client or depositor of the respondent Associated Bank in its branch at Rosario, Binondo,
Manila. As such, respondent Tan was allowed to maintain two (2) savings accounts therein.13 The first is Savings Account No. 20161-3
under his name "Frank Tan."14 The other is Savings Account No. 19877 under his assumed Filipino name "Julius Dizon,"15 to which
account the check was deposited in the instant case. Both witnesses for the respondent Associated Bank, Oscar Luna (signature
verifier) and Luz Lagrimas (new accounts clerk), testified that respondent Tan was using the alias "Julius Dizon," and that both names
referred to one and the same person, as Frank Tan himself regularly transacted business at the bank under both names.16 This is also
evidenced by the "Agreement on Bills Purchased"17 and the "Continuing Suretyship Agreement"18 executed between Frank Tan and
the respondent Associated Bank on January 16, 1989. Frank Tan’s name appears in said document as "FRANK TAN GUAN LENG
(a.k.a. JULIUS DIZON).19 The same documentary evidence also made reference to Savings Account No. 19877,20 the very same
account to which the check was deposited and the entire P1,545,000 was credited. Additionally, Citibank Check No. 07571321 which
was presented by the petitioner to prove one of the loans previously extended to respondent Tan showed that the endorsement of
respondent Tan at the dorsal side thereof22 is strikingly similar to the signatures of "Frank Tan" appearing in said agreements.
By seeking to recover the loan from respondent Tan, the petitioner admitted that respondent Tan received the amount of the check.
This apprehension was not without any basis at all, for after the petitioner attempted to communicate with respondent Tan on January
or February 1990, demanding payment for the loan, respondent Tan became elusive of the petitioner.23 As a matter of fact, respondent
Tan did not file his answer to the amended complaint and was never seen or heard of by the petitioner.24 Besides, if it were really a
fact that respondent Tan did not receive the proceeds of the check, he could himself have initiated the instant complaint against
respondents Banks, or in the remotest possibility, joined the petitioner in pursuing the instant claim.
The petitioner initially sought to recover from the respondents Banks the amount of P1,545,000 corresponding to the loan obtained by
respondent Tan from him, obviously because respondent Tan had no intent to pay the amount. The petitioner alleges that the
respondents Banks were negligent in paying the amount to a certain Julius Dizon, in relation to the pertinent provisions of the
Negotiable Instruments Law, without the proper indorsement of the payee, Frank Tan. The petitioner cites the ruling of the Court in
Associated Bank v. Court of Appeals,25 in which we outlined the respective responsibilities and liabilities of a drawee bank, such as the
respondent Citibank, and a collecting bank, such as the defendant Associated Bank, in the event that payment of a check to a person
not designated as the payee, or who is not a holder in due course, had been made. However, the ruling of the Court therein does not
apply to the present case for, as has been amply demonstrated, the petitioner failed to establish that the proceeds of the check was
indeed wrongfully paid by the respondents Banks to a person other than the intended payee. In addition, the Negotiable Instruments
8 Negotiable Instruments – Negotiable Insrturments
Law was enacted for the purpose of facilitating, not hindering or hampering transactions in commercial paper. Thus, the said statute
should not be tampered with haphazardly or lightly. Nor should it be brushed aside in order to meet the necessities in a single case.26
Moreover, the chain of events following the purported delivery of the check to respondent Tan renders even more dubious the
petitioner’s claim that respondent Tan had not received the proceeds of the check. Thus, the petitioner never bothered to find out from
the said respondent whether the latter received the check from his messenger. And if it were to be supposed that respondent Tan did
not receive the check, given that his need for the money was urgent, it strains credulity that respondent Tan never even made an effort
to get in touch with the petitioner to inform the latter that he did not receive the check as agreed upon, and to inquire why the check had
not been delivered to him. The petitioner and respondent Tan saw each other during social gatherings but they never took the chance
to discuss details on the loan or the check.27 Their actuations are not those to be usually expected of friends of 15 years who, as the
petitioner would want to impress upon this Court, were transacting business on the basis of confidence.28 In fact, the first time that the
petitioner attempted to communicate with respondent Tan was on January or February 1990, almost five or six months after the
expected delivery of the check, for the purpose of demanding payment for the loan. And it was only on that occasion that respondent
Tan, as the petitioner insinuates, informed him that he (Frank Tan) had not received the proceeds of the check and refused to pay his
loan.29 All told, the petitioner’s allegation that respondent Tan did not receive the proceeds of the check30 is belied by the evidence on
record and attendant circumstances.
Conversely, the records would disclose that even the petitioner himself had misgivings about the truthfulness of his allegation that
respondent Tan did not receive the amount of the check. This is made implicit by respondent Tan’s being made a party-defendant to
the case when the petitioner filed his amended complaint. In his memorandum in the case below, the petitioner averred inter alia that:
The amount of P1,545,000.00 is sought to be recovered from:
1. Frank Tan for his failure to pay the loan extended by plaintiff; and
2. Associated Bank and Citibank for having accepted for deposit and/or paid the Citibank manager’s check despite the
absence of any signature/endorsement by the named payee, Frank Tan.
The claim of the petitioner that respondent Tan’s use of an alias is illegal does not detract a whit from the fact that respondent Tan had
been credited by the respondent Associated Bank for the amount of the check. Respondent Tan did not appeal the decision of the
RTC.
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED. The Decision dated November 26, 1999 of the Court of Appeals in CA-
G.R. CV No. 49529 is hereby AFFIRMED. Costs against the petitioner.
SO ORDERED.

9 Negotiable Instruments – Negotiable Insrturments


Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-1405 July 31, 1948
BENJAMIN ABUBAKAR, petitioner,
vs.
THE AUDITOR GENERAL, respondent.
Viray and Viola Viray for petitioner.
First Assistant Solicitor General Roberto A. Gianzon and Solicitor Manuel Tomacruz for respondent.
BENGZON, J.:
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.
Finding the first reason to be sufficiently valid we shall not discuss, nor pass upon the second.
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" (Annex A). 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 distinction is not without a difference. Outstanding treasury warrants issued prior to January 2, 1942, amount to more than four
million pesos. The appropriation herein mentioned is only for P1,750,000. Obviously Congress wished to provide for redemption of one
class of warrants — those issued to private individuals — as distinguished from those issued in favor of government officials. Basis for
the discrimination is not lacking. Probably the Government is not so sure that those warrants to officials have all been properly used by
the latter during the Japanese occupation or maybe it wants to conduct further inquiries as to the equities of the present holders
thereof.
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.
Paras, Actg. C.J., Feria, Pablo, Perfecto, Briones, and Padilla, JJ., concur.

10 Negotiable Instruments – Overview of Kinds of Nego Inst


Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 88866 February 18, 1991


METROPOLITAN BANK & TRUST COMPANY, petitioner,
vs.
COURT OF APPEALS, GOLDEN SAVINGS & LOAN ASSOCIATION, INC., LUCIA CASTILLO, MAGNO CASTILLO and GLORIA
CASTILLO, respondents.
Angara, Abello, Concepcion, Regala & Cruz for petitioner.
Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson for Magno and Lucia Castillo.
Agapito S. Fajardo and Jaime M. Cabiles for respondent Golden Savings & Loan Association, Inc.

CRUZ, J.:p
This case, for all its seeming complexity, turns on a simple question of negligence. The facts, pruned of all non-essentials, are easily
told.
The Metropolitan Bank and Trust Co. is a commercial bank with branches throughout the Philippines and even abroad. Golden Savings
and Loan Association was, at the time these events happened, operating in Calapan, Mindoro, with the other private respondents as its
principal officers.
In January 1979, a certain Eduardo Gomez opened an account with Golden Savings and deposited over a period of two months 38
treasury warrants with a total value of P1,755,228.37. They were all drawn by the Philippine Fish Marketing Authority and purportedly
signed by its General Manager and countersigned by its Auditor. Six of these were directly payable to Gomez while the others
appeared to have been indorsed by their respective payees, followed by Gomez as second indorser. 1
On various dates between June 25 and July 16, 1979, all these warrants were subsequently indorsed by Gloria Castillo as Cashier of
Golden Savings and deposited to its Savings Account No. 2498 in the Metrobank branch in Calapan, Mindoro. They were then sent for
clearing by the branch office to the principal office of Metrobank, which forwarded them to the Bureau of Treasury for special clearing. 2
More than two weeks after the deposits, Gloria Castillo went to the Calapan branch several times to ask whether the warrants had been
cleared. She was told to wait. Accordingly, Gomez was meanwhile not allowed to withdraw from his account. Later, however,
"exasperated" over Gloria's repeated inquiries and also as an accommodation for a "valued client," the petitioner says it finally decided
to allow Golden Savings to withdraw from the proceeds of the
warrants. 3 The first withdrawal was made on July 9, 1979, in the amount of P508,000.00, the second on July 13, 1979, in the amount of
P310,000.00, and the third on July 16, 1979, in the amount of P150,000.00. The total withdrawal was P968.000.00. 4
In turn, Golden Savings subsequently allowed Gomez to make withdrawals from his own account, eventually collecting the total amount
of P1,167,500.00 from the proceeds of the apparently cleared warrants. The last withdrawal was made on July 16, 1979.
On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants had been dishonored by the Bureau of Treasury on July
19, 1979, and demanded the refund by Golden Savings of the amount it had previously withdrawn, to make up the deficit in its account.
The demand was rejected. Metrobank then sued Golden Savings in the Regional Trial Court of Mindoro. 5 After trial, judgment was
rendered in favor of Golden Savings, which, however, filed a motion for reconsideration even as Metrobank filed its notice of appeal. On
November 4, 1986, the lower court modified its decision thus:
ACCORDINGLY, judgment is hereby rendered:
1. Dismissing the complaint with costs against the plaintiff;
2. Dissolving and lifting the writ of attachment of the properties of defendant Golden Savings and Loan Association,
Inc. and defendant Spouses Magno Castillo and Lucia Castillo;
3. Directing the plaintiff to reverse its action of debiting Savings Account No. 2498 of the sum of P1,754,089.00 and to
reinstate and credit to such account such amount existing before the debit was made including the amount of
P812,033.37 in favor of defendant Golden Savings and Loan Association, Inc. and thereafter, to allow defendant
Golden Savings and Loan Association, Inc. to withdraw the amount outstanding thereon before the debit;
4. Ordering the plaintiff to pay the defendant Golden Savings and Loan Association, Inc. attorney's fees and
expenses of litigation in the amount of P200,000.00.
5. Ordering the plaintiff to pay the defendant Spouses Magno Castillo and Lucia Castillo attorney's fees and
expenses of litigation in the amount of P100,000.00.
SO ORDERED.

11 Negotiable Instruments – Overview of Kinds of Nego Inst


On appeal to the respondent court, 6
the decision was affirmed, prompting Metrobank to file this petition for review on the following
grounds:
1. Respondent Court of Appeals erred in disregarding and failing to apply the clear contractual terms and conditions
on the deposit slips allowing Metrobank to charge back any amount erroneously credited.
(a) Metrobank's right to charge back is not limited to instances where the checks or treasury warrants are forged or
unauthorized.
(b) Until such time as Metrobank is actually paid, its obligation is that of a mere collecting agent which cannot be held
liable for its failure to collect on the warrants.
2. Under the lower court's decision, affirmed by respondent Court of Appeals, Metrobank is made to pay for warrants
already dishonored, thereby perpetuating the fraud committed by Eduardo Gomez.
3. Respondent Court of Appeals erred in not finding that as between Metrobank and Golden Savings, the latter
should bear the loss.
4. Respondent Court of Appeals erred in holding that the treasury warrants involved in this case are not negotiable
instruments.
The petition has no merit.
From the above undisputed facts, it would appear to the Court that Metrobank was indeed negligent in giving Golden Savings the
impression that the treasury warrants had been cleared and that, consequently, it was safe to allow Gomez to withdraw the proceeds
thereof from his account with it. Without such assurance, Golden Savings would not have allowed the withdrawals; with such
assurance, there was no reason not to allow the withdrawal. Indeed, Golden Savings might even have incurred liability for its refusal to
return the money that to all appearances belonged to the depositor, who could therefore withdraw it any time and for any reason he
saw fit.
It was, in fact, to secure the clearance of the treasury warrants that Golden Savings deposited them to its account with Metrobank.
Golden Savings had no clearing facilities of its own. It relied on Metrobank to determine the validity of the warrants through its own
services. The proceeds of the warrants were withheld from Gomez until Metrobank allowed Golden Savings itself to withdraw them from
its own deposit. 7 It was only when Metrobank gave the go-signal that Gomez was finally allowed by Golden Savings to withdraw them
from his own account.
The argument of Metrobank that Golden Savings should have exercised more care in checking the personal circumstances of Gomez
before accepting his deposit does not hold water. It was Gomez who was entrusting the warrants, not Golden Savings that was
extending him a loan; and moreover, the treasury warrants were subject to clearing, pending which the depositor could not withdraw its
proceeds. There was no question of Gomez's identity or of the genuineness of his signature as checked by Golden Savings. In fact, the
treasury warrants were dishonored allegedly because of the forgery of the signatures of the drawers, not of Gomez as payee or
indorser. Under the circumstances, it is clear that Golden Savings acted with due care and diligence and cannot be faulted for the
withdrawals it allowed Gomez to make.
By contrast, Metrobank exhibited extraordinary carelessness. The amount involved was not trifling — more than one and a half million
pesos (and this was 1979). There was no reason why it should not have waited until the treasury warrants had been cleared; it would
not have lost a single centavo by waiting. Yet, despite the lack of such clearance — and notwithstanding that it had not received a
single centavo from the proceeds of the treasury warrants, as it now repeatedly stresses — it allowed Golden Savings to withdraw —
not once, not twice, but thrice — from the uncleared treasury warrants in the total amount of P968,000.00
Its reason? It was "exasperated" over the persistent inquiries of Gloria Castillo about the clearance and it also wanted to
"accommodate" a valued client. It "presumed" that the warrants had been cleared simply because of "the lapse of one week." 8 For a
bank with its long experience, this explanation is unbelievably naive.
And now, to gloss over its carelessness, Metrobank would invoke the conditions printed on the dorsal side of the deposit slips through
which the treasury warrants were deposited by Golden Savings with its Calapan branch. The conditions read as follows:
Kindly note that in receiving items on deposit, the bank obligates itself only as the depositor's collecting agent,
assuming no responsibility beyond care in selecting correspondents, and until such time as actual payment shall
have come into possession of this bank, the right is reserved to charge back to the depositor's account any amount
previously credited, whether or not such item is returned. This also applies to checks drawn on local banks and
bankers and their branches as well as on this bank, which are unpaid due to insufficiency of funds, forgery,
unauthorized overdraft or any other reason. (Emphasis supplied.)
According to Metrobank, the said conditions clearly show that it was acting only as a collecting agent for Golden Savings and give it the
right to "charge back to the depositor's account any amount previously credited, whether or not such item is returned. This also applies
to checks ". . . which are unpaid due to insufficiency of funds, forgery, unauthorized overdraft of any other reason." It is claimed that the
said conditions are in the nature of contractual stipulations and became binding on Golden Savings when Gloria Castillo, as its Cashier,
signed the deposit slips.
Doubt may be expressed about the binding force of the conditions, considering that they have apparently been imposed by the bank
unilaterally, without the consent of the depositor. Indeed, it could be argued that the depositor, in signing the deposit slip, does so only
to identify himself and not to agree to the conditions set forth in the given permit at the back of the deposit slip. We do not have to rule
on this matter at this time. At any rate, the Court feels that even if the deposit slip were considered a contract, the petitioner could still
not validly disclaim responsibility thereunder in the light of the circumstances of this case.

12 Negotiable Instruments – Overview of Kinds of Nego Inst


In stressing that it was acting only as a collecting agent for Golden Savings, Metrobank seems to be suggesting that as a mere agent it
cannot be liable to the principal. This is not exactly true. On the contrary, Article 1909 of the Civil Code clearly provides that —
Art. 1909. — The agent is responsible not only for fraud, but also for negligence, which shall be judged 'with more or
less rigor by the courts, according to whether the agency was or was not for a compensation.
The negligence of Metrobank has been sufficiently established. To repeat for emphasis, it was the clearance given by it that assured
Golden Savings it was already safe to allow Gomez to withdraw the proceeds of the treasury warrants he had deposited Metrobank
misled Golden Savings. There may have been no express clearance, as Metrobank insists (although this is refuted by Golden Savings)
but in any case that clearance could be implied from its allowing Golden Savings to withdraw from its account not only once or even
twice but three times. The total withdrawal was in excess of its original balance before the treasury warrants were deposited, which only
added to its belief that the treasury warrants had indeed been cleared.
Metrobank's argument that it may recover the disputed amount if the warrants are not paid for any reason is not acceptable. Any reason
does not mean no reason at all. Otherwise, there would have been no need at all for Golden Savings to deposit the treasury warrants
with it for clearance. There would have been no need for it to wait until the warrants had been cleared before paying the proceeds
thereof to Gomez. Such a condition, if interpreted in the way the petitioner suggests, is not binding for being arbitrary and
unconscionable. And it becomes more so in the case at bar when it is considered that the supposed dishonor of the warrants was not
communicated to Golden Savings before it made its own payment to Gomez.
The belated notification aggravated the petitioner's earlier negligence in giving express or at least implied clearance to the treasury
warrants and allowing payments therefrom to Golden Savings. But that is not all. On top of this, the supposed reason for the dishonor,
to wit, the forgery of the signatures of the general manager and the auditor of the drawer corporation, has not been established. 9 This
was the finding of the lower courts which we see no reason to disturb. And as we said in MWSS v. Court of Appeals: 10
Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA 238). It must be established by clear, positive
and convincing evidence. This was not done in the present case.
A no less important consideration is the circumstance that the treasury warrants in question are not negotiable instruments. Clearly
stamped on their face is the word "non-negotiable." Moreover, and this is of equal significance, it is indicated that they are payable from
a particular fund, to wit, Fund 501.
The following sections of the Negotiable Instruments Law, especially the underscored parts, are pertinent:
Sec. 1. — Form of negotiable instruments. — An instrument to be negotiable must conform to the following
requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable
certainty.
xxx xxx xxx
Sec. 3. When promise is unconditional. — An unqualified order or promise to pay is unconditional within the meaning
of this Act though coupled with —
(a) An indication of a particular fund out of which reimbursement is to be made or a particular account to be debited
with the amount; or
(b) A statement of the transaction which gives rise to the instrument judgment.
But an order or promise to pay out of a particular fund is not unconditional.
The indication of Fund 501 as the source of the payment to be made on the treasury warrants makes the order or promise to pay "not
unconditional" and the warrants themselves non-negotiable. There should be no question that the exception on Section 3 of the
Negotiable Instruments Law is applicable in the case at bar. This conclusion conforms to Abubakar vs. Auditor General 11 where the
Court held:
The petitioner argues that he is a holder in good faith and for value of a negotiable instrument and is entitled to the
rights and privileges of a holder in due course, free from defenses. But this treasury warrant is not within the scope of
the negotiable instrument law. For one thing, the document bearing on its face the words "payable from the
appropriation for food administration, is actually an Order for payment out of "a particular fund," and is not
unconditional and does not fulfill one of the essential requirements of a negotiable instrument (Sec. 3 last sentence
and section [1(b)] of the Negotiable Instruments Law).
Metrobank cannot contend that by indorsing the warrants in general, Golden Savings assumed that they were "genuine and in all
respects what they purport to be," in accordance with Section 66 of the Negotiable Instruments Law. The simple reason is that this law
is not applicable to the non-negotiable treasury warrants. The indorsement was made by Gloria Castillo not for the purpose of
guaranteeing the genuineness of the warrants but merely to deposit them with Metrobank for clearing. It was in fact Metrobank that
made the guarantee when it stamped on the back of the warrants: "All prior indorsement and/or lack of endorsements guaranteed,
Metropolitan Bank & Trust Co., Calapan Branch."

13 Negotiable Instruments – Overview of Kinds of Nego Inst


The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the Philippine Islands, 12 but we feel this case is inapplicable to the
present controversy. That case involved checks whereas this case involves treasury warrants. Golden Savings never represented that
the warrants were negotiable but signed them only for the purpose of depositing them for clearance. Also, the fact of forgery was
proved in that case but not in the case before us. Finally, the Court found the Jai Alai Corporation negligent in accepting the checks
without question from one Antonio Ramirez notwithstanding that the payee was the Inter-Island Gas Services, Inc. and it did not appear
that he was authorized to indorse it. No similar negligence can be imputed to Golden Savings.
We find the challenged decision to be basically correct. However, we will have to amend it insofar as it directs the petitioner to credit
Golden Savings with the full amount of the treasury checks deposited to its account.
The total value of the 32 treasury warrants dishonored was P1,754,089.00, from which Gomez was allowed to withdraw P1,167,500.00
before Golden Savings was notified of the dishonor. The amount he has withdrawn must be charged not to Golden Savings but to
Metrobank, which must bear the consequences of its own negligence. But the balance of P586,589.00 should be debited to Golden
Savings, as obviously Gomez can no longer be permitted to withdraw this amount from his deposit because of the dishonor of the
warrants. Gomez has in fact disappeared. To also credit the balance to Golden Savings would unduly enrich it at the expense of
Metrobank, let alone the fact that it has already been informed of the dishonor of the treasury warrants.
WHEREFORE, the challenged decision is AFFIRMED, with the modification that Paragraph 3 of the dispositive portion of the judgment
of the lower court shall be reworded as follows:
3. Debiting Savings Account No. 2498 in the sum of P586,589.00 only and thereafter allowing defendant Golden
Savings & Loan Association, Inc. to withdraw the amount outstanding thereon, if any, after the debit.
SO ORDERED.

14 Negotiable Instruments – Overview of Kinds of Nego Inst


Republic of the Philippines
SUPREME COURT
Manila
EN BANC

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


PHILIPPINE EDUCATION CO., INC., plaintiff-appellant,
vs.
MAURICIO A. SORIANO, ET AL., defendant-appellees.
Marcial Esposo for plaintiff-appellant.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Antonio G. Ibarra and Attorney Concepcion Torrijos-
Agapinan for defendants-appellees.

DIZON, J.:
An appeal from a decision of the Court of First Instance of Manila dismissing the complaint filed by the Philippine Education Co., Inc.
against Mauricio A. Soriano, Enrico Palomar and Rafael Contreras.
On April 18, 1958 Enrique Montinola sought to purchase from the Manila Post Office ten (10) money orders of P200.00 each payable to
E.P. Montinola withaddress at Lucena, Quezon. After the postal teller had made out money ordersnumbered 124685, 124687-124695,
Montinola offered to pay for them with a private checks were not generally accepted in payment of money orders, the teller advised him
to see the Chief of the Money Order Division, but instead of doing so, Montinola managed to leave building with his own check and the
ten(10) money orders without the knowledge of the teller.
On the same date, April 18, 1958, upon discovery of the disappearance of the unpaid money orders, an urgent message was sent to all
postmasters, and the following day notice was likewise served upon all banks, instructing them not to pay anyone of the money orders
aforesaid if presented for payment. The Bank of America received a copy of said notice three days later.
On April 23, 1958 one of the above-mentioned money orders numbered 124688 was received by appellant as part of its sales receipts.
The following day it deposited the same with the Bank of America, and one day thereafter the latter cleared it with the Bureau of Posts
and received from the latter its face value of P200.00.
On September 27, 1961, appellee Mauricio A. Soriano, Chief of the Money Order Division of the Manila Post Office, acting for and in
behalf of his co-appellee, Postmaster Enrico Palomar, notified the Bank of America that money order No. 124688 attached to his letter
had been found to have been irregularly issued and that, in 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 praying for judgment as follows:
WHEREFORE, plaintiff prays that after hearing defendants be ordered:
(a) To countermand the notice given to the Bank of America on September 27, 1961, deducting from the said Bank's
clearing account the sum of P200.00 represented by postal money order No. 124688, or in the alternative indemnify
the plaintiff in the same amount with interest at 8-½% per annum from September 27, 1961, which is the rate of
interest being paid by plaintiff on its overdraft account;
(b) To pay to the plaintiff out of their own personal funds, jointly and severally, actual and moral damages in the
amount of P1,000.00 or in such amount as will be proved and/or determined by this Honorable Court: exemplary
damages in the amount of P1,000.00, attorney's fees of P1,000.00, and the costs of action.
Plaintiff also prays for such other and further relief as may be deemed just and equitable.
On November 17, 1962, after the parties had submitted the stipulation of facts reproduced at pages 12 to 15 of the Record on Appeal,
the above-named court rendered judgment as follows:
WHEREFORE, judgment is hereby rendered, ordering the defendants to countermand the notice given to the Bank of
America on September 27, 1961, deducting from said Bank's clearing account the sum of P200.00 representing the
amount of postal money order No. 124688, or in the alternative, to indemnify the plaintiff in the said sum of P200.00
with interest thereon at the rate of 8-½% per annum from September 27, 1961 until fully paid; without any
pronouncement as to cost and attorney's fees.

15 Negotiable Instruments – Overview of Kinds of Nego Inst


The case was appealed to the Court of First Instance of Manila where, after the parties had resubmitted the same stipulation of facts,
the appealed decision dismissing the complaint, with costs, was rendered.
The first, second and fifth assignments of error discussed in appellant's brief are related to the other and will therefore be discussed
jointly. They raise this main issue: that the postal money order in question is a negotiable instrument; that its nature as such is not in
anyway affected by the letter dated October 26, 1948 signed by the Director of Posts and addressed to all banks with a clearing
account with the Post Office, and that money orders, once issued, create a contractual relationship of debtor and creditor, respectively,
between the government, on the one hand, and the remitters payees or endorses, on the other.
It is not disputed that our postal statutes were patterned after statutes in force in the United States. For this reason, ours are generally
construed in accordance with the construction given in the United States to their own postal statutes, in the absence of any special
reason justifying a departure from this policy or practice. The weight of authority in the United States is that postal money orders are not
negotiable instruments (Bolognesi vs. U.S. 189 Fed. 395; U.S. vs. Stock Drawers National Bank, 30 Fed. 912), the reason behind this
rule being that, in establishing and operating a postal money order system, the government is not engaging in commercial transactions
but merely exercises a governmental power for the public benefit.
It is to be noted in this connection that some of the restrictions imposed upon money orders by postal laws and regulations are
inconsistent with the character of negotiable instruments. For instance, such laws and regulations usually provide for not more than one
endorsement; payment of money orders may be withheld under a variety of circumstances (49 C.J. 1153).
Of particular application to the postal money order in question are the conditions laid down in the letter of the Director of Posts of
October 26, 1948 (Exhibit 3) to the Bank of America for the redemption of postal money orders received by it from its depositors.
Among others, the condition is imposed that "in cases of adverse claim, the money order or money orders involved will be returned to
you (the bank) and the, corresponding amount will have to be refunded to the Postmaster, Manila, who reserves the right to deduct the
value thereof from any amount due you if such step is deemed necessary." The conditions thus imposed in order to enable the bank to
continue enjoying the facilities theretofore enjoyed by its depositors, were accepted by the Bank of America. The latter is therefore
bound by them. That it is so is clearly referred from the fact that, upon receiving advice that the amount represented by the money order
in question had been deducted from its clearing account with the Manila Post Office, it did not file any protest against such action.
Moreover, not being a party to the understanding existing between the postal officers, on the one hand, and the Bank of America, on
the other, appellant has no right to assail the terms and conditions thereof on the ground that the letter setting forth the terms and
conditions aforesaid is void because it was not issued by a Department Head in accordance with Sec. 79 (B) of the Revised
Administrative Code. In reality, however, said legal provision does not apply to the letter in question because it does not provide for a
department regulation but merely sets down certain conditions upon the privilege granted to the Bank of Amrica to accept and pay
postal money orders presented for payment at the Manila Post Office. Such being the case, it is clear that the Director of Posts had
ample authority to issue it pursuant to Sec. 1190 of the Revised Administrative Code.
In view of the foregoing, We do not find it necessary to resolve the issues raised in the third and fourth assignments of error.
WHEREFORE, the appealed decision being in accordance with law, the same is hereby affirmed with costs.

16 Negotiable Instruments – Overview of Kinds of Nego Inst


Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 45125 April 22, 1991


LORETA SERRANO, petitioner,
vs.
COURT OF APPEALS and LONG LIFE PAWNSHOP, INC., respondents.
Cecilio D. Ignacio for petitioner.
Hildawa & Gomez for private respondent.

RESOLUTION

FELICIANO, J.:p
Sometime in early March 1968, petitioner Loreta Serrano bought some pieces of jewelry for P48,500.00 from Niceta Ribaya. On 21
March 1968, petitioner, then in need of money, instructed her private secretary, Josefina Rocco, to pawn the jewelry. Josefina Rocco
went to private respondent Long Life Pawnshop, Inc. ("Long Life"), pledged the jewelry for P22,000.00 with its principal owner and
General Manager, Yu An Kiong, and then absconded with said amount and the pawn ticket. The pawnshop ticket issued to Josefina
Rocco stipulated that it was redeemable "on presentation by the bearer."
Three (3) months later, Gloria Duque and Amalia Celeste informed Niceta Ribaya that a pawnshop ticket issued by private respondent
was being offered for sale. They told Niceta the ticket probably covered jewelry once owned by the latter which jewelry had been
pawned by one Josefina Rocco. Suspecting that it was the same jewelry she had sold to petitioner, Niceta informed the latter of this
offer and suggested that petitioner go to the Long Life pawnshop to check the matter out. Petitioner claims she went to private
respondent pawnshop, verified that indeed her missing jewelry was pledged there and told Yu An Kiong not to permit anyone to redeem
the jewelry because she was the lawful owner thereof. Petitioner claims that Yu An Kiong agreed.
On 9 July 1968, petitioner went to the Manila Police Department to report the loss, and a complaint first for qualified theft and later
changed to estafa was subsequently filed against Josefina Rocco. On the same date, Detective Corporal Oswaldo Mateo of the Manila
Police also claims to have gone to the pawnshop, showed Yu An Kiong petitioner's report and left the latter a note asking him to hold
the jewelry and notify the police in case some one should redeem the same. The next day, on 10 July 1968, Yu An Kiong permitted one
Tomasa de Leon, exhibiting the appropriate pawnshop ticket, to redeem the jewelry.
On 4 October 1968, petitioner filed a complaint with the then Court of First Instance of Manila for damages against private respondent
Long Life for failure to hold the jewelry and for allowing its redemption without first notifying petitioner or the police. After trial, the trial
judge, Hon. Luis B. Reyes, rendered a decision in favor of petitioner, awarding her P26,500.00 as actual damages, with legal interest
thereon from the date of the filing of the complaint, P2,000.00 as attorney's fees, and the costs of the suit.
Judge L.B. Reyes' decision was reversed on appeal and the complaint dismissed by the public respondent Court of Appeals in a
Decision promulgated on 26 September 1976.
The Court of Appeals gave credence to Yu An Kiong's testimony that neither petitioner nor Detective Mateo ever apprised him of the
misappropriation of petitioner's loan, or obtained a commitment from him not to permit redemption of the jewelry, prior to 10 July 1968.
Yu An Kiong claims to have become aware of the loan's misappropriation only on 16 August 1968 when a subpoena duces tecum was
served by the Manila Fiscal's Office requiring him to bring the record of the pledge in connection with the preliminary investigation of the
estafa charge against Josefina Rocco. Consequently, the appellate court ruled, there could have been no negligence, much less a
grave one amounting to bad faith, imputable to Yu An Kiong as the basis for an award of damages.
In this Petition for Review, petitioner seeks reversal of the Public respondent's findings relating to the credibility of witnesses and the
restoration of the trial court's decision.
Deliberating on the present Petition for Review, the Court considers that the public respondent Court of Appeals committed reversible
error in rendering its questioned Decision.
It is a settled principle of civil procedure that the conclusions of the trial court regarding the credibility of witnesses are entitled to great
respect from the appellate courts because the trial court had an opportunity to observe the demeanor of witnesses while giving
testimony which may indicate their candor or lack thereof. 1 While the Supreme Court ordinarily does not rule on the issue of credibility
of witnesses, that being a question of fact not properly raised in a petition under Rule 45, the Court has undertaken to do so in
exceptional situations where, for instance, as here, the trial court and the Court of Appeals arrived at divergent conclusions on
questions of fact and the credibility of witnesses. 2
The Court of Appeals rejected what it considered to be the incredible testimony of petitioner and Detective Mateo. It faulted petitioner
for failing to report to the police authorities the loss of her jewelry immediately on 21 March 1968 when Josefina Rocco failed to return
to her either the loan proceeds or the jewelry. But it must be noted that Josefina Rocco simply disappeared without a trace on said date.
Petitioner had no way of knowing if Josefina had misappropriated her jewelry, or had first pledged the jewelry as instructed and then
17 Negotiable Instruments – Overview of Kinds of Nego Inst
misappropriated the proceeds of the loan. In the latter case, which was in fact what had occurred, petitioner could have had no idea as
to the identity of the pawnbroker. Moreover, this Court has several times recognized that different people may have diverse reasons for
failing to report promptly to the police their having been victimized by some criminal or fraudulent scheme and that such failure does not
by itself render their subsequent testimony unworthy of credence. 3 The Court of Appeals also found it hard to believe that Detective
Mateo had failed to obtain a written acknowledgment from Yu An Kiong of the receipt of the note as corroboration for his testimony.
However, absent evidence that it was an established practice for police officers to obtain such acknowledgment in situations like the
one here, it is difficult to see why Detective Mateo's behavior should be considered unbelievable. On the other hand, as the trial court
pointed out, it would not have been sensible for Detective Mateo to leave a note reminding Yu An Kiong to hold unto the jewelry if the
latter had in fact then told the policeman that the jewelry had already been redeemed.
The public respondent apparently believed petitioner had failed to establish her ownership of the jewelry pledged by Josefina Rocco,
such failure purportedly engendering doubt that Tomasa de Leon may have redeemed jewelry different from that owned by petitioner.
This is curious and untenable because the record on appeal indicates that Yu An Kiong had admitted in his answer and memorandum
before the trial court that he received pledged jewelry from Josefina Rocco and, in his memorandum, that such jewelry had been
entrusted to Josefina by petitioner as the latter's employer. It is clear from these judicial admissions that he considered petitioner to
have been the true owner of the jewelry.
Finally, the Court of Appeals did not believe petitioner's testimony because of a claimed material inconsistency therein. On direct
examination, petitioner said she "immediately" went to the private respondent's establishment upon being informed by Niceta Ribaya of
the possible whereabouts of her jewelry. On cross-examination, she said she went to the establishment "a few days later." If this is an
inconsistency, it relates to an unimportant detail. What is clear is that in any event, petitioner testified that she went to the respondent's
pawnshop to meet Yu An Kiong and notify him of the misappropriation before anyone had redeemed the jewelry.
We must also note that the Court of Appeals apparently over-looked a fact of substance which did not escape the attention of the trial
court. Petitioner's version of events was corroborated by Police Detective Mateo and by Niceta Ribaya. These were two (2) individuals
who had nothing to gain from the outcome of the case. Certainly, their disinterested testimony should have been accorded more
probative weight than the negative, uncorroborated and self-serving testimony of Yu An Kiong, which presented a diametrically
opposed version of events calculated to show that in permitting redemption of the jewelry, he was acting in good faith. 4 The testimony
of Detective Mateo was moreover supported by the presumption that he had acted in the regular performance of his official duty as a
police officer, a presumption that Yu An Kiong did not try to rebut.
This being a civil case, it was enough for petitioner to show, by a preponderance of evidence, that her version of events did in fact
occur. We agree with the trial court that this burden of proof had been discharged by petitioner because her evidence was direct and
more credible and persuasive than that propounded by Yu An Kiong, 5 and corroborated by disinterested witnesses.
Turning to the substantive legal rights and duties of the parties, we believe and so hold that, having been notified by petitioner and the
police that jewelry pawned to it was either stolen or involved in an embezzlement of the proceeds of the pledge, private respondent
pawnbroker became duty bound to hold the things pledged and to give notice to petitioner and the police of any effort to redeem them.
Such a duty was imposed by Article 21 of the Civil Code. 6 The circumstance that the pawn ticket stated that the pawn was redeemable
by the bearer, did not dissolve that duty. The pawn ticket was not a negotiable instrument under the Negotiable Instruments Law nor a
negotiable document of title under Articles 1507 et seq. of the Civil Code. If the third person Tomasa de Leon, who redeemed the things
pledged a day after petitioner and the police had notified Long Life, claimed to be owner thereof, the prudent recourse of the
pawnbroker was to file an interpleader suit, impleading both petitioner and Tomasa de Leon. The respondent pawnbroker was, of
course, entitled to demand payment of the loan extended on the security of the pledge before surrendering the jewelry, upon the
assumption that it had given the loan in good faith and was not a "fence" for stolen articles and had not conspired with the faithless
Josefina Rocco or with Tomasa de Leon. Respondent pawnbroker acted in reckless disregard of that duty in the instant case and must
bear the consequences, without prejudice to its right to recover damages from Josefina Rocco.
The trial court correctly held that private respondent was liable to petitioner for actual damages which corresponded to the difference in
the value of the jewelry (P48,500.00) and the amount of the loan (P22,000.00), or the sum of P26,500.00. Petitioner is entitled to collect
the balance of the value of the jewelry, corresponding to the amount of the loan, in an appropriate action against Josefina Rocco.
Private respondent Long Life in turn is entitled to seek reimbursement from Josefina Rocco of the amount of the damages it must pay to
petitioner.
ACCORDINGLY, the Petition is GRANTED. The Decision of the Court of Appeals dated 23 September 1976 is hereby REVERSED and
SET ASIDE. The Decision of the Court of First Instance dated 22 May 1970 is hereby REINSTATED in toto. No pronouncement as to
costs.
Fernan, C.J., Gutierrez, Jr., Bidin and Davide, Jr., JJ., concur.

18 Negotiable Instruments – Overview of Kinds of Nego Inst


Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 97753 August 10, 1992


CALTEX (PHILIPPINES), INC., petitioner,
vs.
COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.
Bito, Lozada, Ortega & Castillo for petitioners.
Nepomuceno, Hofileña & Guingona for private.

REGALADO, J.:
This petition for review on certiorari impugns and seeks the reversal of the decision promulgated by respondent court on March 8, 1991
in CA-G.R. CV No. 23615 1 affirming with modifications, the earlier decision of the Regional Trial Court of Manila, Branch XLII, 2 which
dismissed the complaint filed therein by herein petitioner against respondent bank.
The undisputed background of this case, as found by the court a quo and adopted by respondent court, appears of record:
1. On various dates, defendant, a commercial banking institution, through its Sucat Branch issued 280 certificates of
time deposit (CTDs) in favor of one Angel dela Cruz who deposited with herein defendant the aggregate amount of
P1,120,000.00, as follows: (Joint Partial Stipulation of Facts and Statement of Issues, Original Records, p. 207;
Defendant's Exhibits 1 to 280);
CTD CTD
Dates Serial Nos. Quantity Amount
22 Feb. 82 90101 to 90120 20 P80,000
26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000
——— ————
Total 280 P1,120,000
===== ========
2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff in connection with his purchased of
fuel products from the latter (Original Record, p. 208).
3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the Sucat Branch Manger, that he lost
all the certificates of time deposit in dispute. Mr. Tiangco advised said depositor to execute and submit a notarized
Affidavit of Loss, as required by defendant bank's procedure, if he desired replacement of said lost CTDs (TSN,
February 9, 1987, pp. 48-50).
4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank the required Affidavit of Loss
(Defendant's Exhibit 281). On the basis of said affidavit of loss, 280 replacement CTDs were issued in favor of said
depositor (Defendant's Exhibits 282-561).
5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from defendant bank in the amount of Eight
Hundred Seventy Five Thousand Pesos (P875,000.00). On the same date, said depositor executed a notarized Deed
of Assignment of Time Deposit (Exhibit 562) which stated, among others, that he (de la Cruz) surrenders to
defendant bank "full control of the indicated time deposits from and after date" of the assignment and further
authorizes said bank to pre-terminate, set-off and "apply the said time deposits to the payment of whatever amount or
amounts may be due" on the loan upon its maturity (TSN, February 9, 1987, pp. 60-62).
6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.) Inc., went to the defendant
bank's Sucat branch and presented for verification the CTDs declared lost by Angel dela Cruz alleging that the same
were delivered to herein plaintiff "as security for purchases made with Caltex Philippines, Inc." by said depositor
(TSN, February 9, 1987, pp. 54-68).
7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563) from herein plaintiff formally
informing it of its possession of the CTDs in question and of its decision to pre-terminate the same.

19 Negotiable Instruments – Form and Interpretation (Sec 1-23)


8. On December 8, 1982, plaintiff was requested by herein defendant to furnish the former "a copy of the document
evidencing the guarantee agreement with Mr. Angel dela Cruz" as well as "the details of Mr. Angel dela Cruz"
obligation against which plaintiff proposed to apply the time deposits (Defendant's Exhibit 564).
9. No copy of the requested documents was furnished herein defendant.
10. Accordingly, defendant bank rejected the plaintiff's demand and claim for payment of the value of the CTDs in a
letter dated February 7, 1983 (Defendant's Exhibit 566).
11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured and fell due and on August 5, 1983,
the latter set-off and applied the time deposits in question to the payment of the matured loan (TSN, February 9,
1987, pp. 130-131).
12. In view of the foregoing, plaintiff filed the instant complaint, praying that defendant bank be ordered to pay it the
aggregate value of the certificates of time deposit of P1,120,000.00 plus accrued interest and compounded interest
therein at 16% per annum, moral and exemplary damages as well as attorney's fees.
After trial, the court a quo rendered its decision dismissing the instant complaint. 3
On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of the complaint, hence this petition wherein
petitioner faults respondent court in ruling (1) that the subject certificates of deposit are non-negotiable despite being clearly negotiable
instruments; (2) that petitioner did not become a holder in due course of the said certificates of deposit; and (3) in disregarding the
pertinent provisions of the Code of Commerce relating to lost instruments payable to bearer. 4
The instant petition is bereft of merit.
A sample text of the certificates of time deposit is reproduced below to provide a better understanding of the issues involved in this
recourse.
SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____
This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS: FOUR
THOUSAND ONLY, SECURITY BANK SUCAT OFFICE P4,000 & 00 CTS Pesos, Philippine
Currency, repayable to said depositor 731 days. after date, upon presentation and surrender of this
certificate, with interest at the rate of 16% per cent per annum.
(Sgd. Illegible) (Sgd. Illegible)
—————————— ———————————
AUTHORIZED SIGNATURES 5
Respondent court ruled that the CTDs in question are non-negotiable instruments, nationalizing as follows:
. . . While it may be true that the word "bearer" appears rather boldly in the CTDs issued, it is important to note that
after the word "BEARER" stamped on the space provided supposedly for the name of the depositor, the words "has
deposited" a certain amount follows. The document further provides that the amount deposited shall be "repayable to
said depositor" on the period indicated. Therefore, the text of the instrument(s) themselves manifest with clarity that
they are payable, not to whoever purports to be the "bearer" but only to the specified person indicated therein, the
depositor. In effect, the appellee bank acknowledges its depositor Angel dela Cruz as the person who made the
deposit and further engages itself to pay said depositor the amount indicated thereon at the stipulated date. 6
We disagree with these findings and conclusions, and hereby hold that the CTDs in question are negotiable instruments. Section 1 Act
No. 2031, otherwise known as the Negotiable Instruments Law, enumerates the requisites for an instrument to become negotiable, viz:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable
certainty.
The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties' bone of contention is with regard to
requisite (d) set forth above. It is noted that Mr. Timoteo P. Tiangco, Security Bank's Branch Manager way back in 1982, testified in
open court that the depositor reffered to in the CTDs is no other than Mr. Angel de la Cruz.
xxx xxx xxx
Atty. Calida:

20 Negotiable Instruments – Form and Interpretation (Sec 1-23)


q In other words Mr. Witness, you are saying that per books of the bank, the depositor referred (sic)
in these certificates states that it was Angel dela Cruz?
witness:
a Yes, your Honor, and we have the record to show that Angel dela Cruz was the one who cause
(sic) the amount.
Atty. Calida:
q And no other person or entity or company, Mr. Witness?
witness:
a None, your Honor. 7
xxx xxx xxx
Atty. Calida:
q Mr. Witness, who is the depositor identified in all of these certificates of time deposit insofar as
the bank is concerned?
witness:
a Angel dela Cruz is the depositor. 8
xxx xxx xxx
On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is determined from the writing, that is, from
the face of the instrument itself. 9 In the construction of a bill or note, the intention of the parties is to control, if it can be legally
ascertained. 10 While the writing may be read in the light of surrounding circumstances in order to more perfectly understand the intent
and meaning of the parties, yet as they have constituted the writing to be the only outward and visible expression of their meaning, no
other words are to be added to it or substituted in its stead. The duty of the court in such case is to ascertain, not what the parties may
have secretly intended as contradistinguished from what their words express, but what is the meaning of the words they have used.
What the parties meant must be determined by what they said. 11
Contrary to what respondent court held, the CTDs are negotiable instruments. The documents provide that the amounts deposited shall
be repayable to the depositor. And who, according to the document, is the depositor? It is the "bearer." The documents do not say that
the depositor is Angel de la Cruz and that the amounts deposited are repayable specifically to him. Rather, the amounts are to be
repayable to the bearer of the documents or, for that matter, whosoever may be the bearer at the time of presentment.
If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it could have with facility so expressed that
fact in clear and categorical terms in the documents, instead of having the word "BEARER" stamped on the space provided for the
name of the depositor in each CTD. On the wordings of the documents, therefore, the amounts deposited are repayable to whoever
may be the bearer thereof. Thus, petitioner's aforesaid witness merely declared that Angel de la Cruz is the depositor "insofar as the
bank is concerned," but obviously other parties not privy to the transaction between them would not be in a position to know that the
depositor is not the bearer stated in the CTDs. Hence, the situation would require any party dealing with the CTDs to go behind the
plain import of what is written thereon to unravel the agreement of the parties thereto through facts aliunde. This need for resort to
extrinsic evidence is what is sought to be avoided by the Negotiable Instruments Law and calls for the application of the elementary rule
that the interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. 12
The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer is in the negative. The records reveal that
Angel de la Cruz, whom petitioner chose not to implead in this suit for reasons of its own, delivered the CTDs amounting to
P1,120,000.00 to petitioner without informing respondent bank thereof at any time. Unfortunately for petitioner, although the CTDs are
bearer instruments, a valid negotiation thereof for the true purpose and agreement between it and De la Cruz, as ultimately
ascertained, requires both delivery and indorsement. For, although petitioner seeks to deflect this fact, the CTDs were in reality
delivered to it as a security for De la Cruz' purchases of its fuel products. Any doubt as to whether the CTDs were delivered as payment
for the fuel products or as a security has been dissipated and resolved in favor of the latter by petitioner's own authorized and
responsible representative himself.
In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . .
These certificates of deposit were negotiated to us by Mr. Angel dela Cruz to guarantee his purchases of fuel products" (Emphasis
ours.) 13 This admission is conclusive upon petitioner, its protestations notwithstanding. Under the doctrine of estoppel, an admission or
representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying
thereon. 14 A party may not go back on his own acts and representations to the prejudice of the other party who relied upon them. 15 In
the law of evidence, whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led another to believe
a particular thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act, or omission, be
permitted to falsify it. 16
If it were true that the CTDs were delivered as payment and not as security, petitioner's credit manager could have easily said so,
instead of using the words "to guarantee" in the letter aforequoted. Besides, when respondent bank, as defendant in the court below,
moved for a bill of particularity therein 17 praying, among others, that petitioner, as plaintiff, be required to aver with sufficient
definiteness or particularity (a) the due date or dates of payment of the alleged indebtedness of Angel de la Cruz to plaintiff and (b)
whether or not it issued a receipt showing that the CTDs were delivered to it by De la Cruz as payment of the latter's alleged
indebtedness to it, plaintiff corporation opposed the motion. 18 Had it produced the receipt prayed for, it could have proved, if such truly
was the fact, that the CTDs were delivered as payment and not as security. Having opposed the motion, petitioner now labors under the
presumption that evidence willfully suppressed would be adverse if produced. 19
21 Negotiable Instruments – Form and Interpretation (Sec 1-23)
Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs. Philippine National Bank, et al. 20
is
apropos:
. . . Adverting again to the Court's pronouncements in Lopez, supra, we quote therefrom:
The character of the transaction between the parties is to be determined by their intention,
regardless of what language was used or what the form of the transfer was. If it was intended to
secure the payment of money, it must be construed as a pledge; but if there was some other
intention, it is not a pledge. However, even though a transfer, if regarded by itself, appears to have
been absolute, its object and character might still be qualified and explained by contemporaneous
writing declaring it to have been a deposit of the property as collateral security. It has been said
that a transfer of property by the debtor to a creditor, even if sufficient on its face to make an
absolute conveyance, should be treated as a pledge if the debt continues in inexistence and is not
discharged by the transfer, and that accordingly the use of the terms ordinarily importing
conveyance of absolute ownership will not be given that effect in such a transaction if they are also
commonly used in pledges and mortgages and therefore do not unqualifiedly indicate a transfer of
absolute ownership, in the absence of clear and unambiguous language or other circumstances
excluding an intent to pledge.
Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the Negotiable Instruments Law, an instrument is
negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder thereof, 21 and
a holder may be the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof. 22 In the present case, however,
there was no negotiation in the sense of a transfer of the legal title to the CTDs in favor of petitioner in which situation, for obvious
reasons, mere delivery of the bearer CTDs would have sufficed. Here, the delivery thereof only as security for the purchases of Angel
de la Cruz (and we even disregard the fact that the amount involved was not disclosed) could at the most constitute petitioner only as a
holder for value by reason of his lien. Accordingly, a negotiation for such purpose cannot be effected by mere delivery of the instrument
since, necessarily, the terms thereof and the subsequent disposition of such security, in the event of non-payment of the principal
obligation, must be contractually provided for.
The pertinent law on this point is that where the holder has a lien on the instrument arising from contract, he is deemed a holder for
value to the extent of his lien. 23 As such holder of collateral security, he would be a pledgee but the requirements therefor and the
effects thereof, not being provided for by the Negotiable Instruments Law, shall be governed by the Civil Code provisions on pledge of
incorporeal rights, 24 which inceptively provide:
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged. The instrument proving
the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed.
Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged and the date of the
pledge do not appear in a public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of respondent court quoted at the start of
this opinion show that petitioner failed to produce any document evidencing any contract of pledge or guarantee agreement between it
and Angel de la Cruz. 25 Consequently, the mere delivery of the CTDs did not legally vest in petitioner any right effective against and
binding upon respondent bank. The requirement under Article 2096 aforementioned is not a mere rule of adjective law prescribing the
mode whereby proof may be made of the date of a pledge contract, but a rule of substantive law prescribing a condition without which
the execution of a pledge contract cannot affect third persons adversely. 26
On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of respondent bank was embodied in a public
instrument. 27 With regard to this other mode of transfer, the Civil Code specifically declares:
Art. 1625. An assignment of credit, right or action shall produce no effect as against third persons, unless it appears
in a public instrument, or the instrument is recorded in the Registry of Property in case the assignment involves real
property.
Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether as purchaser, assignee or lien holder of
the CTDs, neither proved the amount of its credit or the extent of its lien nor the execution of any public instrument which could affect or
bind private respondent. Necessarily, therefore, as between petitioner and respondent bank, the latter has definitely the better right
over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the question of whether or not private respondent observed the
requirements of the law in the case of lost negotiable instruments and the issuance of replacement certificates therefor, on the ground
that petitioner failed to raised that issue in the lower court. 28
On this matter, we uphold respondent court's finding that the aspect of alleged negligence of private respondent was not included in the
stipulation of the parties and in the statement of issues submitted by them to the trial court. 29 The issues agreed upon by them for
resolution in this case are:
1. Whether or not the CTDs as worded are negotiable instruments.
2. Whether or not defendant could legally apply the amount covered by the CTDs against the depositor's loan by
virtue of the assignment (Annex "C").
3. Whether or not there was legal compensation or set off involving the amount covered by the CTDs and the
depositor's outstanding account with defendant, if any.
4. Whether or not plaintiff could compel defendant to preterminate the CTDs before the maturity date provided
therein.
22 Negotiable Instruments – Form and Interpretation (Sec 1-23)
5. Whether or not plaintiff is entitled to the proceeds of the CTDs.
6. Whether or not the parties can recover damages, attorney's fees and litigation expenses from each other.
As respondent court correctly observed, with appropriate citation of some doctrinal authorities, the foregoing enumeration does not
include the issue of negligence on the part of respondent bank. An issue raised for the first time on appeal and not raised timely in the
proceedings in the lower court is barred by estoppel. 30 Questions raised on appeal must be within the issues framed by the parties and,
consequently, issues not raised in the trial court cannot be raised for the first time on appeal. 31
Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a case are properly raised. Thus, to obviate
the element of surprise, parties are expected to disclose at a pre-trial conference all issues of law and fact which they intend to raise at
the trial, except such as may involve privileged or impeaching matters. The determination of issues at a pre-trial conference bars the
consideration of other questions on appeal. 32
To accept petitioner's suggestion that respondent bank's supposed negligence may be considered encompassed by the issues on its
right to preterminate and receive the proceeds of the CTDs would be tantamount to saying that petitioner could raise on appeal any
issue. We agree with private respondent that the broad ultimate issue of petitioner's entitlement to the proceeds of the questioned
certificates can be premised on a multitude of other legal reasons and causes of action, of which respondent bank's supposed
negligence is only one. Hence, petitioner's submission, if accepted, would render a pre-trial delimitation of issues a useless exercise. 33
Still, even assuming arguendo that said issue of negligence was raised in the court below, petitioner still cannot have the odds in its
favor. A close scrutiny of the provisions of the Code of Commerce laying down the rules to be followed in case of lost instruments
payable to bearer, which it invokes, will reveal that said provisions, even assuming their applicability to the CTDs in the case at bar, are
merely permissive and not mandatory. The very first article cited by petitioner speaks for itself.
Art 548. The dispossessed owner, no matter for what cause it may be, may apply to the judge or court of competent
jurisdiction, asking that the principal, interest or dividends due or about to become due, be not paid a third person, as
well as in order to prevent the ownership of the instrument that a duplicate be issued him. (Emphasis ours.)
xxx xxx xxx
The use of the word "may" in said provision shows that it is not mandatory but discretionary on the part of the "dispossessed owner" to
apply to the judge or court of competent jurisdiction for the issuance of a duplicate of the lost instrument. Where the provision reads
"may," this word shows that it is not mandatory but discretional. 34 The word "may" is usually permissive, not mandatory. 35 It is an
auxiliary verb indicating liberty, opportunity, permission and possibility. 36
Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of the Code of Commerce, on which petitioner seeks to
anchor respondent bank's supposed negligence, merely established, on the one hand, a right of recourse in favor of a dispossessed
owner or holder of a bearer instrument so that he may obtain a duplicate of the same, and, on the other, an option in favor of the party
liable thereon who, for some valid ground, may elect to refuse to issue a replacement of the instrument. Significantly, none of the
provisions cited by petitioner categorically restricts or prohibits the issuance a duplicate or replacement instrument sans compliance
with the procedure outlined therein, and none establishes a mandatory precedent requirement therefor.
WHEREFORE, on the modified premises above set forth, the petition is DENIED and the appealed decision is hereby AFFIRMED.
SO ORDERED.

23 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Republic of the Philipppines
SUPREME COURT
Manila

SECOND DIVISION
[G.R. No. 136729. September 23 ,2003]
ASTRO ELECTRONICS CORP. and PETER ROXAS, Petitioner, vs. PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE
CORPORATION, respondent.
DECISION
AUSTRIA-MARTINEZ, J.:chanroblesvirtuallawlibrary
Assailed in this petition for review on certiorari under Rule 45 of the Rules of Court is the decision of the Court of Appeals in CA-G.R.
CV No. 41274,[1] affirming the decision of the Regional Trial Court (Branch 147) of Makati, then Metro Manila, whereby petitioners
Peter Roxas and Astro Electronics Corp. (Astro for brevity) were ordered to pay respondent Philippine Export and Foreign Loan
Guarantee Corporation (Philguarantee), jointly and severally, the amount of P3,621,187.52 with interests and
costs.chanroblesvirtuallawlibrary
The antecedent facts are undisputed.chanroblesvirtuallawlibrary
Astro was granted several loans by the Philippine Trust Company (Philtrust) amounting to P3,000,000.00 with interest and secured by
three promissory notes: PN NO. PFX-254 dated December 14, 1981 for P600,000.00, PN No. PFX-258 also dated December 14, 1981
for P400,000.00 and PN No. 15477 dated August 27, 1981 for P2,000,000.00. In each of these promissory notes, it appears that
petitioner Roxas signed twice, as President of Astro and in his personal capacity.[2] Roxas also signed a Continuing Surety ship
Agreement in favor of Philtrust Bank, as President of Astro and as surety.[3]chanroblesvirtuallawlibrary
Thereafter, Philguarantee, with the consent of Astro, guaranteed in favor of Philtrust the payment of 70% of Astros loan,[4] subject to
the condition that upon payment by Philguanrantee of said amount, it shall be proportionally subrogated to the rights of Philtrust against
Astro.[5]chanroblesvirtuallawlibrary
As a result of Astros failure to pay its loan obligations, despite demands, Philguarantee paid 70% of the guaranteed loan to Philtrust.
Subsequently, Philguarantee filed against Astro and Roxas a complaint for sum of money with the RTC of
Makati.chanroblesvirtuallawlibrary
In his Answer, Roxas disclaims any liability on the instruments, alleging, inter alia, that he merely signed the same in blank and the
phrases in his personal capacity and in his official capacity were fraudulently inserted without his knowledge.
[6]chanroblesvirtuallawlibrary
After trial, the RTC rendered its decision in favor of Philguarantee with the following dispositive portion:chanroblesvirtuallawlibrary
WHEREFORE, in view of all the foregoing, the Court hereby renders judgment in favor or (sic) the plaintiff and against the defendants
Astro Electronics Corporation and Peter T. Roxas, ordering the then (sic) to pay, jointly and severally, the plaintiff the sum of
P3,621.187.52 representing the total obligation of defendants in favor of plaintiff Philguarantee as of December 31, 1984 with interest at
the stipulated rate of 16% per annum and stipulated penalty charges of 16% per annum computed from January 1, 1985 until the
amount is fully paid. With costs.chanroblesvirtuallawlibrary
SO ORDERED.[7]chanroblesvirtuallawlibrary
The trial court observed that if Roxas really intended to sign the instruments merely in his capacity as President of Astro, then he should
have signed only once in the promissory note.[8]chanroblesvirtuallawlibrary
On appeal, the Court of Appeals affirmed the RTC decision agreeing with the trial court that Roxas failed to explain satisfactorily why he
had to sign twice in the contract and therefore the presumption that private transactions have been fair and regular must be sustained.
[9]chanroblesvirtuallawlibrary
In the present petition, the principal issue to be resolved is whether or not Roxas should be jointly and severally liable (solidary) with
Astro for the sum awarded by the RTC.chanroblesvirtuallawlibrary
The answer is in the affirmative.chanroblesvirtuallawlibrary
Astros loan with Philtrust Bank is secured by three promissory notes. These promissory notes are valid and binding against Astro and
Roxas. As it appears on the notes, Roxas signed twice: first, as president of Astro and second, in his personal capacity. In signing his
name aside from being the President of Asro, Roxas became a co-maker of the promissory notes and cannot escape any liability
arising from it. Under the Negotiable Instruments Law, persons who write their names on the face of promissory notes are makers,[10]
promising that they will pay to the order of the payee or any holder according to its tenor.[11] Thus, even without the phrase personal
capacity, Roxas will still be primarily liable as a joint and several debtor under the notes considering that his intention to be liable as
such is manifested by the fact that he affixed his signature on each of the promissory notes twice which necessarily would imply that he
is undertaking the obligation in two different capacities, official and personal.chanroblesvirtuallawlibrary
Unnoticed by both the trial court and the Court of Appeals, a closer examination of the signatures affixed by Roxas on the promissory
notes, Exhibits A-4 and 3-A and B-4 and 4-A readily reveals that portions of his signatures covered portions of the typewritten words
personal capacity indicating with certainty that the typewritten words were already existing at the time Roxas affixed his signatures thus

24 Negotiable Instruments – Form and Interpretation (Sec 1-23)


demolishing his claim that the typewritten words were just inserted after he signed the promissory notes. If what he claims is true, then
portions of the typewritten words would have covered portions of his signatures, and not vice versa.chanroblesvirtuallawlibrary
As to the third promissory note, Exhibit C-4 and 5-A, the copy submitted is not clear so that this Court could not discern the same
observations on the notes, Exhibits A-4 and 3-A and B-4 and 4-A.chanroblesvirtuallawlibrary
Nevertheless, the following discussions equally apply to all three promissory notes.chanroblesvirtuallawlibrary
The three promissory notes uniformly provide: FOR VALUE RECEIVED, I/We jointly, severally and solidarily, promise to pay to
PHILTRUST BANK or order...[12] 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.[13] Also, the phrase joint and several binds the makers 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.[14] Having signed
under such terms, Roxas assumed the solidary liability of a debtor and Philtrust Bank may choose to enforce the notes against him
alone or jointly with Astro.chanroblesvirtuallawlibrary
Roxas claim that the phrases in his personal capacity and in his official capacity were inserted on the notes without his knowledge was
correctly disregarded by the RTC and the Court of Appeals. It is not disputed that Roxas does not deny that he signed the notes twice.
As aptly found by both the trial and appellate court, Roxas did not offer any explanation why he did so. It devolves upon him to
overcome the presumptions that private transactions are presumed to be fair and regular[15] and that a person takes ordinary care of
his concerns.[16] Aside from his self-serving allegations, Roxas failed to prove the truth of such allegations. Thus, said presumptions
prevail over his claims. Bare allegations, when unsubstantiated by evidence, documentary or otherwise, are not equivalent to proof
under our Rules of Court.[17]chanroblesvirtuallawlibrary
Roxas is the President of Astro and reasonably, a businessman who is presumed to take ordinary care of his concerns. Absent any
countervailing evidence, it cannot be gainsaid that he will not sign document without first informing himself of its contents and
consequences. Clearly, he knew the nature of the transactions and documents involved as he not only executed these notes on two
different dates but he also executed, and again, signed twice, a continuing Surety ship Agreement notarized on July 31, 1981, wherein
he guaranteed, jointly and severally with Astro the repayment of P3,000,000.00 due to Philtrust. Such continuing suretyship agreement
even re-enforced his solidary liability Philtrust because as a surety, he bound himself jointly and severally with Astros obligation.[18]
Roxas cannot now avoid liability by hiding under the convenient excuse that he merely signed the notes in blank and the phrases in
personal capacity and in his official capacity were fraudulently inserted without his knowledge.chanroblesvirtuallawlibrary
Lastly, Philguarantee has all the right to proceed against petitioner, it is subrogated to the rights of Philtrust to demand for and collect
payment from both Roxas and Astro since it already paid the value of 70% of roxas and Astro Electronics Corp.s loan obligation. In
compliance with its contract of Guarantee in favor of Philtrust.chanroblesvirtuallawlibrary
Subrogation is the transfer of all the rights of the creditor to a third person, who substitutes him in all his rights.[19] It may either be legal
or conventional. Legal subrogation is that which takes place without agreement but by operation of law because of certain acts.[20]
Instances of legal subrogation are those provided in Article 1302 of the Civil Code. Conventional subrogation, on the other hand, is that
which takes place by agreement of the parties.[21]chanroblesvirtuallawlibrary
Roxas acquiescence is not necessary for subrogation to take place because the instant case is one of the legal subrogation that occurs
by operation of law, and without need of the debtors knowledge.[22] Further, Philguarantee, as guarantor, became the transferee of all
the rights of Philtrust as against Roxas and Astro because the guarantor who pays is subrogated by virtue thereof to all the rights which
the creditor had against the debtor.[23]chanroblesvirtuallawlibrary WHEREFORE, finding no error with the decision of the Court of
Appeals dated December 10, 1998, the same is hereby AFFIRMED in toto.chanroblesvirtuallawlibrary SO
ORDERED.chanroblesvirtuallawlibrary

25 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 105836 March 7, 1994


SPOUSES GEORGE MORAN and LIBRADA P. MORAN, petitioners,
vs.
THE HON. COURT OF APPEALS and CITYTRUST BANKING CORPORATION, respondents.
Gonzales, Batiller, Bilog & Associates for petitioners.
Agcaoli & Associates for private respondent.

REGALADO, J.:
Petitioner spouses George and Librada Moran are the owners of the Wack-Wack Petron gasoline station located at Shaw Boulevard,
corner Old Wack-Wack Road, Mandaluyong, Metro Manila. They regularly purchased bulk fuel and other related products from
Petrophil Corporation on cash on delivery (COD) basis. Orders for bulk fuel and other related products were made by telephone and
payments were effected by personal checks upon delivery. 1
Petitioners maintained three joint accounts, namely one current account (No. 37-00066-7) and two savings accounts, (Nos.
1037002387 and 1037001372) with the Shaw Boulevard branch of Citytrust Banking Corporation. As a special privilege to the Morans,
whom it considered as valued clients, the bank allowed them to maintain a zero balance in their current account. Transfers from Saving
Account No. 1037002387 to their current account could be made only with their prior authorization, but they gave written authority to
Citytrust to automatically transfer funds from their Savings Account No. 1037001372 to their Current Account No. 37-00066-7 at any
time whenever the funds in their current account were insufficient to meet withdrawals from said current account. Such arrangement for
automatic transfer of funds was called a pre-authorized transfer (PAT) agreement. 2
The PAT letter-agreement entered into by the parties on March 19, 1982 contained the following provisions:
xxx xxx xxx
1. The transfer may be effected on the day following the overdrawing of the current account, but the check/s would
be honored if the savings account has sufficient balance to cover the overdraft.
2. The regular charges on overdraft, and activity fees will be imposed by the Bank.
3. This is merely an accommodation on our part and we have the right, at all times and for any reason whatsoever, to
refuse to effect transfer of funds at our sole and absolute option and discretion, reserving our right to terminate this
arrangement at any time without written notice to you.
4. You hold CITYTRUST free and harmless for any and all omissions or oversight in executing this automatic transfer
of funds; . . . 3
xxx xxx xxx
On December 12, 1983, petitioners, through Librada Moran, drew a check (Citytrust No. 041960) for P50,576.00 payable to Petrophil
Corporation. 4 The next day, December 13, 1983, petitioners, again through Librada Moran, issued another check (Citytrust No.
041962) in the amount of P56,090.00 in favor of the same corporation. 5 The total sum of the two checks was P106,666.00.
On December 14, 1983, Petrophil Corporation deposited the two aforementioned checks to its account with the Pandacan branch of the
Philippine National Bank (PNB), the collecting bank. In turn, PNB, Pandacan branch presented them for clearing with the Philippine
Clearing House Corporation in the afternoon of the same day. The records show that on December 14, 1983, Current Account No. 37-
00066-7 had a zero balance, while Savings Account No. 1037001372 (covered by the PAT) had an available balance of
P26,104.30 6 and Savings Account No. 1037002387 had an available balance of P43,268.39. 7
At about ten o'clock in the morning of the following day, December 15, 1983, petitioner George Moran went to the bank, as was his
regular practice, to personally oversee their daily transactions with the bank. He deposited in their Savings Account No. 1037002387
the amounts of P10,874.58 and P6,754.25, 8 and he likewise deposited in their Savings Account No. 1037001372 the amounts of
P5,900.00, P35,100.00 and 30.00. 9 The amount of P40,000.00 was then transferred by him from Saving Account No. 1037002387 to
their current account by means of a pro forma withdrawal form (a debit memorandum), which was provided by the bank, authorizing the
latter to make the necessary transfer. At the same time, the amount of P66,666.00 was transferred from Savings Account No.
1037001372 to the same current account through the pre-authorized transfer (PAT) agreement. 10
Sometime on December 15 or 16, 1983 George Moran was informed by his wife Librada, that Petrophil refused to deliver their orders
on a credit basis because the two checks they had previously issued were dishonored upon presentment for payment. Apparently, the
bank dishonored the checks due to "insufficiency of funds." 11 The non-delivery of gasoline forced petitioners to temporarily stop
business operations, allegedly causing them to suffer loss of earnings. In addition, Petrophil cancelled their credit accommodation,
forcing them to pay for their purchases in cash. 12 George Moran, furious and upset, demanded an explanation from Raul Diaz, the

26 Negotiable Instruments – Form and Interpretation (Sec 1-23)


branch manager. Failing to get a sufficient explanation, he talked to a certain Villareal, a bank officer, who allegedly told him that Amy
Belen Ragodo, the customer service officer, had committed a "grave error". 13
On December 16 or 17, 1983, Diaz went to the Moran residence to get the signatures of the petitioners on an application for a
manager's check so that the dishonored checks could be redeemed. Diaz then went to Petrophil to personally present the checks in
payment for the two dishonored checks. 14
In a chance meeting around May or June, 1984, George Moran learned from one Constancio Magno, credit manager of Petrophil, that
the latter received from Citytrust, through Diaz, a letter dated December 16, 1983, notifying them that the two aforementioned checks
were "inadvertently dishonored . . . due to operational error." Said letter was received by Petrophil on January 4, 1984. 15
On July 24, 1984, or a little over six months after the incident, petitioners, through counsel, wrote Citytrust claiming that the bank's
dishonor of the checks caused them besmirched business and personal reputation, shame and anxiety, hence they were contemplating
the filing of the necessary legal actions unless the bank issued a certification clearing their name and paid them P1,000,000.00 as
moral damages. 16
The bank did not act favorably on their demands, hence petitioners filed a complaint for damages on September 8, 1984, with the
Regional Trial Court, Branch 159 at Pasig, Metro Manila, which was docketed therein as Civil Case No. 51549. In turn, Citytrust filed a
counterclaim for damages, alleging that the case filed against it was unfounded and unjust.
After trial, a decision dated October 9, 1989 was rendered by the trial court dismissing both the complaint and the counterclaim. 17 On
appeal, the Court of Appeals rendered judgment in CA-G.R. CV No. 25009 on October 9, 1989 affirming the decision of the trial court. 18
We start some basic and accepted rules, statutory and doctrinal. A check is a bill of exchange drawn on a bank payable on demand. 19
Thus, a check is a written order addressed to a bank or persons carrying on the business of banking, by a party having money in their
hands, requesting them to pay on presentment, to a person named therein or to bearer or order, a named sum of money. 20
Fixed savings and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple
loan. 21 In other words, the relationship between the bank and the depositor is that of a debtor and creditor. 22 By virtue of the contract of
deposit between the banker and its depositor, the banker agrees to pay checks drawn by the depositor provided that said depositor has
money in the hands of the bank. 23
Hence, where the bank possesses funds of a depositor, it is bound to honor his checks to the extent of the amount of his deposits. The
failure of a bank to pay the check of a merchant or a trader, when the deposit is sufficient, entitles the drawer to substantial damages
without any proof of actual
damages. 24
Conversely, a bank is not liable for its refusal to pay a check on account of insufficient funds, notwithstanding the fact that a deposit
may be made later in the day. 25 Before a bank depositor may maintain a suit to recover a specific amount from his bank, he must first
show that he had on deposit sufficient funds to meet his demand. 26
The present action for damages accordingly hinges on the resolution of the inquiry as to whether or not petitioners had sufficient funds
in their accounts when the bank dishonored the checks in question. In view of the factual findings of the two lower courts the
correctness of which are challenged by what appear to be plausible, arguments, we feel that the same should properly be resolved by
us. This would necessarily require us to inquire into both the savings and current accounts of petitioners in relation to the PAT
arrangement.
On December 14, 1983, when PNB, Pandacan branch, presented the checks for collection, the available balance for Savings Account
No. 1037001372 was P26,104.30 while Current Account No. 37-00066-7 expectedly had a zero balance. On December 15, 1983, at
approximately ten o'clock in the morning, petitioners, through George Moran, learned that P66,666.00 from Saving Account No.
1037001372 was transferred to their current account. Another P40,000.00 was transferred from Saving Accounts No. 1037002387 to
the current account. Considering that the transfers were by then sufficient to cover the two checks, it is asserted by petitioners that such
fact should have prevented the dishonor of the checks. It appears, however, that it was not so.
As explained by respondent court in its decision, Gerard E. Rionisto, head of the centralized clearing unit of Citytrust, detailed on the
witness stand the standard clearing procedure adopted by respondent bank and the Philippine Clearing House Corporation, to wit:.
Q: Let me again re-phase the question. Most of (sic) these two checks issued by Mrs. Librada
Moran under the accounts of the plaintiffs with Citytrust Banking Corporation were drawn dated
December 12, 1983 and December 13, 1983(and) these two (2) checks were made payable to
Petrophil Corporation. On record, Petrophil Corporation presented these two (2) checks for clearing
with PNB Pandacan Branch on December 14, 1983. Now in accordance with the bank, what would
happen with these checks drawn with (sic) PNB on December 14, 1983?.
A: So these checks will now be presented by PNB with the Philippine Clearing House on
December 14, and then the Philippine Clearing House will process it until midnight of December
14. Citytrust will send a clearing representative to the Philippine Clearing House at around 2:00
o'clock in the morning of December 15 and then get the checks. The checks will now be processed
at the Citytrust Computer at around 3:00 o'clock in the morning of December 14 (sic)but it will be
processed for balance of Citytrust as of December 14 because for one, we have not opened on
December 15 at 3:00 o'clock. Under the clearing house rules, we are supposed to process it on the
date it was presented for clearing. (tsn, September 9, 1988, pp. 9-10). 27
Considering the clearing process adopted, as explained in the aforequoted testimony, it is clear that the available balance on December
14, 1983 was used by the bank in determining whether or not there was sufficient cash deposited to fund the two checks, although what
was stamped on the dorsal side of the two checks in question was "DAIF/12-15-83," since December 15, 1983 was the actual date

27 Negotiable Instruments – Form and Interpretation (Sec 1-23)


when the checks were processed. As earlier stated, when petitioners' checks were dishonored due to insufficiency of funds, the
available balance of Savings Account No. 1037001372, which was the subject of the PAT agreement, was not enough to cover either of
the two checks. On December 14, 1983, when PNB, Pandacan branch presented the checks for collection, the available balance for
Savings Account No. 1037001372, to repeat, was only P26,104.30 while Current Account No. 37-0006-7 had no available balance. It
was only on December 15, 1983 at around ten o'clock in the morning that the necessary funds were deposited, which unfortunately was
too late to prevent the dishonor of the checks.
Petitioners argue that public respondent, by relying heavily on Rionisto's testimony, failed to consider the fact that the witness himself
admitted that he had no personal knowledge surrounding the dishonor of the two checks in question. Thus, although he knew the
standard clearing procedure, it does not necessarily mean that the same procedure was adopted with regard to the two checks.
We do not agree. Section 3(q), Rule 131 of the Rules of Court provides a disputable presumption in law that the ordinary course of
business has been followed. In the absence of a contrary showing, it is presumed that the acts in question were in conformity with the
usual conduct of business. In the case at bar, petitioners failed to present countervailing evidence to rebut the presumption that the
checks involved underwent the same regular process for clearing of checks followed by the bank since 1983.
Petitioner had no reason to complain, for they alone were at fault. A drawer must remember his responsibilities every time he issues a
check. He must personally keep track of his available balance in the bank and not rely on the bank to notify him of the necessity to fund
certain check she previously issued. A check, as distinguished from an ordinary bill of exchange, is supposed to be drawn against a
previous deposit of funds for it is ordinarily intended for immediately payment. 28
Moreover, between the time of the issuance of said checks on December 12 and 13 and the time of their presentment on December 14,
petitioners had, at the very least, twenty-four hours to replenish their balance in the bank.
As previously noted, it was only during business hours in the morning of December 15, 1983, that P66,666.00 was automatically
transferred from Savings Account No. 1037001372 to Current Account No. 37-00066-7, and another P40,000.00 was transferred from
Savings Account No. 1037002387 to the same current by a debit memorandum. Petitioners argue that if indeed the checks were
dishonored in the early morning of December 15, 1983, the bank would not have automatically transferred P66,666.00 to said current
account. They theorize that the checks having already been dishonored, there was no necessity to put into effect the pre-authorized
transfer agreement.
That theory is incorrect. When the transfer from both savings accounts to the current account were made, they were done in the hope
that the checks may be retrieved, thus preventing their dishonor. Unfortunately, respondent bank did not succeed in effectuating its
good intentions. The transfers were made to preserve its relations with petitioners whom it knew were valued clients, hence it wanted to
prevent the dishonor of their checks, if the same was at all possible. Although not admitting fault, it tried its best to make sure that the
checks would not bounce.
Under similar circumstances, it was held in Whitman vs. First National Bank 29 that a bank performs its full duty where, upon the receipt
of a check drawn against an account in which there are insufficient funds to pay it in full, it endeavors to induce the drawer to make
good his account so that the check can be paid, and failing in this, it protests the check on the following morning and notifies its
correspondent bank by the telegraph of the protest. It cannot, therefore, be held liable to the payee and holder of the check for not
protesting it upon the day when it was received. In fact, the court added that the bank did more that it was required to do by making an
effort to induce the drawer to deposit sufficient money to make the check good, and by notifying its correspondent of the dishonor of the
check by telegram.
Petitioners maintain that at the time the checks were dishonored, they had already deposited sufficient funds to cover said checks. To
prove their point, petitioners quoted in their petition the following testimony of said witness Rionisto, to wit:
Q: Now according to you, you would receive the checks from (being deposited to) the collecting
bank which in this particular example was the Pandacan Branch of PNB which in turn will deliver it
to the Philippine Clearing House and the Philippine Clearing House will deliver it to your office
around 12:00 o'clock of December . . . ?
A: Around 2:00 o'clock of December 15. We sent a clearing representative.
Q: And the checks will be processed in accordance with the balance available as of December 14?
A: Yes, sir.
Q: And naturally you will place there "drawn against insufficient funds, December 14, 1983"?
A: Yes, sir.
Q: Are you sure about that?
A: Yes, sir . . . (tsn, September 9, 1988, p. 14) 30
Obviously witness Rionisto was merely confused as to the dates (December 14 and 15) because it did not jibe with his previous
testimony, wherein he categorically stated that "the checks will now be processed as the Citytrust Computer at around 3:00 in the
morning of December 14 (sic) but it will be processed for balance of Citytrust as of December 14 because for one, we have not opened
on December 15 at 3:00 o'clock. Under the clearing house rules, we are supposed to process it on the date it was presented for
clearing." 31 Analyzing the procedure he had previously explained, and analyzing his testimony in its entirety and not in truncated
portions, it would logically and ineluctably appear that he actually meant December 15, and not December 14.
In the early morning of every business day, prior to banking hours, the various branches of Citytrust would receive a computer printout
called the "rejected transactions" report from the head office. The report contains, among others, a listing of "checks to be funded."
When Citytrust, Shaw Boulevard branch, received said report in the early morning of December 15, 1983, the two checks involved were
included in the "checks to be funded." That report was used by the bank as its basis in dishonoring the two checks in question.
28 Negotiable Instruments – Form and Interpretation (Sec 1-23)
Petitioner contends that the bank erred when it did so because on previous occasions, the report was merely used by the bank as a
basis for determining whether or not it was necessary to notify them of the need to deposit certain amounts in their accounts.
Amy Belen Rogado, a bank employee, testified that she would normally copy the details stated in the report and transfer in on a "pink
slip." These pink slips were then given to George Moran. In turn, George Moran testified that he would deposit the necessary funds
stated in the pink slips. As a matter of fact, so petitioner asseverated, not a single check written on the notices was ever dishonored
after he had funded said checks with the bank. Thus, petitioner argues, the checks were not yet dishonored after the bank received the
report in the early morning of December 15, 1983.
Said argument does not persuade. If ever petitioners on previous occasions were given notices every time a check was presented for
clearing and payment and there were no adequate funds in their accounts, these were, at most, mere accommodations on the part of
respondent bank. It was not a requirement or a general banking practice, hence non-compliance therewith could not lay the bank open
to blame or rebuke. Legally, the bank had all the right to dishonor the checks because there were no sufficient funds to speak of in the
first place. If the demand is by check, a drawer must have to his credit enough to cover the demand. If his credit with the bank is less
than the amount on the face of the check, the bank may lawfully refuse payment. 32
Pursuing this matter further, the bank could also not be faulted for not accepting either of the two checks. The first check issued was in
the amount of P50,576.00, while the second one was for P56,090.00. Savings Account No. 1307001372 then had a balance of only
P26,104.30. This being the case, Citytrust could not be expected to accept for payment either one of the two checks nor partially honor
one check.
A bank is under no obligation to make part payment on a check, up to only the amount of the drawer's funds, where the check is drawn
for an amount larger than what the drawer has on deposit. Such a practice of paying checks in part has never existed. Upon partial
payment, the check holder could not be called upon to surrender the check, and the bank would be without a voucher affording a
certain means of showing the payment. The rule is based on commercial convenience, and any rule that would work such manifest
inconvenience should not be recognized. A check is intended not only to transfer a right to the amount named in it, but to serve the
further purpose of affording evidence for the bank of the payment of such amount when the check is taken up. 33
On the other hand, assuming arguendo that Savings Account No. 1037002387, which is not covered by a pre-arranged automatic
transfer agreement, had enough amount deposited to cover both checks (which is not so in this case), the bank still had no obligation to
honor said checks as there was then no authority given to it to make the transfer of funds. Where a depositor has two accounts with a
bank, an open account and a savings account, and draws a check upon the open account for more money than the account contains,
the bank may rightfully refuse to pay the check, and is under no duty to make up the deficiency from the savings account. 34
We are agree with respondent Court of Appeals in its assessment and interpretation of the nature of the letter of Citytrust to Petrophil,
dated December 16, 1983. As aptly and correctly stated by said court, ". . . the letter is not an admission of liability as it was written
merely to maintain the goodwill and continued patronage of plaintiff-appellants. (This) cannot be characterized as baseless, considering
the totality of the circumstances surrounding its writing." 35
In the present case, the actions taken by the bank after the incident clearly show that there was neither malice nor bad faith, but rather
a clear intent to mollify an obviously agitated client. Raul Diaz, the branch manager, even went for this purpose to the Moran residence
to facilitate their application for a manager's check. Later, he went to the Petrophil Corporation to personally redeem the checks. Still
later, the letter was sent by respondent bank to Petrophil explaining that the dishonor of the checks was due to "operational error."
However, we reiterate, it would be a mistake to construe that letter as an admission of guilt on the part of the bank. It knew that it was
confronted with a client who obviously was not willing to admit any fault on his part, although the facts show otherwise. Thus,
respondent bank ran the risk of losing the business of an important and influential member of the financial community if it did not do
anything to assuage the feelings of petitioners.
It will be recalled that the credit standing of the Morans with Petrophil Corporation was involved, which fact, more than anything,
displeased them, to say the least. On demand of petitioners that their names be cleared, the bank considered it more prudent to send
the letter. It never realized that it would thereafter be used by petitioners as one of the bases of their legal action. It will be noted that
there was no reason for the bank to send the letter to Petrophil Corporation since the latter was not a client nor was it demanding any
explanation. Clearly, therefore, the letter was merely intended to accommodate the request of the Morans and was part of the series of
damage-control measures taken by the bank to placate petitioners.
Respondent Court of Appeals perceptively observed that "all these somehow pacified plaintiffs-appellants (herein petitioners) for they
did not thereafter take immediate punitive action against the defendant-appellee (herein private respondent). As pointed out by the
court a quo, it took plaintiffs-appellants about six (6) months after the dishonor of the checks to demand that defendant-appellee pay
them P1,000,000.00 as damages. At that time, plaintiffs-appellants had discovered the letter of Mr. Diaz attributing the dishonor of their
checks to 'operational error'. The attempt to unduly ride on the letter of Mr. Diaz speaks for itself." 36
On the above premises which irresistibly commend themselves to our acceptance, we find no cogent and sufficient to award actual,
moral, or exemplary damages to petitioners. Although we take judicial notice of the fact that there is a fiduciary relationship between a
bank and its depositors, as well as the extent of diligence expected of it in handling the accounts entrusted to its care, 37 the bank may
not be held responsible for such damages in the absence of fraud, bad faith, malice, or wanton attitude. 38
WHEREFORE, finding no reversible error in the judgment appealed from, the same is hereby AFFIRMED, with costs against
petitioners.
SO ORDERED.

29 Negotiable Instruments – Form and Interpretation (Sec 1-23)


SECOND DIVISION

G.R. No. L-29900 June 28, 1974


IN THE MATTER OF THE INTESTATE ESTATE OF JUSTO PALANCA, Deceased, GEORGE PAY, petitioner-appellant,
-versus-
SEGUNDINA CHUA VDA. DE PALANCA, oppositor-appellee.
Florentino B. del Rosario for petitioner-appellant.
Manuel V. San Jose for oppositor-appellee.

FERNANDO, J.:
There is no difficulty attending the disposition of this appeal by petitioner on questions of law. While several points were raised, the
decisive issue is whether a creditor is barred by prescription in his attempt to collect on a promissory note executed more than fifteen
years earlier with the debtor sued promising to pay either upon receipt by him of his share from a certain estate or upon demand, the
basis for the action being the latter alternative. The lower court held that the ten-year period of limitation of actions did apply, the note
being immediately due and demandable, the creditor admitting expressly that he was relying on the wording "upon demand." On the
above facts as found, and with the law being as it is, it cannot be said that its decision is infected with error. We affirm.
From the appealed decision, the following appears: "The parties in this case agreed to submit the matter for resolution on the basis of
their pleadings and annexes and their respective memoranda submitted. Petitioner George Pay is a creditor of the Late Justo Palanca
who died in Manila on July 3, 1963. The claim of the petitioner is based on a promissory note dated January 30, 1952, whereby the late
Justo Palanca and Rosa Gonzales Vda. de Carlos Palanca promised to pay George Pay the amount of P26,900.00, with interest
thereon at the rate of 12% per annum. George Pay is now before this Court, asking that Segundina Chua vda. de Palanca, surviving
spouse of the late Justo Palanca, he appointed as administratrix of a certain piece of property which is a residential dwelling located at
2656 Taft Avenue, Manila, covered by Tax Declaration No. 3114 in the name of Justo Palanca, assessed at P41,800.00. The idea is
that once said property is brought under administration, George Pay, as creditor, can file his claim against the administratrix." 1 It then
stated that the petition could not prosper as there was a refusal on the part of Segundina Chua Vda. de Palanca to be appointed as
administratrix; that the property sought to be administered no longer belonged to the debtor, the late Justo Palanca; and that the rights
of petitioner-creditor had already prescribed. The promissory note, dated January 30, 1962, is worded thus: " `For value received from
time to time since 1947, we [jointly and severally promise to] pay to Mr. [George Pay] at his office at the China Banking Corporation the
sum of [Twenty Six Thousand Nine Hundred Pesos] (P26,900.00), with interest thereon at the rate of 12% per annum upon receipt by
either of the undersigned of cash payment from the Estate of the late Don Carlos Palanca or upon demand'. . . . As stated, this
promissory note is signed by Rosa Gonzales Vda. de Carlos Palanca and Justo Palanca." 2 Then came this paragraph: "The Court has
inquired whether any cash payment has been received by either of the signers of this promissory note from the Estate of the late Carlos
Palanca. Petitioner informed that he does not insist on this provision but that petitioner is only claiming on his right under the promissory
note ." 3 After which, came the ruling that the wording of the promissory note being "upon demand," the obligation was immediately due.
Since it was dated January 30, 1952, it was clear that more "than ten (10) years has already transpired from that time until to date. The
action, therefore, of the creditor has definitely prescribed." 4 The result, as above noted, was the dismissal of the petition.
In an exhaustive brief prepared by Attorney Florentino B. del Rosario, petitioner did assail the correctness of the rulings of the lower
court as to the effect of the refusal of the surviving spouse of the late Justo Palanca to be appointed as administratrix, as to the property
sought to be administered no longer belonging to the debtor, the late Justo Palanca, and as to the rights of petitioner-creditor having
already prescribed. As noted at the outset, only the question of prescription need detain us in the disposition of this appeal. Likewise,
as intimated, the decision must be affirmed, considering the clear tenor of the promissory note.
From the manner in which the promissory note was executed, it would appear that petitioner was hopeful that the satisfaction of his
credit could he realized either through the debtor sued receiving cash payment from the estate of the late Carlos Palanca presumptively
as one of the heirs, or, as expressed therein, "upon demand." There is nothing in the record that would indicate whether or not the first
alternative was fulfilled. What is undeniable is that on August 26, 1967, more than fifteen years after the execution of the promissory
note on January 30, 1952, this petition was filed. The defense interposed was prescription. Its merit is rather obvious. Article 1179 of
the Civil Code provides: "Every obligation whose performance does not depend upon a future or uncertain event, or upon a past event
unknown to the parties, is demandable at once." This used to be Article 1113 of the Spanish Civil Code of 1889. As far back as Floriano
v. Delgado, 5 a 1908 decision, it has been applied according to its express language. The well-known Spanish commentator, Manresa,
on this point, states: "Dejando con acierto, el caracter mas teorico y grafico del acto, o sea la perfeccion de este, se fija, para
determinar el concepto de la obligacion pura, en el distinctive de esta, y que es consecuencia de aquel: la exigibilidad immediata." 6
The obligation being due and demandable, it would appear that the filing of the suit after fifteen years was much too late. For again,
according to the Civil Code, which is based on Section 43 of Act No. 190, the prescriptive period for a written contract is that of ten
years. 7 This is another instance where this Court has consistently adhered to the express language of the applicable norm. 8 There is
no necessity therefore of passing upon the other legal questions as to whether or not it did suffice for the petition to fail just because the
30 Negotiable Instruments – Form and Interpretation (Sec 1-23)
surviving spouse refuses to be made administratrix, or just because the estate was left with no other property. The decision of the lower
court cannot be overturned.
WHEREFORE, the lower court decision of July 24, 1968 is affirmed. Costs against George Pay.
Zaldivar (Chairman), Barredo, Antonio, Fernandez and Aquino, JJ., concur.

31 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-14883 July 31, 1963
NARCISA BUENCAMINO, AMADA DE LEON-ERAÑA, ENCARNACION DE LEON and BIENVENIDO B. ERAÑA, petitioners-
appellants,
vs.
C. HERNANDEZ, as City Treasurer of Quezon City,
JAIME HERNANDEZ, as Secretary of Finance and
LAND TENURE ADMINISTRATION, respondents-appellees.
N. S. Sison for petitioners-appellants.
Revilla, Lustre and Agloro for respondents-appellees.
REGALA, J.:
This is an appeal from the order of the Quezon City Court of First Instance, Judge Nicasio Yatco, presiding, dismissing the petition for
mandamus filed by the herein petitioners to compel the respondent City Treasurer of Quezon City to accept Government negotiable
land certificates as payment for land taxes.
The respondent City Treasurer accepts the following statement of facts set forth in the petitioners' brief:
On May 11, 1957, the Land Tenure Administration, LTA for short, purchased from the petitioners Narcisa Buencamino, Amada de
Leon-Eraña, and Encarnacion de Leon, and other members of the de Leon family their hacienda in Talavera, Nueva Ecija for a total
consideration of P2,746,000.00. For the purpose, a Memorandum Agreement was executed on the said date which expressly declared
that the LTA was purchasing the hacienda upon petition of the tenants thereof in accordance with Republic Act No. 1400, otherwise
known as the Land Reform Act of 1955.
The parties to the sale agreed that of the full price of P2,746,000.00, 50% or P1,373,000.00 was to be paid in cash and the balance in
negotiable land certificates. Below is a reproduction of one such negotiable land certificate typical of and identical to all the other issued
by the LTA to the petitioners.
AMOUNT: P10,000.00
NEGOTIABLE LAND CERTIFICATE
THE GOVERNMENT OF THE REPUBLIC OF
THE PHILIPPINES
is indebted unto the
BEARER
in the sum of TEN THOUSAND PESOS. This certificate is issued in accordance with the provisions of Section 9,
Republic Act No. 1400, entitled "AN ACT DEFINING A LAND TENURE POLICY, PROVIDING FOR AN
INSTRUMENTALITY TO CARRY OUT THE POLICY, AND APPROPRIATING FUNDS FOR ITS
IMPLEMENTATION", approved September 9, 1955, and is due and payable to BEARER on demand and upon
presentation at the Central Bank of the Philippines without interest, if presented for payment within five years from the
date of issue; with interest at the rate of 4 per centum per annum, if presented for payment after five years from the
date of issue; with interest at the rate of 4-½ per centum per annum, if presented for payment after ten years from the
date of issue; and, with interest at the rate of 5 per centum per annum, if presented for payment after fifteen years
from the date of issue. Both principal and interest are payable by the Treasurer of the Philippines, through the Central
Bank of the Philippines, in legal tender currency of the Philippines.
This land certificate is part of the total negotiable land certificates issued and limited to the aggregate principal sum of
SIXTY MILLION PESOS a year, to be issued during the first two years from September 9, 1955 when Republic Act
No. 1400 was approved, and P30 million each year during the succeeding years, for the purchase of private
agricultural lands for resale at cost to bona-fide tenants or occupants, or, in the case of estates abandoned by the
owners for the last five years, to private individuals who will work the lands themselves and who are qualified to
acquire or own lands, but who do not own more than six hectares of lands in the Philippines.
Manila, Philippines, August 9, 1957.
Encashment of this certificate may not be made until after five (5) years from the date of execution of the Deed of
Sale of Hacienda de Leon, pursuant to the conditions under Paragraph "b" of the Memorandum Agreement executed
between the Land Tenure Administration and the owners of Hacienda de Leon on May 11, 1957, acknowledged
before Marcelo Lagramada, Notary Public for Manila, as Doc. No. 324, Page 66, Book No. 6, Series of 1957.
(Sgd.) JUAN CAÑIZARES
Registrar of the Central
Bank of the Philippines
(Sgd.) CARLOS P. GARCIA
President of the Phil.
32 Negotiable Instruments – Form and Interpretation (Sec 1-23)
(Sgd.) VICENTE GELLA
Treasurer of the Phil.

Date of issue: August 9, 1957


Recorded: Illegible
Examined: Illegible
The condition in the certificate regarding its encashment only after the lapse of five years from the date of execution of the Deed of Sale
of Hacienda de Leon was adopted or taken from the Memorandum Agreement of May 11, 1957 first mentioned above and which was
subsequently ratified by the Cabinet and the President. As stipulated in the said document, the condition reads:
B. That the mode of payment shall be 50% in cash and 50% in negotiable land certificates except that the encashment of the
said negotiable land certificate may not be made until after five (5) years from the date of the execution of the deed of sale with
the payments of the corresponding interest, said negotiable land certificate may be applied and used for all the purposes
authorized by Republic Act No. 1400 and other pertinent laws on the matter within the said period of five (5) years; (page 3,
Memorandum Agreement).1äwphï1.ñët
Subsequently, this stipulation was incorporated and clarified in the Absolute Deed of Sale executed to formalize the terms contained in
the Memorandum Agreement. Under the deed of sale, dated July 31, 1957, the above condition was —
That the VENDORS shall not, however, within five (5) years, present for encashment the negotiable land certificates
amounting to ONE MILLION THREE HUNDRED SEVENTY THREE THOUSAND PESOS (P1,373,000.00) but nevertheless,
shall be authorized to use the same for payment of land taxes or obligations due and payable in favor of the Government and
such other uses or purposes provided for by Section 10 of Republic Act No. 1400 within the said period of five (5) years from
this date. (page 4, Absolute Deed of Sale)
Doubtless, therefore, the aforecited provisions of the Memorandum Agreement and the Absolute Deed of Sale in relation to the
condition in the negotiable land certificate were mere implementation of Section 10 of Republic Act No. 1400, which provided:
Sec. 10. Uses of certificates. — Negotiable land certificates maybe used by the holder thereof for any of the following
purposes:
xxx xxx xxx
(3) Payment of all tax obligations of the holder thereof, or of any debt or monetary obligation of the holder to the Government
or any of its instrumentalities or agencies, including the Rehabilitation Finance Corporation and the Philippine National Bank;
Provided, however, That payment of indebtedness shall not be less than twenty per centum of the total indebtedness of the
debtor; and .
xxx xxx xxx
Availing themselves of what they considered was their contractual and statutory rights under the certificate, the petitioners presented
two of them to the respondent City Treasurer in payment of certain 1957 realty tax obligations to Quezon City. The respondent
Treasurer refused to accept the same and claimed that as per the opinion rendered by the Secretary of Finance, it was discretionary on
his part, the respondent Treasurer, to accept or reject the said certificates. And, invoking his discretion in the premises, the respondent
Treasurer explained that he could not accept the certificates offered as Quezon City was then in great need of funds.
The petitioners were thus obliged to settle in cash the 1957 tax obligation aforementioned. Subsequently, however, the petitioners
tendered once more the same certificates in payment of their 1958 realty taxes and the respondent Treasurer similarly rejected the
tender. As a result, the petitioners filed the instant mandamus proceedings with the Court of First Instance of Quezon City.
To the above petition, the LTA filed a timely answer sustaining the petitioners' stand. The Secretary of Finance, represented by the
Solicitor General, also filed an answer, which argued that he was not a necessary party to the case as he was not the officer with the
duty of collecting taxes.
The respondent Treasurer did not file an answer. Instead, represented by the City Attorney's Office, he filed a Motion to Dismiss on the
ground that the petition filed to state a cause of action.
The Motion to Dismiss discussed various arguments for the position of the respondent that he could not be compelled to accept the
certificates. In effect, however, they resolve themselves into the single question of whether or not the said certificates where drawn
payable on demand as required by Section 9 of Republic Act 1400.
The respondent Treasurer contends that the certificates in question were not issued strictly in accordance with the provisions of
Republic Act No. 1400 because while Section 9 of that Act inquires that "negotiable land certificates shall be issued in denominations of
one thousand pesos or multiples of one thousand pesos and shall be payable to bearer on demand . . ., " the ones issue to the
petitioners were payable to bearer not on demand but, only upon the expiration of the five-year period there in specified.
On the other hand, the petitioners contend that although the certificates issued could not really be encashed within the period therein
mentioned, they could, however, still be used for the settlement of tax liabilities at any time after their issue in accordance with Section
10 of the same Act. The petitioners maintain that the 5-year restriction against encashment referred merely and exclusively to the time
when the certificates may be converted to cash and not anymore to the utility of the said instruments as substitutes for tax obligations.
The court a quo sustained the position of the respondent Treasurer and dismissed the suit for mandamus. Thus, this appeal.
Although the issue raised by the instant appeal has already been rendered moot, by time, it is the sense of this Court that a brief
discussion of the point of controversy will favor the best interest of justice as well as of the parties hereto.

33 Negotiable Instruments – Form and Interpretation (Sec 1-23)


We hold the refusal of the respondent Treasurer to accept the land certificates to be legally justified. They failed to comply with the
requirements of Republic Act No. 1400.
Under the above-mentioned law, the land certificates "shall be payable to bearer on demand." (Section 9) The one issued, however,
were payable to bearer only after the lapse of five years from a given period. Obviously then, the requirement that they should be
payable on demand was not met since an instrument payable on demand is one which (a) is expressed to be payable on demand, or at
sight, or on presentation; or (b) expresses no time for payment (Sec. 7, Negotiable Instruments Law) The 5-year period within which the
certificates could not be encashed was an expression of the time for payment contrary to paragraph (b) of the last law cited.
The petitioners maintain, as already indicated above, that although the questioned certificates may not really be payable on demand,
they may nevertheless be used for the payment of realty obligations to the Government because of Section 10 of Republic Act No.
1400. As expressed by the petitioners, "as to Government agencies and instrumentalities, the certificate is payable to bearer on
demand during that first five-year period."
There is no merit in the above assertion. It is a conclusion unsupported by any provision of law. While Section 10 of Republic Act No.
1400 expressly authorizes the use of the said certificates for the "payment of all tax obligations of the holder thereof," the said section
can only have meant such certificates as were issued strictly in accordance with Section 9 of the same Act, i.e., that the instrument is
payable on demand. And, as discussed above, the certificates issued were not payable on demand, then the benefits of Section 10
cannot be properly invoked.
IN VIEW OF ALL THE FOREGOING, the order appealed from is hereby affirmed, with costs against the appellants.

34 Negotiable Instruments – Form and Interpretation (Sec 1-23)


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

GUTIERREZ, JR., J.:


This is a petition for certiorari under Rule 45 of the Rules of Court which assails on questions of law a decision of the Intermediate
Appellate Court in AC-G.R. CV No. 68609 dated July 17, 1985, as well as its resolution dated October 17, 1985, denying the motion for
reconsideration.
The antecedent facts culled from the petition are as follows:
The petitioner is a corporation engaged in the logging business. It had for its program of logging activities for the year 1978 the opening
of additional roads, and simultaneous logging operations along the route of said roads, in its logging concession area at Baganga,
Manay, and Caraga, Davao Oriental. For this purpose, it needed two (2) additional units of tractors.
Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf & Pacific Company of Manila, through its sister company and
marketing arm, Industrial Products Marketing (the "seller-assignor"), a corporation dealing in tractors and other heavy equipment
business, offered to sell to petitioner-corporation two (2) "Used" Allis Crawler Tractors, one (1) an HDD-21-B and the other an HDD-16-
B.
In order to ascertain the extent of work to which the tractors were to be exposed, (t.s.n., May 28, 1980, p. 44) and to determine the
capability of the "Used" tractors being offered, petitioner-corporation requested the seller-assignor to inspect the job site. After
conducting said inspection, the seller-assignor assured petitioner-corporation that the "Used" Allis Crawler Tractors which were being
offered were fit for the job, and gave the corresponding warranty of ninety (90) days performance of the machines and availability of
parts. (t.s.n., May 28, 1980, pp. 59-66).
With said assurance and warranty, and relying on the seller-assignor's skill and judgment, petitioner-corporation through petitioners
Wee and Vergara, president and vice- president, respectively, agreed to purchase on installment said two (2) units of "Used" Allis
Crawler Tractors. It also paid the down payment of Two Hundred Ten Thousand Pesos (P210,000.00).
On April 5, 1978, the seller-assignor issued the sales invoice for the two 2) units of tractors (Exh. "3-A"). At the same time, the deed of
sale with chattel mortgage with promissory note was executed (Exh. "2").
Simultaneously with the execution of the deed of sale with chattel mortgage with promissory note, the seller-assignor, by means of a
deed of assignment (E exh. " 1 "), assigned its rights and interest in the chattel mortgage in favor of the respondent.
Immediately thereafter, the seller-assignor delivered said two (2) units of "Used" tractors to the petitioner-corporation's job site and as
agreed, the seller-assignor stationed its own mechanics to supervise the operations of the machines.
Barely fourteen (14) days had elapsed after their delivery when one of the tractors broke down and after another nine (9) days, the
other tractor likewise broke down (t.s.n., May 28, 1980, pp. 68-69).
On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the seller-assignor of the fact that the tractors broke down and
requested for the seller-assignor's usual prompt attention under the warranty (E exh. " 5 ").
In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit "5," the seller-assignor sent to the job site its mechanics to
conduct the necessary repairs (Exhs. "6," "6-A," "6-B," 16 C," "16-C-1," "6-D," and "6-E"), but the tractors did not come out to be what
they should be after the repairs were undertaken because the units were no longer serviceable (t. s. n., May 28, 1980, p. 78).
Because of the breaking down of the tractors, the road building and simultaneous logging operations of petitioner-corporation were
delayed and petitioner Vergara advised the seller-assignor that the payments of the installments as listed in the promissory note would
likewise be delayed until the seller-assignor completely fulfills its obligation under its warranty (t.s.n, May 28, 1980, p. 79).
Since the tractors were no longer serviceable, on April 7, 1979, petitioner Wee asked the seller-assignor to pull out the units and have
them reconditioned, and thereafter to offer them for sale. The proceeds were to be given to the respondent and the excess, if any, to be
divided between the seller-assignor and petitioner-corporation which offered to bear one-half (1/2) of the reconditioning cost (E exh. " 7
").
No response to this letter, Exhibit "7," was received by the petitioner-corporation and despite several follow-up calls, the seller-assignor
did nothing with regard to the request, until the complaint in this case was filed by the respondent against the petitioners, the
corporation, Wee, and Vergara.

35 Negotiable Instruments – Form and Interpretation (Sec 1-23)


The complaint was filed by the respondent against the petitioners for the recovery of the principal sum of One Million Ninety Three
Thousand Seven Hundred Eighty Nine Pesos & 71/100 (P1,093,789.71), accrued interest of One Hundred Fifty One Thousand Six
Hundred Eighteen Pesos & 86/100 (P151,618.86) as of August 15, 1979, accruing interest thereafter at the rate of twelve (12%)
percent per annum, attorney's fees of Two Hundred Forty Nine Thousand Eighty One Pesos & 71/100 (P249,081.7 1) and costs of suit.
The petitioners filed their amended answer praying for the dismissal of the complaint and asking the trial court to order the respondent
to pay the petitioners damages in an amount at the sound discretion of the court, Twenty Thousand Pesos (P20,000.00) as and for
attorney's fees, and Five Thousand Pesos (P5,000.00) for expenses of litigation. The petitioners likewise prayed for such other and
further relief as would be just under the premises.
In a decision dated April 20, 1981, the trial court rendered the following judgment:
WHEREFORE, judgment is hereby rendered:
1. ordering defendants to pay jointly and severally in their official and personal capacities the principal sum of ONE
MILLION NINETY THREE THOUSAND SEVEN HUNDRED NINETY EIGHT PESOS & 71/100 (P1,093,798.71) with
accrued interest of ONE HUNDRED FIFTY ONE THOUSAND SIX HUNDRED EIGHTEEN PESOS & 86/100
(P151,618.,86) as of August 15, 1979 and accruing interest thereafter at the rate of 12% per annum;
2. ordering defendants to pay jointly and severally attorney's fees equivalent to ten percent (10%) of the principal and
to pay the costs of the suit.
Defendants' counterclaim is disallowed. (pp. 45-46, Rollo)
On June 8, 1981, the trial court issued an order denying the motion for reconsideration filed by the petitioners.
Thus, the petitioners appealed to the Intermediate Appellate Court and assigned therein the following errors:
I
THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER ATLANTIC GULF AND PACIFIC COMPANY OF MANILA DID
NOT APPROVE DEFENDANTS-APPELLANTS CLAIM OF WARRANTY.
II
THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF- APPELLEE IS A HOLDER IN DUE COURSE OF THE
PROMISSORY NOTE AND SUED UNDER SAID NOTE AS HOLDER THEREOF IN DUE COURSE.
On July 17, 1985, the Intermediate Appellate Court issued the challenged decision affirming in toto the decision of the trial court. The
pertinent portions of the decision are as follows:
xxx xxx xxx
From the evidence presented by the parties on the issue of warranty, We are of the considered opinion that aside
from the fact that no provision of warranty appears or is provided in the Deed of Sale of the tractors and even
admitting that in a contract of sale unless a contrary intention appears, there is an implied warranty, the defense of
breach of warranty, if there is any, as in this case, does not lie in favor of the appellants and against the plaintiff-
appellee who is the assignee of the promissory note and a holder of the same in due course. Warranty lies in this
case only between Industrial Products Marketing and Consolidated Plywood Industries, Inc. The plaintiff-appellant
herein upon application by appellant corporation granted financing for the purchase of the questioned units of Fiat-
Allis Crawler,Tractors.
xxx xxx xxx
Holding that breach of warranty if any, is not a defense available to appellants either to withdraw from the contract
and/or demand a proportionate reduction of the price with damages in either case (Art. 1567, New Civil Code). We
now come to the issue as to whether the plaintiff-appellee is a holder in due course of the promissory note.
To begin with, it is beyond arguments that the plaintiff-appellee is a financing corporation engaged in financing and
receivable discounting extending credit facilities to consumers and industrial, commercial or agricultural enterprises
by discounting or factoring commercial papers or accounts receivable duly authorized pursuant to R.A. 5980
otherwise known as the Financing Act.
A study of the questioned promissory note reveals that it is a negotiable instrument which was discounted or sold to
the IFC Leasing and Acceptance Corporation for P800,000.00 (Exh. "A") considering the following. it is in writing and
signed by the maker; it contains an unconditional promise to pay a certain sum of money payable at a fixed or
determinable future time; it is payable to order (Sec. 1, NIL); the promissory note was negotiated when it was
transferred and delivered by IPM to the appellee and duly endorsed to the latter (Sec. 30, NIL); it was taken in the
conditions that the note was complete and regular upon its face before the same was overdue and without notice,
that it had been previously dishonored and that the note is in good faith and for value without notice of any infirmity or
defect in the title of IPM (Sec. 52, NIL); that IFC Leasing and Acceptance Corporation held the instrument free from
any defect of title of prior parties and free from defenses available to prior parties among themselves and may
enforce payment of the instrument for the full amount thereof against all parties liable thereon (Sec. 57, NIL); the
appellants engaged that they would pay the note according to its tenor, and admit the existence of the payee IPM and
its capacity to endorse (Sec. 60, NIL).
In view of the essential elements found in the questioned promissory note, We opine that the same is legally and
conclusively enforceable against the defendants-appellants.

36 Negotiable Instruments – Form and Interpretation (Sec 1-23)


WHEREFORE, finding the decision appealed from according to law and evidence, We find the appeal without merit
and thus affirm the decision in toto. With costs against the appellants. (pp. 50-55, Rollo)
The petitioners' motion for reconsideration of the decision of July 17, 1985 was denied by the Intermediate Appellate Court in its
resolution dated October 17, 1985, a copy of which was received by the petitioners on October 21, 1985.
Hence, this petition was filed on the following grounds:
I.
ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A NEGOTIABLE INSTRUMENT AS DEFINED UNDER THE LAW
SINCE IT IS NEITHER PAYABLE TO ORDER NOR TO BEARER.
II
THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS A MERE ASSIGNEE OF THE SUBJECT PROMISSORY
NOTE.
III.
SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE INSTRUMENT AND THE TRANSFER OF RIGHTS WAS THROUGH
A MERE ASSIGNMENT, THE PETITIONERS MAY RAISE AGAINST THE RESPONDENT ALL DEFENSES THAT ARE AVAILABLE
TO IT AS AGAINST THE SELLER- ASSIGNOR, INDUSTRIAL PRODUCTS MARKETING.
IV.
THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE PROMISSORY NOTE BECAUSE:
A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY UNDER THE LAW;
B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE SELLER-ASSIGNOR OF THE PROMISSORY NOTE.
V.
THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER- ASSIGNOR IN FAVOR OF THE RESPONDENT DOES NOT
CHANGE THE NATURE OF THE TRANSACTION FROM BEING A SALE ON INSTALLMENTS TO A PURE LOAN.
VI.
THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN EVIDENCE IN ANY COURT BECAUSE THE REQUISITE
DOCUMENTARY STAMPS HAVE NOT BEEN AFFIXED THEREON OR CANCELLED.
The petitioners prayed that judgment be rendered setting aside the decision dated July 17, 1985, as well as the resolution dated
October 17, 1985 and dismissing the complaint but granting petitioners' counterclaims before the court of origin.
On the other hand, the respondent corporation in its comment to the petition filed on February 20, 1986, contended that the petition was
filed out of time; that the promissory note is a negotiable instrument and respondent a holder in due course; that respondent is not liable
for any breach of warranty; and finally, that the promissory note is admissible in evidence.
The core issue herein is whether or not the promissory note in question is a negotiable instrument so as to bar completely all the
available defenses of the petitioner against the respondent-assignee.
Preliminarily, it must be established at the outset that we consider the instant petition to have been filed on time because the petitioners'
motion for reconsideration actually raised new issues. It cannot, therefore, be considered pro- formal.
The petition is impressed with merit.
First, there is no question that the seller-assignor breached its express 90-day warranty because the findings of the trial court, adopted
by the respondent appellate court, that "14 days after delivery, the first tractor broke down and 9 days, thereafter, the second tractor
became inoperable" are sustained by the records. The petitioner was clearly a victim of a warranty not honored by the maker.
The Civil Code provides that:
ART. 1561. The vendor shall be responsible for warranty against the hidden defects which the thing sold may have,
should they render it unfit for the use for which it is intended, or should they diminish its fitness for such use to such
an extent that, had the vendee been aware thereof, he would not have acquired it or would have given a lower price
for it; but said vendor shall not be answerable for patent defects or those which may be visible, or for those which are
not visible if the vendee is an expert who, by reason of his trade or profession, should have known them.
ART. 1562. In a sale of goods, there is an implied warranty or condition as to the quality or fitness of the goods, as
follows:
(1) Where the buyer, expressly or by implication makes known to the seller the particular purpose for which the
goods are acquired, and it appears that the buyer relies on the sellers skill or judge judgment (whether he be the
grower or manufacturer or not), there is an implied warranty that the goods shall be reasonably fit for such purpose;
xxx xxx xxx
ART. 1564. An implied warranty or condition as to the quality or fitness for a particular purpose may be annexed by
the usage of trade.
xxx xxx xxx

37 Negotiable Instruments – Form and Interpretation (Sec 1-23)


ART. 1566. The vendor is responsible to the vendee for any hidden faults or defects in the thing sold even though he
was not aware thereof.
This provision shall not apply if the contrary has been stipulated, and the vendor was not aware of the hidden faults or
defects in the thing sold. (Emphasis supplied).
It is patent then, that the seller-assignor is liable for its breach of warranty against the petitioner. This liability as a general rule, extends
to the corporation to whom it assigned its rights and interests unless the assignee is a holder in due course of the promissory note in
question, assuming the note is negotiable, in which case the latter's rights are based on the negotiable instrument and assuming further
that the petitioner's defenses may not prevail against it.
Secondly, it likewise cannot be denied that as soon as the tractors broke down, the petitioner-corporation notified the seller-assignor's
sister company, AG & P, about the breakdown based on the seller-assignor's express 90-day warranty, with which the latter complied
by sending its mechanics. However, due to the seller-assignor's delay and its failure to comply with its warranty, the tractors became
totally unserviceable and useless for the purpose for which they were purchased.
Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its contract with the seller-assignor.
Articles 1191 and 1567 of the Civil Code provide that:
ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation with the payment of
damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.
xxx xxx xxx
ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and 1566, the vendee may elect between withdrawing
from the contract and demanding a proportionate reduction of the price, with damages in either case. (Emphasis
supplied)
Petitioner, having unilaterally and extrajudicially rescinded its contract with the seller-assignor, necessarily can no longer sue the seller-
assignor except by way of counterclaim if the seller-assignor sues it because of the rescission.
In the case of the University of the Philippines v. De los Angeles (35 SCRA 102) we held:
In other words, the party who deems the contract violated may consider it resolved or rescinded, and act accordingly,
without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding
court that will conclusively and finally settle whether the action taken was or was not correct in law. But the law
definitely does not require that the contracting party who believes itself injured must first file suit and wait for
adjudgement before taking extrajudicial steps to protect its interest. Otherwise, the party injured by the other's breach
will have to passively sit and watch its damages accumulate during the pendency of the suit until the final judgment of
rescission is rendered when the law itself requires that he should exercise due diligence to minimize its own
damages (Civil Code, Article 2203). (Emphasis supplied)
Going back to the core issue, we rule that the promissory note in question is not a negotiable instrument.
The pertinent portion of the note is as follows:
FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the INDUSTRIAL PRODUCTS MARKETING,
the sum of ONE MILLION NINETY THREE THOUSAND SEVEN HUNDRED EIGHTY NINE PESOS & 71/100 only (P
1,093,789.71), Philippine Currency, the said principal sum, to be payable in 24 monthly installments starting July 15,
1978 and every 15th of the month thereafter until fully paid. ...
Considering that paragraph (d), Section 1 of the Negotiable Instruments Law requires that a promissory note "must be payable to order
or bearer, " it cannot be denied that the promissory note in question is not a negotiable instrument.
The instrument in order to be considered negotiablility-i.e. must contain the so-called 'words of negotiable, must be
payable to 'order' or 'bearer'. These words serve as an expression of consent that the instrument may be transferred.
This consent is indispensable since a maker assumes greater risk under a negotiable instrument than under a non-
negotiable one. ...
xxx xxx xxx
When instrument is payable to order.
SEC. 8. WHEN PAYABLE TO ORDER. — The instrument is payable to order where it is drawn payable to the order
of a specified person or to him or his order. . . .
xxx xxx xxx
These are the only two ways by which an instrument may be made payable to order. There must always be a
specified person named in the instrument. It means that the bill or note is to be paid to the person designated in the
instrument or to any person to whom he has indorsed and delivered the same. Without the words "or order" or"to the
order of, "the instrument is payable only to the person designated therein and is therefore non-negotiable. Any
subsequent purchaser thereof will not enjoy the advantages of being a holder of a negotiable instrument but will
merely "step into the shoes" of the person designated in the instrument and will thus be open to all defenses available

38 Negotiable Instruments – Form and Interpretation (Sec 1-23)


against the latter." (Campos and Campos, Notes and Selected Cases on Negotiable Instruments Law, Third Edition,
page 38). (Emphasis supplied)
Therefore, considering that the subject promissory note is not a negotiable instrument, it follows that the respondent can never be a
holder in due course but remains a mere assignee of the note in question. Thus, the petitioner may raise against the respondent all
defenses available to it as against the seller-assignor Industrial Products Marketing.
This being so, there was no need for the petitioner to implied the seller-assignor when it was sued by the respondent-assignee because
the petitioner's defenses apply to both or either of either of them. Actually, the records show that even the respondent itself admitted to
being a mere assignee of the promissory note in question, to wit:
ATTY. PALACA:
Did we get it right from the counsel that what is being assigned is the Deed of Sale with Chattel
Mortgage with the promissory note which is as testified to by the witness was indorsed? (Counsel
for Plaintiff nodding his head.) Then we have no further questions on cross,
COURT:
You confirm his manifestation? You are nodding your head? Do you confirm that?
ATTY. ILAGAN:
The Deed of Sale cannot be assigned. A deed of sale is a transaction between two persons; what
is assigned are rights, the rights of the mortgagee were assigned to the IFC Leasing & Acceptance
Corporation.
COURT:
He puts it in a simple way as one-deed of sale and chattel mortgage were assigned; . . . you want
to make a distinction, one is an assignment of mortgage right and the other one is indorsement of
the promissory note. What counsel for defendants wants is that you stipulate that it is contained in
one single transaction?
ATTY. ILAGAN:
We stipulate it is one single transaction. (pp. 27-29, TSN., February 13, 1980).
Secondly, even conceding for purposes of discussion that the promissory note in question is a negotiable instrument, the respondent
cannot be a holder in due course for a more significant reason.
The evidence presented in the instant case shows that prior to the sale on installment of the tractors, there was an arrangement
between the seller-assignor, Industrial Products Marketing, and the respondent whereby the latter would pay the seller-assignor the
entire purchase price and the seller-assignor, in turn, would assign its rights to the respondent which acquired the right to collect the
price from the buyer, herein petitioner Consolidated Plywood Industries, Inc.
A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory Note, the Deed of Assignment and the Disclosure of
Loan/Credit Transaction shows that said documents evidencing the sale on installment of the tractors were all executed on the same
day by and among the buyer, which is herein petitioner Consolidated Plywood Industries, Inc.; the seller-assignor which is the Industrial
Products Marketing; and the assignee-financing company, which is the respondent. Therefore, the respondent had actual knowledge of
the fact that the seller-assignor's right to collect the purchase price was not unconditional, and that it was subject to the condition that
the tractors -sold were not defective. The respondent knew that when the tractors turned out to be defective, it would be subject to the
defense of failure of consideration and cannot recover the purchase price from the petitioners. Even assuming for the sake of argument
that the promissory note is negotiable, the respondent, which took the same with actual knowledge of the foregoing facts so that its
action in taking the instrument amounted to bad faith, is not a holder in due course. As such, the respondent is subject to all defenses
which the petitioners may raise against the seller-assignor. Any other interpretation would be most inequitous to the unfortunate buyer
who is not only saddled with two useless tractors but must also face a lawsuit from the assignee for the entire purchase price and all its
incidents without being able to raise valid defenses available as against the assignor.
Lastly, the respondent failed to present any evidence to prove that it had no knowledge of any fact, which would justify its act of taking
the promissory note as not amounting to bad faith.
Sections 52 and 56 of the Negotiable Instruments Law provide that: negotiating it.
xxx xxx xxx
SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE. — A holder in due course is a holder who has taken
the instrument under the following conditions:
xxx xxx xxx
xxx xxx xxx
(c) That he took it in good faith and for value
(d) That the time it was negotiated by him he had no notice of any infirmity in the instrument of deffect in the title of
the person negotiating it
xxx xxx xxx

39 Negotiable Instruments – Form and Interpretation (Sec 1-23)


SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. — To constitute notice of an infirmity in the instrument or
defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual
knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounts to
bad faith. (Emphasis supplied)
We subscribe to the view of Campos and Campos that a financing company is not a holder in good faith as to the buyer, to wit:
In installment sales, the buyer usually issues a note payable to the seller to cover the purchase price. Many times, in
pursuance of a previous arrangement with the seller, a finance company pays the full price and the note is indorsed
to it, subrogating it to the right to collect the price from the buyer, with interest. With the increasing frequency of
installment buying in this country, it is most probable that the tendency of the courts in the United States to protect the
buyer against the finance company will , the finance company will be subject to the defense of failure of consideration
and cannot recover the purchase price from the buyer. As against the argument that such a rule would seriously
affect "a certain mode of transacting business adopted throughout the State," a court in one case stated:
It may be that our holding here will require some changes in business methods and will impose a
greater burden on the finance companies. We think the buyer-Mr. & Mrs. General Public-should
have some protection somewhere along the line. We believe the finance company is better able to
bear the risk of the dealer's insolvency than the buyer and in a far better position to protect his
interests against unscrupulous and insolvent dealers. . . .
If this opinion imposes great burdens on finance companies it is a potent argument in favor of a rule
which win afford public protection to the general buying public against unscrupulous dealers in
personal property. . . . (Mutual Finance Co. v. Martin, 63 So. 2d 649, 44 ALR 2d 1 [1953]) (Campos
and Campos, Notes and Selected Cases on Negotiable Instruments Law, Third Edition, p. 128).
In the case of Commercial Credit Corporation v. Orange Country Machine Works (34 Cal. 2d 766) involving similar facts, it was held
that in a very real sense, the finance company was a moving force in the transaction from its very inception and acted as a party to it.
When a finance company actively participates in a transaction of this type from its inception, it cannot be regarded as a holder in due
course of the note given in the transaction.
In like manner, therefore, even assuming that the subject promissory note is negotiable, the respondent, a financing company which
actively participated in the sale on installment of the subject two Allis Crawler tractors, cannot be regarded as a holder in due course of
said note. It follows that the respondent's rights under the promissory note involved in this case are subject to all defenses that the
petitioners have against the seller-assignor, Industrial Products Marketing. For Section 58 of the Negotiable Instruments Law provides
that "in the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were
non-negotiable. ... "
Prescinding from the foregoing and setting aside other peripheral issues, we find that both the trial and respondent appellate court
erred in holding the promissory note in question to be negotiable. Such a ruling does not only violate the law and applicable
jurisprudence, but would result in unjust enrichment on the part of both the assigner- assignor and respondent assignee at the expense
of the petitioner-corporation which rightfully rescinded an inequitable contract. We note, however, that since the seller-assignor has not
been impleaded herein, there is no obstacle for the respondent to file a civil Suit and litigate its claims against the seller- assignor in the
rather unlikely possibility that it so desires,
WHEREFORE, in view of the foregoing, the decision of the respondent appellate court dated July 17, 1985, as well as its resolution
dated October 17, 1986, are hereby ANNULLED and SET ASIDE. The complaint against the petitioner before the trial court is
DISMISSED.
SO ORDERED.

40 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-42278 January 20, 1989
GOVERNMENT SERVICE INSURANCE SYSTEM (GSIS), petitioner,
vs.
HON. COURT OF APPEALS and RENE KNECHT, respondents.
Cesar R. Vidal for petitioner.
Norberto J. Quisumbing for private respondent.

MEDIALDEA, J.:
This is a petition for review on certiorari filed by the Government Service Insurance System (GSIS) seeking the reversal of the decision
of the respondent Court of Appeals dated October 13, 1975, in the special civil action for certiorari docketed as CA-G.R. No. SP-04300,
entitled "Rene Knecht vs. Hon. Pedro JL. Bautista, etc., et. al.," and its resolution dated December 18, 1975, denying petitioner's motion
for reconsideration. Per Resolution dated May 4, 1976, however, We treated this case as a special civil action (p. 217, Rollo).
The assailed decision set aside, "as having been issued in grave abuse of discretion," the Orders of the Court of First Instance (now
Regional Trial Court) of Rizal, Branch III, Pasay City, dated May 26, 1975 and May 27, 1976, which respectively denied private
respondent Knecht's "Urgent Motion for Intervention" and granted GSIS' "Ex-parte Motion for Issuance of Writ of Possession" in GLRO
Record No. 317 and 1356, or CFI Case No. 1104.
The antecedent facts in the instant case are as follows:
Mariano R. Dulay Enterprises (hereinafter referred to as Dulay) obtained on various occassions, real estate loans from the Government
Service Insurance System (GSIS for short) all amounting to P9,535,000.00 (p. 3, Rollo). These loans were secured by a real estate
mortgage of a certain parcel of land (which included Hotel Frederick), then covered by Transfer Certificate of Title No. 17638 of the
Registry of Deeds of Pasay City, under Act No. 3135, as amended by Act No. 4118.
As of September 10, 1974, DULAY had incurred arrearages in the payment of its loans all amounting to P3,335,878.81. In view thereof,
the GSIS instituted extrajudicial foreclosure proceedings on the mortgaged property and on November 5, 1974, the said property was
sold at public auction by the Sheriff of Pasay City to the GSIS as the highest bidder for P13,426,382.00. A Certificate of Sale was
subsequently issued on November 22, 1974, and the same was duly registered on December 13, 1974 (p. 4, Rollo).
On January 7, 1975, the GSIS filed with the Court of First Instance (now Regional Trial Court) of Rizal, with station at Pasay City, an
"Ex-Parte Petition for Issuance of a Writ of Possession" in the original registration proceedings (therein docketed as GLRO Record No.
317 and 1356, or CPI Case No. 1104), conformably with Section 4 of P.D. 385 (p. 355, Rollo).
On January 16, 1975, private respondent Rene C. Knecht (Knecht for short), filed with the aforesaid court, an "Urgent Motion for
Intervention" claiming that DULAY had sold the property to him on May 4, 1974 and assigned to him on November 5, 1974, the right to
redeem the same. The GSIS opposed the motion alleging that "intervention will not lie when there is no pending litigation; when it
impairs substantial rights of the adverse party; when the intervenor is guilty of laches; and that the intervenor has no legal interest in the
property subject of a writ of possession" (p. 5, Rollo).
On May 26, 1975, the Court of First Instance of Rizal, with Judge Pedro JL. Bautista presiding, denied Knecht's motion for intervention
citing Section 7 of Act No. 3135 and Section 4 of PD No. 385, and, on May 27, 1975, directed the issuance of a writ of possession in
favor of the GSIS upon the latter's posting a bond in the amount of P2,000,000.00 (p. 6, Rollo).
On June 11, 1975, Knecht filed a special civil action for certiorari with the Court of Appeals wherein he assailed the said Orders of the
Court of First Instance of Rizal as having been issued in grave abuse of discretion amounting to lack of jurisdiction (p. 4, Rollo). The
Court of Appeals immediately, and without any prior hearing, issued a writ of preliminary injunction, upon Knecht's filing of a bond in the
sum of Pl,000.00, enjoying the Court of First Instance of Rizal from issuing the writ of possession and the Sheriff of Pasay City from
executing the same, if already issued (p. 642, Rollo).
On October 13, 1975, respondent Court of Appeals rendered a decision (p. 78, Rollo) (after GSIS had filed its Answer to the Petition but
therefore the parties could file their respective Memoranda) upholding Knecht's right to intervene in the proceedings for the issuance of
a writ of possession, as a successor-in-interest of the Dulays, and standing "on better footing than a necessary or an indispensable
party" (p. 89, Rollo). Respondent Court of Appeals likewise set aside, "as having been issued in grave abuse of discretion," the Orders
of the CFI of Rizal, dated May 26, 1975 (denying the motion for intervention) and May 27, 1975 (granting the writ of possession), and
making permanent the injunction it had earlier issued. The motion for reconsideration filed by GSIS (p. 102, Rollo) was denied per
Resolution dated December 18, 1975 (p. 108, Rollo).
On January 7, 1976, the GSIS filed the present "Petition for Review on Certiorari" praying for the reversal of respondent Court of
Appeals' Decision.
Meantime, title to the subject property was consolidated in the name of the GSIS on January 15, 1976. Transfer Certificate of Title No.
17638, in the name of Manuel R. Dulay Enterprises, Inc. was cancelled and Transfer Certificate of Title No. 19836 of the Register of
Deeds of Pasay City was issued in the name of the GSIS.

41 Negotiable Instruments – Form and Interpretation (Sec 1-23)


On August 11, 1976, upon motion of GSIS, We issued a Writ of Preliminary Mandatory and Prohibitory Injunction enjoining the Court of
Appeals from enforcing its final injunction issued against the GSIS, and directing Knecht: (1) to turn over to the GSIS the possession of
the subject property; (2) to submit an accounting of all revenues derived from his hotel operations as of November 5, 1974; (3) to
deposit with this court all such revenues on hand as of turn-over of premises to GSIS.
Knecht moved to dissolve the preliminary injunction. In a Resolution dated August 18, 1976 (p. 399, Rollo), We upheld said preliminary
injunction but suspended the portion regarding deposit of revenues, and declared the case submitted for decision.
Knecht refused to comply with the preliminary injunction, prompting the GSIS to move to declare him in contempt of court for which We
issued a Show-Cause Order on November 15, 1976 (p. 425, Rollo). On January 24, 1977, however, the day set for the hearing of the
contempt charge, the parties filed a Joint Manifestation and Motion praying for the cancellation of the hearing in view of possible
amicable settlement. This Rollo was granted per Our Resolution dated January 28, 1977 (p. 517, Rollo).
However, the parties failed to reach an amicable settlement, prompting the GSIS to move for immediate compliance (by Knecht) with
the Resolution of August 11, 1976, and upon his failure to do so, the immediate implementation of the Writ of Preliminary Mandatory
and Prohibitory Injunction issued by Us on August 11, 1976.
Petitioner GSIS seeks the reversal and setting aside of the decision of respondent Court of Appeals, on the following grounds:
1. Subject orders are predicated on Sec. 7 of Act 3135 and Sec. 4 of PD 385; hence respondent Court of Appeals
could not have possibly found the CFI of Rizal guilty of capricious, arbitrary, whimsical or despotic exercise of
judgment;
2. Respondent Court of Appeals failed to support its conclusion of grave abuse of discretion with a finding of
capricious, arbitrary, whimsical, or despotic exercise of judgment in issuing Orders;
3. The Extraordinary writ of certiorari is available only to correct or rectify jurisdictional errors. It cannot be used where
the error assigned is one of judgment, nothing more;
4. Other procedural infirmities suggest bias or prejudice against the lawful interest of petitioner:
a.) the issuance of a preliminary injunction without prior hearing
b.) the bond of Pl,000.00 required of Knecht, as against the P2 M posted by GSIS
c.) promulgation of the decision prior to the expiration of the period granted by the Court of Appeals for the parties to
submit their respective memoranda (p. 693, Rollo).
On the other hand, respondent Knecht claims that:
1. as a purchaser of the mortgaged property, and subsequent assignee of the redemption rights of mortgagor, (per
Deed of Assignment), dated November 7, 1974, he has pecuniary interest in the mortgaged property which would
warrant his right to intervene in the petition for issuance of the writ of possession.
2. the extrajudicial foreclosure is null and void.
The petition is impressed with merit.
Respondent Court of Appeals gravely erred in setting aside the Orders of the Court of First Instance (now Regional Trial Court) of Rizal,
dated May 26, 1975 and May 27, 1975, which respectively denied Knecht's "Urgent Motion for Intervention" and granted GSIS' Ex-
Parte Motion for Issuance of Writ of Possession.
The CFI orders denying the motion for intervention and granting the writ of possession upon an ex-parte motion of petitioner GSIS were
premised on Section 7 of Act No. 3135 and Sec. 4 of P.D. No. 385.
Section 7 provides as follows:
SEC. 7. In any sale made under the provisions of this Act, the purchaser may petition the Court of First Instance of
the province or place where the property or any part thereof is situated, to give him possession thereof during the
redemption period, furnishing bond in an amount equivalent to the use of the property for a period of twelve months,
to indemnify the debtor in case it be shown that the sale was made without violating the mortgage or without
complying with the requirements of this Act. Such petition shall be made under oath and filed in form of an ex parte
motion in the registration or cadastral proceedings if the property is registered, or in special proceedings in the case
of property registered under the Mortgage Law or under section one hundred and ninety-four of the Administrative
Code, or of any other real property encumbered with a mortgage duly registered in the office of any register of deeds
in accordance with any existing law, and in each case the clerk of the court shall, upon the filing of such petition,
collect the fees specified in paragraph eleven of section one hundred and fourteen of Act Numbered Four hundred
and ninety-six, as amended by Act Numbered Twenty-eight hundred and sixty-six, and the court shall, upon approval
of the bond, order that a writ of possession issue, addressed to the sheriff of the province in which the property is
situated, who shall execute said order immediately. (Emphasis ours)
It has been held:
Sections 7 and 8 of Act 3135, expressly authorize the purchaser at the public auction in an extrajudicial foreclosure of
mortgage to petition for a writ of possession during the redemption period by filing an ex parte motion under oath for
that purpose in the corresponding registration or cadastral proceeding in the case of property with Torrens title; and
upon the filing of such motion and the approval of the corresponding bond, the law, also in express terms, directs the
court to issue the order for a writ of possession. Under said sections, the order for a writ of possession issues as a
matter of course upon the filing of the proper motion and the approval of the corresponding bond. The judge issuing

42 Negotiable Instruments – Form and Interpretation (Sec 1-23)


the order following these express provisions of law cannot be charged with having acted without jurisdiction or with
grave abuse of discretion (Emphasis ours) (Eugenio S. de Garcia vs. Hon. Ramon R. San Jose, et. al. (94 Phil 623)).
Likewise in the case of Marcelo Steel Corp. vs. Court of Appeals, G.R. Nos. L-34317 and L-34335, November 28, 1973, 54 SCRA 891),
We stated that the issuance of the writ is a legal mandate, and the judge may not be charged with grave abuse of discretion, for
complying with, and implementing said legal mandate:
Having merely followed an express provision of law, whose validity is not questioned, the Judge cannot be charged
with having acted without jurisdiction or with grave abuse of discretion. The rule that the purchaser at a judicial public
auction is not entitled to possession during the period of redemption is not applicable to a sale under Act No. 3135
where the granting of said possession is expressly authorized (p. 18, Rollo) (Emphasis supplied).
On the other hand, Sec. 4 of P.D. 385, issued on January 13, 1974 provides:
SECTION 4. As a result of foreclosure or any other legal proceedings wherein the properties of the debtor which are
foreclosed, attached, or levied upon in satisfaction of a judgment are sold to a government financial institution, the
said properties shall be placed in the possession and control of the financial institution concerned, with the assistance
of the Armed Forces of the Philippines whenever necessary. The Petition for Writ of Possession shall be acted upon
by the court within fifteen (15) days from the date of filing. (Emphasis ours)
In PNB vs. M. Adil, et al. (G.R. No. 52823, November 2,1982, 118 SCRA 110) We stated that P.D. No. 385 makes it mandatory for the
court to place a financial institution in possession of the property:
The right of the purchaser to be placed in the possession of the property is bolstered by Section 8 of the aforecited
Act which provides that if the judge finds the complaint assailing the legality of the foreclosure sale justified, it shall
not transfer the possession of the property, even on appeal, but will only proceed against the bond posted by the
purchaser.
Based on the foregoing, the order for the issuance of the writ was clearly within the power, competence and jurisdiction of the court a
quo to issue.
As to the wisdom or soundness of the challenged order granting such writ of possession, it is a matter of judgment in connection with
which the remedy is ordinary appeal. (Toribia Lamagan vs. Hon. Rafael de la Cruz and Cosme O. Follosco, G.R. No. L-27950, July 29,
1971; 40 SCRA 101; Salvador E. Bimeda vs. Arcadio Perez and Hon. Jose T. Surtida, 93 Phil. 636). There being no showing that the
court a quo acted whimsically or capriciously as to amount to excess or lack of jurisdiction in issuing the questioned orders, but acted
precisely in compliance with the mandatory provisions of Sec. 7, Act 3135 and PD 385, the respondent Court of Appeals erred in acting
on the petition for certiorari, which is intended to correct defects of jurisdiction solely and not to correct errors of procedure or matters in
the court a quo's findings or conclusions (Ilacad vs. Court of Appeals, 79 SCRA 301).
Is Knecht a proper intervenor?
In allowing Knecht to intervene in the proceedings for the issuance of the writ, respondent Court of Appeals premised its ruling on his
being the purchaser of the mortgaged property, whose rights allegedly would be adversely affected by the foreclosure (CA decision, p.
85, Rollo). This ruling, unfortunately, admits the validity of the Deed of Sale with Assumption of Mortgage, executed between the Dulays
and Knecht as against petitioner GSIS. There is, however, no evidence that this sale was registered. It is well-settled that in case of a
piece of land titled under the Torrens system, it is the act of registration that transfers the ownership of the land sold (Agbulos vs.
Alberto, G.R. No. L-17483, July 31, 1982, 115 Phil. 797; Sec. 50, Land Registration Act, Act No. 496, now Sec. 51, Property
Registration Decree, P.D. No. 1529). Moreover, this sale was made without the prior consent of GSIS, in violation of condition No. 7 of
the Mortgage Contract (p. 149, Rollo) Annex "A", Comment). Well settled is the rule that the consent of the creditor is indispensable for
a valid novation consisting of a change of debtor (Garcia vs. Khu Yeh Chiong, 38 OG 926).
In the absence of such registration and GSIS consent, Knecht was not validly substituted as debtor (Mc Collough and Co., Inc. vs.
Velasco, 46 Phil. 1), on the basis of which he could assail and/or intervene in the proceedings for the issuance of the writ of possession.
The sale therefore did not in any manner bind GSIS which is obliged to recognize only the Dulays as mortgagor. (Thus, the GSIS notice
of arrearages was directed solely to the Dulays. Neither is there any GSIS board resolution officially recognizing Knecht as substitute
debtor). To rule otherwise would be to defeat the statutory remedy of foreclosure. A wily mortgagor could easily avoid and/or delay the
transfer of possession of the foreclosed property to the purchaser by secretly conveying the same to third persons, who would then
assert ownership rights/pecuniary interests thereon to the prejudice of the legitimate purchaser.
Foregoing considered, Knecht therefore acquired no legal right over the mortgaged property as against the GSIS, and consequently is
not a proper intervenor.
Assuming the validity of the sale, then Knecht would hold the title and possess the property as the Dulays' transferee, i.e., any right he
has to the property cannot be better than that of the transferor Dulays. Thus, in the instant case, considering that the property has
already been sold at public auction, pursuant to an extrajudicial foreclosure, and the Dulays have not contested the validity either of the
foreclosure proceedings instituted against the mortgaged properties, or the ex parte motion for the issuance of a writ of possession (p.
34, Rollo), the only right transferrable to Knecht is the right to redeem the mortgaged properties within the period prescribed by law.
Knecht subscribed to this view, when he asserted a right to redeem the foreclosed property, based on an alleged "deed of assignment
of redemption rights, dated November, 1974" (p. 134, Rollo). (See Alberto C. Roxas and Nenita de Guia vs. Mariano Buan, et. al., G.R.
No. 53798, November 8, 1988).
However, as there is likewise no evidence on record of the assignment, nor was it duly annotated on TCT No. 17638, (covering the
mortgaged property) Knecht is not validly substituted as debtor, and the assignment is not effective against GSIS, which is again
obliged to recognize the redemption rights of the Dulays only:

43 Negotiable Instruments – Form and Interpretation (Sec 1-23)


There is no right conferred by law in favor of a buyer of mortgaged property to redeem the same where the sale to
such third party was not with the consent of the mortgaged creditor' (R. Bonnevie vs. CA, G.R. No. L-4910, October
24, 1983, 125 SCRA 122, at p. 125).
Aside from the lack of legal interest, We also agree with petitioner that intervention is not proper when there is no pending litigation.
The proceedings in which respondent Knecht sought to intervene is an ex-parte proceeding pursuant to Sec. 7 of Act No. 3135, and, as
pointed out by petitioner, is a "judicial proceeding brought for the benefit of one party only, and without notice to, or consent by any
person adversely interested (Stella vs. Mosele, 19 N.E., 2d. 433,435, 299 III. App. 53; Imbrought v. Parker, 83 N.E. 2d 42, 43, 336 III
App. 124; City Nat. Bank & Trust Co. v. Aavis Hotel Corporation, 280 III. App. 247), ... or a proceeding wherein relief is granted without
an opportunity for the person against whom the relief is sought to be heard" (Restatement, Torts, S 674, p. 365, Rollo).
On the other hand, Rule 12, Sec. 2 of the Revised Rules of Court on Intervention provides:
SEC. 2. Intervention. - Any person may, before or during a trial be permitted by the court, in its discretion, to
intervene in an action, if he has legal interest in the matter in litigation, or in the success of either of the parties, or an
interest against both, or when he is so situated as to be adversely affected by a distribution or other disposition of
property in the custody of the court or of an officer thereof' (emphasis supplied).
Intervention is defined as "a proceeding in a suit or action by which a third person is permitted by the court to make himself a party,
either joining plaintiff in claiming what is sought by the complaint, or uniting with defendant in resisting the claims of plaintiff, or
demanding something adversely to both of them; the act or proceeding by which a third person becomes a party in a suit pending
between others; the admission, by leave of court, of a person not an original party to pending legal proceedings, by which such person
becomes a party thereto for the protection of some right of interest alleged by him to be affected by such proceedings' (33 C.J., 477,
cited in Eulalio Garcia, et. al. vs. Sinforoso David, et. al., 67 Phil. 279, at p. 282).
Action, under Rule 2, Sec. 1, is defined as an ordinary suit in a court of justice, by which one party prosecutes another for the
enforcement or protection of a right, or the prevention or redress of a wrong.
From the aforesaid definitions, it is clear that intervention contemplates a suit, and is therefore exercisable during a trial and, as pointed
out by petitioner is one which envisions the introduction of evidence by the parties, leading to the rendition of the decision in the case
(p. 363, Rollo). Very clearly, this concept is not that contemplated by Sec. 7 of Act No. 3135, whereby, under settled jurisprudence, the
Judge has to order the immediate issuance of a writ of possession 1) upon the filing of the proper motion and 2) the approval of the
corresponding bond. The rationale for the mandate is to allow the purchaser to have possession of the foreclosed property without
delay, such possession being founded on his right of ownership. A trial which entails delay is obviously out of the question.
Knecht's remedy, as correctly pointed out by petitioner GSIS, is a separate, distinct, and independent suit, provided for in Section 8 of
Act No. 3135:
And any question regarding the regularity and validity of the sale is left to be determined in a subsequent proceeding
as outlined in section 8. Such question is not to be raised as a justification for opposing the issuance of the writ of
possession, since, under the Act, the proceeding for this is ex parte (De Gracia v. San Jose, et al., 94 Phil. 623, p. 12,
Rollo).
Respondent Court of Appeals also enjoined the Court a quo from implementing the writ of possession issued on May 27, 1975,
ultimately depriving petitioner GSIS of its property rights for over a decade, and effectively barring its right to dispose of and/or sell
subject property in order to generate much needed funds.
Section 2 of PD 385 makes it mandatory for the Court to place a government financial institution in possession of the property. The
injunction against the petitioner from taking possession of the property rendered nugatory the provisions of the decree:
SECTION 2. No restraining order, temporary or permanent injunction shall be issued by the court against any
government financial institution in any action taken by such institution in compliance with the mandatory foreclosure
provided in Section 1 hereof, whether such restraining order, temporary or permanent injunction is sought by the
borrower(s) or any third party or parties, except after due hearing in which it is established by the borrower and
admitted by the government financial institution concerned that twenty percent (20%) of the outstanding arrearages
has been paid after the filing of foreclosure proceedings.
x x x.
(See T. Lamagan vs. Hon. R. de la Cruz and C. O. Follosco, supra; and S. E. Bimeda vs. A. Perez and Hon. J. T. Surtida, supra)
likewise specially noting the provisions of the 13th Whereas Clause, which state:
WHEREAS, it has been shown by the experience of government financial institutions that in instances where
extrajudicial foreclosure on large loans is successfully pursued, the assets, aside from land, that form part of the
foreclosed collaterals, including buildings, machinery, equipment, materials, furniture and fixtures, are usually pilfered
or lost rendering it necessary that the foreclosing government creditor have a writ of possession issued in its favor
without delay after the foreclosure auction sale. (Emphasis ours)
As regards the validity of the foreclosure sale, this matter has been resolved in the decision of the Court of Appeals in CA-G.R. No. Civil
Case No. 08858, (promulgated March 15, 1988) (P. 695, Rollo) which affirmed the decision of the lower court dismissing the action for
annulment of foreclosure, separately filed by Knecht:
There was no fraudulent inducement committed by the GSIS on the appellant and the foreclosure sale was valid.
Contrary to appellant's narrow view, Manuel Dulay himself, in Annex Q of the basic complaint, requested for the
deferment of the payment of the principal and the interests of his loan and this alone is indicative that Dulay was then
in arrears. To demonstrate the infirmity of the sale with assumption of mortgage, it is at once flagrant and obvious

44 Negotiable Instruments – Form and Interpretation (Sec 1-23)


from the records that Rene Knecht and Dulay Enterprises entered into the assumption of mortgage in derogation of
the original mortgage contract between GSIS and Dulay Enterprises to the effect that any disposition, transfer or
encumbrance of the properties must be made with the prior written consent of the mortgagee (Annex F, Complaint, p.
116, Record). Now, had not the appellant and conformity of the mortgagee GSIS, the course of events and
proceedings would have necessarily taken an entirely different path.
Foreclosure was clearly in order and the GSIS had a perfect right to protect its investment it appearing that the first
loan granted to the Dulay spouses was granted in 1968 yet and the auction sale was conducted more than six (6)
years thereafter, or on November 5, 1974. The presumption of regularity of the foreclosure proceedings and
subsequent proceedings as well as the consolidation of ownership by the GSIS over the property has not been
overturned by appellant.
x x x (pp. 9-10).
ACCORDINGLY, the petition is hereby granted, and the assailed decision of the respondent Court of Appeals, dated October 13, 1975,
as well as its Resolution, dated December 8, 1975 are hereby reversed and set aside.
Further, private respondent Rene Knecht is directed:
1.) to immediately turn over to the petitioner GSIS the possession of the property covered by TCT No. 19836
(formerly TCT No. 17638). The Armed Forces of the Philippines is hereby directed to place petitioner in possession
and control of the properties, without any further delay, pursuant to Sec. 4 of PD No. 385, 2.) to render an accounting
of all the revenues derived from the operations thereof, from November 5, 1974, the date when petitioner extrajudicial
foreclosure sale and 3.) to deliver to petitioner all revenues on hand as of turn-over of premises to GSIS.
This decision is immediately executory.
SO ORDERED.

45 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 93073 December 21, 1992
REPUBLIC PLANTERS BANK, petitioner,
vs.
COURT OF APPEALS and FERMIN CANLAS, respondents.

CAMPOS, JR., J.:


This is an appeal by way of a Petition for Review on Certiorari from the decision * of the Court of Appeals in CA G.R. CV No. 07302,
entitled "Republic Planters Bank.Plaintiff-Appellee vs. Pinch Manufacturing Corporation, et al., Defendants, and Fermin Canlas,
Defendant-Appellant", which affirmed the decision ** in Civil Case No. 82-5448 except that it completely absolved Fermin Canlas from
liability under the promissory notes and reduced the award for damages and attorney's fees. The RTC decision, rendered on June 20,
1985, is quoted hereunder:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff Republic Planters Bank,
ordering defendant Pinch Manufacturing Corporation (formerly Worldwide Garment Manufacturing, Inc.) and
defendants Shozo Yamaguchi and Fermin Canlas to pay, jointly and severally, the plaintiff bank the following sums
with interest thereon at 16% per annum from the dates indicated, to wit:
Under the promissory note (Exhibit "A"), the sum of P300,000.00 with interest from January 29, 1981 until fully paid;
under promissory note (Exhibit "B"), the sum of P40,000.00 with interest from November 27, 1980; under the
promissory note (Exhibit "C"), the sum of P166,466.00 which interest from January 29, 1981; under the promissory
note (Exhibit "E"), the sum of P86,130.31 with interest from January 29, 1981; under the promissory note (Exhibit
"G"), the sum of P12,703.70 with interest from November 27, 1980; under the promissory note (Exhibit "H"), the sum
of P281,875.91 with interest from January 29, 1981; and under the promissory note (Exhibit "I"), the sum of
P200,000.00 with interest from January 29, 1981.
Under the promissory note (Exhibit "D") defendants Pinch Manufacturing Corporation (formerly named Worldwide
Garment Manufacturing, Inc.), and Shozo Yamaguchi are ordered to pay jointly and severally, the plaintiff bank the
sum of P367,000.00 with interest of 16% per annum from January 29, 1980 until fully paid
Under the promissory note (Exhibit "F") defendant corporation Pinch (formerly Worldwide) is ordered to pay the
plaintiff bank the sum of P140,000.00 with interest at 16% per annum from November 27, 1980 until fully paid.
Defendant Pinch (formely Worldwide) is hereby ordered to pay the plaintiff the sum of P231,120.81 with interest at
12% per annum from July 1, 1981, until fully paid and the sum of P331,870.97 with interest from March 28, 1981, until
fully paid.
All the defendants are also ordered to pay, jointly and severally, the plaintiff the sum of P100,000.00 as and for
reasonable attorney's fee and the further sum equivalent to 3% per annum of the respective principal sums from the
dates above stated as penalty charge until fully paid, plus one percent (1%) of the principal sums as service charge.
With costs against the defendants.
SO ORDERED. 1
From the above decision only defendant Fermin Canlas appealed to the then Intermediate Court (now the Court Appeals). His
contention was that inasmuch as he signed the promissory notes in his capacity as officer of the defunct Worldwide Garment
Manufacturing, Inc, he should not be held personally liable for such authorized corporate acts that he performed. It is now the
contention of the petitioner Republic Planters Bank that having unconditionally signed the nine (9) promissory notes with Shozo
Yamaguchi, jointly and severally, defendant Fermin Canlas is solidarity liable with Shozo Yamaguchi on each of the nine notes.
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 severaIly promise to pay to the ORDER of the
REPUBLIC PLANTERS BANK, at its office in Manila, Philippines, the sum of ___________ PESOS(....) Philippine
Currency...
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:

46 Negotiable Instruments – Form and Interpretation (Sec 1-23)


________ 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.
In the promissory notes marked as Exhibits C, D and F, the name Worldwide Garment Manufacturing, Inc. was apparently rubber
stamped above the signatures of defendant and private respondent.
On December 20, 1982, Worldwide Garment Manufacturing, Inc. noted 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 with interest thereon, plus attorney's fees and penalty charges. The complainant was originally brought against
Worldwide Garment Manufacturing, Inc. inter alia, but it was later amended to drop Worldwide Manufacturing, Inc. as defendant and
substitute Pinch Manufacturing Corporation it its place. 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.
In the mind of this Court, the only issue material to the resolution of this appeal is whether private respondent Fermin Canlas is
solidarily liable with the other defendants, namely Pinch Manufacturing Corporation and Shozo Yamaguchi, on the nine promissory
notes.
We hold that private respondent Fermin Canlas is solidarily liable on each of the promissory notes bearing his signature for the
following reasons:
The promissory motes are negotiable instruments and must be governed by the Negotiable Instruments Law. 2
Under the Negotiable lnstruments 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. 6 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. 7 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. 8 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. 9 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.
As to whether the interpolation of the phrase "and (in) his personal capacity" below the signatures of the makers in the notes will affect
the liability of the makers, We do not find it necessary to resolve and decide, because it is immaterial and will not affect to the liability of
private respondent Fermin Canlas as a joint and several debtor of the notes. With or without the presence of said phrase, private
respondent Fermin Canlas is primarily liable as a co-maker of each of the notes and his liability is that of a solidary debtor.
Finally, the respondent Court made a grave error in holding that an amendment in a corporation's Articles of Incorporation effecting a
change of corporate name, in this case from Worldwide Garment manufacturing Inc to Pinch Manufacturing Corporation extinguished
the personality of the original corporation.
The corporation, upon such change in its name, is in no sense a new corporation, nor the successor of the original corporation. It is the
same corporation with a different name, and its character is in no respect changed. 10
A change in the corporate name does not make a new corporation, and whether effected by special act or under a general law, has no
affect on the identity of the corporation, or on its property, rights, or liabilities. 11
The corporation continues, as before, responsible in its new name for all debts or other liabilities which it had previously contracted or
incurred. 12
As a general rule, officers or directors under the old corporate name bear no personal liability for acts done or contracts entered into by
officers of the corporation, if duly authorized. Inasmuch as such officers acted in their capacity as agent of the old corporation and the
change of name meant only the continuation of the old juridical entity, the corporation bearing the same name is still bound by the acts
of its agents if authorized by the Board. Under the Negotiable Instruments Law, the liability of a person signing as an agent is
specifically provided for as follows:
Sec. 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

47 Negotiable Instruments – Form and Interpretation (Sec 1-23)


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 take 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 agent's personal liability. 13
On the private respondent's 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 payee's 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-debtor 's 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:
Sec. 14. Blanks: when may be filled. — Where the instrument is wanting in any material particular, the person in
possesion 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...
Proof that the notes were signed in blank was only the self-serving testimony of private respondent Fermin Canlas, as determined by
the trial court, so that the trial court ''doubts the defendant (Canlas) signed in blank the promissory notes". We chose to believe the
bank's testimony that the notes were filled up before they were given to private respondent Fermin Canlas and defendant Shozo
Yamaguchi for their signatures as joint and several promissors. For signing the notes above their typewritten names, they bound
themselves as unconditional makers. We take judicial notice of the customary procedure of commercial banks of requiring their clientele
to sign promissory notes prepared by the banks in printed form with blank spaces already filled up as per agreed terms of the loan,
leaving the borrowers-debtors to do nothing but read the terms and conditions therein printed and to sign as makers or co-makers.
When the notes were given to private respondent Fermin Canlas for his signature, the notes were complete in the sense that the
spaces for the material particular had been filled up by the bank as per agreement. The notes were not incomplete instruments; neither
were they given to private respondent Fermin Canlas in blank as he claims. Thus, Section 14 of the NegotiabIe Instruments Law is not
applicable.
The ruling in case of Reformina vs. Tomol relied upon by the appellate court in reducing the interest rate on the promissory notes from
16% to 12% per annum does not squarely apply to the instant petition. In the abovecited case, the rate of 12% was applied to
forebearances of money, goods or credit and court judgemets thereon, only in the absence of any stipulation between the parties.
In the case at bar however , it was found by the trial court that the rate of interest is 9% per annum, which interest rate the plaintiff may
at any time without notice, raise within the limits allowed law. And so, as of February 16, 1984 , the plaintiff had fixed the interest at 16%
per annum.
This Court has held that the rates under the Usury Law, as amended by Presidential Decree No. 116, are applicable only to interests by
way of compensation for the use or forebearance of money. Article 2209 of the Civil Code, on the other hand, governs interests by way
of damages. 15 This fine distinction was not taken into consideration by the appellate court, which instead made a general statement that
the interest rate be at 12% per annum.
Inasmuch as this Court had declared that increases in interest rates are not subject to any ceiling prescribed by the Usury Law, the
appellate court erred in limiting the interest rates at 12% per annum. Central Bank Circular No. 905, Series of 1982 removed the Usury
Law ceiling on interest rates. 16
In the 1ight 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. Judgement 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, to wit:
Under the promissory note marked as exhibit A, the sum of P300,000.00 with interest from January 29, 1981 until fully paid; under
promissory note marked as Exhibit B, the sum of P40,000.00 with interest from November 27, 1980: under the promissory note
denominated as Exhibit C, the amount of P166,466.00 with interest from January 29, 1981; under the promissory note denominated as
Exhibit D, the amount of P367,000.00 with interest from January 29, 1981 until fully paid; under the promissory note marked as Exhibit
E, the amount of P86,130.31 with interest from January 29, 1981; under the promissory note marked as Exhibit F, the sum of
P140,000.00 with interest from November 27, 1980 until fully paid; under the promissory note marked as Exhibit G, the amount of
P12,703.70 with interest from November 27, 1980; the promissory note marked as Exhibit H, the sum of P281,875.91 with interest from
January 29, 1981; and the promissory note marked as Exhibit I, the sum of P200,000.00 with interest on January 29, 1981.
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 attorney's fees, and penalty and service charges, the private respondent Fermin Canlas is hereby held jointly and
solidarity liable with defendants for the amounts found, by the Court a quo. With costs against private respondent.
SO ORDERED.

48 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-38816 November 3, 1933
INSULAR DRUG CO., INC., plaintiff-appellee,
vs.
THE PHILIPPINE NATIONAL BANK, ET AL., defendants.
THE PHILIPPINE NATIONAL BANK, appellant.
Camus and Delgado for appellant.
Franco and Reinoso for appellee.

MALCOLM, J.:
This is an appeal taken by Philippine National Bank from a judgment of the Court of First Instance of Manila requiring bank to pay
to the Insular Drug Co., Inc., the sum of P18,285.92 with legal interest and costs.
The record consists of the testimony of Alfred Von Arend, President and Manager of the Insular Drug Co., Inc., and of exhibits
obtained from the Philippine National Bank showing transactions of U.E. Foerster with the bank. The Philippine National Bank was
content to submit the case without presenting evidence in its behalf. The meagre record and the statement of facts agreed upon by the
attorneys for the contending parties disclose the following facts:
The Insular Drug Co., Inc., is a Philippine corporation with offices in the City of Manila. U.E. Foerster was formerly a salesman of
drug company for the Islands of Panay and Negros. Foerster also acted as a collector for the company. He was instructed to take the
checks which came to his hands for the drug company to the Iloilo branch of the Chartered Bank of India, Australia and China and
deposit the amounts to the credit of the drug company. Instead, Foerster deposited checks, including those of Juan Llorente, Dolores
Salcedo, Estanislao Salcedo, and a fourth party, with the Iloilo branch of the Philippine National Bank. The checks were in that bank
placed in the personal account of Foerster. Some of the checks were drawn against the Bank of Philippine National Bank. After the
indorsement on the checks was written "Received payment prior indorsement guaranteed by Philippine National bank, Iloilo Branch,
Angel Padilla, Manager." The indorsement on the checks took various forms, some being "Insular Drug Company, Inc., By: (Sgd.) U.
Foerster, Agent. (Sgd.) U. Foerster" other being "Insular Drug Co., Inc., By: (Sgd.) Carmen E. de Foerster, Agent (Sgd.) Carmen E. de
Foerster"; others "Insular Drug Co., Inc., By: (Sgd.) Carmen E. de Foerster, Carmen E. de Froster"; others "(Sgd.) Carmen E. de
Foerster, (Sgd.) Carmen E. de Foerster"; one (Sgd.) U. Foerster. (Sgd.) U. Foerster"; others; "Insular Drug Co., Inc., Carmen E. de
Foerster, By: (Sgd.) V. Bacaldo," etc. In this connection it should be explained that Carmen E. de Foerster was his stenographer. As a
consequence of the indorsements on checks the amounts therein stated were subsequently withdrawn by U. E., Foerster and Carmen
E. de Foerster.
Eventually the Manila office of the drug company investigated the transactions of Foerster. Upon the discovery of anomalies,
Foerster committed suicide. But there is no evidence showing that the bank knew that Foerster was misappropriating the funds of his
principal. The Insular Drug Company claims that it never received the face value of 132 checks here in the question covering a total of
P18,285.92.lawphil.net
There is no Philippine authority which directly fits the proven facts. The case of Fulton Iron Works Co., vs. China Banking
Corporation ([1930], 55 Phil., 208), mentioned by both parties rest on a different states of facts. However, there are elementary
principles governing the relationship between a bank and its customers which are controlling.
In first place, the bank argues that the drug company was never defrauded at all. While the evidence on the extent of the loss
suffered by the drug company is not nearly as clear as it should be, it is a sufficient answer to state that no such special defense was
relied upon by the bank in the trial court. The drug company saw fit to stand on the proposition that checks drawn in its favor were
improperly and illegally cashed by the bank for Foerster and placed in his personal account, thus making it possible for Foerster to
defraud the drug company, and the bank did not try to go back of this proposition.
The next point relied upon by the bank, to the effect that Foerster had implied authority to indorse all checks made out in the
name of the Insular Drug Co., Inc., has even less force. Not only did the bank permit Foerster to indorse checks and then place them to
his personal account, but it went farther and permitted Foerster's wife and clerk to indorse the checks. The right of an agent to indorse
commercial paper is a very responsible power and will not be lightly inferred. A salesman with authority to collect money belonging to
his principal does not have the implied authority to indorse checks received in payment. Any person taking checks made payable to a
corporation, which can act only by agent does so at his peril, and must same by the consequences if the agent who indorses the same
is without authority. (Arcade Realty Co. vs. Bank of Commerce [1919], 180 Cal., 318; Standard Steam Specialty Co., vs. Corn
Exchange Bank [1917], 220 N.Y., 278; People vs. Bank of North America [1879], 75 N.Y., 547; Graham vs. United States Savings
Institution [1870], 46 Mo., 186.) Further speaking to the errors specified by the bank, it is sufficient to state that no trust fund was
involved; that the fact that bank acted in good faith does not relieve it from responsibility; that no proof was adduced, admitting that
Foerster had right to indorse the checks, indicative of right of his wife and clerk to do the same , and that the checks drawn on the Bank
of the Philippine Islands can not be differentiated from those drawn on the Philippine National Bank because of the indorsement by the
latter.
In brief, this is a case where 132 checks made out in the name of the Insular Drug Co., Inc., were brought to the branch office of
the Philippine National Bank in Iloilo by Foerster, a salesman of the drug company, Foerster's wife, and Foerster's clerk. The bank
49 Negotiable Instruments – Form and Interpretation (Sec 1-23)
could tell by the checks themselves that the money belonged to the Insular Drug Co., Inc., and not to Foerster or his wife or his clerk.
When the bank credited those checks to the personal account of Foerster and permitted Foerster and his wife to make withdrawals
without there being made authority from the drug company to do so, the bank made itself responsible to the drug company for the
amounts represented by the checks. The bank could relieve itself from responsibility by pleading and proving that after the money was
withdrawn from the bank it passed to the drug company which thus suffered no loss, but the bank has not done so. Much more could
be said about this case, but it suffices to state in conclusion that bank will have to stand the loss occasioned by the negligence of its
agents.
Overruling the errors assigned, judgment of the trial court will be affirmed, the costs of this instance to be paid by appellant.
Villa-Real, Hull, Imperial, and Butte, JJ., concur.

50 Negotiable Instruments – Form and Interpretation (Sec 1-23)


JAI ALAI V. BPI
66 SCRA 29

FACTS:
Checks were deposited by petitioner in its current account with the bank. These checks were from a certain
Ramirez, a consistent better in its games, who was a sales agent from Inter-Island Gas. Inter-Island
later found out that of the forgeries committed in the checks and thus, it informed all the parties
concerned. Upon the demands on the bank as the collecting bank, it debited the account of petitioner.
Thereafter, petitioner tried to issue a check for payment of shares of stock but such was dishonored for
insufficient funds. It filed a complaint against the bank.

HELD:
Respondent bank acted within legal bounds when it debited the account of petitioner. When the petitioner
deposited the checks to its account, the relationship created was one of agency still and not of creditor-
debtor. The bank was to collect from the drawees of the checks with the corresponding
proceeds.

The Bank may have the proceeds already when it debited the account of petitioner. Nonetheless, there is
still no creditor-debtor relationship.
Following Section 23, a forged signature is wholly inoperative and no right to discharge it or enforce its
payment can be acquired through or under the forged signature except against a party who cannot invoke
its forgery or want of authority. It stands to reason that as a collecting bank which
indorsed the checks to the drawee-banks for clearing, should be liable to the latter for reimbursement for
the indorsements on the checks had been forged prior to their delivery to the petitioner. The payments made by
the drawee banks to respondent were ineffective—the creditor-debtor relationship hadn’t been validly
effected.

51 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-20745 September 2, 1966
DOLORES GRANADA and ESTRELLA GRANADA, ET AL., petitioners,
vs.
PHILIPPINE NATIONAL BANK, ET AL., respondents.
G. Occeno, Sr. for petitioner.
Tomas Besa and J.C. Jimenez for respondents.

BARRERA, J.:
Petitioners herein seek to review the decision of the Court of Appeals reversing that of the Court of First Instance of Negros
Occidental, and sentencing petitioners to pay the respondent Philippine National Bank the of P1,982.24 with interest thereon at 5% per
annum from August 20, 1940 and 10% on the principal as attorneys' fees; and the sum of P1,349.90 with interest at 5% per annum,
from September 20, 1941, and 10% on the principal as attorneys' fees, and costs.
There is no dispute as to the amounts involved; that they represent the balances they represent the balances due and unpaid on
sugar crop loans applied from and granted by the PNB to Dolores, Estrella, 1 Feliza, and Corazon, all surnamed Granada; that said
loans were personally received by the petitioners for which the corresponding promissory notes were principally executed and signed
by them, uniformly worded as follows:
On demand after date, for value received, I promise to pay to the order of the Philippine National Bank at its office in
Bacolod or Manila, the sum of (amount in pesos stated), Philippine currency, with interest at the rate of 5% per annum from
date until paid.
In case of judicial execution of this obligation or any part of it, the debtor waives his right under the provisions of Rule
39, Section 12 of the Rules of Court.
In case it is necessary to collect this note by or through an attorney-at-law, the makers and indorsers shall pay, 10% of
the amount due on the notes as attorney's fee. Demand and dishonor waived. Holder may accept partial payment reserving
his right of recourse against each and all indorsers.
The only issue raised by petitioners emanated from an amended complaint filed by the attorney of the PNB branch in Bacolod,
Occidental Negros, wherein it was alleged that
defendants Dolores Granada and Estrella Granada, together with their sisters Feliza Granada and Corazon Granada,
who are now dead, as representative of their parents, Cristeta Granada and Matias Granada, borrowed from and were granted
by, the plaintiff ... sugar crop loan .. for the cultivation and production of sugar canes in hacienda Cristeta.
that said ... loan ... was released to, and received by, defendants Dolores Granada and Estrella Granada and their
sisters Feliza Granada and Corazon Granada, as representatives of their parents Cristeta Granada and Matias Granada, as
evidenced by promissory notes hereto attached as Exhibit A, B,C, ... etc., and made integral parts hereof.
Solely on the strength of the phrase "as representatives of their parents, etc." inserted in the amended complaint, the petitioners
contended, and that trial court sustained the contention, that they are not liable personally as they merely acted as agents of a
disclosed principal.
The Court of Appeals, however, reversed the decision of the court a quo after reviewing the facts and antecedents of the case.
It appears that in the original complaint filed by the plaintiff bank, it was alleged that the defendants Dolores, Estrella, Feliza, and
Corazon, all surnamed Granada, secured sugar crop loans for the crop year 1940-41 and 1941-42 from the plaintiff and received the
money as evidenced by various promissory notes attached to said original complaint marked as Exhibits "A" to "F" and "G" to "P" that
the balances of said crop loans in the sum of P1,982.24 and P1,349.90 were not paid; hence, it was prayed that the defendants be
sentenced to pay the same, plus interest and costs.2
A motion to dismiss the complaint was filed by the defendants alleging prescription and that the signers of the promissory notes
have secured and received the amounts of the loans as "mere representatives of the parents Matias and Cristeta Granada," who were
the owners of Hda. Cristeta, and that the money was used for maintenance and support of the said spouses and their children Dolores,
Estrella, Feliza and Corazon, who were then still single and living with their parents.
In answer to the motion, plaintiff reiterated that the documents covering that loans were signed and executed by Dolores
Granada, for herself and as attorney-in-fact of Estrella, Feliza and Corazon, by virtue of a duly notarized power of attorney, and that
plaintiff has no documents or evidence in its possession to hold the spouses Matias and Cristeta Granada liable for the payment of the
accounts. The motion to dismiss was denied.
Thereafter, the defendants filed their answer, again alleging that the promissory notes were signed by them as mere
representatives and administrators of their parents and that the plaintiff has been informed by Cristeta Granada and her attorney-in-
fact, Jose Granada that the so-called accounts of "Granada Hermanas" were the accounts of the spouses Matias and Cristeta and
could be charged against their properties known as Hda. Cristeta.
52 Negotiable Instruments – Form and Interpretation (Sec 1-23)
Subsequently, the defendants filed another motion calling attention to their defense alleged in their answer and praying that in
view thereof "the plaintiff be given leave of court to amend the complaint and include as principal party defendants Cristeta Granada,
and the defendants be allowed to file their answer, if they so desire." The motion was granted in an order of the following tenor, "... por
el presente si les concede a ambas partes autorizacion para presentar los escritos enmendados que deseen presentar dentro del plazo
reglamentario."
Accordingly, the plaintiff filed an amended complaint, this time impleading Cristeta Granada, together with the original
defendants, and it was in this amended complaint that for the first time, the phrase "as representatives of their parents" was inserted.
There was no other amendment in the complaint, and in the prayer, the plaintiff insisted that judgment be rendered ordering defendants
Dolores Granada, Estrella Granada and Cristeta Granada to pay the plaintiff the amounts claimed in the complaint, and granting such
other relief as the court may deem just and equitable.1awphîl.nèt
In their answer to the amended complaint, defendants Dolores and Estrella Granada reproduced and reiterated their allegations
in their answer to the original complaint.
Cristeta Granada, in his answer under oath, significantly denied that she has given or granted any authority to Dolores, Estrella,
Feliza and Corazon, or to any of them, to borrow money or secure a loan in her behalf from the bank.
Replying to the answer to the amended complaint of the defendants Dolores and Estrella Granada, the plaintiff again averred that
as alleged in the original complaint, Dolores, Estrella, Feliza and Corazon were personally, jointly and severally liable to the plaintiff for
the payment of the amount of the loans, as that is what appears in the promissory notes and the borrowers did not inform the bank
when they applied for and secured the loan that they were acting as agents for and in behalf of their parents, and the filing of the
amended complaint joining Cristeta Granada as a party defendant was in obedience to the order of the court issued upon motion of the
original defendants, and "in order to be relieved of any liability it is incumbent upon defendants Dolores and Estrella to prove or help the
plaintiff prove that they acted as representatives of their parents."
Thereafter, trial was held and plaintiff presented the promissory notes whose genuineness and due execution were
unquestioned; proof of the receipt of the loans by defendants and the amounts still unpaid thereon in spite of demands. All this
evidence was admitted without objection on the part of the defendants.
Upon these facts, the Court of Appeals, as already stated, reversed the decision of the court a quo and rendered judgment in
favor of the plaintiff, reasoning thus:
As a general rule, facts alleged in a party's pleading are deemed admissions of that party and binding upon it. However,
that is not an absolute and inflexible rule. Every admission is to be taken as an entirety of the fact which makes for the one
side with the qualifications which limit, modify or destroy its effect on the other side. The reason for this is that, where part of a
statement of a party is used against him as an admission, the court should consider and weigh any other portions connected
with the statement which tend to neutralize or explain the portion which is against interest. In other words, while the admission
is admissible in evidence, its probative value is to be determined from the whole statement and others intimately related or
connected therewith as an integrated unit for, as said by the Supreme Court, although acts or facts admitted do not require
proof and cannot be contradicted, however, evidence aliunde can be presented to show that the admission was made through
palpable mistake. (Irlanda vs. Pitargue, 22 Phil. 383.)
From the pleadings filed by the parties it clearly appears that the cause of action stated in the original complaint was
against Dolores, Estrella, Felisa and Corazon, surnamed Granada, for the payment of the loans which they obtained from the
bank in their individual and personal capacity, as evidenced by the promissory notes in question.1awphîl.nèt
The foregoing facts called from the pleadings of the parties have persuaded us to believe, and we so hold, that in filing
the amended complaint containing the allegation which has become the bone of contention on this appeal, the plaintiff had
acted through a mistaken belief that the adverted allegation in the amended complaint did not constitute an amendment of its
cause of action, and this matter was made known to the court and the defendants when in its reply to the motion to dismiss it
stated that it has no document or evidence in its possession to hold the spouses Matias and Cristeta Granada liable to the
payment of the account; and it honestly relied on the belief that the defendants, Dolores and Estrella, surnamed Granada, had
the necessary evidence to establish the fact. At any rate, guided by the provisions of the rules of court that "These rules shall
be liberally construed in order to promote their object and to assist the parties in obtaining just, speedy, and inexpensive
determination of every action and proceeding"; the amended complaint may be treated as stating two or more statements of a
claim in a single cause of action, which is permitted under Section 9, Rule 15, or it may be considered as including several
defendants in the alternative against any of which plaintiff may be entitled to relief, a course of action sanctioned by Section
13, Rule 3. There are cases where the facts essential to the party's claim or defense are within the knowledge of the adverse
party, as to be unable to state them with certainty. He may, however, know that one out of two or more sets of facts is true,
without knowing which. In such a case, plaintiff is allowed to make alternative statements of his claim under Section 9, Rule
15. (Everett vs. Asia Banking Corporation, 59 Phil. 512, 526, cited in 1 Moran 235, 1957 ed.) On the other hand, Section 13 of
Rule 3 "gives the plaintiff the right to include alternatively several possible defendants when he is uncertain against which of
them he is entitled to relief, as ... where a defendant may have been acting either as an agent or a principal." ... And the above
provision is applicable, although the right to relief alleged to exist against one of the defendants may be inconsistent with the
right to relief against the other, as where A is sued as principal and B is joined in the alternative, if A should be found to have
been B's agents. (1 Moran 71, 1957 ed.) The amended complaint in the instant case may not be a model pleading for an
alternative statements of the claim or against two or more defendants in the alternative; however, judging the said complaint
from a liberal standpoint as ordained by the Rules and considering that in the prayer judgment is asked against all the
defendants, Dolores Granada, Estrella Granada and Cristeta Granada, it is within the jurisdiction of the court to render such
judgment as the facts warrant against all or some of the defendants for the payment of the amount claimed by the plaintiff.
Taking into account the circumstances of this case, we find no error committed by the Court of Appeals, both in the assessment
of the facts and the application of the law on the matter in dispute. It is evident that the plaintiff bank, in amending the complaint
53 Negotiable Instruments – Form and Interpretation (Sec 1-23)
conformably with the order of the trial court, never intended to change the cause of action which was embodied in the original
complaint.
WHEREFORE, this petition is hereby dismissed, with costs against the petitioners. So ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ., concur.
Regala, J., took no part.

54 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Republic of the Philippines
SUPREME COURT
Manila
G.R. Nos. L-25836-37 January 31, 1981
THE PHILIPPINE BANK OF COMMERCE, plaintiff-appellee,
vs.
JOSE M. ARUEGO, defendant-appellant.

FERNANDEZ, J.:
The defendant, Jose M. Aruego, appealed to the Court of Appeals from the order of the Court of First Instance of Manila, Branch XIII, in
Civil Case No. 42066 denying his motion to set aside the order declaring him in default, 1 and from the order of said court in the same
case denying his motion to set aside the judgment rendered after he was declared in default. 2 These two appeals of the defendant
were docketed as CA-G.R. NO. 27734-R and CA-G.R. NO. 27940-R, respectively.
Upon motion of the defendant on July 25, 1960, 3 he was allowed by the Court of Appeals to file one consolidated record on appeal of
CA-G.R. NO. 27734-R and CA-G.R. NO. 27940-R. 4
In a resolution promulgated on March 1, 1966, the Court of Appeals, First Division, certified the consolidated appeal to the Supreme
Court on the ground that only questions of law are involved. 5
On December 1, 1959, the Philippine Bank of Commerce instituted against Jose M. Aruego Civil Case No. 42066 for the recovery of the
total sum of about P35,000.00 with daily interest thereon from November 17, 1959 until fully paid and commission equivalent to 3/8%
for every thirty (30) days or fraction thereof plus attorney's fees equivalent to 10% of the total amount due and costs. 6 The complaint
filed by the Philippine Bank of Commerce contains twenty-two (22) causes of action referring to twenty-two (22) transactions entered
into by the said Bank and Aruego on different dates covering the period from August 28, 1950 to March 14, 1951. 7 The sum sought to
be recovered represents the cost of the printing of "World Current Events," a periodical published by the defendant. To facilitate the
payment of the printing the defendant obtained a credit accommodation from the plaintiff. Thus, for every printing of the "World Current
Events," the printer, Encal Press and Photo Engraving, collected the cost of printing by drawing a draft against the plaintiff, said draft
being sent later to the defendant for acceptance. As an added security for the payment of the amounts advanced to Encal Press and
Photo-Engraving, the plaintiff bank also required defendant Aruego to execute a trust receipt in favor of said bank wherein said
defendant undertook to hold in trust for plaintiff the periodicals and to sell the same with the promise to turn over to the plaintiff the
proceeds of the sale of said publication to answer for the payment of all obligations arising from the draft. 8
Aruego received a copy of the complaint together with the summons on December 2, 1959. 9 On December 14, 1959 defendant filed an
urgent motion for extension of time to plead, and set the hearing on December 16, 1959. 10 At the hearing, the court denied defendant's
motion for extension. Whereupon, the defendant filed a motion to dismiss the complaint on December 17, 1959 on the ground that the
complaint states no cause of action because:
a) When the various bills of exchange were presented to the defendant as drawee for acceptance, the amounts thereof had already
been paid by the plaintiff to the drawer (Encal Press and Photo Engraving), without knowledge or consent of the defendant drawee.
b) In the case of a bill of exchange, like those involved in the case at bar, the defendant drawee is an accommodating party only for the
drawer (Encal Press and Photo-Engraving) and win be liable in the event that the accommodating party (drawer) fails to pay its
obligation to the plaintiff. 11
The complaint was dismissed in an order dated December 22, 1959, copy of which was received by the defendant on December 24,
1959. 12
On January 13, 1960, the plaintiff filed a motion for reconsideration. 13 On March 7, 1960, acting upon the motion for reconsideration
filed by the plaintiff, the trial court set aside its order dismissing the complaint and set the case for hearing on March 15, 1960 at 8:00 in
the morning. 14 A copy of the order setting aside the order of dismissal was received by the defendant on March 11, 1960 at 5:00
o'clock in the afternoon according to the affidavit of the deputy sheriff of Manila, Mamerto de la Cruz. On the following day, March 12,
1960, the defendant filed a motion to postpone the trial of the case on the ground that there having been no answer as yet, the issues
had not yet been joined. 15 On the same date, the defendant filed his answer to the complaint interposing the following defenses: That
he signed the document upon which the plaintiff sues in his capacity as President of the Philippine Education Foundation; that his
liability is only secondary; and that he believed that he was signing only as an accommodation party. 16
On March 15, 1960, the plaintiff filed an ex parte motion to declare the defendant in default on the ground that the defendant should
have filed his answer on March 11, 1960. He contends that by filing his answer on March 12, 1960, defendant was one day late. 17 On
March 19, 1960 the trial court declared the defendant in default. 18 The defendant learned of the order declaring him in default on March
21, 1960. On March 22, 1960 the defendant filed a motion to set aside the order of default alleging that although the order of the court
dated March 7, 1960 was received on March 11, 1960 at 5:00 in the afternoon, it could not have been reasonably expected of the
defendant to file his answer on the last day of the reglementary period, March 11, 1960, within office hours, especially because the
order of the court dated March 7, 1960 was brought to the attention of counsel only in the early hours of March 12, 1960. The defendant
also alleged that he has a good and substantial defense. Attached to the motion are the affidavits of deputy sheriff Mamerto de la Cruz
that he served the order of the court dated March 7, 1960 on March 11, 1960, at 5:00 o'clock in the afternoon and the affidavit of the
defendant Aruego that he has a good and substantial defense. 19 The trial court denied the defendant's motion on March 25, 1960. 20
On May 6, 1960, the trial court rendered judgment sentencing the defendant to pay to the plaintiff the sum of P35,444.35 representing

55 Negotiable Instruments – Form and Interpretation (Sec 1-23)


the total amount of his obligation to the said plaintiff under the twenty-two (22) causes of action alleged in the complaint as of
November 15, 1957 and the sum of P10,000.00 as attorney's fees. 21
On May 9, 1960 the defendant filed a notice of appeal from the order dated March 25, 1961 denying his motion to set aside the order
declaring him in default, an appeal bond in the amount of P60.00, and his record on appeal. The plaintiff filed his opposition to the
approval of defendant's record on appeal on May 13, 1960. The following day, May 14, 1960, the lower court dismissed defendant's
appeal from the order dated March 25, 1960 denying his motion to set aside the order of default. 22 On May 19, 1960, the defendant
filed a motion for reconsideration of the trial court's order dismissing his appeal. 23 The plaintiff, on May 20, 1960, opposed the
defendant's motion for reconsideration of the order dismissing appeal. 24 On May 21, 1960, the trial court reconsidered its previous
order dismissing the appeal and approved the defendant's record on appeal. 25 On May 30, 1960, the defendant received a copy of a
notice from the Clerk of Court dated May 26, 1960, informing the defendant that the record on appeal filed ed by the defendant was
forwarded to the Clerk of Court of Appeals. 26
On June 1, 1960 Aruego filed a motion to set aside the judgment rendered after he was declared in default reiterating the same ground
previously advanced by him in his motion for relief from the order of default. 27 Upon opposition of the plaintiff filed on June 3, 1960, 28
the trial court denied the defendant's motion to set aside the judgment by default in an order of June 11, 1960. 29 On June 20, 1960, the
defendant filed his notice of appeal from the order of the court denying his motion to set aside the judgment by default, his appeal bond,
and his record on appeal. The defendant's record on appeal was approved by the trial court on June 25, 1960. 30 Thus, the defendant
had two appeals with the Court of Appeals: (1) Appeal from the order of the lower court denying his motion to set aside the order of
default docketed as CA-G.R. NO. 27734-R; (2) Appeal from the order denying his motion to set aside the judgment by default docketed
as CA-G.R. NO. 27940-R.
In his brief, the defendant-appellant assigned the following errors:
I
THE LOWER COURT ERRED IN HOLDING THAT THE DEFENDANT WAS IN DEFAULT.
II
THE LOWER COURT ERRED IN ENTERTAINING THE MOTION TO DECLARE DEFENDANT IN DEFAULT
ALTHOUGH AT THE TIME THERE WAS ALREADY ON FILE AN ANSWER BY HIM WITHOUT FIRST DISPOSING
OF SAID ANSWER IN AN APPROPRIATE ACTION.
III
THE LOWER COURT ERRED IN DENYING DEFENDANT'S PETITION FOR RELIEF OF ORDER OF DEFAULT
AND FROM JUDGMENT BY DEFAULT AGAINST DEFENDANT. 31
It has been held that to entitle a party to relief from a judgment taken against him through his mistake, inadvertence, surprise or
excusable neglect, he must show to the court that he has a meritorious defense. 32 In other words, in order to set aside the order of
default, the defendant must not only show that his failure to answer was due to fraud, accident, mistake or excusable negligence but
also that he has a meritorious defense.
The record discloses that Aruego received a copy of the complaint together with the summons on December 2, 1960; that on December
17, 1960, the last day for filing his answer, Aruego filed a motion to dismiss; that on December 22, 1960 the lower court dismissed the
complaint; that on January 23, 1960, the plaintiff filed a motion for reconsideration and on March 7, 1960, acting upon the motion for
reconsideration, the trial court issued an order setting aside the order of dismissal; that a copy of the order was received by the
defendant on March 11, 1960 at 5:00 o'clock in the afternoon as shown in the affidavit of the deputy sheriff; and that on the following
day, March 12, 1960, the defendant filed his answer to the complaint.
The failure then of the defendant to file his answer on the last day for pleading is excusable. The order setting aside the dismissal of the
complaint was received at 5:00 o'clock in the afternoon. It was therefore impossible for him to have filed his answer on that same day
because the courts then held office only up to 5:00 o'clock in the afternoon. Moreover, the defendant immediately filed his answer on
the following day.
However, while the defendant successfully proved that his failure to answer was due to excusable negligence, he has failed to show
that he has a meritorious defense. The defendant does not have a good and substantial defense.
Defendant Aruego's defenses consist of the following:
a) The defendant signed the bills of exchange referred to in the plaintiff's complaint in a representative capacity, as the then President
of the Philippine Education Foundation Company, publisher of "World Current Events and Decision Law Journal," printed by Encal
Press and Photo-Engraving, drawer of the said bills of exchange in favor of the plaintiff bank;
b) The defendant signed these bills of exchange not as principal obligor, but as accommodation or additional party obligor, to add to the
security of said plaintiff bank. The reason for this statement is that unlike real bills of exchange, where payment of the face value is
advanced to the drawer only upon acceptance of the same by the drawee, in the case in question, payment for the supposed bills of
exchange were made before acceptance; so that in effect, although these documents are labelled bills of exchange, legally they are not
bills of exchange but mere instruments evidencing indebtedness of the drawee who received the face value thereof, with the defendant
as only additional security of the same. 33
The first defense of the defendant is that he signed the supposed bills of exchange as an agent of the Philippine Education Foundation
Company where he is president. Section 20 of the Negotiable Instruments Law provides that "Where the instrument contains or a
person adds to his signature words indicating that he signs for or on behalf of a principal or in a representative capacity, he is not liable
on the instrument if he was duly authorized; but the mere addition of words describing him as an agent or as filing a representative
character, without disclosing his principal, does not exempt him from personal liability."

56 Negotiable Instruments – Form and Interpretation (Sec 1-23)


An inspection of the drafts accepted by the defendant shows that nowhere has he disclosed that he was signing as a representative of
the Philippine Education Foundation Company. 34 He merely signed as follows: "JOSE ARUEGO (Acceptor) (SGD) JOSE ARGUEGO
For failure to disclose his principal, Aruego is personally liable for the drafts he accepted.
The defendant also contends that he signed the drafts only as an accommodation party and as such, should be made liable only after a
showing that the drawer is incapable of paying. This contention is also without merit.
An accommodation party is one who has signed the instrument as maker, drawer, indorser, without receiving value therefor and for the
purpose of lending his name to some other person. Such person is liable on the instrument to a holder for value, notwithstanding such
holder, at the time of the taking of the instrument knew him to be only an accommodation party. 35 In lending his name to the
accommodated party, the accommodation party is in effect a surety for the latter. He lends his name to enable the accommodated party
to obtain credit or to raise money. He receives no part of the consideration for the instrument but assumes liability to the other parties
thereto because he wants to accommodate another. In the instant case, the defendant signed as a drawee/acceptor. Under the
Negotiable Instrument Law, a drawee is primarily liable. Thus, if the defendant who is a lawyer, he should not have signed as an
acceptor/drawee. In doing so, he became primarily and personally liable for the drafts.
The defendant also contends that the drafts signed by him were not really bills of exchange but mere pieces of evidence of
indebtedness because payments were made before acceptance. This is also without merit. Under the Negotiable Instruments Law, a
bill of exchange is an unconditional order in writting addressed by one person to another, signed by the person giving it, requiring the
person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer.
36
As long as a commercial paper conforms with the definition of a bill of exchange, that paper is considered a bill of exchange. The
nature of acceptance is important only in the determination of the kind of liabilities of the parties involved, but not in the determination of
whether a commercial paper is a bill of exchange or not.
It is evident then that the defendant's appeal 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. 37
WHEREFORE, the order appealed from in Civil Case No. 42066 of the Court of First Instance of Manila denying the petition for relief
from the judgment rendered in said case is hereby affirmed, without pronouncement as to costs.
SO ORDERED.

57 Negotiable Instruments – Form and Interpretation (Sec 1-23)


[G.R. No. 142047. July 10, 2006]
SPS. SERGIO AND MILAGROS OJEDA versus ANDRELINA ORBETA
Third Division
Sirs/Mesdames:
Quoted hereunder, for your information, is a resolution of this Court dated JULY 10, 2006.
G.R. No. 142047 (Sps. Sergio and Milagros Ojeda versus Andrelina Orbeta)
Petitioner spouses Sergio Ojeda and Milagros Ojeda seek a reversal of the February 24, 2000 Decision rendered by the Court of
Appeals in CA-G.R. CV No. 59985 entitled Andrelina Orbeta v. Sps. Sergio Ojeda and Milagros Ojeda. The questioned decision
affirmed the February 23, 1995 Decision of the Regional Trial Court, Branch 106 of Quezon City in Civil Case No. Q-91-7794.
The facts of this case are not complicated.
From 1986 to 1989, the spouses Ojeda obtained various loans they would use as additional capital from Andrelina Orbeta, a general
merchandiser and former market stall holder. Over time, Orbeta extended a total of 18 loans to the spouses. Although the couple
failed to pay their obligations on time, Orbeta continued to accommodate them, and lent them more money on the assurance that they
would soon pay all their debts. Every time Orbeta would verbally demand payment, she was told that payment was forthcoming and
there was nothing to worry about since the spouses' business was doing well and the couple had a daughter based in Japan who
always sent them money. To their sincerity, they aver, they even delivered a copy of the registration papers of one of their vehicles to
Orbeta.
Notwithstanding all their promises, however, the spouses' obligations remained unpaid. Orbeta made numerous demands but all
attempts to collect from the couple proved futile. Frustrated by their failure to pay, Orbeta through her lawyer sent a demand letter to
the spouses on March 1989. Eventually, on July 1989, after an accounting of all outstanding loans due, Milagros Ojeda issued Security
Bank and Trust Company Check No. 027836 dated September 1, 1989 for P487,133.87, representing full settlement of all obligations
due in favor of Orbeta. When presented for payment, however, the check was dishonored for having been drawn against an account
already closed.
Consequently, Orbeta filed Criminal Case No. Q-90-10226 for violation of Batas Pambansa Bilang 22 against Milagros Ojeda with the
Regional Trial Court of Quezon City. After a plea of guilty, judgment was rendered against the accused in a decision dated October 11,
1990. The dispositive portion of the decision read:
WHEREFORE, considering the plea of Guilty entered by accused Milagros Ojeda this morning, the Court hereby renders judgment:
1. Finding said accused GUILTY beyond reasonable doubt of the offense charged;
2. Sentencing her to suffer the penalty of ONE (1) YEAR imprisonment; and
3. To pay costs.
The decision was promulgated in open Court this morning in the presence of the accused herself, Assistant City Prosecutor Perpetuo
LB Alonzo and Atty. Renerio S. Payumo.
SO ORDERED.
Consistent with the reservation made by Ojeda in the BP 22 case, Civil Case No. Q-91-7794 was subsequently filed against the
spouses to collect on the civil aspect of the BP 22 case. In the civil case, the Regional Trial Court ruled as follows:
WHEREFORE, finding no cogent reason to deny the relief being prayed for, the cause of action of plaintiff having been fully established
and proven by preponderant evidence, judgment is hereby rendered ordering defendants to pay plaintiff:
1. The amount of Four Hundred Eighty Seven Thousand One Hundred Thirteen and 87/100 (P487,113.87) pesos with 12% interest
from filing of the case until fully paid.
2. 25% of the principal obligation as and by way of attorney's fees.
3. Cost of suit.
SO ORDERED.
Aggrieved, the spouses brought their case to the Court of Appeals where the Regional Trial Court's judgment was affirmed, to wit:
WHEREFORE, with the sole modification that the award for attorney's fee[s] is hereby eliminated, the Judgment appealed from is in all
other respects AFFIRMED, with the costs of this instance to be taxed against the defendants-appellants.
SO ORDERED.
Before us now are the following issues: (1) Are the spouses liable for issuing Security Bank and Trust Company Check No. 027836? (2)
Did the Court of Appeals err in upholding the propriety of the civil case that was instituted separately from the BP 22 case?
To justify their prayer for a reversal of the Court of Appeals' decision, the spouses insist that there are special and important reasons
present in the case which constitute a question of law and there was a misapprehension of facts committed by the Court of Appeals
which must be rectified.
Petitioners maintain that any obligation arising from Security Bank and Trust Company Check No. 027836 is invalid and illegal since the
same was issued in blank except for the signature of Milagros Ojeda. They further claim that they already paid P55,000 to satisfy their
58 Negotiable Instruments – Form and Interpretation (Sec 1-23)
obligation to Orbeta of P30,000 only. The couple also aver that the motion of Orbeta to file a separate civil action was merely noted by
the Regional Trial Court in the BP 22 case and there was no order granting the institution of a separate civil action.
Respondent Orbeta, on the other hand, counters that the errors raised by the spouses deal with questions of fact which have already
been passed upon and decided by the Regional Trial Court and the Court of Appeals and cannot now be raised in this petition for
review. Orbeta also contends that, the couple cannot assert for the first time that the motion to file a separate civil action was merely
noted and no order was issued by the Regional Trial Court granting the same since a full blown trial had been conducted without the
said issue having been raised by the spouses, hence, they are barred from doing so, since they are considered to have waived any
objection they may have had on the subject. Finally, Orbeta points out that the judgment in the BP 22 case did not contain an award for
civil liability which is tantamount to the Regional Trial Court's approval of the motion.
To resolve the first issue, we must here emphasize that the jurisdiction of this Court in a petition such as this is limited to reviewing
errors of law that might have been committed by the lower court. The allegation of the spouses that Security Bank and Trust Company
Check No. 027836 was delivered to Orbeta in blank except for the signature of Milagros Ojeda and the amount of P10,000 annotated at
the back of the check, and their contention that they cannot be held liable for the face value of the check since Milagros Ojeda was not
the one who filled up the date, name of the payee and the amount appearing on the check, are questions of fact that require us to re-
examine the evidence presented by the contending parties during trial. This cannot be done in a petition for review. Under Rule 45,
only questions of law may be raised in a petition for review, except in very few specified instances, e.g. where there is variance in the
factual findings of the trial and appellate courts. Since both the Regional Trial Court and the Court of Appeals agree on the cited facts,
we are bound by their factual findings.
In any event, the spouses do not deny that the check was delivered to Orbeta and that the signature appearing on the check belongs to
Milagros Ojeda. Even if the check was delivered to Orbeta in blank, we must stress that the presumption is that the latter had prima
facie authority to complete the check by filling up the same. Here, the provision of Section 14 of the Negotiable Instruments Law is
pertinent:
SEC. 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. And a signature on a blank paper delivered by the
person making the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie authority
to fill it up as such for any amount. 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. But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all
purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a
reasonable time. (Emphasis supplied.)
The law merely requires that the instrument be in the possession of a person other than the drawer or maker, and from such
possession, together with the fact that the instrument is wanting in a material particular, the law presumes agency to fill up the blanks.
Because of the presumption of authority, the burden of proving that there was no authority or that the authority granted was exceeded
is placed on the person questioning such authority. There is nothing on record to show that the prima facie presumption created by the
afore-quoted section was successfully refuted by the spouses. Therefore, the couple's stance that they cannot be held liable for the
check because they were not the ones who wrote the date, the name of the payee and the amount, is untenable.
On the second issue, it appears that an urgent motion to file a separate civil action was filed by Orbeta on October 11, 1990, which
motion was correspondingly noted by the Regional Trial Court in its decision. Since the civil liability involved in this case is one that
arises from a crime, the rule is that the same is impliedly instituted with the criminal action unless the offended party expressly waives
the civil action; reserves his right to institute it separately; or institutes the civil action prior to the filing of the criminal case. The purpose
of the rule requiring reservation is to prevent the offended party from recovering damages twice for the same act or omission.
Orbeta's intention to reserve her right to recover the civil liability arising from the BP 22 case is clear from the time she filed the urgent
motion. The fact that the Regional Trial Court did not provide for an award of damages in its decision is also a clear recognition of
Orbeta's reservation.
Contrary to the spouses' argument, an order by the Regional Trial Court granting the urgent motion to file a separate civil action is not
necessary since the rules only require that the offended party make the reservation before the prosecution starts to present its evidence
and under circumstances affording the offended party a reasonable opportunity to make such reservation.
Lastly, we agree with respondent that it is now too late for the spouses to question the institution of the civil case separately from the
BP 22 case. A full blown trial was conducted in the civil case with the participation of the spouses, but they never raised any objection
thereto, and they cannot be allowed here and now to raise this issue for the first time.
WHEREFORE, the instant petition is DENIED. The February 24, 2000 Decision of the Court of Appeals sustaining the February 23,
1995 Decision of the Regional Trial Court is AFFIRMED.
Costs against petitioners.
SO ORDERED.

59 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 111190 June 27, 1995


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

BELLOSILLO, J.:
RAUL H. SESBREÑO filed a complaint for damages against Assistant City Fiscals Bienvenido N. Mabanto, Jr., and Dario D. Rama, Jr.,
before the Regional Trial Court of Cebu City. After trial judgment was rendered ordering the defendants to pay P11,000.00 to the
plaintiff, private respondent herein. The decision having become final and executory, on motion of the latter, the trial court ordered its
execution. This order was questioned by the defendants before the Court of Appeals. However, on 15 January 1992 a writ of execution
was issued.
On 4 February 1992 a notice of garnishment was served on petitioner Loreto D. de la Victoria as City Fiscal of Mandaue City where
defendant Mabanto, Jr., was then detailed. The notice directed petitioner not to disburse, transfer, release or convey to any other
person except to the deputy sheriff concerned the salary checks or other checks, monies, or cash due or belonging to Mabanto, Jr.,
under penalty of law. 1 On 10 March 1992 private respondent filed a motion before the trial court for examination of the garnishees.
On 25 May 1992 the petition pending before the Court of Appeals was dismissed. Thus the trial court, finding no more legal obstacle to
act on the motion for examination of the garnishees, directed petitioner on 4 November 1992 to submit his report showing the amount
of the garnished salaries of Mabanto, Jr., within fifteen (15) days from receipt 2 taking into consideration the provisions of Sec. 12, pars.
(f) and (i), Rule 39 of the Rules of Court.
On 24 November 1992 private respondent filed a motion to require petitioner to explain why he should not be cited in contempt of court
for failing to comply with the order of 4 November 1992.
On the other hand, on 19 January 1993 petitioner moved to quash the notice of garnishment claiming that he was not in possession of
any money, funds, credit, property or anything of value belonging to Mabanto, Jr., except his salary and RATA checks, but that said
checks were not yet properties of Mabanto, Jr., until delivered to him. He further claimed that, as such, they were still public funds which
could not be subject to garnishment.
On 9 March 1993 the trial court denied both motions and ordered petitioner to immediately comply with its order of 4 November 1992. 3
It opined that the checks of Mabanto, Jr., had already been released through petitioner by the Department of Justice duly signed by the
officer concerned. Upon service of the writ of garnishment, petitioner as custodian of the checks was under obligation to hold them for
the judgment creditor. Petitioner became a virtual party to, or a forced intervenor in, the case and the trial court thereby acquired
jurisdiction to bind him to its orders and processes with a view to the complete satisfaction of the judgment. Additionally, there was no
sufficient reason for petitioner to hold the checks because they were no longer government funds and presumably delivered to the
payee, conformably with the last sentence of Sec. 16 of the Negotiable Instruments Law.
With regard to the contempt charge, the trial court was not morally convinced of petitioner's guilt. For, while his explanation suffered
from procedural infirmities nevertheless he took pains in enlightening the court by sending a written explanation dated 22 July 1992
requesting for the lifting of the notice of garnishment on the ground that the notice should have been sent to the Finance Officer of the
Department of Justice. Petitioner insists that he had no authority to segregate a portion of the salary of Mabanto, Jr. The explanation
however was not submitted to the trial court for action since the stenographic reporter failed to attach it to the record. 4
On 20 April 1993 the motion for reconsideration was denied. The trial court explained that it was not the duty of the garnishee to inquire
or judge for himself whether the issuance of the order of execution, writ of execution and notice of garnishment was justified. His only
duty was to turn over the garnished checks to the trial court which issued the order of execution. 5
Petitioner raises the following relevant issues: (1) whether a check still in the hands of the maker or its duly authorized representative is
owned by the payee before physical delivery to the latter: and, (2) whether the salary check of a government official or employee
funded with public funds can be subject to garnishment.
Petitioner reiterates his position that the salary checks were not owned by Mabanto, Jr., because they were not yet delivered to him,
and that petitioner as garnishee has no legal obligation to hold and deliver them to the trial court to be applied to Mabanto, Jr.'s
judgment debt. The thesis of petitioner is that the salary checks still formed part of public funds and therefore beyond the reach of
garnishment proceedings.
Petitioner has well argued his case.
Garnishment is considered as a species of attachment for reaching credits belonging to the judgment debtor owing to him from a
stranger to the litigation. 6 Emphasis is laid on the phrase "belonging to the judgment debtor" since it is the focal point in resolving the
issues raised.

60 Negotiable Instruments – Form and Interpretation (Sec 1-23)


As Assistant City Fiscal, the source of the salary of Mabanto, Jr., is public funds. He receives his compensation in the form of checks
from the Department of Justice through petitioner as City Fiscal of Mandaue City and head of office. Under Sec. 16 of the Negotiable
Instruments Law, every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose
of giving effect thereto. As ordinarily understood, delivery means the transfer of the possession of the instrument by the maker or
drawer with intent to transfer title to the payee and recognize him as the holder thereof. 7
According to the trial court, the checks of Mabanto, Jr., were already released by the Department of Justice duly signed by the officer
concerned through petitioner and upon service of the writ of garnishment by the sheriff petitioner was under obligation to hold them for
the judgment creditor. It recognized the role of petitioner 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 8 we ruled that —
The salary check of a government officer or employee such as a teacher does not belong to him before it is physically
delivered to him. Until that time the check belongs to the government. Accordingly, before there is actual delivery of
the check, the payee has no power over it; he cannot assign it without the consent of the Government.
As a necessary consequence of being public fund, the checks may not be garnished to satisfy the judgment. 9 The rationale behind this
doctrine is obvious consideration of public policy. The Court succinctly stated in Commissioner of Public Highways v. San Diego 10 that

The functions and public services rendered by the State cannot be allowed to be paralyzed or disrupted by the
diversion of public funds from their legitimate and specific objects, as appropriated by law.
In denying petitioner's motion for reconsideration, the trial court expressed the additional ratiocination that it was not the duty of the
garnishee to inquire or judge for himself whether the issuance of the order of execution, the writ of execution, and the notice of
garnishment was justified, citing our ruling in Philippine Commercial Industrial Bank v. Court of Appeals. 11 Our precise ruling in that
case was that "[I]t is not incumbent upon the garnishee to inquire or to judge for itself whether or not the order for the advance
execution of a judgment is valid." But that is invoking only the general rule. We have also established therein the compelling reasons,
as exceptions thereto, which were not taken into account by the trial court, e.g., a defect on the face of the writ or actual knowledge by
the garnishee of lack of entitlement on the part of the garnisher. It is worth to note that the ruling referred to the validity of advance
execution of judgments, but a careful scrutiny of that case and similar cases reveals that it was applicable to a notice of garnishment as
well. In the case at bench, it was incumbent upon petitioner to inquire into the validity of the notice of garnishment as he had actual
knowledge of the non-entitlement of private respondent to the checks in question. Consequently, we find no difficulty concluding that
the trial court exceeded its jurisdiction in issuing the notice of garnishment concerning the salary checks of Mabanto, Jr., in the
possession of petitioner.
WHEREFORE, the petition is GRANTED. The orders of 9 March 1993 and 20 April 1993 of the Regional Trial Court of Cebu City, Br.
17, subject of the petition are SET ASIDE. The notice of garnishment served on petitioner dated 3 February 1992 is ordered
DISCHARGED.
SO ORDERED.

61 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-42847 April 29, 1977
THE PEOPLE OF THE PHILIPPINES, petitioner,
vs.
CECILIA QUE YABUT and HON. JESUS DE VEGA, as Judge of the Court of First Instance of Bulacan, Branch II, respondents.
G.R. No. L-42902 April 29, 1977
THE PEOPLE OF THE PHILIPPINES,petitioner,
vs.
GEMINIANO YABUT, JR., respondent.
Provincial Fiscal Pascual Kliatchko and Office of the Solicitor General, for petitioner.
Z oilo P. Perlas as private prosecutor.
Geminiano F. Yabut for private respondents.

MARTIN, J.:
Two novel questions of law are presented to Us in these petitions to review on certiorari the quashal orders of the Court of First
Instance of Bulacan, sitting at Malolos, first, the rule on venue or jurisdiction in a case of estafa for postdating or issuing a check without
insufficient funds, and second, whether the new law on checks punishes the postdating or issuance thereof in payment of a pre-existing
obligation.
Private respondent Cecilia Que Yabut in L-42847 was accused of estafa by means of false pretenses before the Court of First Instance
of Bulacan, presided over by respondent Judge Jesus de Vega. The information, docketed as criminal case 1404, charges:
That during the period from February 22, to February 26, 1975, in the Municipality of Malolos, Province of Bulcan,
Philippines, and within the jurisdiction of this Honorable Court, the said accused Cecilia Que Yabut, as treasurer of
the Yabut Transit Line, by means of false pretenses and pretending to have sufficient funds in the Merchants Banking
Corporation, located and doing business in Caloocan City, prepared issued and make out Check Nos. CB-19035 B,
CB-190396 and CB-190397, dated February 22, 1975, February 24, 1975 and February 26, 1975, in the total sum of
P6,568.94, drawn against the Merchants Banking Corporation, payable to Freeway Tires Supply, owned and
operated by Alicia P. Andan, in payment of articles and merchandise delivered to and received by said accused, gave
and delivered the said checks to the said Freeway Tires Supply, the said accused Cecilia Que Yabut well knowing
that at the time there was no or insufficient funds in the said Merchants Banking Corporation, and upon presentation
of the said checks to the bank, the checks were dishonored and inspite of repeated demands by the owner of the
Freeway Tires Supply to deposit the necessary funds to cover the checks within the reglementary period enjoined by
law, failed and refused to do so, to the damage and prejudice of Alicia P. Andan, owner and operator of the Freeway
Tires Supply, in the total amount of P6,568.94.
Instead of entering a plea, respondent Cecilia Que Yabut filed a motion to quash on September 1, 1975, contending that the acts
charged do not constitute the offense as there is no allegation that the postdated checks were issued and delivered to the complainant
prior to or simultaneously with the delivery of the merchandise, the crime of estafa not being indictable ,when checks are postdated or
issued in payment of pre-existing obligation; and the venue was improperly laid in Malolos, Bulacan, because the postdated checks
were issued and delivered to, and received by, the complainant in the City of Caloocan, where she (respondent Que Yabut) holds
office.
An opposition was interposed by the People, maintaining that the new law on checks (Rep. Act 4885, amending Art. 315, par. 2 (d),
Revised Penal Code), penalizes the postdating or issuance thereof in payment of pre-existing obligation and that the Malolos court can
exercise jurisdiction over the case, since the last ingredient of the offense, i.e., damage, transpired in Bulacan (residence of
complainant) after the dishonor of the checks for lack of funds.
Judge Jesus de Vega quashed the information, as prayed for by respondent Que Yabut, on November 10, 1975 for the reason "that the
proper venue in this case is Caloocan City and not Bulacan." Whether estafa lies for postdating or issuing a check in payment of a pre-
existing obligation was not by respondent Judge.
The People's motion for reconsideration of this dismissal order was denied on January 12, 1976.
The other private respondent, Germiniano Yabut, Jr. (L-42902), husband of respondent Cecilia Que Yabut, stood charged in criminal
case 1405-M before the Court of First Instance of Bulacan, presided over by Judge Edgardo L. Paras, of the crime of estafa under Art.
315, par. 2 (d) of the Revised Penal Code in that:
(D)uring the period from February 23 to April 9, 1975, in the municipality of Malolos, Province of Bulacan, Philippines,
and within the jurisdiction of this Honorable Court, the said accused Geminiano Yabut, Jr., as presided of the Yabut
Transit Line, by means of false pretenses and pretending to have sufficient funds in the Merchants Banking
Corporation and Manufacturers Bank and Trust Company, located and doing business in Caloocan City, prepared,

62 Negotiable Instruments – Form and Interpretation (Sec 1-23)


issued and make out Check Nos. CB-192042 B, CB-192043 B, 423123, CB-191988 B, 423124, CB-192044 B, CB-
192045 B, CB-193737 B, CB-193738 B, CB-193739 B, CB-199953 B, CB-199954 B, CB-199955 B, and CB-199956
B, dated February 23, 26, 27, March 1, 3, 10, 11, 12, April 4, 7, 8 and 9, 1975 in the total sum of P37,206.00,drawn
against the Merchants Banking Corporation and Manufacturers Bank and Trust Company, payable to the Free Tires
Supply and Free Caltex Station, owned and operated by Alicia P. Andan, in payment articles and merchandise
delivered to and received by said accused, gave and delivered the said checks to said Freeway Tires Supply and
Freeway Caltex Station, the said accused Geminiano Yabut, Jr. well knowing that at the time there was no or
insufficient funds in the said Merchants Banking Corporation and Manufacturers Bank and Trust Company, and upon
presentation of the said checks to the bank, the checks were dishonored and inspite of repeated demands by the
owner of the Freeway Tires Supply and Freeway Caltex Station to deposit the necessary funds to cover the cheeks
within the reglementary period enjoined by law, failed and refused to do so, to the damage and Prejudice of Alicia P.
Andan, owner and operator of the Freeway Tires Supply and Freeway Caltex Station in the total sum of P37,206.00.
Like his wife, respondent Geminiano Jr. moved to quash the information on two grounds: (1) the facts recited do not constitute an
offense because the checks were issued in payment of a pre-existing obligation; and (2) the venue was improperly laid, considering
that the postdated checks were issued and delivered to and received by the complainant in City of Caloocan, where respondent holds
office.
On October 13, 1975, Judge Paras quashed the information because "(t)he elements of the crime (issuance of the rubber check,
attempted encashment, and refusal to honor) alleged in the Information all took place within the territorial jurisdiction, not of Bulacan,
but of Caloocan City."
The People moved for reconsideration, but on February 9, 1976, the motion was denied.
Hence, the two petitions for review on certiorari were filed by the People of the Philippines.
We find both petitions to be impressed with merits.
1. Estafa by postdating or issuing a bad check under Art. 315, par. 2 (d) of the Revised Penal Code may be a transitory or continuing
offense. 1 Its basic elements of deceit and damage 2 may independently arise in separate places. In the event of such occurrence, the
institution of the criminal action in either place is legally allowed. Section 14(a), Rule 110 of the Revised Rules of Court provides: "In all
criminal prosecutions the action shall be instituted and tried in the Court of the municipality or province wherein the offense was
committed or any one of the essential ingredients thereof took place." The theory is that a person indicted with a transitory offense may
be validly tried in any jurisdiction where the offense was in part committed. 3 However, if all the acts material and essential to the crime
and requisite of its consummation occurred in one municipality or province, the court of that municipality or province has the sole
jurisdiction to try the case.
The estafa charged in the two informations involved in the case before Us appears to be transitory or continuing in nature. Deceit has
taken place in Malolos, Bulacan, while the damage in Caloocan City, where the checks were dishonored by the drawee banks there.
Jurisdiction can, therefore, be entertained by either the Malolos court or the Caloocan court. While the subject checks were written,
signed, or dated in Caloocan City, they were not completely made or drawn there, but in Malolos, Bulacan, where they were uttered
and delivered. That is the place of business and residence of the payee. The place where the bills were written, signed, or dated does
not necessarily fix or determine the place where they were executed. What is of decisive importance is the delivery thereof. The
delivery of the instrument is the final act essential to its consummation as an obligation. 4 An undelivered bill or note is inoperative. Until
delivery, the contract is revocable. 5 And the issuance as well as the delivery of the check must be to a person who takes it as a holder,
which means "(t)he payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof." 6 Delivery of the check signifies
transfer of possession, whether actual or constructive, from one person to another with intent to transfer title thereto. 7 Thus, the
penalizing clause of the provision of Art. 315, par. 2 (d) states: "By postdating a check, or issuing a check in payment of an obligation
when the offender had no funds in the bank, or his funds deposited therein were not sufficient to cover the amount of the check."
Clearly, therefore, the element of deceit thru the issuance and delivery of the worthless checks to the complainant took place in
Malolos, Bulcan, conferring upon a court in that locality jurisdiction to try the case.
Modesto Yambao's receipt of the bad checks from Cecilia Que Yabut or Geminiano Yabut Jr. in Caloocan City cannot, contrary to the
holding of the respodent Judges, be licitly taken as delivery of the checks to the complainant Alicia P. Andan at Caloocan City to fix the
venue there. He did not take delivery of the checks as holder, i.e., as "payee" or "indorse". And there appears to be no contract of
agency between Yambao and Andan so as to bind the latter for the acts of the former. Alicia P. Andan declared in that sworn testimony
before the investigating fiscal that Yambao is but her "messenger" or "part-time employee." 8 There was no special fiduciary relationship
that permeated their dealings. For a contract of agency to exist, the consent of both parties is essential, the principal consent of both
parties is essential, the principal consents that the other party, the agent, shall act on his behalf, and the agent consents so to act. 9 It
must exist as a fact. The law makes no presumption thereof. The person alleging it has the burden of proof to show, not only the fact of
its existence, but also its nature and extent. 10 This is more imperative when it is considered that the transaction dealt with involves
checks, which are not legal tender, and the creditor may validly refuse the same as payment of obligation. 11
Furthermore, the place of business of the offended party, the Freeway Tires Supply and Freeway Caltex Station, is at Malolos, Bulacan,
from where the tire and gas purchases were amade by the two private respondents. As a consequence, payment thereof should be
considered effected at Malolos, Bulacan. "(I)f the undertaking is to deliver a determinate thing, the payment shall be made wherever the
thing might be at the moment the obligation was constituted. 12 The receipt by the two private respondents at Caloocan City of the tires
and gas supplies from Malolos, Bulacan, signifies but the consummation of the contract between the parties. It was the result of an
obligation previously contracted at Malolos, Bulacan. 13 The averments in the informations do not indicate that the complainant is an
ambulant peddler of tires and gas, but maintains a fixed and determinate place of business at Malolos, Bulacan. Obligations, therefore,
contracted as regards her business must presumptively be at her place of business.
2. In general terms, a prosecution for issuing a worthless check with intent to defraud is in the county where the check was uttered and
delivered. 14 Thus, where a check was drawn in Merced County and made payable at a Merced County bank, but delivered to a
63 Negotiable Instruments – Form and Interpretation (Sec 1-23)
merchant in Sacramento County by the drawer's agent, the Sacramento County courts and had jurisdiction of a prosecution against the
drawer for uttering a check without funds or credit with intent to defraud. 15 The venue of the offense lies at the place where the check
was executed and delivered to the payee. 16 Since in the instant case it was in Malolos, Bulacan where the checks were uttered and
delivered to complaint Andan, at which place, her business and residence were also located, the criminal prosecution of estafa may be
lodged therein.17 As earlier pointed out, the giving of the checks by the two private respondents in Caloocan City to Modesto Yambo
cannot be treated as valid delivery of the checks, because Yambo is a mere "messenger" or "part-time employee" and not an agent of
complaint Alicia P. Andan.
3. The next point of inquiry is whether or not the postdating or issuing of a worthless check in payment of a pre-existing obligation
constitutes estafa under Art. 315, par. 2 (d) of the Revised Penal Code. We feel, however, that due to the absence of concrete
evidence on the specific nature of the obligation assumed or supposedly discharged by the issuance of the bad checks, resolution of
this controversial issue on the basis of the averments in the criminal informations alone is not yet ripe. As revealed by the pleadings, the
parties are at divergence on the character of the obligation for which the private respondents issued the checks intended as payment
thereof. Private respondents maintain that the obligation is a pre-existing one. The prosecution, on the other hand, represented to the
trial courts in its Opposition to the Motions to Quash: "We will prove by our evidence that said checks are not in payment of a pre-
existing obligation." 18 The deferment of the resolution becomes more imperative when it is considered that the question raised is one of
first impression and of consequential far-ranging effects on transactions in checks.
4. Ad interim, We hold that the facts charged in the informations against private respondents, contrary to their claim, constitute estafa
under Art. 315, par. 2 (d) of the Revised Penal Code. In considering a motion to quash based on the ground "(t)hat the facts charged do
not constitute an offense," 19 the point of resolution is whether the facts alleged, if hypothetically admitted, would meet the essential
elements of the offense as defined in the law. 20 The facts alleged in the criminal charge should be taken as they are. 21 An analysis of
the two informations involved in the present case convinces Us that the facts charged therein substantially constitute the integral
elements of the offense as defined in the law. And the averments in the two informations sufficiently inform the two private respondents
of the nature and cause of the accusations against them, thereby defeating any constitutional objection of lack of notice. 22
ACCORDINGLY, the appealed orders of the respondent trial courts ordering the quashal of the estafa informations against the two
private respondents in the petitions at bar are hereby reversed and set aside. The informations, as they are, substantially conform with
the crime charged as defined in the law. Let the arraignment of the private respondents in the criminal cases below be set at the
earliest date and, thereafter, the trial on the merits to proceed immediately. No costs. Republic of the Philippines

64 Negotiable Instruments – Form and Interpretation (Sec 1-23)


SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 107898 December 19, 1995


MANUEL LIM and ROSITA LIM, petitioners,
vs.
COURT OF APPEALS and PEOPLE OF THE PHILIPPINES, respondents.

BELLOSILLO, J.:
MANUEL LIM and ROSITA LIM, spouses, were charged before the Regional Trial Court of Malabon with estafa on three (3) counts
under Art. 315, par. 2 (d), of The Revised Penal Code, docketed as Crim. Cases Nos. 1696-MN to 1698-MN. The Informations
substantially alleged that Manuel and Rosita, conspiring together, purchased goods from Linton Commercial Company, Inc. (LINTON),
and with deceit issued seven Consolidated Bank and Trust Company (SOLIDBANK) checks simultaneously with the delivery as
payment therefor. When presented to the drawee bank for payment the checks were dishonored as payment on the checks had been
stopped and/or for insufficiency of funds to cover the amounts. Despite repeated notice and demand the Lim spouses failed and
refused to pay the checks or the value of the goods.
On the basis of the same checks, Manuel and Rosita Lim were also charged with seven (7) counts of violation of B.P. Blg. 22,
otherwise known as the Bouncing Checks Law, docketed as Crim. Cases Nos. 1699-MN to 1705-MN. In substance, the Informations
alleged that the Lims issued the checks with knowledge that they did not have sufficient funds or credit with the drawee bank for
payment in full of such checks upon presentment. When presented for payment within ninety (90) days from date thereof the checks
were dishonored by the drawee bank for insufficiency of funds. Despite receipt of notices of such dishonor the Lims failed to pay the
amounts of the checks or to make arrangements for full payment within five (5) banking days.
Manuel Lim and Rosita Lim are the president and treasurer, respectively, of Rigi Bilt Industries, Inc. (RIGI). RIGI had been transacting
business with LINTON for years, the latter supplying the former with steel plates, steel bars, flat bars and purlin sticks which it uses in
the fabrication, installation and building of steel structures. As officers of RIGI the Lim spouses were allowed 30, 60 and sometimes
even up to 90 days credit.
On 27 May 1983 the Lims ordered 100 pieces of mild steel plates worth P51,815.00 from LINTON which were delivered on the same
day at their place of business at 666 7th Avenue, 8th Street, Kalookan City. To pay LINTON for the delivery the Lims issued
SOLIDBANK Check No. 027700 postdated 3 September 1983 in the amount of P51,800.00. 1
On 30 May 1983 the Lims ordered another 65 pieces of mild steel plates worth P63,455.00 from LINTON which were delivered at their
place of business on the same day. They issued as payment SOLIDBANK Check No. 027699 in the amount of P63,455.00 postdated
20 August 1983. 2
The Lim spouses also ordered 2,600 "Z" purlins worth P241,800.00 which were delivered to them on various dates, to wit: 15 and 22
April 1983; 11, 14, 20, 23, 25, 28 and 30 May 1983; and, 2 and 9 June 1983. To pay for the deliveries, they issued seven SOLIDBANK
checks, five of which were —
Check No. Date of Issue Amount
027683 16 July 1983 P27,900.00 3
027684 23 July 1983 P27,900.00 4
027719 6 Aug. 1983 P32,550.00 5
027720 13 Aug. 1983 P27,900.00 6
027721 27 Aug. 1983 P37,200.00 7
William Yu Bin, Vice President and Sales Manager of LINTON, testified that when those seven (7) checks were deposited with the Rizal
Commercial Banking Corporation they were dishonored for "insufficiency of funds" with the additional notation "payment stopped"
stamped thereon. Despite demand Manuel and Rosita refused to make good the checks or pay the value of the deliveries.
Salvador Alfonso, signature verifier of SOLIDBANK, Grace Park Branch, Kalookan City, where the Lim spouses maintained an account,
testified on the following transactions with respect to the seven (7) checks:
CHECK NO. DATE PRESENTED REASON FOR DISHONOR
027683 22 July 1983 Payment Stopped (PS) 8
027684 23 July 1983 PS and Drawn Against
Insufficient Fund (DAIF) 9
027699 24 Aug. 1983 PS and DAIF 10
027700 5 Sept. 1983 PS and DAIF 11
027719 9 Aug. 1983 DAIF 12
027720 16 Aug. 1983 PS and DAIF 13
027721 30 Aug. 1983 PS and DAIF 14

65 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Manuel Lim admitted having issued the seven (7) checks in question to pay for deliveries made by LINTON but denied that his
company's account had insufficient funds to cover the amounts of the checks. He presented the bank ledger showing a balance of
P65,752.75. Also, he claimed that he ordered SOLIDBANK to stop payment because the supplies delivered by LINTON were not in
accordance with the specifications in the purchase orders.
Rosita Lim was not presented to testify because her statements would only be corroborative.
On the basis of the evidence thus presented the trial court held both accused guilty of estafa and violation of B.P. Blg. 22 in its decision
dated 25 January 1989. In Crim. Case No. 1696-MN they were sentenced to an indeterminate penalty of six (6) years and one (1) day
of prision mayor as minimum to twelve (12) years and one (1) day of reclusion temporal as maximum plus one (1) year for each
additional P10,000.00 with all the accessory penalties provided for by law, and to pay the costs. They were also ordered to indemnify
LINTON in the amount of P241,800.00. Similarly sentences were imposed in Crim. Cases Nos. 1697-MN and 1698-MN except as to the
indemnities awarded, which were P63,455.00 and P51,800.00, respectively.
In Crim. Case No. 1699-MN the trial court sentenced both accused to a straight penalty of one (1) year imprisonment with all the
accessory penalties provided for by law and to pay the costs. In addition, they were ordered to indemnify LINTON in the amount of
P27,900.00. Again, similar sentences were imposed in Crim. Cases Nos. 1700-MN to 1705-MN except for the indemnities awarded,
which were P32,550.00, P27,900.00, P27,900.00, P63,455.00, P51,800.00 and P37,200.00 respectively. 15
On appeal, the accused assailed the decision as they imputed error to the trial court as follows: (a) the regional Trial Court of malabon
had no jurisdiction over the cases because the offenses charged ere committed outside its territory; (b) they could not be held liable for
estafa because the seven (7) checks were issued by them several weeks after the deliveries of the goods; and, (c) neither could they
be held liable for violating B.P. Blg. 22 as they ordered payment of the checks to be stopped because the goods delivered were not
those specified by them, besides they had sufficient funds to pay the checks.
In the decision of 18 September 1992 16 respondent Court of Appeals acquitted accused-appellants of estafa on the ground that indeed
the checks were not made in payment of an obligation contracted at the time of their issuance. However it affirmed the finding of the
trial court that they were guilty of having violated B.P. Blg. 22. 17 On 6 November 1992 their motion for reconsideration was denied. 18
In the case at bench petitioners maintain that the prosecution failed to prove that any of the essential elements of the crime punishable
under B.P. Blg. 22 was committed within the jurisdiction of the Regional Trial Court of Malabon. They claim that what was proved was
that all the elements of the offense were committed in Kalookan City. The checks were issued at their place of business, received by a
collector of LINTON, and dishonored by the drawee bank, all in Kalookan City. Furthermore, no evidence whatsoever supports the
proposition that they knew that their checks were insufficiently funded. In fact, some of the checks were funded at the time of
presentment but dishonored nonetheless upon their instruction to the bank to stop payment. In fine, considering that the checks were
all issued, delivered, and dishonored in Kalookan City, the trial court of Malabon exceeded its jurisdiction when it tried the case and
rendered judgment thereon.
The petition has no merit. Section 1, par. 1, of B.P. Blg. 22 punishes "[a]ny person who makes or draws and issues any check to apply
on account or for value, knowing at the time of issue that he does not have sufficient funds in or credit with the drawee bank for the
payment of such check in full upon its presentment, which check is subsequently dishonored by the drawee bank for insufficiency of
funds or credit or would have been dishonored for the same reason had not the drawer, without any valid reason, ordered the bank to
stop payment . . ." The gravamen of the offense is knowingly issuing a worthless check. 19 Thus, a fundamental element is knowledge
on the part of the drawer of the insufficiency of his funds in 20 or credit with the drawee bank for the payment of such check in full upon
presentment. Another essential element is subsequent dishonor of the check by the drawee bank for insufficiency of funds or credit or
would have been dishonored for the same reason had not the drawer, without any valid reason, ordered the bank to stop payment. 21
It is settled that venue in criminal cases is a vital ingredient of jurisdiction. 22 Section 14, par. (a), Rule 110, of the Revised Rules of
Court, which has been carried over in Sec. 15, par. (a), Rule 110 of the 1985 Rules on Criminal Procedure, specifically provides:
Sec. 14. Place where action is to be instituted. — (a) In all criminal prosecutions the action shall be instituted and
tried in the court of the municipality or province wherein the offense was committed or anyone of the essential
ingredients thereof took place.
If all the acts material and essential to the crime and requisite of its consummation occurred in one municipality or territory, the court
therein has the sole jurisdiction to try the case. 23 There are certain crimes in which some acts material and essential to the crimes and
requisite to their consummation occur in one municipality or territory and some in another, in which event, the court of either has
jurisdiction to try the cases, it being understood that the first court taking cognizance of the case excludes the other. 24 These are the so-
called transitory or continuing crimes under which violation of B.P. Blg. 22 is categorized. In other words, a person charged with a
transitory crime may be validly tried in any municipality or territory where the offense was in part committed. 25
In determining proper venue in these cases, the following acts material and essential to each crime and requisite to its consummation
must be considered: (a) the seven (7) checks were issued to LINTON at its place of business in Balut, Navotas; b) they were delivered
to LINTON at the same place; (c) they were dishonored in Kalookan City; and, (d) petitioners had knowledge of the insufficiency of their
funds in SOLIDBANK at the time the checks were issued. Since there is no dispute that the checks were dishonored in Kalookan City, it
is no longer necessary to discuss where the checks were dishonored.
Under Sec. 191 of the Negotiable Instruments Law the term "issue" means the first delivery of the instrument complete in form to a
person who takes it as a holder. On the other hand, the term "holder" refers to the payee or indorsee of a bill or note who is in
possession of it or the bearer thereof. In People v. Yabut 26 this Court explained —
. . . The place where the bills were written, signed, or dated does not necessarily fix or determine the place where
they were executed. What is of decisive importance is the delivery thereof. The delivery of the instrument is the final
act essential to its consummation as an obligation. An undelivered bill or note is inoperative. Until delivery, the
contract is revocable. And the issuance as well as the delivery of the check must be to a person who takes it as a

66 Negotiable Instruments – Form and Interpretation (Sec 1-23)


holder, which means "(t)he payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof."
Delivery of the check signifies transfer of possession, whether actual or constructive, from one person to another with
intent to transfer title thereto . . .
Although LINTON sent a collector who received the checks from petitioners at their place of business in Kalookan City, they were
actually issued and delivered to LINTON at its place of business in Balut, Navotas. The receipt of the checks by the collector of LINTON
is not the issuance and delivery to the payee in contemplation of law. The collector was not the person who could take the checks as a
holder, i.e., as a payee or indorsee thereof, with the intent to transfer title thereto. Neither could the collector be deemed an agent of
LINTON with respect to the checks because he was a mere employee. As this Court further explained in People v. Yabut 27 —
Modesto Yambao's receipt of the bad checks from Cecilia Que Yabut or Geminiano Yabut, Jr., in Caloocan City
cannot, contrary to the holding of the respondent Judges, be licitly taken as delivery of the checks to the complainant
Alicia P. Andan at Caloocan City to fix the venue there. He did not take delivery of the checks as holder, i.e., as
"payee" or "indorsee." And there appears to be no contract of agency between Yambao and Andan so as to bind the
latter for the acts of the former. Alicia P. Andan declared in that sworn testimony before the investigating fiscal that
Yambao is but her "messenger" or "part-time employee." There was no special fiduciary relationship that permeated
their dealings. For a contract of agency to exist, the consent of both parties is essential. The principal consents that
the other party, the agent, shall act on his behalf, and the agent consents so as to act. It must exist as a fact. The law
makes no presumption thereof. The person alleging it has the burden of proof to show, not only the fact of its
existence, but also its nature and extent . . .
Section 2 of B.P. Blg. 22 establishes a prima facie evidence of knowledge of insufficient funds as follows —
The making, drawing and issuance of a check payment of which is refused by the bank because of insufficient funds
in or credit with such bank, when presented within ninety (90) days from the date of the check, shall be prima facie
evidence of knowledge of such insufficiency of funds or credit unless such maker or drawer pays the holder thereof
the amount due thereon, or makes arrangement for payment in full by the drawee of such check within five (5)
banking days after receiving notice that such check has not been paid by the drawee.
The prima facie evidence has not been overcome by petitioners in the cases before us because they did not pay LINTON the amounts
due on the checks; neither did they make arrangements for payment in full by the drawee bank within five (5) banking days after
receiving notices that the checks had not been paid by the drawee bank. In People v. Grospe 28 citing People v. Manzanilla 29 we held
that ". . . knowledge on the part of the maker or drawer of the check of the insufficiency of his funds is by itself a continuing eventuality,
whether the accused be within one territory or another."
Consequently, venue or jurisdiction lies either in the Regional Trial Court of Kalookan City or Malabon. Moreover, we ruled in the same
Grospe and Manzanilla cases as reiterated in Lim v. Rodrigo 30 that venue or jurisdiction is determined by the allegations in the
Information. The Informations in the cases under consideration allege that the offenses were committed in the Municipality of Navotas
which is controlling and sufficient to vest jurisdiction upon the Regional Trial Court of Malabon. 31
We therefore sustain likewise the conviction of petitioners by the Regional Trial Court of Malabon for violation of B.P. Blg. 22 thus —
Accused-appellants claim that they ordered payment of the checks to be stopped because the goods delivered were
not those specified by them. They maintain that they had sufficient funds to cover the amount of the checks. The
records of the bank, however, reveal otherwise. The two letters (Exhs. 21 and 22) dated July 23, and August 10,
1983 which they claim they sent to Linton Commercial, complaining against the quality of the goods delivered by the
latter, did not refer to the delivery of mild steel plates (6mm x 4 x 8) and "Z" purlins (16 x 7 x 2-1/2 mts) for which the
checks in question were issued. Rather, the letters referred to B.1. Lally columns (Sch. #20), which were the subject
of other purchase orders.
It is true, as accused-appellants point out, that in a case brought by them against the complainant in the Regional
Trial Court of Kalookan City (Civil Case No. C-10921) the complainant was held liable for actual damages because of
the delivery of goods of inferior quality (Exh. 23). But the supplies involved in that case were those of B.I. pipes, while
the purchases made by accused-appellants, for which they issued the checks in question, were purchases of mild
steel plates and "Z" purlins.
Indeed, the only question here is whether accused-appellants maintained funds sufficient to cover the amounts of
their checks at the time of issuance and presentment of such checks. Section 3 of B.P. Blg. 22 provides that
"notwithstanding receipt of an order to stop payment, the drawee bank shall state in the notice of dishonor that there
were no sufficient funds in or credit with such bank for the payment in full of the check, if such be the fact."
The purpose of this provision is precisely to preclude the maker or drawer of a worthless check from ordering the
payment of the check to be stopped as a pretext for the lack of sufficient funds to cover the check.
In the case at bar, the notice of dishonor issued by the drawee bank, indicates not only that payment of the check
was stopped but also that the reason for such order was that the maker or drawer did not have sufficient funds with
which to cover the checks. . . . Moreover, the bank ledger of accused-appellants' account in Consolidated Bank
shows that at the time the checks were presented for encashment, the balance of accused-appellants' account was
inadequate to cover the amounts of the checks. 32 . . .
WHEREFORE, the decision of the Court of Appeals dated 18 September 1992 affirming the conviction of petitioners Manuel Lim and
Rosita Lim —
In CA-G.R. CR No. 07277 (RTC Crim. Case No. 1699-MN); CA-G.R. CR No. 07278 (RTC Crim. Case No. 1700-MN);
CA-G.R. CR No. 07279 (RTC Crim. Case No. 1701-MN); CA-G.R. CR No. 07280 (RTC Crim. Case No. 1702-MN);

67 Negotiable Instruments – Form and Interpretation (Sec 1-23)


CA-G.R. CR No. 07281 (RTC Crim. Case No. 1703-MN); CA-G.R. CA No. 07282 (RTC Crim. Case No. 1704-MN);
and CA-G.R. CR No. 07283 (RTC Crim Case No. 1705-MN), the Court finds the accused-appellants
MANUEL LIM and ROSITA LIM guilty beyond reasonable doubt of violation of Batas Pambansa Bilang 22 and are
hereby sentenced to suffer a STRAIGHT PENALTY OF ONE (1) YEAR IMPRISONMENT in each case, together with
all the accessory penalties provided by law, and to pay the costs.
In CA-G.R. CR No. 07277 (RTC Crim. Case No. 1699-MN), both accused-appellants are hereby ordered to indemnify
the offended party in the sum of P27,900.00.
In CA-G.R. CR No. 07278 (RTC Crim. Case No. 1700-MN) both accused-appellants are hereby ordered to indemnify
the offended party in the sum of P32,550.00.
In CA-G.R. CR No. 07278 (RTC Crim. Case No. 1701-MN) both accused-appellants are hereby ordered to indemnify
the offended party in the sum of P27,900.00.
In CA-G.R. CR No. 07280 (RTC Crim. Case No. 1702-MN) both accused-appellants are hereby ordered to indemnify
the offended party in the sum of P27,900.00.
In CA-G.R. CR No. 07281 (RTC Crim. Case No. 1703-MN) both accused are hereby ordered to indemnify the
offended party in the sum of P63,455.00.
In CA-G.R CR No. 07282 (RTC Crim. Case No. 1704-MN) both accused-appellants are hereby ordered to indemnify
the offended party in the sum of P51,800.00, and
In CA-G.R. CR No. 07283 (RTC Crim. Case No. 1705-MN) both accused-appellants are hereby ordered to indemnify
the offended party in the sum of P37,200.00 33 —
as well as its resolution of 6 November 1992 denying reconsideration thereof, is AFFIRMED. Costs against petitioners.
SO ORDERED.

SO ORDERED.

68 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 129015 August 13, 2004
SAMSUNG CONSTRUCTION COMPANY PHILIPPINES, INC., petitioner,
vs.
FAR EAST BANK AND TRUST COMPANY AND COURT OF APPEALS, respondents.

DECISION

TINGA, J.:
Called to fore in the present petition is a classic textbook question – if a bank pays out on a forged check, is it liable to reimburse the
drawer from whose account the funds were paid out? The Court of Appeals, in reversing a trial court decision adverse to the bank,
invoked tenuous reasoning to acquit the bank of liability. We reverse, applying time-honored principles of law.
The salient facts follow.
Plaintiff Samsung Construction Company Philippines, Inc. ("Samsung Construction"), while based in Biñan, Laguna, maintained a
current account with defendant Far East Bank and Trust Company1 ("FEBTC") at the latter’s Bel-Air, Makati branch.2 The sole signatory
to Samsung Construction’s account was Jong Kyu Lee ("Jong"), its Project Manager,3 while the checks remained in the custody of the
company’s accountant, Kyu Yong Lee ("Kyu").4
On 19 March 1992, a certain Roberto Gonzaga presented for payment FEBTC Check No. 432100 to the bank’s branch in Bel-Air,
Makati. The check, payable to cash and drawn against Samsung Construction’s current account, was in the amount of Nine Hundred
Ninety Nine Thousand Five Hundred Pesos (P999,500.00). The bank teller, Cleofe Justiani, first checked the balance of Samsung
Construction’s account. After ascertaining there were enough funds to cover the check,5 she compared the signature appearing on the
check with the specimen signature of Jong as contained in the specimen signature card with the bank. After comparing the two
signatures, Justiani was satisfied as to the authenticity of the signature appearing on the check. She then asked Gonzaga to submit
proof of his identity, and the latter presented three (3) identification cards.6
At the same time, Justiani forwarded the check to the branch Senior Assistant Cashier Gemma Velez, as it was bank policy that two
bank branch officers approve checks exceeding One Hundred Thousand Pesos, for payment or encashment. Velez likewise
counterchecked the signature on the check as against that on the signature card. He too concluded that the check was indeed signed
by Jong. Velez then forwarded the check and signature card to Shirley Syfu, another bank officer, for approval. Syfu then noticed that
Jose Sempio III ("Sempio"), the assistant accountant of Samsung Construction, was also in the bank. Sempio was well-known to Syfu
and the other bank officers, he being the assistant accountant of Samsung Construction. Syfu showed the check to Sempio, who
vouched for the genuineness of Jong’s signature. Confirming the identity of Gonzaga, Sempio said that the check was for the purchase
of equipment for Samsung Construction. Satisfied with the genuineness of the signature of Jong, Syfu authorized the bank’s
encashment of the check to Gonzaga.
The following day, the accountant of Samsung Construction, Kyu, examined the balance of the bank account and discovered that a
check in the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00) had been encashed. Aware that he
had not prepared such a check for Jong’s signature, Kyu perused the checkbook and found that the last blank check was missing.7 He
reported the matter to Jong, who then proceeded to the bank. Jong learned of the encashment of the check, and realized that his
signature had been forged. The Bank Manager reputedly told Jong that he would be reimbursed for the amount of the check. 8 Jong
proceeded to the police station and consulted with his lawyers.9 Subsequently, a criminal case for qualified theft was filed against
Sempio before the Laguna court.10
In a letter dated 6 May 1992, Samsung Construction, through counsel, demanded that FEBTC credit to it the amount of Nine Hundred
Ninety Nine Thousand Five Hundred Pesos (P999,500.00), with interest.11 In response, FEBTC said that it was still conducting an
investigation on the matter. Unsatisfied, Samsung Construction filed a Complaint on 10 June 1992 for violation of Section 23 of the
Negotiable Instruments Law, and prayed for the payment of the amount debited as a result of the questioned check plus interest, and
attorney’s fees.12 The case was docketed as Civil Case No. 92-61506 before the Regional Trial Court ("RTC") of Manila, Branch 9.13
During the trial, both sides presented their respective expert witnesses to testify on the claim that Jong’s signature was forged.
Samsung Corporation, which had referred the check for investigation to the NBI, presented Senior NBI Document Examiner Roda B.
Flores. She testified that based on her examination, she concluded that Jong’s signature had been forged on the check. On the other
hand, FEBTC, which had sought the assistance of the Philippine National Police (PNP), 14 presented Rosario C. Perez, a document
examiner from the PNP Crime Laboratory. She testified that her findings showed that Jong’s signature on the check was genuine.15
Confronted with conflicting expert testimony, the RTC chose to believe the findings of the NBI expert. In a Decision dated 25 April 1994,
the RTC held that Jong’s signature on the check was forged and accordingly directed the bank to pay or credit back to Samsung
Construction’s account the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00), together with interest
tolled from the time the complaint was filed, and attorney’s fees in the amount of Fifteen Thousand Pesos (P15,000.00).

69 Negotiable Instruments – Form and Interpretation (Sec 1-23)


FEBTC timely appealed to the Court of Appeals. On 28 November 1996, the Special Fourteenth Division of the Court of Appeals
rendered a Decision,16 reversing the RTC Decision and absolving FEBTC from any liability. The Court of Appeals held that the
contradictory findings of the NBI and the PNP created doubt as to whether there was forgery.17 Moreover, the appellate court also held
that assuming there was forgery, it occurred due to the negligence of Samsung Construction, imputing blame on the accountant Kyu for
lack of care and prudence in keeping the checks, which if observed would have prevented Sempio from gaining access thereto. 18 The
Court of Appeals invoked the ruling in PNB v. National City Bank of New York 19 that, if a loss, which must be borne by one or two
innocent persons, can be traced to the neglect or fault of either, such loss would be borne by the negligent party, even if innocent of
intentional fraud.20
Samsung Construction now argues that the Court of Appeals had seriously misapprehended the facts when it overturned the RTC’s
finding of forgery. It also contends that the appellate court erred in finding that it had been negligent in safekeeping the check, and in
applying the equity principle enunciated in PNB v. National City Bank of New York.
Since the trial court and the Court of Appeals arrived at contrary findings on questions of fact, the Court is obliged to examine the
record to draw out the correct conclusions. Upon examination of the record, and based on the applicable laws and jurisprudence, we
reverse the Court of Appeals.
Section 23 of the Negotiable Instruments Law states:
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. (Emphasis supplied)
The general rule is to the effect that a forged signature is "wholly inoperative," and payment made "through or under such signature" is
ineffectual or does not discharge the instrument.21 If payment is made, the drawee cannot charge it to the drawer’s account. The
traditional justification for the result is that the drawee is in a superior position to detect a forgery because he has the maker’s signature
and is expected to know and compare it.22 The rule has a healthy cautionary effect on banks by encouraging care in the comparison of
the signatures against those on the signature cards they have on file. Moreover, the very opportunity of the drawee to insure and to
distribute the cost among its customers who use checks makes the drawee an ideal party to spread the risk to insurance.23
Brady, in his treatise The Law of Forged and Altered Checks, elucidates:
When a person deposits money in a general account in a bank, against which he has the privilege of drawing checks in the
ordinary course of business, the relationship between the bank and the depositor is that of debtor and creditor. So far as the
legal relationship between the two is concerned, the situation is the same as though the bank had borrowed money from the
depositor, agreeing to repay it on demand, or had bought goods from the depositor, agreeing to pay for them on demand. The
bank owes the depositor money in the same sense that any debtor owes money to his creditor. Added to this, in the case of
bank and depositor, there is, of course, the bank’s obligation to pay checks drawn by the depositor in proper form and
presented in due course. When the bank receives the deposit, it impliedly agrees to pay only upon the depositor’s order. When
the bank pays a check, on which the depositor’s signature is a forgery, it has failed to comply with its contract in this respect.
Therefore, the bank is held liable.
The fact that the forgery is a clever one is immaterial. The forged signature may so closely resemble the genuine as to defy
detection by the depositor himself. And yet, if a bank pays the check, it is paying out its own money and not the depositor’s.
The forgery may be committed by a trusted employee or confidential agent. The bank still must bear the loss. Even in a case
where the forged check was drawn by the depositor’s partner, the loss was placed upon the bank. The case referred to is
Robinson v. Security Bank, Ark., 216 S. W. Rep. 717. In this case, the plaintiff brought suit against the defendant bank for
money which had been deposited to the plaintiff’s credit and which the bank had paid out on checks bearing forgeries of the
plaintiff’s signature.
xxx
It was held that the bank was liable. It was further held that the fact that the plaintiff waited eight or nine months after
discovering the forgery, before notifying the bank, did not, as a matter of law, constitute a ratification of the payment, so as to
preclude the plaintiff from holding the bank liable. xxx
This rule of liability can be stated briefly in these words: "A bank is bound to know its depositors’ signature." The rule is
variously expressed in the many decisions in which the question has been considered. But they all sum up to the proposition
that a bank must know the signatures of those whose general deposits it carries.24
By no means is the principle rendered obsolete with the advent of modern commercial transactions. Contemporary texts still affirm this
well-entrenched standard. Nickles, in his book Negotiable Instruments and Other Related Commercial Paper wrote, thus:
The deposit contract between a payor bank and its customer determines who can draw against the customer’s account by
specifying whose signature is necessary on checks that are chargeable against the customer’s account. Therefore, a check
drawn against the account of an individual customer that is signed by someone other than the customer, and without authority
from her, is not properly payable and is not chargeable to the customer’s account, inasmuch as any "unauthorized signature
on an instrument is ineffective" as the signature of the person whose name is signed.25
Under Section 23 of the Negotiable Instruments Law, forgery is a real or absolute defense by the party whose signature is forged. 26 On
the premise that Jong’s signature was indeed forged, FEBTC is liable for the loss since it authorized the discharge of the forged check.
Such liability attaches even if the bank exerts due diligence and care in preventing such faulty discharge. Forgeries often deceive the
eye of the most cautious experts; and when a bank has been so deceived, it is a harsh rule which compels it to suffer although no one

70 Negotiable Instruments – Form and Interpretation (Sec 1-23)


has suffered by its being deceived.27 The forgery may be so near like the genuine as to defy detection by the depositor himself, and yet
the bank is liable to the depositor if it pays the check.28
Thus, the first matter of inquiry is into whether the check was indeed forged. A document formally presented is presumed to be genuine
until it is proved to be fraudulent. In a forgery trial, this presumption must be overcome but this can only be done by convincing
testimony and effective illustrations.29
In ruling that forgery was not duly proven, the Court of Appeals held:
[There] is ground to doubt the findings of the trial court sustaining the alleged forgery in view of the conflicting conclusions
made by handwriting experts from the NBI and the PNP, both agencies of the government.
xxx
These contradictory findings create doubt on whether there was indeed a forgery. In the case of Tenio-Obsequio v. Court of
Appeals, 230 SCRA 550, the Supreme Court held that forgery cannot be presumed; it must be proved by clear, positive and
convincing evidence.
This reasoning is pure sophistry. Any litigator worth his or her salt would never allow an opponent’s expert witness to stand
uncontradicted, thus the spectacle of competing expert witnesses is not unusual. The trier of fact will have to decide which version to
believe, and explain why or why not such version is more credible than the other. Reliance therefore cannot be placed merely on the
fact that there are colliding opinions of two experts, both clothed with the presumption of official duty, in order to draw a conclusion,
especially one which is extremely crucial. Doing so is tantamount to a jurisprudential cop-out.
Much is expected from the Court of Appeals as it occupies the penultimate tier in the judicial hierarchy. This Court has long deferred to
the appellate court as to its findings of fact in the understanding that it has the appropriate skill and competence to plough through the
minutiae that scatters the factual field. In failing to thoroughly evaluate the evidence before it, and relying instead on presumptions
haphazardly drawn, the Court of Appeals was sadly remiss. Of course, courts, like humans, are fallible, and not every error deserves a
stern rebuke. Yet, the appellate court’s error in this case warrants special attention, as it is absurd and even dangerous as a precedent.
If this rationale were adopted as a governing standard by every court in the land, barely any actionable claim would prosper, defeated
as it would be by the mere invocation of the existence of a contrary "expert" opinion.
On the other hand, the RTC did adjudge the testimony of the NBI expert as more credible than that of the PNP, and explained its
reason behind the conclusion:
After subjecting the evidence of both parties to a crucible of analysis, the court arrived at the conclusion that the testimony of
the NBI document examiner is more credible because the testimony of the PNP Crime Laboratory Services document
examiner reveals that there are a lot of differences in the questioned signature as compared to the standard specimen
signature. Furthermore, as testified to by Ms. Rhoda Flores, NBI expert, the manner of execution of the standard signatures
used reveals that it is a free rapid continuous execution or stroke as shown by the tampering terminal stroke of the signatures
whereas the questioned signature is a hesitating slow drawn execution stroke. Clearly, the person who executed the
questioned signature was hesitant when the signature was made.30
During the testimony of PNP expert Rosario Perez, the RTC bluntly noted that "apparently, there [are] differences on that questioned
signature and the standard signatures."31 This Court, in examining the signatures, makes a similar finding. The PNP expert excused
the noted "differences" by asserting that they were mere "variations," which are normal deviations found in writing.32 Yet the RTC,
which had the opportunity to examine the relevant documents and to personally observe the expert witness, clearly disbelieved the
PNP expert. The Court similarly finds the testimony of the PNP expert as unconvincing. During the trial, she was confronted several
times with apparent differences between strokes in the questioned signature and the genuine samples. Each time, she would just
blandly assert that these differences were just "variations,"33 as if the mere conjuration of the word would sufficiently disquiet whatever
doubts about the deviations. Such conclusion, standing alone, would be of little or no value unless supported by sufficiently cogent
reasons which might amount almost to a demonstration.34
The most telling difference between the questioned and genuine signatures examined by the PNP is in the final upward stroke in the
signature, or "the point to the short stroke of the terminal in the capital letter ‘L,’" as referred to by the PNP examiner who had marked it
in her comparison chart as "point no. 6." To the plain eye, such upward final stroke consists of a vertical line which forms a ninety
degree (90º) angle with the previous stroke. Of the twenty one (21) other genuine samples examined by the PNP, at least nine (9)
ended with an upward stroke.35 However, unlike the questioned signature, the upward strokes of eight (8) of these signatures are
looped, while the upward stroke of the seventh36 forms a severe forty-five degree (45º) with the previous stroke. The difference is
glaring, and indeed, the PNP examiner was confronted with the inconsistency in point no. 6.
Q: Now, in this questioned document point no. 6, the "s" stroke is directly upwards.
A: Yes, sir.
Q: Now, can you look at all these standard signature (sic) were (sic) point 6 is repeated or the last stroke "s" is pointing directly
upwards?
A: There is none in the standard signature, sir.37
Again, the PNP examiner downplayed the uniqueness of the final stroke in the questioned signature as a mere variation,38 the same
excuse she proffered for the other marked differences noted by the Court and the counsel for petitioner.39
There is no reason to doubt why the RTC gave credence to the testimony of the NBI examiner, and not the PNP expert’s. The NBI
expert, Rhoda Flores, clearly qualifies as an expert witness. A document examiner for fifteen years, she had been promoted to the rank
of Senior Document Examiner with the NBI, and had held that rank for twelve years prior to her testimony. She had placed among the
top five examinees in the Competitive Seminar in Question Document Examination, conducted by the NBI Academy, which qualified her

71 Negotiable Instruments – Form and Interpretation (Sec 1-23)


as a document examiner.40 She had trained with the Royal Hongkong Police Laboratory and is a member of the International
Association for Identification.41 As of the time she testified, she had examined more than fifty to fifty-five thousand questioned
documents, on an average of fifteen to twenty documents a day.42 In comparison, PNP document examiner Perez admitted to having
examined only around five hundred documents as of her testimony.43
In analyzing the signatures, NBI Examiner Flores utilized the scientific comparative examination method consisting of analysis,
recognition, comparison and evaluation of the writing habits with the use of instruments such as a magnifying lense, a stereoscopic
microscope, and varied lighting substances. She also prepared enlarged photographs of the signatures in order to facilitate the
necessary comparisons.44 She compared the questioned signature as against ten (10) other sample signatures of Jong. Five of these
signatures were executed on checks previously issued by Jong, while the other five contained in business letters Jong had signed.45
The NBI found that there were significant differences in the handwriting characteristics existing between the questioned and the sample
signatures, as to manner of execution, link/connecting strokes, proportion characteristics, and other identifying details.46
The RTC was sufficiently convinced by the NBI examiner’s testimony, and explained her reasons in its Decisions. While the Court of
Appeals disagreed and upheld the findings of the PNP, it failed to convincingly demonstrate why such findings were more credible than
those of the NBI expert. As a throwaway, the assailed Decision noted that the PNP, not the NBI, had the opportunity to examine the
specimen signature card signed by Jong, which was relied upon by the employees of FEBTC in authenticating Jong’s signature. The
distinction is irrelevant in establishing forgery. Forgery can be established comparing the contested signatures as against those of any
sample signature duly established as that of the persons whose signature was forged.
FEBTC lays undue emphasis on the fact that the PNP examiner did compare the questioned signature against the bank signature
cards. The crucial fact in question is whether or not the check was forged, not whether the bank could have detected the
forgery. The latter issue becomes relevant only if there is need to weigh the comparative negligence between the bank and
the party whose signature was forged.
At the same time, the Court of Appeals failed to assess the effect of Jong’s testimony that the signature on the check was not his.47
The assertion may seem self-serving at first blush, yet it cannot be ignored that Jong was in the best position to know whether or not
the signature on the check was his. While his claim should not be taken at face value, any averments he would have on the matter, if
adjudged as truthful, deserve primacy in consideration. Jong’s testimony is supported by the findings of the NBI examiner. They are
also backed by factual circumstances that support the conclusion that the assailed check was indeed forged. Judicial notice can be
taken that is highly unusual in practice for a business establishment to draw a check for close to a million pesos and make it payable to
cash or bearer, and not to order. Jong immediately reported the forgery upon its discovery. He filed the appropriate criminal charges
against Sempio, the putative forger.48
Now for determination is whether Samsung Construction was precluded from setting up the defense of forgery under Section 23 of the
Negotiable Instruments Law. The Court of Appeals concluded that Samsung Construction was negligent, and invoked the doctrines that
"where a loss must be borne by one of two innocent person, 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 succeeded49 or who put into the power of the
third person to perpetuate the wrong."50 Applying these rules, the Court of Appeals determined that it was the negligence of Samsung
Construction that allowed the encashment of the forged check.
In the case at bar, the forgery appears to have been made possible through the acts of one Jose Sempio III, an assistant
accountant employed by the plaintiff Samsung [Construction] Co. Philippines, Inc. who supposedly stole the blank check and
who presumably is responsible for its encashment through a forged signature of Jong Kyu Lee. Sempio was assistant to the
Korean accountant who was in possession of the blank checks and who through negligence, enabled Sempio to have access
to the same. Had the Korean accountant been more careful and prudent in keeping the blank checks Sempio would not have
had the chance to steal a page thereof and to effect the forgery. Besides, Sempio was an employee who appears to have had
dealings with the defendant Bank in behalf of the plaintiff corporation and on the date the check was encashed, he was there
to certify that it was a genuine check issued to purchase equipment for the company.51
We recognize that Section 23 of the Negotiable Instruments Law bars a party from setting up the defense of forgery if it is guilty of
negligence.52 Yet, we are unable to conclude that Samsung Construction was guilty of negligence in this case. The appellate court
failed to explain precisely how the Korean accountant was negligent or how more care and prudence on his part would have prevented
the forgery. We cannot sustain this "tar and feathering" resorted to without any basis.
The bare fact that the forgery was committed by an employee of the party whose signature was forged cannot necessarily imply that
such party’s negligence was the cause for the forgery. Employers do not possess the preternatural gift of cognition as to the evil that
may lurk within the hearts and minds of their employees. The Court’s pronouncement in PCI Bank v. Court of Appeals53 applies in this
case, to wit:
[T]he mere fact that the forgery was committed by a drawer-payor’s confidential employee or agent, who by virtue of his
position had unusual facilities for perpetrating the fraud and imposing the forged paper upon the bank, does not entitle the
bank to shift the loss to the drawer-payor, in the absence of some circumstance raising estoppel against the drawer.54
Admittedly, the record does not clearly establish what measures Samsung Construction employed to safeguard its blank checks. Jong
did testify that his accountant, Kyu, kept the checks inside a "safety box,"55 and no contrary version was presented by FEBTC.
However, such testimony cannot prove that the checks were indeed kept in a safety box, as Jong’s testimony on that point is hearsay,
since Kyu, and not Jong, would have the personal knowledge as to how the checks were kept.
Still, in the absence of evidence to the contrary, we can conclude that there was no negligence on Samsung Construction’s part. The
presumption remains that every person takes ordinary care of his concerns,56 and that the ordinary course of business has been
followed.57 Negligence is not presumed, but must be proven by him who alleges it.58 While the complaint was lodged at the instance
of Samsung Construction, the matter it had to prove was the claim it had alleged - whether the check was forged. It cannot be required
as well to prove that it was not negligent, because the legal presumption remains that ordinary care was employed.

72 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Thus, it was incumbent upon FEBTC, in defense, to prove the negative fact that Samsung Construction was negligent. While the payee,
as in this case, may not have the personal knowledge as to the standard procedures observed by the drawer, it well has the means of
disputing the presumption of regularity. Proving a negative fact may be "a difficult office,"59 but necessarily so, as it seeks to overcome
a presumption in law. FEBTC was unable to dispute the presumption of ordinary care exercised by Samsung Construction, hence we
cannot agree with the Court of Appeals’ finding of negligence.
The assailed Decision replicated the extensive efforts which FEBTC devoted to establish that there was no negligence on the part of
the bank in its acceptance and payment of the forged check. However, the degree of diligence exercised by the bank would be
irrelevant if the drawer is not precluded from setting up the defense of forgery under Section 23 by his own negligence. The rule of
equity enunciated in PNB v. National City Bank of New York, 60 as relied upon by the Court of Appeals, deserves careful examination.
The point in issue has sometimes been said to be that of negligence. The drawee who has paid upon the forged signature
is held to bear the loss, because he has been negligent in failing to recognize that the handwriting is not that of his
customer. But it follows obviously that if the payee, holder, or presenter of the forged paper has himself been in default, if he
has himself been guilty of a negligence prior to that of the banker, or if by any act of his own he has at all contributed to induce
the banker's negligence, then he may lose his right to cast the loss upon the banker.61 (Emphasis supplied)
Quite palpably, the general rule remains that the drawee who has paid upon the forged signature bears the loss. The exception to this
rule arises only when negligence can be traced on the part of the drawer whose signature was forged, and the need arises to weigh the
comparative negligence between the drawer and the drawee to determine who should bear the burden of loss. The Court finds no basis
to conclude that Samsung Construction was negligent in the safekeeping of its checks. For one, the settled rule is that the mere fact
that the depositor leaves his check book lying around does not constitute such negligence as will free the bank from liability to him,
where a clerk of the depositor or other persons, taking advantage of the opportunity, abstract some of the check blanks, forges the
depositor’s signature and collect on the checks from the bank.62 And for another, in point of fact Samsung Construction was not
negligent at all since it reported the forgery almost immediately upon discovery.63
It is also worth noting that the forged signatures in PNB v. National City Bank of New York were not of the drawer, but of indorsers. The
same circumstance attends PNB v. Court of Appeals,64 which was also cited by the Court of Appeals. It is accepted that a forged
signature of the drawer differs in treatment than a forged signature of the indorser.
The justification for the distinction between forgery of the signature of the drawer and forgery of an indorsement is that the
drawee is in a position to verify the drawer’s signature by comparison with one in his hands, but has ordinarily no opportunity
to verify an indorsement.65
Thus, a drawee bank is generally liable to its depositor in paying a check which bears either a forgery of the drawer’s signature
or a forged indorsement. But the bank may, as a general rule, recover back the money which it has paid on a check bearing a
forged indorsement, whereas it has not this right to the same extent with reference to a check bearing a forgery of the drawer’s
signature.66
The general rule imputing liability on the drawee who paid out on the forgery holds in this case.
Since FEBTC puts into issue the degree of care it exercised before paying out on the forged check, we might as well comment on the
bank’s performance of its duty. It might be so that the bank complied with its own internal rules prior to paying out on the questionable
check. Yet, there are several troubling circumstances that lead us to believe that the bank itself was remiss in its duty.
The fact that the check was made out in the amount of nearly one million pesos is unusual enough to require a higher degree of caution
on the part of the bank. Indeed, FEBTC confirms this through its own internal procedures. Checks below twenty-five thousand pesos
require only the approval of the teller; those between twenty-five thousand to one hundred thousand pesos necessitate the approval of
one bank officer; and should the amount exceed one hundred thousand pesos, the concurrence of two bank officers is required.67
In this case, not only did the amount in the check nearly total one million pesos, it was also payable to cash. That latter circumstance
should have aroused the suspicion of the bank, as it is not ordinary business practice for a check for such large amount to be made
payable to cash or to bearer, instead of to the order of a specified person.68 Moreover, the check was presented for payment by one
Roberto Gonzaga, who was not designated as the payee of the check, and who did not carry with him any written proof that he was
authorized by Samsung Construction to encash the check. Gonzaga, a stranger to FEBTC, was not even an employee of Samsung
Construction.69 These circumstances are already suspicious if taken independently, much more so if they are evaluated in
concurrence. Given the shadiness attending Gonzaga’s presentment of the check, it was not sufficient for FEBTC to have merely
complied with its internal procedures, but mandatory that all earnest efforts be undertaken to ensure the validity of the check, and of the
authority of Gonzaga to collect payment therefor.
According to FEBTC Senior Assistant Cashier Gemma Velez, the bank tried, but failed, to contact Jong over the phone to verify the
check.70 She added that calling the issuer or drawer of the check to verify the same was not part of the standard procedure of the
bank, but an "extra effort."71 Even assuming that such personal verification is tantamount to extraordinary diligence, it cannot be
denied that FEBTC still paid out the check despite the absence of any proof of verification from the drawer. Instead, the bank seems to
have relied heavily on the say-so of Sempio, who was present at the bank at the time the check was presented.
FEBTC alleges that Sempio was well-known to the bank officers, as he had regularly transacted with the bank in behalf of Samsung
Construction. It was even claimed that everytime FEBTC would contact Jong about problems with his account, Jong would hand the
phone over to Sempio.72 However, the only proof of such allegations is the testimony of Gemma Velez, who also testified that she did
not know Sempio personally,73 and had met Sempio for the first time only on the day the check was encashed.74 In fact, Velez had to
inquire with the other officers of the bank as to whether Sempio was actually known to the employees of the bank.75 Obviously, Velez
had no personal knowledge as to the past relationship between FEBTC and Sempio, and any averments of her to that effect should be
deemed hearsay evidence. Interestingly, FEBTC did not present as a witness any other employee of their Bel-Air branch, including
those who supposedly had transacted with Sempio before.

73 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Even assuming that FEBTC had a standing habit of dealing with Sempio, acting in behalf of Samsung Construction, the irregular
circumstances attending the presentment of the forged check should have put the bank on the highest degree of alert. The Court
recently emphasized that the highest degree of care and diligence is required of banks.
Banks are engaged in a business impressed with public interest, and it is their duty to protect in return their many clients and
depositors who transact business with them. They have the obligation to treat their client’s account meticulously and with the
highest degree of care, considering the fiduciary nature of their relationship. The diligence required of banks, therefore, is
more than that of a good father of a family.76
Given the circumstances, extraordinary diligence dictates that FEBTC should have ascertained from Jong personally that the signature
in the questionable check was his.
Still, even if the bank performed with utmost diligence, the drawer whose signature was forged may still recover from the bank as long
as he or she is not precluded from setting up the defense of forgery. After all, Section 23 of the Negotiable Instruments Law plainly
states that no right to enforce the payment of a check can arise out of a forged signature. Since the drawer, Samsung Construction, is
not precluded by negligence from setting up the forgery, the general rule should apply. Consequently, if a bank pays a forged check, it
must be considered as paying out of its funds and cannot charge the amount so paid to the account of the depositor.77 A bank is liable,
irrespective of its good faith, in paying a forged check.78
WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals dated 28 November 1996 is REVERSED, and the
Decision of the Regional Trial Court of Manila, Branch 9, dated 25 April 1994 is REINSTATED. Costs against respondent.
SO ORDERED.

74 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
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.
Juan J. Diaz and Cesar T. Basa for respondent PNB.
San Juan, Africa, Gonzales & San Agustin Law Offices for respondent PCIB.

GUTIERREZ, JR., J.:


This petition for review asks us to set aside the October 29, 1982 decision of the respondent Court of Appeals, now Intermediate
Appellate Court which reversed the decision of the Court of First Instance of Manila, Branch XL, and dismissed the plaintiff's complaint,
the third party complaint, as well as the defendant's counterclaim.
The background facts which led to the filing of the instant petition are summarized in the decision of the respondent Court of Appeals:
Metropolitan Waterworks and Sewerage System (hereinafter referred to as MWSS) is a government owned and
controlled corporation created under Republic Act No. 6234 as the successor-in- interest of the defunct NWSA. The
Philippine National Bank (PNB for short), on the other hand, is the depository bank of MWSS and its predecessor-in-
interest NWSA. Among the several accounts of NWSA with PNB is NWSA Account No. 6, otherwise known as
Account No. 381-777 and which is presently allocated No. 010-500281. The authorized signature for said Account
No. 6 were those of MWSS treasurer Jose Sanchez, its auditor Pedro Aguilar, and its acting General Manager Victor
L. Recio. Their respective specimen signatures were submitted by the MWSS to and on file with the PNB. By special
arrangement with the PNB, the MWSS used personalized checks in drawing from this account. These checks were
printed for MWSS by its printer, F. Mesina Enterprises, located at 1775 Rizal Extension, Caloocan City.
During the months of March, April and May 1969, twenty-three (23) checks were prepared, processed, issued and
released by NWSA, all of which were paid and cleared by PNB and debited by PNB against NWSA Account No. 6, to
wit:
Check No. Date Payee Amount Date Paid
By PNB
1. 59546 8-21-69 Deogracias P 3,187.79 4-2-69
Estrella
2. 59548 3-31-69 Natividad 2,848.86 4-23 69
Rosario
3. 59547 3-31-69 Pangilinan 195.00 Unreleased
Enterprises
4. 59549 3-31-69 Natividad 3,239.88 4-23-69
Rosario
5. 59552 4-1-69 Villarama 987.59 5-6-69
& Sons
6. 59554 4-1-69 Gascom 6,057.60 4-16 69
Engineering
7. 59558 4-2-69 The Evening 112.00 Unreleased
News
8. 59544 3-27-69 Progressive 18,391.20 4-18 69
Const.
9. 59564 4-2-69 Ind. Insp. 594.06 4-18 69
Int. Inc.
10. 59568 4-7-69 Roberto 800.00 4-22-69
Marsan

75 Negotiable Instruments – Form and Interpretation (Sec 1-23)


11. 59570 4-7-69 Paz Andres 200.00 4-22-69
12. 59574 4-8-69 Florentino 100,000.00 4-11-69
Santos
13. 59578 4-8-69 Mla. Daily 95.00 Unreleased
Bulletin
14. 59580 4-8-69 Phil. Herald 100.00 5-9-69
15. 59582 4-8-69 Galauran 7,729.09 5-6-69
& Pilar
16. 59581 4-8-69 Manila 110.00 5-12 69
Chronicle
17. 59588 4-8-69 Treago 21,583.00 4-11 69
Tunnel
18. 59587 4-8-69 Delfin 120,000.00 4-11-69
Santiago
19. 59589 4-10-69 Deogracias 1,257.49 4-16 69
Estrella
20. 59594 4-14-69 Philam Ac- 33.03 4-29 69
cident Inc.
21. 59577 4-8-69 Esla 9,429.78 4-29 69
22. 59601 4-16-69 Justino 20,000.00 4-18-69
Torres
23. 59595 4-14-69 Neris Phil. 4,274.00 5-20-69
Inc. --------------------
P 320,636.26
During the same months of March, April and May 1969, twenty-three (23) checks bearing the same numbers as the
aforementioned NWSA checks were likewise paid and cleared by PNB and debited against NWSA Account No. 6, to
wit:
Check Date Payee Amount Date Paid
No. Issued By PNB
1. 59546 3-6-69 Raul Dizon P 84,401.00 3-16-69
2. 59548 3-11-69 Raul Dizon 104,790.00 4-1-69
3. 59547 3-14-69 Arturo Sison 56,903.00 4-11-69
4. 59549 3-20-69 Arturo Sison 48,903.00 4-15-69
5. 59552 3-24-69 Arturo Sison 63,845.00 4-16-69
6. 59544 3-26-69 Arturo Sison 98,450.00 4-17-69
7. 59558 3-28-69 Arturo Sison 114,840.00 4-21-69
8. 59544 3-16-69 Antonio 38,490.00 4-22-69 Mendoza
9. 59564 3-31-69 Arturo Sison 180,900.00 4-23-69
10.59568 4-2-69 Arturo Sison 134,940.00 4- 5-69
11.59570 4-1-69 Arturo Sison 64,550.00 4-28-69
12.59574 4-2-69 Arturo Sison 148,610.00 4-29-69
13.59578 4-10-69 Antonio 93,950.00 4-29-69
Mendoza
14.59580 4-8-69 Arturo Sison 160,000.00 5-2-69
15.59582 4-10-69 Arturo Sison 155,400.00 5-5-69
16.59581 4-8-69 Antonio 176,580.00 5-6-69
Mendoza

76 Negotiable Instruments – Form and Interpretation (Sec 1-23)


17.59588 4-16-69 Arturo Sison 176,000.00 5-8-69
18.59587 4-16-69 Arturo Sison 300,000.00 5-12-69
19.59589 4-18-69 Arturo Sison 122,000.00 5-14-69
20.59594 4-18-69 Arturo Sison 280,000.00 5-15-69
21.59577 4-14-69 Antonio 260,000.00 5-16-69
Mendoza
22.59601 4-18-69 Arturo Sison 400,000.00 5-19-69
23.59595 4-28-69 Arturo Sison 190,800.00 5-21-69
---------------
P3,457,903.00
The foregoing checks were deposited by the payees Raul Dizon, Arturo Sison and Antonio Mendoza in their
respective current accounts with the Philippine Commercial and Industrial Bank (PCIB) and Philippine Bank of
Commerce (PBC) in the months of March, April and May 1969. Thru the Central Bank Clearing, these checks were
presented for payment by PBC and PCIB to the defendant PNB, and paid, also in the months of March, April and May
1969. At the time of their presentation to PNB these checks bear the standard indorsement which reads 'all prior
indorsement and/or lack of endorsement guaranteed.'
Subsequent investigation however, conducted by the NBI showed that Raul Dizon, Arturo Sison and Antonio
Mendoza were all fictitious persons. The respective balances in their current account with the PBC and/or PCIB stood
as follows: Raul Dizon P3,455.00 as of April 30, 1969; Antonio Mendoza P18,182.00 as of May 23, 1969; and Arturo
Sison Pl,398.92 as of June 30, 1969.
On June 11, 1969, NWSA addressed a letter to PNB requesting the immediate restoration to its Account No. 6, of the
total sum of P3,457,903.00 corresponding to the total amount of these twenty-three (23) checks claimed by NWSA to
be forged and/or spurious checks. "In view of the refusal of PNB to credit back to Account No. 6 the said total sum of
P3,457,903.00 MWSS filed the instant complaint on November 10, 1972 before the Court of First Instance of Manila
and docketed thereat as Civil Case No. 88950.
In its answer, PNB contended among others, that the checks in question were regular on its face in all respects,
including the genuineness of the signatures of authorized NWSA signing officers and there was nothing on its face
that could have aroused any suspicion as to its genuineness and due execution and; that NWSA was guilty of
negligence which was the proximate cause of the loss.
PNB also filed a third party complaint against the negotiating banks PBC and PCIB on the ground that they failed to
ascertain the Identity of the payees and their title to the checks which were deposited in the respective new accounts
of the payees with them.
xxx xxx xxx
On February 6, 1976, the Court of First Instance of Manila rendered judgment in favor of the MWSS. The dispositive portion of the
decision reads:
WHEREFORE, on the COMPLAINT by a clear preponderance of evidence and in accordance with Section 23 of the
Negotiable Instruments Law, the Court hereby renders judgment in favor of the plaintiff Metropolitan Waterworks and
Sewerage System (MWSS) by ordering the defendant Philippine National Bank (PNB) to restore the total sum of
THREE MILLION FOUR HUNDRED FIFTY SEVEN THOUSAND NINE HUNDRED THREE PESOS (P3,457,903.00)
to plaintiff's Account No. 6, otherwise known as Account No. 010-50030-3, with legal interest thereon computed from
the date of the filing of the complaint and until as restored in the said Account No. 6.
On the THIRD PARTY COMPLAINT, the Court, for lack of evidence, hereby renders judgment in favor of the third
party defendants Philippine Bank of Commerce (PBC) and Philippine Commercial and Industrial Bank (PCIB) by
dismissing the Third Party Complaint.
The counterclaims of the third party defendants are likewise dismissed for lack of evidence.
No pronouncement as to costs.
As earlier stated, the respondent court reversed the decision of the Court of First Instance of Manila and rendered judgment in favor of
the respondent Philippine National Bank.
A motion for reconsideration filed by the petitioner MWSS was denied by the respondent court in a resolution dated January 3, 1983.
The petitioner now raises the following assignments of errors for the grant of this petition:
I. IN NOT HOLDING THAT AS THE SIGNATURES ON THE CHECKS WERE FORGED, THE DRAWEE BANK WAS
LIABLE FOR THE LOSS UNDER SECTION 23 OF THE NEGOTIABLE INSTRUMENTS LAW.
II. IN FAILING TO CONSIDER THE PROXIMATE NEGLIGENCE OF PNB IN ACCEPTING THE SPURIOUS
CHECKS DESPITE THE OBVIOUS IRREGULARITY OF TWO SETS OF CHECKS BEARING IdENTICAL NUMBER
BEING ENCASHED WITHIN DAYS OF EACH OTHER.

77 Negotiable Instruments – Form and Interpretation (Sec 1-23)


III. IN NOT HOLDING THAT THE SIGNATURES OF THE DRAWEE MWSS BEING CLEARLY FORGED, AND THE
CHECKS SPURIOUS, SAME ARE INOPERATIVE AS AGAINST THE ALLEGED DRAWEE.
The appellate court applied Section 24 of the Negotiable Instruments Law which provides:
Every negotiable instrument is deemed prima facie to have been issued for valuable consideration and every person
whose signature appears thereon to have become a party thereto for value.
The petitioner submits that the above provision does not apply to the facts of the instant case because the questioned checks were not
those of the MWSS and neither were they drawn by its authorized signatories. The petitioner states that granting that Section 24 of the
Negotiable Instruments Law is applicable, the same creates only a prima facie presumption which was overcome by the following
documents, to wit: (1) the NBI Report of November 2, 1970; (2) the NBI Report of November 21, 1974; (3) the NBI Chemistry Report
No. C-74891; (4) the Memorandum of Mr. Juan Dino, 3rd Assistant Auditor of the respondent drawee bank addressed to the Chief
Auditor of the petitioner; (5) the admission of the respondent bank's counsel in open court that the National Bureau of Investigation
found the signature on the twenty-three (23) checks in question to be forgeries; and (6) the admission of the respondent bank's witness,
Mr. Faustino Mesina, Jr. that the checks in question were not printed by his printing press. The petitioner contends that since the
signatures of the checks were forgeries, the respondent drawee bank must bear the loss under the rulings of this Court.
A bank is bound to know the signatures of its customers; and if it pays a forged check it must be considered as
making the payment out of its obligation funds, and cannot ordinarily charge the amount so paid to the account of the
depositor whose name was forged.
xxx xxx xxx
The signatures to the checks being forged, under Section 23 of the Negotiable Instruments Law they are not a charge
against plaintiff nor are the checks of any value to the defendant.
It must therefore be held that the proximate cause of loss was due to the negligence of the Bank of the Philippine
Islands in honoring and cashing the two forged checks. (San Carlos Milling Co. v. Bank of the P. I., 59 Phil. 59)
It is admitted that the Philippine National Bank cashed the check upon a forged signature, and placed the money to
the credit of Maasim, who was the forger. That the Philippine National Bank then endorsed the chock and forwarded
it to the Shanghai Bank by whom it was paid. The Philippine National Bank had no license or authority to pay the
money to Maasim or anyone else upon a forged signature. It was its legal duty to know that Malicor's endorsement
was genuine before cashing the check. Its remedy is against Maasim to whom it paid the money. (Great Eastern Life
Ins. Co. v. Hongkong & Shanghai Bank, 43 Phil. 678).
We have carefully reviewed the documents cited by the petitioner. There is no express and categorical finding in these documents that
the twenty-three (23) questioned checks were indeed signed by persons other than the authorized MWSS signatories. On the contrary,
the findings of the National Bureau of Investigation in its Report dated November 2, 1970 show that the MWSS fraud was an "inside
job" and that the petitioner's delay in the reconciliation of bank statements and the laxity and loose records control in the printing of its
personalized checks facilitated the fraud. Likewise, the questioned Documents Report No. 159-1074 dated November 21, 1974 of the
National Bureau of Investigation does not declare or prove that the signatures appearing on the questioned checks are forgeries. The
report merely mentions the alleged differences in the type face, checkwriting, and printing characteristics appearing in the standard or
submitted models and the questioned typewritings. The NBI Chemistry Report No. C-74-891 merely describes the inks and pens used
in writing the alleged forged signatures.
It is clear that these three (3) NBI Reports relied upon by the petitioner are inadequate to sustain its allegations of forgery. These
reports did not touch on the inherent qualities of the signatures which are indispensable in the determination of the existence of forgery.
There must be conclusive findings that there is a variance in the inherent characteristics of the signatures and that they were written by
two or more different persons.
Forgery cannot be presumed (Siasat, et al. v. Intermediate Appellate Court, et al, 139 SCRA 238). It must be established by clear,
positive, and convincing evidence. This was not done in the present case.
The cases of San Carlos Milling Co. Ltd. v. Bank of the Philippine Islands, et al. (59 Phil. 59) and Great Eastern Life Ins., Co. v.
Hongkong and Shanghai Bank (43 Phil. 678) relied upon by the petitioner are inapplicable in this case because the forgeries in those
cases were either clearly established or admitted while in the instant case, the allegations of forgery were not clearly established during
trial.
Considering the absence of sufficient security in the printing of the checks coupled with the very close similarities between the genuine
signatures and the alleged forgeries, the twenty-three (23) checks in question could have been presented to the petitioner's signatories
without their knowing that they were bogus checks. Indeed, the cashier of the petitioner whose signatures were allegedly forged was
unable to ten the difference between the allegedly forged signature and his own genuine signature. On the other hand, the MWSS
officials admitted that these checks could easily be passed on as genuine.
The memorandum of Mr. A. T. Tolentino, no, Assistant Chief Accountant of the drawee Philippine National Bank to Mr. E. Villatuya,
Executive Vice-President of the petitioner dated June 9, 1969 cites an instance where even the concerned NWSA officials could not ten
the differences between the genuine checks and the alleged forged checks.
At about 12:00 o'clock on June 6, 1969, VP Maramag requested me to see him in his office at the Cashier's Dept.
where Messrs. Jose M. Sanchez, treasurer of NAWASA and Romeo Oliva of the same office were present. Upon my
arrival I observed the NAWASA officials questioning the issue of the NAWASA checks appearing in their own list,
xerox copy attached.
For verification purposes, therefore, the checks were taken from our file. To everybody there present namely VIP
Maramag, the two abovementioned NAWASA officials, AVP, Buhain, Asst. Cashier Castelo, Asst. Cashier Tejada
78 Negotiable Instruments – Form and Interpretation (Sec 1-23)
and Messrs. A. Lopez and L. Lechuga, both C/A bookkeepers, no one was able to point out any difference on the
signatures of the NAWASA officials appearing on the checks compared to their official signatures on file. In fact 3
checks, one of those under question, were presented to the NAWASA treasurer for verification but he could not point
out which was his genuine signature. After intent comparison, he pointed on the questioned check as bearing his
correct signature.
xxx xxx xxx
Moreover, the petitioner is barred from setting up the defense of forgery under Section 23 of the Negotiable Instruments Law which
provides that:
SEC. 23. FORGED SIGNATURE; EFFECT OF.- When the signature is forged or made without authority of the
person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a
discharge therefor, or to enforce payment thereof against any party thereto can be acquired through or under such
signature unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or
want of authority.
because it was guilty of negligence not only before the questioned checks were negotiated but even after the same had already been
negotiated. (See Republic v. Equitable Banking Corporation, 10 SCRA 8) The records show that at the time the twenty-three (23)
checks were prepared, negotiated, and encashed, the petitioner was using its own personalized checks, instead of the official PNB
Commercial blank checks. In the exercise of this special privilege, however, the petitioner failed to provide the needed security
measures. That there was gross negligence in the printing of its personalized checks is shown by the following uncontroverted facts, to
wit:
(1) The petitioner failed to give its printer, Mesina Enterprises, specific instructions relative to the safekeeping and disposition of excess
forms, check vouchers, and safety papers;
(2) The petitioner failed to retrieve from its printer all spoiled check forms;
(3) The petitioner failed to provide any control regarding the paper used in the printing of said checks;
(4) The petitioner failed to furnish the respondent drawee bank with samples of typewriting, cheek writing, and print used by its printer in
the printing of its checks and of the inks and pens used in signing the same; and
(5) The petitioner failed to send a representative to the printing office during the printing of said checks.
This gross negligence of the petitioner is very evident from the sworn statement dated June 19, 1969 of Faustino Mesina, Jr., the owner
of the printing press which printed the petitioner's personalized checks:
xxx xxx xxx
7. Q: Do you have any business transaction with the National Waterworks and Sewerage Authority
(NAWASA)?
A: Yes, sir. I have a contract with the NAWASA in printing NAWASA Forms such as NAWASA
Check
xxx xxx xxx
15. Q: Were you given any ingtruction by the NAWASA in connection with the printing of these
check vouchers?
A: There is none, sir. No instruction whatsoever was given to me.
16. Q: Were you not advised as to what kind of paper would be used in the check vouchers?
A: Only as per sample, sir.
xxx xxx xxx
20. Q: Where did you buy this Hammermill Safety check paper?
A: From Tan Chiong, a paper dealer with store located at Juan Luna, Binondo, Manila. (In front of
the Metropolitan Bank).
xxx xxx xxx
24. Q: Were all these check vouchers printed by you submitted to NAWASA?
A: Not all, sir. Because we have to make reservations or allowances for spoilage.
25. Q: Out of these vouchers printed by you, how many were spoiled and how many were the
excess printed check vouchers?
A: Approximately four hundred (400) sheets, sir. I cannot determine the proportion of the excess
and spoiled because the final act of perforating these check vouchers has not yet been done and
spoilage can only be determined after this final act of printing.
26. Q: What did you do with these excess check vouchers?
A: I keep it under lock and key in my firing cabinet.
xxx xxx xxx

79 Negotiable Instruments – Form and Interpretation (Sec 1-23)


28. Q: Were you not instructed by the NAWASA authorities to bum these excess check vouchers?
A: No, sir. I was not instructed.
29. Q: What do you intend to do with these excess printed check vouchers?
A: I intend to use them for future orders from the
xxx xxx xxx
32. Q: In the process of printing the check vouchers ordered by the NAWASA, how many sheets
were actually spoiled?
A: I cannot approximate, sir. But there are spoilage in the process of printing and perforating.
33. Q: What did you do with these spoilages?
A: Spoiled printed materials are usually thrown out, in the garbage can.
34. Q: Was there any representative of the NAWASA to supervise the printing or watch the printing
of these check vouchers?
A: None, sir.
xxx xxx xxx
39. Q: During the period of printing after the days work, what measures do you undertake to
safeguard the mold and other paraphernalia used in the printing of these particular orders of
NAWASA?
A: Inasmuch as I have an employee who sleeps in the printing shop and at the same time do the
guarding, we just leave the mold attached to the machine and the other finished or unfinished work
check vouchers are left in the rack so that the work could be continued the following day.
The National Bureau of Investigation Report dated November 2, 1970 is even more explicit. Thus—
xxx xxx xxx
60. We observed also that there is some laxity and loose control in the printing of NAWASA
cheeks. We gathered from MESINA ENTERPRISES, the printing firm that undertook the printing of
the check vouchers of NAWASA that NAWASA had no representative at the printing press during
the process of the printing and no particular security measure instructions adopted to safeguard the
interest of the government in connection with printing of this accountable form.
Another factor which facilitated the fraudulent encashment of the twenty-three (23) checks in question was the failure of the petitioner to
reconcile the bank statements with its own records.
It is accepted banking procedure for the depository bank to furnish its depositors bank statements and debt and credit memos through
the mail. The records show that the petitioner requested the respondent drawee bank to discontinue the practice of mailing the bank
statements, but instead to deliver the same to a certain Mr. Emiliano Zaporteza. For reasons known only to Mr. Zaporteza however, he
was unreasonably delayed in taking prompt deliveries of the said bank statements and credit and debit memos. As a consequence, Mr.
Zaporteza failed to reconcile the bank statements with the petitioner's records. If Mr. Zaporteza had not been remiss in his duty of
taking the bank statements and reconciling them with the petitioner's records, the fraudulent encashments of the first checks should
have been discovered, and further frauds prevented. This negligence was, therefore, the proximate cause of the failure to discover the
fraud. Thus,
When a person opens a checking account with a bank, he is given blank checks which he may fill out and use
whenever he wishes. Each time he issues a check, he should also fill out the check stub to which the check is usually
attached. This stub, if properly kept, will contain the number of the check, the date of its issue, the name of the payee
and the amount thereof. The drawer would therefore have a complete record of the checks he issues. It is the custom
of banks to send to its depositors a monthly statement of the status of their accounts, together with all the cancelled
checks which have been cashed by their respective holders. If the depositor has filled out his check stubs properly, a
comparison between them and the cancelled checks will reveal any forged check not taken from his checkbook. It is
the duty of a depositor to carefully examine the bank's statement, his cancelled checks, his check stubs and other
pertinent records within a reasonable time, and to report any errors without unreasonable delay. If his negligence
should cause the bank to honor a forged check or prevent it from recovering the amount it may have already paid on
such check, he cannot later complain should the bank refuse to recredit his account with the amount of such check.
(First Nat. Bank of Richmond v. Richmond Electric Co., 106 Va. 347, 56 SE 152, 7 LRA, NS 744 [1907]. See also
Leather Manufacturers' Bank v. Morgan, 117 US 96, 6 S. Ct. 657 [1886]; Deer Island Fish and Oyster Co. v. First Nat.
Bank of Biloxi, 166 Miss. 162, 146 So. 116 [1933]). Campos and Campos, Notes and Selected Cases on Negotiable
Instruments Law, 1971, pp. 267-268).
This failure of the petitioner to reconcile the bank statements with its cancelled checks was noted by the National Bureau of
Investigation in its report dated November 2, 1970:
58. One factor which facilitate this fraud was the delay in the reconciliation of bank (PNB) statements with the
NAWASA bank accounts. x x x. Had the NAWASA representative come to the PNB early for the statements and had
the bank been advised promptly of the reported bogus check, the negotiation of practically all of the remaining checks
on May, 1969, totalling P2,224,736.00 could have been prevented.

80 Negotiable Instruments – Form and Interpretation (Sec 1-23)


The records likewise show that the petitioner failed to provide appropriate security measures over its own records thereby laying
confidential records open to unauthorized persons. The petitioner's own Fact Finding Committee, in its report submitted to their General
manager underscored this laxity of records control. It observed that the "office of Mr. Ongtengco (Cashier No. VI of the Treasury
Department at the NAWASA) is quite open to any person known to him or his staff members and that the check writer is merely on top
of his table."
When confronted with this report at the Anti-Fraud Action Section of the National Bureau of Investigation. Mr. Ongtengco could only
state that:
A. Generally my order is not to allow anybody to enter my office. Only authorized persons are
allowed to enter my office. There are some cases, however, where some persons enter my office
because they are following up their checks. Maybe, these persons may have been authorized by
Mr. Pantig. Most of the people entering my office are changing checks as allowed by the Resolution
of the Board of Directors of the NAWASA and the Treasurer. The check writer was never placed on
my table. There is a place for the check write which is also under lock and key.
Q. Is Mr. Pantig authorized to allow unauthorized persons to enter your office?
A. No, sir.
Q. Why are you tolerating Mr. Pantig admitting unauthorized persons in your office?
A. I do not want to embarrass Mr. Pantig. Most of the people following up checks are employees of
the NAWASA.
Q. Was the authority given by the Board of Directors and the approval by the Treasurer for
employees, and other persons to encash their checks carry with it their authority to enter your
office?
A. No, sir.
xxx xxx xxx
Q. From the answers that you have given to us we observed that actually there is laxity and poor
control on your part with regards to the preparations of check payments inasmuch as you allow
unauthorized persons to follow up their vouchers inside your office which may leakout confidential
informations or your books of account. After being apprised of all the shortcomings in your office,
as head of the Cashiers' Office of the Treasury Department what remedial measures do you intend
to undertake?
A. Time and again the Treasurer has been calling our attention not to allow interested persons to
hand carry their voucher checks and we are trying our best and if I can do it to follow the
instructions to the letter, I will do it but unfortunately the persons who are allowed to enter my office
are my co-employees and persons who have connections with our higher ups and I can not
possibly antagonize them. Rest assured that even though that everybody will get hurt, I win do my
best not to allow unauthorized persons to enter my office.
xxx xxx xxx
Q. Is it not possible inasmuch as your office is in charge of the posting of check payments in your
books that leakage of payments to the banks came from your office?
A. I am not aware of it but it only takes us a couple of minutes to process the checks. And there are
cases wherein every information about the checks may be obtained from the Accounting
Department, Auditing Department, or the Office of the General Manager.
Relying on the foregoing statement of Mr. Ongtengco, the National Bureau of Investigation concluded in its Report dated November 2,
1970 that the fraudulent encashment of the twenty-three (23)cheeks in question was an "inside job". Thus-
We have all the reasons to believe that this fraudulent act was an inside job or one pulled with inside connivance at
NAWASA. As pointed earlier in this report, the serial numbers of these checks in question conform with the numbers
in current use of NAWASA, aside from the fact that these fraudulent checks were found to be of the same kind and
design as that of NAWASA's own checks. While knowledge as to such facts may be obtained through the possession
of a NAWASA check of current issue, an outsider without information from the inside can not possibly pinpoint which
of NAWASA's various accounts has sufficient balance to cover all these fraudulent checks. None of these checks, it
should be noted, was dishonored for insufficiency of funds. . .
Even if the twenty-three (23) checks in question are considered forgeries, considering the petitioner's gross negligence, it is barred from
setting up the defense of forgery under Section 23 of the Negotiable Instruments Law.
Nonetheless, the petitioner claims that it was the negligence of the respondent Philippine National Bank that was the proximate cause
of the loss. The petitioner relies on our ruling in Philippine National Bank v. Court of Appeals (25 SCRA 693) that.
Thus, by not returning the cheek to the PCIB, by thereby indicating that the PNB had found nothing wrong with the
check and would honor the same, and by actually paying its amount to the PCIB, the PNB induced the latter, not only
to believe that the check was genuine and good in every respect, but, also, to pay its amount to Augusto Lim. In other
words, the PNB was the primary or proximate cause of the loss, and, hence, may not recover from the PCIB.

81 Negotiable Instruments – Form and Interpretation (Sec 1-23)


The argument has no merit. The records show that the respondent drawee bank, had taken the necessary measures in the detection of
forged checks and the prevention of their fraudulent encashment. In fact, long before the encashment of the twenty-three (23) checks in
question, the respondent Bank had issued constant reminders to all Current Account Bookkeepers informing them of the activities of
forgery syndicates. The Memorandum of the Assistant Vice-President and Chief Accountant of the Philippine National Bank dated
February 17, 1966 reads in part:
SUBJECT: ACTIVITIES OF FORGERY SYNDICATE
From reliable information we have gathered that personalized checks of current account depositors are now the
target of the forgery syndicate. To protect the interest of the bank, you are hereby enjoined to be more careful in
examining said checks especially those coming from the clearing, mails and window transactions. As a reminder
please be guided with the following:
1. Signatures of drawers should be properly scrutinized and compared with those we have on file.
2. The serial numbers of the checks should be compared with the serial numbers registered with the Cashier's Dept.
3. The texture of the paper used and the printing of the checks should be compared with the sample we have on file
with the Cashier's Dept.
4. Checks bearing several indorsements should be given a special attention.
5. Alteration in amount both in figures and words should be carefully examined even if signed by the drawer.
6. Checks issued in substantial amounts particularly by depositors who do not usually issue checks in big amounts
should be brought to the attention of the drawer by telephone or any fastest means of communication for purposes of
confirmation.
and your attention is also invited to keep abreast of previous circulars and memo instructions issued to bookkeepers.
We cannot fault the respondent drawee Bank for not having detected the fraudulent encashment of the checks because the printing of
the petitioner's personalized checks was not done under the supervision and control of the Bank. There is no evidence on record
indicating that because of this private printing the petitioner furnished the respondent Bank with samples of checks, pens, and inks or
took other precautionary measures with the PNB to safeguard its interests.
Under the circumstances, therefore, the petitioner was in a better position to detect and prevent the fraudulent encashment of its
checks.
WHEREFORE, the petition for review on certiorari is hereby DISMISSED for lack of merit. The decision of the respondent Court of
Appeals dated October 29, 1982 is AFFIRMED. No pronouncement as to costs.
SO ORDERED.

82 Negotiable Instruments – Form and Interpretation (Sec 1-23)


EN BANC
G.R. No. L-26001 October 29, 1968
PHILIPPINE NATIONAL BANK, petitioner,
-versus-
THE COURT OF APPEALS and PHILIPPINE COMMERCIAL AND INDUSTRIAL BANK, respondents.
Tomas Besa, Jose B. Galang and Juan C. Jimenez for petitioner.
San Juan, Africa & Benedicto for respondents.
CONCEPCION, C.J.:
The Philippine National Bank — hereinafter referred to as the PNB — seeks the review by certiorari of a decision of the Court of
Appeals, which affirmed that of the Court of First Instance of Manila, dismissing plaintiff's complaint against the Philippine Commercial
and Industrial Bank — hereinafter referred to as the PCIB — for the recovery of P57,415.00.
A partial stipulation of facts entered into by the parties and the decision of the Court of Appeals show that, 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: (1) in not finding the PCIB guilty of negligence; (2) in not finding that the
indorsements at the back of the check are forged; (3) in not finding the PCIB liable to the PNB by virtue of the former's warranty on the
back of the check; (4) in not holding that "clearing" is not "acceptance", in contemplation of the Negotiable Instruments law; (5) in not
finding that, since the check had not been accepted by the PNB, the latter is entitled to reimbursement therefor; and (6) in denying the
PNB's right to recover from the PCIB.
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,1 for, as against the drawee, the indorsement of an
intermediate bank does not guarantee the signature of the drawer,2 since the forgery of the indorsement is not the cause of the loss.3
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.4 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 indorsee5 or a holder in due course6 subsequent to the PCIB, but,
the PNB is neither.7 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.8
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 Law9 is not required for checks, for the same are payable on demand.10 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.11 In the words of the Law,12 "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

83 Negotiable Instruments – Form and Interpretation (Sec 1-23)


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.13
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.14
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.15
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.16
WHEREFORE, the decision appealed from is hereby affirmed, with costs against the Philippine National Bank. It is so ordered.

84 Negotiable Instruments – Form and Interpretation (Sec 1-23)


EN BANC
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.
Gibbs and McDonough and Roman Ozaeta for appellant.
Araneta, De Joya, Zaragosa and Araneta for appellee Bank of the Philippine Islands.
Marcelo Nubla and Guevara, Francisco and Recto for appellee China Banking Corporation.

HULL, J.:
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 $100,00. 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 spurious.
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.

85 Negotiable Instruments – Form and Interpretation (Sec 1-23)


The Bank of the Philippine Islands presented many special defenses, but in the main their 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.
After trial in which much testimony was taken, 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.
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.
Plaintiff in its letter of December 23, 1928, to the Bank of the Philippine Islands said in part:
". . . we now leave to demand that you pay over to us the entire amount of said manager's check of two hundred one thousand
(P201,000) pesos, together with interest thereon at the agreed rate of 3 ½ per cent per annum on daily balances of our credit
in account current with your bank to this date. In the event of your refusal to pay, we shall claim interest at the legal rate of 6
per cent from and after the date of this demand inasmuch as we desire to withdraw and make use of the money." Such
language might well be treated as a ratification of the deposit.
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.

86 Negotiable Instruments – Form and Interpretation (Sec 1-23)


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.
Malcolm, Villa-Real, Vickers, and Imperial, JJ., concur.

87 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 92244 February 9, 1993


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

CAMPOS, JR., J.:


From the adverse decision * of the Court of Appeals (CA-G.R. CV No. 16447), petitioner, Natividad Gempesaw, appealed to this Court
in a Petition for Review, on the issue of the right of the drawer to recover from the drawee bank who pays a check with a forged
indorsement of the payee, debiting the same against the drawer's account.
The records show that on January 23, 1985, petitioner filed a Complaint against the private respondent Philippine Bank of
Communications (respondent drawee Bank) for recovery of the money value of eighty-two (82) checks charged against the petitioner's
account with the respondent drawee Bank on the ground that the payees' indorsements were forgeries. The Regional Trial Court,
Branch CXXVIII of Caloocan City, which tried the case, rendered a decision on November 17, 1987 dismissing the complaint as well as
the respondent drawee Bank's counterclaim. On appeal, the Court of Appeals in a decision rendered on February 22, 1990, affirmed
the decision of the RTC on two grounds, namely (1) that the plaintiff's (petitioner herein) gross negligence in issuing the checks was the
proximate cause of the loss and (2) assuming that the bank was also negligent, the loss must nevertheless be borne by the party
whose negligence was the proximate cause of the loss. On March 5, 1990, the petitioner filed this petition under Rule 45 of the Rules of
Court setting forth the following as the alleged errors of the respondent Court: 1
I
THE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE NEGLIGENCE OF THE DRAWER IS
THE PROXIMATE CAUSE OF THE RESULTING INJURY TO THE DRAWEE BANK, AND THE DRAWER IS
PRECLUDED FROM SETTING UP THE FORGERY OR WANT OF AUTHORITY.
II
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT FINDING AND RULING THAT IT IS THE
GROSS AND INEXCUSABLE NEGLIGENCE AND FRAUDULENT ACTS OF THE OFFICIALS AND EMPLOYEES
OF THE RESPONDENT BANK IN FORGING THE SIGNATURE OF THE PAYEES AND THE WRONG AND/OR
ILLEGAL PAYMENTS MADE TO PERSONS, OTHER THAN TO THE INTENDED PAYEES SPECIFIED IN THE
CHECKS, IS THE DIRECT AND PROXIMATE CAUSE OF THE DAMAGE TO PETITIONER WHOSE SAVING (SIC)
ACCOUNT WAS DEBITED.
III
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT ORDERING THE RESPONDENT BANK TO
RESTORE OR RE-CREDIT THE CHECKING ACCOUNT OF THE PETITIONER IN THE CALOOCAN CITY
BRANCH BY THE VALUE OF THE EIGHTY-TWO (82) CHECKS WHICH IS IN THE AMOUNT OF P1,208,606.89
WITH LEGAL INTEREST.
From the records, the relevant facts are as follows:
Petitioner Natividad O. Gempesaw (petitioner) owns and operates four grocery stores located at Rizal Avenue Extension and at Second
Avenue, Caloocan City. Among these groceries are D.G. Shopper's Mart and D.G. Whole Sale Mart. Petitioner maintains a checking
account numbered 13-00038-1 with the Caloocan City Branch of the respondent drawee Bank. To facilitate payment of debts to her
suppliers, petitioner draws checks against her checking account with the respondent bank as drawee. Her customary practice of issuing
checks in payment of her suppliers was as follows: the checks were prepared and filled up as to all material particulars by her trusted
bookkeeper, Alicia Galang, an employee for more than eight (8) years. After the bookkeeper prepared the checks, the completed
checks were submitted to the petitioner for her signature, together with the corresponding invoice receipts which indicate the correct
obligations due and payable to her suppliers. Petitioner signed each and every check without bothering to verify the accuracy of the
checks against the corresponding invoices because she reposed full and implicit trust and confidence on her bookkeeper. The issuance
and delivery of the checks to the payees named therein were left to the bookkeeper. Petitioner admitted that she did not make any
verification as to whether or not the checks were delivered to their respective payees. Although the respondent drawee Bank notified
her of all checks presented to and paid by the bank, petitioner did not verify he correctness of the returned checks, much less check if
the payees actually received the checks in payment for the supplies she received. In the course of her business operations covering a
period of two years, petitioner issued, following her usual practice stated above, a total of eighty-two (82) checks in favor of several

88 Negotiable Instruments – Form and Interpretation (Sec 1-23)


suppliers. These checks were all presented by the indorsees as holders thereof to, and honored by, the respondent drawee Bank.
Respondent drawee Bank correspondingly debited the amounts thereof against petitioner's checking account numbered 30-00038-1.
Most of the aforementioned checks were for amounts in excess of her actual obligations to the various payees as shown in their
corresponding invoices. To mention a few:
. . . 1) in Check No. 621127, dated June 27, 1984 in the amount of P11,895.23 in favor of Kawsek Inc. (Exh. A-60),
appellant's actual obligation to said payee was only P895.33 (Exh. A-83); (2) in Check No. 652282 issued on
September 18, 1984 in favor of Senson Enterprises in the amount of P11,041.20 (Exh. A-67) appellant's actual
obligation to said payee was only P1,041.20 (Exh. 7); (3) in Check No. 589092 dated April 7, 1984 for the amount of
P11,672.47 in favor of Marchem (Exh. A-61) appellant's obligation was only P1,672.47 (Exh. B); (4) in Check No.
620450 dated May 10, 1984 in favor of Knotberry for P11,677.10 (Exh. A-31) her actual obligation was only P677.10
(Exhs. C and C-1); (5) in Check No. 651862 dated August 9, 1984 in favor of Malinta Exchange Mart for P11,107.16
(Exh. A-62), her obligation was only P1,107.16 (Exh. D-2); (6) in Check No. 651863 dated August 11, 1984 in favor of
Grocer's International Food Corp. in the amount of P11,335.60 (Exh. A-66), her obligation was only P1,335.60 (Exh.
E and E-1); (7) in Check No. 589019 dated March 17, 1984 in favor of Sophy Products in the amount of P11,648.00
(Exh. A-78), her obligation was only P648.00 (Exh. G); (8) in Check No. 589028 dated March 10, 1984 for the amount
of P11,520.00 in favor of the Yakult Philippines (Exh. A-73), the latter's invoice was only P520.00 (Exh. H-2); (9) in
Check No. 62033 dated May 23, 1984 in the amount of P11,504.00 in favor of Monde Denmark Biscuit (Exh. A-34),
her obligation was only P504.00 (Exhs. I-1 and I-2). 2
Practically, all the checks issued and honored by the respondent drawee bank were crossed checks. 3 Aside from the daily notice given
to the petitioner by the respondent drawee Bank, the latter also furnished her with a monthly statement of her transactions, attaching
thereto all the cancelled checks she had issued and which were debited against her current account. It was only after the lapse of more
two (2) years that petitioner found out about the fraudulent manipulations of her bookkeeper.
All the eighty-two (82) checks with forged signatures of the payees were brought to Ernest L. Boon, Chief Accountant of respondent
drawee Bank at the Buendia branch, who, without authority therefor, accepted them all for deposit at the Buendia branch to the credit
and/or in the accounts of Alfredo Y. Romero and Benito Lam. Ernest L. Boon was a very close friend of Alfredo Y. Romero. Sixty-three
(63) out of the eighty-two (82) checks were deposited in Savings Account No. 00844-5 of Alfredo Y. Romero at the respondent drawee
Bank's Buendia branch, and four (4) checks in his Savings Account No. 32-81-9 at its Ongpin branch. The rest of the checks were
deposited in Account No. 0443-4, under the name of Benito Lam at the Elcaño 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 Elcaño branches accepted the deposits made in the Buendia branch and credited the
accounts of Alfredo Y. Romero and Benito Lam in their respective branches.
On November 7, 1984, petitioner made a written demand on respondent drawee Bank to credit her account with the money value of the
eighty-two (82) checks totalling P1,208.606.89 for having been wrongfully charged against her account. Respondent drawee Bank
refused to grant petitioner's demand. On January 23, 1985, petitioner filed the complaint with the Regional Trial Court.
This is not a suit by the party whose signature was forged on a check drawn against the drawee bank. The payees are not parties to
the case. Rather, it is the drawer, whose signature is genuine, who instituted this action to recover from the drawee bank the money
value of eighty-two (82) checks paid out by the drawee bank to holders of those checks where the indorsements of the payees were
forged. How and by whom the forgeries were committed are not established on the record, but the respective payees admitted that they
did not receive those checks and therefore never indorsed the same. The applicable law is the Negotiable Instruments Law 4 (heretofore
referred to as the NIL). Section 23 of the NIL provides:
When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly
inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof
against any party thereto, can be acquired through or under such signature, unless the party against whom it is
sought to enforce such right is precluded from setting up the forgery or want of authority.
Under the aforecited provision, forgery is a real or absolute defense by the party whose signature is forged. A party whose
signature to an instrument was forged was never a party and never gave his consent to the contract which gave rise to the
instrument. Since his signature does not appear in the instrument, he cannot be held liable thereon by anyone, not even by a
holder in due course. Thus, if a person's signature is forged as a maker of a promissory note, he cannot be made to pay
because he never made the promise to pay. Or where a person's signature as a drawer of a check is forged, the drawee bank
cannot charge the amount thereof against the drawer's account because he never gave the bank the order to pay. And said
section does not refer only to the forged signature of the maker of a promissory note and of the drawer of a check. It covers
also a forged indorsement, i.e., the forged signature of the payee or indorsee of a note or check. Since under said provision a
forged signature is "wholly inoperative", no one can gain title to the instrument through such forged indorsement. Such an
indorsement prevents any subsequent party from acquiring any right as against any party whose name appears prior to the
forgery. Although rights may exist between and among parties subsequent to the forged indorsement, not one of them can
acquire rights against parties prior to the forgery. Such forged indorsement cuts off the rights of all subsequent parties as
against parties prior to the forgery. However, the law makes an exception to these rules where a party is precluded from
setting up forgery as a defense.

89 Negotiable Instruments – Form and Interpretation (Sec 1-23)


As a matter of practical significance, problems arising from forged indorsements of checks may generally be broken into two types of
cases: (1) where forgery was accomplished by a person not associated with the drawer — for example a mail robbery; and (2) where
the indorsement was forged by an agent of the drawer. This difference in situations would determine the effect of the drawer's
negligence with respect to forged indorsements. While there is no duty resting on the depositor to look for forged indorsements on his
cancelled checks in contrast to a duty imposed upon him to look for forgeries of his own name, a depositor is under a duty to set up an
accounting system and a business procedure as are reasonably calculated to prevent or render difficult the forgery of indorsements,
particularly by the depositor's own employees. And if the drawer (depositor) learns that a check drawn by him has been paid under a
forged indorsement, the drawer is under duty promptly to report such fact to the drawee bank. 5 For his negligence or failure either to
discover or to report promptly the fact of such forgery to the drawee, the drawer loses his right against the drawee who has debited his
account under a forged indorsement. 6 In other words, he is precluded from using forgery as a basis for his claim for re-crediting of his
account.
In the case at bar, petitioner admitted that the checks were filled up and completed by her trusted employee, Alicia Galang, and were
given to her for her signature. Her signing the checks made the negotiable instrument complete. Prior to signing the checks, there was
no valid contract yet.
Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument to the payee for the purpose of
giving effect thereto. 7 The first delivery of the instrument, complete in form, to the payee who takes it as a holder, is called issuance of
the instrument. 8 Without the initial delivery of the instrument from the drawer of the check to the payee, there can be no valid and
binding contract and no liability on the instrument.
Petitioner completed the checks by signing them as drawer and thereafter authorized her employee Alicia Galang to deliver the eighty-
two (82) checks to their respective payees. Instead of issuing the checks to the payees as named in the checks, Alicia Galang delivered
them to the Chief Accountant of the Buendia branch of the respondent drawee Bank, a certain Ernest L. Boon. It was established that
the signatures of the payees as first indorsers were forged. The record fails to show the identity of the party who made the forged
signatures. The checks were then indorsed for the second time with the names of Alfredo Y. Romero and Benito Lam, and were
deposited in the latter's accounts as earlier noted. The second indorsements were all genuine signatures of the alleged holders. All the
eighty-two (82) checks bearing the forged indorsements of the payees and the genuine second indorsements of Alfredo Y. Romero and
Benito Lam were accepted for deposit at the Buendia branch of respondent drawee Bank to the credit of their respective savings
accounts in the Buendia, Ongpin and Elcaño branches of the same bank. The total amount of P1,208,606.89, represented by eighty-
two (82) checks, were credited and paid out by respondent drawee Bank to Alfredo Y. Romero and Benito Lam, and debited against
petitioner's checking account No. 13-00038-1, Caloocan branch.
As a rule, a drawee bank who has paid a check on which an indorsement has been forged cannot charge the drawer's account for the
amount of said check. An exception to this rule is where the drawer is guilty of such negligence which causes the bank to honor such a
check or checks. If a check is stolen from the payee, it is quite obvious that the drawer cannot possibly discover the forged indorsement
by mere examination of his cancelled check. This accounts for the rule that although a depositor owes a duty to his drawee bank to
examine his cancelled checks for forgery of his own signature, he has no similar duty as to forged indorsements. A different situation
arises where the indorsement was forged by an employee or agent of the drawer, or done with the active participation of the latter. Most
of the cases involving forgery by an agent or employee deal with the payee's indorsement. The drawer and the payee often time shave
business relations of long standing. The continued occurrence of business transactions of the same nature provides the opportunity for
the agent/employee to commit the fraud after having developed familiarity with the signatures of the parties. However, sooner or later,
some leak will show on the drawer's books. It will then be just a question of time until the fraud is discovered. This is specially true when
the agent perpetrates a series of forgeries as in the case at bar.
The negligence of a depositor which will prevent recovery of an unauthorized payment is based on failure of the depositor to act as a
prudent businessman would under the circumstances. In the case at bar, the petitioner relied implicitly upon the honesty and loyalty of
her bookkeeper, and did not even verify the accuracy of amounts of the checks she signed against the invoices attached thereto.
Furthermore, although she regularly received her bank statements, she apparently did not carefully examine the same nor the check
stubs and the returned checks, and did not compare them with the same invoices. Otherwise, she could have easily discovered the
discrepancies between the checks and the documents serving as bases for the checks. With such discovery, the subsequent forgeries
would not have been accomplished. It was not until two years after the bookkeeper commenced her fraudulent scheme that petitioner
discovered that eighty-two (82) checks were wrongfully charged to her account, at which she notified the respondent drawee bank.
It is highly improbable that in a period of two years, not one of Petitioner's suppliers complained of non-payment. Assuming that even
one single complaint had been made, petitioner would have been duty-bound, as far as the respondent drawee Bank was concerned,
to make an adequate investigation on the matter. Had this been done, the discrepancies would have been discovered, sooner or later.
Petitioner's failure to make such adequate inquiry constituted negligence which resulted in the bank's honoring of the subsequent
checks with forged indorsements. On the other hand, since the record mentions nothing about such a complaint, the possibility exists
that the checks in question covered inexistent sales. But even in such a case, considering the length of a period of two (2) years, it is
hard to believe that petitioner did not know or realize that she was paying more than she should for the supplies she was actually
getting. A depositor may not sit idly by, after knowledge has come to her that her funds seem to be disappearing or that there may be a
leak in her business, and refrain from taking the steps that a careful and prudent businessman would take in such circumstances and if
taken, would result in stopping the continuance of the fraudulent scheme. If she fails to take steps, the facts may establish her
negligence, and in that event, she would be estopped from recovering from the bank. 9
One thing is clear from the records — that the petitioner failed to examine her records with reasonable diligence whether before she
signed the checks or after receiving her bank statements. Had the petitioner examined her records more carefully, particularly the
invoice receipts, cancelled checks, check book stubs, and had she compared the sums written as amounts payable in the eighty-two
(82) checks with the pertinent sales invoices, she would have easily discovered that in some checks, the amounts did not tally with
those appearing in the sales invoices. Had she noticed these discrepancies, she should not have signed those checks, and should
have conducted an inquiry as to the reason for the irregular entries. Likewise had petitioner been more vigilant in going over her current

90 Negotiable Instruments – Form and Interpretation (Sec 1-23)


account by taking careful note of the daily reports made by respondent drawee Bank in her issued checks, or at least made random
scrutiny of cancelled checks returned by respondent drawee Bank at the close of each month, she could have easily discovered the
fraud being perpetrated by Alicia Galang, and could have reported the matter to the respondent drawee Bank. The respondent drawee
Bank then could have taken immediate steps to prevent further commission of such fraud. Thus, petitioner's negligence was the
proximate cause of her loss. And since it was her negligence which caused the respondent drawee Bank to honor the forged checks or
prevented it from recovering the amount it had already paid on the checks, petitioner cannot now complain should the bank refuse to
recredit her account with the amount of such checks. 10 Under Section 23 of the NIL, she is now precluded from using the forgery to
prevent the bank's debiting of her account.
The doctrine in the case of Great Eastern Life Insurance Co. vs. Hongkong & Shanghai Bank 11 is not applicable to the case at bar
because in said case, the check was fraudulently taken and the signature of the payee was forged not by an agent or employee of the
drawer. The drawer was not found to be negligent in the handling of its business affairs and the theft of the check by a total stranger
was not attributable to negligence of the drawer; neither was the forging of the payee's indorsement due to the drawer's negligence.
Since the drawer was not negligent, the drawee was duty-bound to restore to the drawer's account the amount theretofore paid under
the check with a forged payee's indorsement because the drawee did not pay as ordered by the drawer.
Petitioner argues that respondent drawee Bank should not have honored the checks because they were crossed checks. Issuing a
crossed check imposes no legal obligation on the drawee not to honor such a check. It is more of a warning to the holder that the check
cannot be presented to the drawee bank for payment in cash. Instead, the check can only be deposited with the payee's bank which in
turn must present it for payment against the drawee bank in the course of normal banking transactions between banks. The crossed
check cannot be presented for payment but it can only be deposited and the drawee bank may only pay to another bank in the payee's
or indorser's account.
Petitioner likewise contends that banking rules prohibit the drawee bank from having checks with more than one indorsement. The
banking rule banning acceptance of checks for deposit or cash payment with more than one indorsement unless cleared by some bank
officials does not invalidate the instrument; neither does it invalidate the negotiation or transfer of the said check. In effect, this rule
destroys the negotiability of bills/checks by limiting their negotiation by indorsement of only the payee. Under the NIL, the only kind of
indorsement which stops the further negotiation of an instrument is a restrictive indorsement which prohibits the further negotiation
thereof.
Sec. 36. When indorsement restrictive. — An indorsement is restrictive which either
(a) Prohibits further negotiation of the instrument; or
xxx xxx xxx
In this kind of restrictive indorsement, the prohibition to transfer or negotiate must be written in express words at the back of the
instrument, so that any subsequent party may be forewarned that ceases to be negotiable. However, the restrictive indorsee acquires
the right to receive payment and bring any action thereon as any indorser, but he can no longer transfer his rights as such indorsee
where the form of the indorsement does not authorize him to do so. 12
Although the holder of a check cannot compel a drawee bank to honor it because there is no privity between them, as far as the
drawer-depositor is concerned, such bank may not legally refuse to honor a negotiable bill of exchange or a check drawn against it with
more than one indorsement if there is nothing irregular with the bill or check and the drawer has sufficient funds. The drawee cannot be
compelled to accept or pay the check by the drawer or any holder because as a drawee, he incurs no liability on the check unless he
accepts it. But the drawee will make itself liable to a suit for damages at the instance of the drawer for wrongful dishonor of the bill or
check.
Thus, it is clear that under the NIL, petitioner is precluded from raising the defense of forgery by reason of her gross negligence. But
under Section 196 of the NIL, any case not provided for in the Act shall be governed by the provisions of existing legislation. Under the
laws of quasi-delict, she cannot point to the negligence of the respondent drawee Bank in the selection and supervision of its
employees as being the cause of the loss because negligence is the proximate cause thereof and under Article 2179 of the Civil Code,
she may not be awarded damages. However, under Article 1170 of the same Code the respondent drawee Bank may be held liable for
damages. The article provides —
Those who in the performance of their obligations are guilty of fraud, negligence or delay, and those who in any
manner contravene the tenor thereof, are liable for damages.
There is no question that there is a contractual relation between petitioner as depositor (obligee) and the respondent drawee bank as
the obligor. In the performance of its obligation, the drawee bank is bound by its internal banking rules and regulations which form part
of any contract it enters into with any of its depositors. When it violated its internal rules that second endorsements are not to be
accepted without the approval of its branch managers and it did accept the same upon the mere approval of Boon, a chief accountant,
it contravened the tenor of its obligation at the very least, if it were not actually guilty of fraud or negligence.
Furthermore, the fact that the respondent drawee Bank did not discover the irregularity with respect to the acceptance of checks with
second indorsement for deposit even without the approval of the branch manager despite periodic inspection conducted by a team of
auditors from the main office constitutes negligence on the part of the bank in carrying out its obligations to its depositors. Article 1173
provides —
The fault or negligence of the obligor consists in the omission of that diligence which is required by the nature of the
obligation and corresponds with the circumstance of the persons, of the time and of the place. . . .
We hold that banking business is so impressed with public interest where the trust and confidence of the public in general is of
paramount importance such that the appropriate standard of diligence must be a high degree of diligence, if not the utmost diligence.
Surely, respondent drawee Bank cannot claim it exercised such a degree of diligence that is required of it. There is no way We can

91 Negotiable Instruments – Form and Interpretation (Sec 1-23)


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.

92 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-15894 January 30, 1964
REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,
vs.
EQUITABLE BANKING CORPORATION, defendant-appellee.
-----------------------------
G.R. No. L-15894 January 30, 1964
REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,
vs.
THE BANK OF THE PHILIPPINE ISLANDS, defendant-appellee,
CORPORATION DE LOS P. DOMINICOS DE FILIPINAS, third-party-defendant-appellee.
Office of the Solicitor General for plaintiff-appellant.
Claudio Teehankee and Aranda and Aviado for defendant-appellee.
Ignacio B. Alcuaz for third-party-defendant-appellee.
CONCEPCION, J.:
Appeal from a decision of the Court of First Instance of Manila dismissing the complaints and the third-party complaints in the above
entitled cases, without special pronouncement as to costs. The cases are before us, only questions of law being raised in the appeal,
apart from the fact that the amount involved in G.R. No. L-16895 exceeds P200,000, and that the evidence introduced therein is the
same evidence in G.R. No. L-15894.
The Republic of the Philippines, hereinafter referred to as the Government, seeks to recover: (1) from the Equitable Banking
Corporation — hereinafter referred to as the Equitable Bank — in case G.R. No. L-15894, the sum of P17,100, representing the
aggregate value of four (4) treasury warrants — hereinafter referred to as warrants — paid to said bank by the Treasurer of the
Philippines — hereinafter referred to as the Treasurer — thru the Clearing Office of the Central Bank of the Philippines; and (2) from the
Bank of the Philippine Islands — hereinafter referred to as the PI Bank — in G.R. No. L-15895, the total sum of P342,767.63,
representing the aggregate value of twenty-four (24) warrants similarly paid by the Treasurer to the PI Bank. These claims for refund
are based upon a common ground — although said twenty-eight (28) warrants were executed on genuine government forms, the
signature thereon of the drawing office and that of the representative of the Auditor General in that office are forged.
It is not disputed that from July to December 1952, the Corporacion de los Padres Dominicos — hereinafter referred to as the
Corporacion — had acquired the twenty-four (24) treasury warrants involved in case G.R. No. L-15895 by accommodating its former
trusted employee — one Jacinto Carranza — who asked the Corporacion to cash the warrants, alleging that it was difficult to do so
directly with the Government and that his wife expected a sort of commission for the encashment; that the Corporacion acceded to
Carranza's request, provided that the warrants would first be deposited with PI Bank, and that actual payment of the value of the
warrants would be made only after the same had been duly accepted and cleared by the Treasurer and the proceeds thereof duly
credited to the account of the Corporacion in the PI Bank; that the warrants were, accordingly, deposited by the Corporacion with said
bank, which accepted them "subject to collection only"; that when the warrants were deposited with the PI Bank, each bore the
indorsement of the respective payees and that of the Corporation; that, subsequently, the PI Bank presented the warrants for payment
to the drawee thereof — the Government — thru the Clearing Office of the Central Bank — hereinafter referred to as the Clearing
Office; that after being cleared, the warrants were paid by the Treasurer as follows:

T/W No. Payee Date ISSUED Amount Date Cleared


2132655 Marcela Antonio Domingo 6-18-52 P8,722.37 7- 1-52
2132650 Gregoria Santos Castro 6-23-52 14,605.91 7- 8-52
2468943 Josefa Castro de Villanueva 10-34-52 14,250.15 11-14-52
2159698 Anacleta Santos de Angeles 10-18-52 15,800.00 12- 5-52
2159668 Virginia Salem de Marcelino 11-13-52 16,900.00 12-10-52
2159692 Brigida San Luis de Santos 9-15-52 13,900.00 11- 3-52
2159673 Silva Sanches de Apolinario 10-14-52 14,810.00 11-11-52
2159667 Francisca Gomez de Galvez 10-12-52 16,200.75 11-11-52
2451448 Gaudencia Ruiz Alvarez 7- 1-52 12,702.76 7-15-52
2132653 Anastacia Capili Trinidad 6-25-52 8,794.21 7-15-52

93 Negotiable Instruments – Form and Interpretation (Sec 1-23)


2468979 Monica Anselmo de Pascua 7- 1-52 13,870.24 9- 852
2468944 Rosalia Manalo de Nazario 7-10-52 14,701.76 9- 8-52
2159682 Luisa Santos de Arellano 11-18-52 16,400.50 12- 8-52
2159669 Leticia Moreno de Ocampo 11-16-52 15,880.75 12- 8-52
2159670 Juana Castro de Jesus 10-12-52 16,200.00 12-15-52
2159671 Antonia Sison de Mauricio 9- 9-52 12,900.75 11-10-52
2159660 Rosario Pilapil de Rodrigo 9- 4-52 13,950.39 9-23-52
2169658 Mauricia Sison de Angeles 9-12-52 15,200.76 9-23-52
2159686 Lucia Angeles de Natalio 9-12-52 12,890.74 10-27-52
2468977 Nicolasa Alvares Jaranilla 7- 2-52 15,340.76 7-25-52
2468978 Maria Antonio de los Reyes 7- 2-52 14,722.31 7-25-52
2159659 Je Jastive de Fernandez 8-16-52 14,820.00 8-27-52
2159656 Gregoria Pascual de Lira 8-15-52 12,900.75 8-27-52
2159666 Luisa Dancel de Mendoza 10-11-52 16,300.75 12- 2-52

and that, accordingly, the PI Bank credited the proceeds of said warrants to the Corporation, which, in turn, withdrew said proceeds by
means of its own checks and eventually paid the corresponding amounts to Jacinto Carranza. On December 23, 1952, the Treasurer
returned three (3) of said warrants (Nos. 2159659, 2159656, and 2159666) to the Central Bank, and demanded, on the ground that
they had been forged, that the value thereof be charged against the accounts of the PI Bank in the Clearing Office and credited back to
the demand deposit of the Bureau of the Treasury, hereinafter referred to as the Treasury. Four (4) days later, two (2) more warrants
(Nos. 2468977 and 2468978), and, finally, on January 16, 1953, the remaining nineteen (19) warrants were returned by the Treasury to
the Central Bank for the same reason and with the same demand. The Central Bank in turn referred said warrants, together with the
letters of demand of the Treasurer, for appropriate action to the PI Bank, which opposed the return of the warrants or to have the value
thereof charged against its account in the Clearing Office and requested the Central Bank to return the warrants to the Treasurer.
The records of G.R. No. L-15894 show that the four (4) warrants involved therein were deposited with the Equitable Bank by persons
known thereto as its depositors or customers, namely, Robert Wong, Lu Chill Kau and Chung Ching; that, in due course, the Equitable
Bank cleared said warrants, thru the Clearing Office, then collected the corresponding amounts from the Treasurer and thereafter
credited said amounts to the accounts of the respective depositors; that on January 15, 1958, the Treasurer notified the Equitable Bank
of the alleged defect of said warrants and demanded reimbursement of the amounts thereof; and that this demand was rejected by the
Equitable Bank. Hence, the institution of G.R. No. L-15895 (Civil Case No. 19599 of the Court of First Instance of Manila), against the
PI Bank, for the recovery of P342,767.63, and of G.R. No. L-15894 (Civil Case No. 19600 of the Court of First Instance of Manila),
against the Equitable Bank for, the recovery of P17,100.00.
Upon leave of the lower court, the PI Bank filed a third-party complaint against the Corporacion. In G.R. No. L-15895, and the Equitable
Bank filed a similar complaint against, Robert Wong, Lu Chill Kau and Chung Ching in G.R. No. L-15894, for whatever reimbursements
the PI Bank and the Equitable Bank may respectively be sentenced to make to the Government. By agreement of the parties, the two
(2) cases were jointly heard, and after appropriate proceedings, the lower court rendered the decision adverted to above. 1äwphï1.ñët
The clearing of the aforementioned twenty-eight (28) warrants thru the Clearing Office was made pursuant to the "24-hour clearing
house rule", which had been adopted by the Central Bank in a conference with representatives and officials of the different banking
institutions in the Philippines. The rule is embodied in Section 4, subsection (c) of Circular No. 9 of the Central Bank, dated February
17, 1949 (Exhibit B), as amended by the letter of the Governor of the Central Bank, dated June 4, 1949 (Exhibit D), reading:
Items which should be returned for any reason whatsoever shall be returned directly to the bank, institution or entity from
which the item was received. For this purpose, the Receipt for Returned Checks (Cash Form No. 9) should be used. The
original and duplicate copies of said Receipt shall be given to the bank, institution or entity which returned the items and the
triplicate copy should be retained by the bank, institution or entity whose demand is being returned. At the following clearing,
the original of the Receipt for returned Checks shall be presented through the Clearing Office as a demand against the bank,
institution or entity whose item has been returned. Nothing in this section shall prevent the resumed items from being settled
by direct reimbursement to the bank, institution or entity returning the items. All items cleared at 11:00 o'clock a.m. shall be
returned not later than 2:00 o'clock p.m. on the same day and all items cleared at 3:00 o'clock p.m. shall be returned not later
than 8:30 a.m. of the following business day, except for items cleared on Saturday which may be returned not later than 3:30
a.m. of the following day. (Emphasis supplied.)
The Government maintains that it is not bound by this rule because: (1) the Treasury is not a bank; and (2) the Treasurer has objected
to the application of said rule to his office. This contention, however, untenable for, admittedly, the Treasury is a member of the
aforementioned Clearing Office and Exh. A clearly shows that the former "has agreed to clear its clearable items through" the latter
"subject to the rules and regulations of the Central Bank." Besides, the above quoted rule applies not only to banks, but, also, to the
institutions and entities therein alluded to. Then too, the opposition of the Treasurer to the "24-hour clearing house rule" is not sufficient
to exempt the Treasury from the operation thereof. Upon the other hand, said opposition is predicated upon the allegation that it is

94 Negotiable Instruments – Form and Interpretation (Sec 1-23)


physically impossible for the Treasury to check and verify the genuineness of treasury warrants within twenty-four (24) hours, because,
during 1952 said office used to receive daily from 3,000 to 4,000 warrants which, considering its very limited personnel at that time,
would have required one (1) or two (2) months clear. This claim is belied, however, by the statements the Treasurer, Exhibits 38 and
38-A to 38-C, showing that on September 15, 23 and 24 and November 25, 1952, his office had cleared 1,618, 2,851, 1,742 and 2,360
warrant respectively. Moreover, if the rule was unwise, the Treasurer could have secured the proper remedy through the President of
the Philippines, since the Treasury and Central Bank are both agencies of the Government.
At any rate, the aforementioned twenty-eight (28) warrants were cleared and paid by the Treasurer, in view which the PI Bank and the
Equitable Bank credited the corresponding amounts to the respective depositors of the warrants and then honored their checks for said
amounts. Thus, the Treasury had not only been negligent in clearing its own warrants, but had, also, thereby induced the PI Bank and
the Equitable Bank to pay the amounts thereof to said depositors. The gross nature of the negligence of the Treasury becomes more
apparent when we consider that each one of the twenty-four (24) warrants involve in G.R. No. L-15895 was for over P5,000, and,
hence; beyond the authority of the auditor of the Treasury — whose signature thereon had been forged — to approve. In other words,
the irregularity of said warrants was apparent the face thereof, from the viewpoint of the Treasury. Moreover, the same had not
advertised the loss of genuine forms of its warrants. Neither had the PI Bank nor the Equitable Bank been informed of any irregularity in
connection with any of the warrants involved in these two (2) cases, until after December 23, 1952, — or after the warrants had been
cleared and honored — when the Treasury gave notice of the forgeries adverted to above. As a consequence, the loss of the amounts
thereof is mainly imputable to acts and omissions of the Treasury, for which the PI Bank and the Equitable Bank should not and cannot
be penalized.
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, 723.)
Generally, where a drawee bank otherwise would have a right of recovery against a collecting or indorsing bank for its
payment of a forged check its action will be barred if it is guilty of an unreasonable delay in discovering the forgery and in
giving notice? thereof. (C.J.S. 769-700.).
Where defendant bank, on presentation to it on September 2, of forged check drawn on another bank, paid part of amount to
presenter, drawee paying check through clearing house on said day, held that the latter, not giving notice of forgery until
December 5, could not hold defendant for amount so paid. (First State Bank & Trust Co. v. First Nat. Bank, 145 N. E. 382, 314
Ill. 269, affirming 234 Ill. App. 39.)
WHEREFORE, the decision appealed from is hereby affirmed, without special pronouncement as to costs. It is so ordered.

95 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 74917 January 20, 1988
BANCO DE ORO SAVINGS AND MORTGAGE BANK, petitioner,
vs.
EQUITABLE BANKING CORPORATION, PHILIPPINE CLEARING HOUSE CORPORATION, AND REGIONAL TRIAL COURT OF
QUEZON CITY, BRANCH XCII (92), respondents.

GANCAYCO, J.:
This is a petition for review on certiorari of a decision of the Regional Trial Court of Quezon City promulgated on March 24, 1986 in Civil
Case No. Q-46517 entitled Banco de Oro Savings and Mortgage Bank versus Equitable Banking Corporation and the Philippine
Clearing House Corporation after a review of the Decision of the Board of Directors of the Philippine Clearing House Corporation
(PCHC) in the case of Equitable Banking Corporation (EBC) vs. Banco de Oro Savings and Mortgage (BCO), ARBICOM Case No.
84033.
The undisputed facts are as follows:
It appears that some time in March, April, May and August 1983, plaintiff through its Visa Card Department, drew six
crossed Manager's check (Exhibits "A" to "F", and herein referred to as Checks) having an aggregate amount of Forty
Five Thousand Nine Hundred and Eighty Two & 23/100 (P45,982.23) Pesos and payable to certain member
establishments of Visa Card. Subsequently, the Checks were deposited with the defendant to the credit of its
depositor, a certain Aida Trencio.
Following normal procedures, and after stamping at the back of the Checks the usual endorsements. All prior and/or
lack of endorsement guaranteed the defendant sent the checks for clearing through the Philippine Clearing House
Corporation (PCHC). Accordingly, plaintiff paid the Checks; its clearing account was debited for the value of the
Checks and defendant's clearing account was credited for the same amount,
Thereafter, plaintiff discovered that the endorsements appearing at the back of the Checks and purporting to be that
of the payees were forged and/or unauthorized or otherwise belong to persons other than the payees.
Pursuant to the PCHC Clearing Rules and Regulations, plaintiff presented the Checks directly to the defendant for
the purpose of claiming reimbursement from the latter. However, defendant refused to accept such direct
presentation and to reimburse the plaintiff for the value of the Checks; hence, this case.
In its Complaint, plaintiff prays for judgment to require the defendant to pay the plaintiff the sum of P45,982.23 with
interest at the rate of 12% per annum from the date of the complaint plus attorney's fees in the amount of P10,000.00
as well as the cost of the suit.
In accordance with Section 38 of the Clearing House Rules and Regulations, the dispute was presented for
Arbitration; and Atty. Ceasar Querubin was designated as the Arbitrator.
After an exhaustive investigation and hearing the Arbiter rendered a decision in favor of the plaintiff and against the
defendant ordering the PCHC to debit the clearing account of the defendant, and to credit the clearing account of the
plaintiff of the amount of P45,982.23 with interest at the rate of 12% per annum from date of the complaint and
Attorney's fee in the amount of P5,000.00. No pronouncement as to cost was made. 1
In a motion for reconsideration filed by the petitioner, the Board of Directors of the PCHC affirmed the decision of the said Arbiter in this
wise:
In view of all the foregoing, the decision of the Arbiter is confirmed; and the Philippine Clearing House Corporation is
hereby ordered to debit the clearing account of the defendant and credit the clearing account of plaintiff the amount of
Forty Five Thousand Nine Hundred Eighty Two & 23/100 (P45,982.23) Pesos with interest at the rate of 12% per
annum from date of the complaint, and the Attorney's fee in the amount of Five Thousand (P5,000.00) Pesos.
Thus, a petition for review was filed with the Regional Trial Court of Quezon City, Branch XCII, wherein in due course a decision was
rendered affirming in toto the decision of the PCHC.
Hence this petition.
The petition is focused on the following issues:
1. Did the PCHC have any jurisdiction to give due course to and adjudicate Arbicom Case No. 84033?
2. Were the subject checks non-negotiable and if not, does it fall under the ambit of the power of the PCHC?
3. Is the Negotiable Instrument Law, Act No. 2031 applicable in deciding controversies of this nature by the PCHC?
4. What law should govern in resolving controversies of this nature?
5. Was the petitioner bank negligent and thus responsible for any undue payment?
96 Negotiable Instruments – Form and Interpretation (Sec 1-23)
Petitioner maintains that the PCHC is not clothed with jurisdiction because the Clearing House Rules and Regulations of PCHC cover
and apply only to checks that are genuinely negotiable. Emphasis is laid on the primary purpose of the PCHC in the Articles of
Incorporation, which states:
To provide, maintain and render an effective, convenient, efficient, economical and relevant exchange and facilitate
service limited to check processing and sorting by way of assisting member banks, entities in clearing checks and
other clearing items as defined in existing and in future Central Bank of the Philippines circulars, memoranda, circular
letters, rules and regulations and policies in pursuance to the provisions of Section 107 of R.A. 265. ...
and Section 107 of R.A. 265 which provides:
xxx xxx xxx
The deposit reserves maintained by the banks in the Central Bank, in accordance with the provisions of Section 1000
shall serve as a basis for the clearing of checks, and the settlement of interbank balances ...
Petitioner argues that by law and common sense, the term check should be interpreted as one that fits the articles of incorporation of
the PCHC, the Central Bank and the Clearing House Rules stating that it is a negotiable instrument citing the definition of a "check" as
basically a "bill of exchange" under Section 185 of the NIL and that it should be payable to "order" or to "bearer" under Section 126 of
game law. Petitioner alleges that with the cancellation of the printed words "or bearer from the face of the check, it becomes non-
negotiable so the PCHC has no jurisdiction over the case.
The Regional Trial Court took exception to this stand and conclusion put forth by the herein petitioner as it held:
Petitioner's theory cannot be maintained. As will be noted, the PCHC makes no distinction as to the character or
nature of the checks subject of its jurisdiction. The pertinent provisions quoted in petitioners memorandum simply
refer to check(s). Where the law does not distinguish, we shall not distinguish.
In the case of Reyes vs. Chuanico (CA-G.R. No. 20813 R, Feb. 5, 1962) the Appellate Court categorically stated that
there are four kinds of checks in this jurisdiction; the regular check; the cashier's check; the traveller's check; and the
crossed check. The Court, further elucidated, that while the Negotiable Instruments Law does not contain any
provision on crossed checks, it is coon practice in commercial and banking operations to issue checks of this
character, obviously in accordance with Article 541 of the Code of Commerce. Attention is likewise called to Section
185 of the Negotiable Instruments Law:
Sec. 185. Check defined. — A check is a bill of exchange drawn on a bank payable on demand.
Except as herein otherwise provided, the provisions of this act applicable to a bill of exchange
payable on demand apply to a check
and the provisions of Section 61 (supra) that the drawer may insert in the instrument an express stipulation negating
or limiting his own liability to the holder. Consequently, it appears that the use of the term "check" in the Articles of
Incorporation of PCHC is to be perceived as not limited to negotiable checks only, but to checks as is generally
known in use in commercial or business transactions.
Anent Petitioner's liability on said instruments, this court is in full accord with the ruling of the PCHC Board of
Directors that:
In presenting the Checks for clearing and for payment, the defendant made an express guarantee
on the validity of "all prior endorsements." Thus, stamped at the back of the checks are the
defendant's clear warranty; ALL PRIOR ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS
GUARANTEED. With. out such warranty, plaintiff would not have paid on the checks.
No amount of legal jargon can reverse the clear meaning of defendant's warranty. As the warranty
has proven to be false and inaccurate, the defendant is liable for any damage arising out of the
falsity of its representation.
The principle of estoppel, effectively prevents the defendant from denying liability for any damage
sustained by the plaintiff which, relying upon an action or declaration of the defendant, paid on the
Checks. The same principle of estoppel effectively prevents the defendant from denying the
existence of the Checks. (Pp. 1011 Decision; pp. 4344, Rollo)
We agree.
As provided in the aforecited articles of incorporation of PCHC its operation extend to "clearing checks and other clearing items." No
doubt transactions on non-negotiable checks are within the ambit of its jurisdiction.
In a previous case, this Court had occasion to rule: "Ubi lex non distinguish nec nos distinguere debemos." 2 It was enunciated in Loc
Cham v. Ocampo, 77 Phil. 636 (1946):
The rule, founded on logic is a corollary of the principle that general words and phrases in a statute should ordinarily
be accorded their natural and general significance. In other words, there should be no distinction in the application of
a statute where none is indicated.
There should be no distinction in the application of a statute where none is indicated for courts are not authorized to distinguish where
the law makes no distinction. They should instead administer the law not as they think it ought to be but as they find it and without
regard to consequences. 3
The term check as used in the said Articles of Incorporation of PCHC can only connote checks in general use in commercial and
business activities. It cannot be conceived to be limited to negotiable checks only.
97 Negotiable Instruments – Form and Interpretation (Sec 1-23)
Checks are used between banks and bankers and their customers, and are designed to facilitate banking operations. It is of the
essence to be payable on demand, because the contract between the banker and the customer is that the money is needed on
demand. 4
The participation of the two banks, petitioner and private respondent, in the clearing operations of PCHC is a manifestation of their
submission to its jurisdiction. Sec. 3 and 36.6 of the PCHC-CHRR clearing rules and regulations provide:
SEC. 3. AGREEMENT TO THESE RULES. — It is the general agreement and understanding that any participant in
the Philippine Clearing House Corporation, MICR clearing operations by the mere fact of their participation, thereby
manifests its agreement to these Rules and Regulations and its subsequent amendments."
Sec 36.6. (ARBITRATION) — The fact that a bank participates in the clearing operations of the PCHC shall be
deemed its written and subscribed consent to the binding effect of this arbitration agreement as if it had done so in
accordance with section 4 of the Republic Act No. 876, otherwise known as the Arbitration Law.
Further Section 2 of the Arbitration Law mandates:
Two or more persons or parties may submit to the arbitration of one or more arbitrators any controversy existing
between them at the time of the submission and which may be the subject of an action, or the parties of any contract
may in such contract agree to settle by arbitration a controversy thereafter arising between them. Such submission or
contract shall be valid and irrevocable, save upon grounds as exist at law for the revocation of any contract.
Such submission or contract may include question arising out of valuations, appraisals or other controversies which
may be collateral, incidental, precedent or subsequent to any issue between the parties. ...
Sec. 21 of the same rules, says:
Items which have been the subject of material alteration or items bearing forged endorsement when such
endorsement is necessary for negotiation shall be returned by direct presentation or demand to the Presenting Bank
and not through the regular clearing house facilities within the period prescribed by law for the filing of a legal action
by the returning bank/branch, institution or entity sending the same. (Emphasis supplied)
Viewing these provisions the conclusion is clear that the PCHC Rules and Regulations should not be interpreted to be applicable only
to checks which are negotiable instruments but also to non-negotiable instruments and that the PCHC has jurisdiction over this case
even as the checks subject of this litigation are admittedly non-negotiable.
Moreover, petitioner is estopped from raising the defense of non-negotiability of the checks in question. It stamped its guarantee on the
back of the checks and subsequently presented these checks for clearing and it was on the basis of these endorsements by the
petitioner that the proceeds were credited in its clearing account.
The petitioner by its own acts and representation can not now deny liability because it assumed the liabilities of an endorser by
stamping its guarantee at the back of the checks.
The petitioner having stamped its guarantee of "all prior endorsements and/or lack of endorsements" (Exh. A-2 to F-2) is now estopped
from claiming that the checks under consideration are not negotiable instruments. The checks were accepted for deposit by the
petitioner stamping thereon its guarantee, in order that it can clear the said checks with the respondent bank. By such deliberate and
positive attitude of the petitioner it has for all legal intents and purposes treated the said cheeks as negotiable instruments and
accordingly assumed the warranty of the endorser when it stamped its guarantee of prior endorsements at the back of the checks. It led
the said respondent to believe that it was acting as endorser of the checks and on the strength of this guarantee said respondent
cleared the checks in question and credited the account of the petitioner. Petitioner is now barred from taking an opposite posture by
claiming that the disputed checks are not negotiable instrument.
This Court enunciated in Philippine National Bank vs. Court of Appeals 5 a point relevant to the issue when it stated the doctrine of
estoppel is based upon the grounds of public policy, fair dealing, good faith and justice and its purpose is to forbid one to speak against
his own act, representations or commitments to the injury of one to whom they were directed and who reasonably relied thereon.
A commercial bank cannot escape the liability of an endorser of a check and which may turn out to be a forged endorsement.
Whenever any bank treats the signature at the back of the checks as endorsements and thus logically guarantees the same as such
there can be no doubt said bank has considered the checks as negotiable.
Apropos the matter of forgery in endorsements, this Court has succinctly emphasized 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. This is laid down in the case of PNB vs. National City Bank. 6 In another case, this court held that if
the drawee-bank discovers that the signature of the payee was forged after it has paid the amount of the check to the holder thereof, it
can recover the amount paid from the collecting bank. 7
A truism stated by this Court is that — "The doctrine of estoppel precludes a party from repudiating an obligation voluntarily assumed
after having accepted benefits therefrom. To countenance such repudiation would be contrary to equity and put premium on fraud or
misrepresentation". 8
We made clear in Our decision in Philippine National Bank vs. The National City Bank of NY & Motor Service Co. 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 drawers signature and his capacity to issue the instrument.
If a drawee bank pays a forged check which was previously accepted or certified by the said bank, it can not recover
from a holder who did not participate in the forgery and did not have actual notice thereof.

98 Negotiable Instruments – Form and Interpretation (Sec 1-23)


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 Act. 9
The point that comes uppermost is whether the drawee bank was negligent in failing to discover the alteration or the forgery. Very akin
to the case at bar is one which involves a suit filed by the drawer of checks against the collecting bank and this came about in Farmers
State Bank 10 where it was held:
A cause of action against the (collecting bank) in favor of the appellee (the drawer) accrued as a result of the bank
breaching its implied warranty of the genuineness of the indorsements of the name of the payee by bringing about the
presentation of the checks (to the drawee bank) and collecting the amounts thereof, the right to enforce that cause of
action was not destroyed by the circumstance that another cause of action for the recovery of the amounts paid on
the checks would have accrued in favor of the appellee against another or to others than the bank if when the checks
were paid they have been indorsed by the payee. (United States vs. National Exchange Bank, 214 US, 302, 29 S
CT665, 53 L. Ed 1006, 16 Am. Cas. 11 84; Onondaga County Savings Bank vs. United States (E.C.A.) 64 F 703)
Section 66 of the Negotiable Instruments ordains that:
Every indorser who indorsee without qualification, warrants to all subsequent holders in due course' (a) that the
instrument is genuine and in all respects what it purports to be; (b) that he has good title to it; (c) that all prior parties
have capacity to contract; and (d) that the instrument is at the time of his indorsement valid and subsisting. 11
It has been enunciated in an American case particularly in American Exchange National Bank vs. Yorkville Bank 12 that: "the drawer
owes no duty of diligence to the collecting bank (one who had accepted an altered check and had paid over the proceeds to the
depositor) except of seasonably discovering the alteration by a comparison of its returned checks and check stubs or other equivalent
record, and to inform the drawee thereof." In this case it was further held that:
The real and underlying reasons why negligence of the drawer constitutes no defense to the collecting bank are that
there is no privity between the drawer and the collecting bank (Corn Exchange Bank vs. Nassau Bank, 204 N.Y.S.
80) and the drawer owe to that bank no duty of vigilance (New York Produce Exchange Bank vs. Twelfth Ward Bank,
204 N.Y.S. 54) and no act of the collecting bank is induced by any act or representation or admission of the drawer
(Seaboard National Bank vs. Bank of America (supra) and it follows that negligence on the part of the drawer cannot
create any liability from it to the collecting bank, and the drawer thus is neither a necessary nor a proper party to an
action by the drawee bank against such bank. It is quite true that depositors in banks are under the obligation of
examining their passbooks and returned vouchers as a protection against the payment by the depository bank
against forged checks, and negligence in the performance of that obligation may relieve that bank of liability for the
repayment of amounts paid out on forged checks, which but for such negligence it would be bound to repay. A
leading case on that subject is Morgan vs. United States Mortgage and Trust Col. 208 N.Y. 218, 101 N.E. 871 Amn.
Cas. 1914D, 462, L.R.A. 1915D, 74.
Thus We hold that while the drawer generally owes no duty of diligence to the collecting bank, the law imposes a duty of diligence on
the collecting bank to scrutinize checks deposited with it for the purpose of determining their genuineness and regularity. The collecting
bank being primarily engaged in banking holds itself out to the public as the expert and the law holds it to a high standard of conduct.
And although the subject checks are non-negotiable the responsibility of petitioner as indorser thereof remains.
To countenance a repudiation by the petitioner of its obligation would be contrary to equity and would deal a negative blow to the whole
banking system of this country.
The court reproduces with approval the following disquisition of the PCHC in its decision —
II. Payments To Persons Other
Than The Payees Are Not Valid
And Give Rise To An Obligation
To Return Amounts Received
Nothing is more clear than that neither the defendant's depositor nor the defendant is entitled to receive payment
payable for the Checks. As the checks are not payable to defendant's depositor, payments to persons other than
payees named therein, their successor-in-interest or any person authorized to receive payment are not valid. Article
1240, New Civil Code of the Philippines unequivocably provides that:
"Art. 1240. Payment shall be made to the person in whose favor the obligation has been
constituted, or his successo-in-interest, or any person authorized to receive it. "
Considering that neither the defendant's depositor nor the defendant is entitled to receive payments for the Checks,
payments to any of them give rise to an obligation to return the amounts received. Section 2154 of the New Civil
Code mandates that:
Article 2154. If something is received when there is no right to demand it, and it was unduly
delivered through mistake, the obligation to return it arises.
It is contended that plaintiff should be held responsible for issuing the Checks notwithstanding that the underlying
transactions were fictitious This contention has no basis in our jurisprudence.
The nullity of the underlying transactions does not diminish, but in fact strengthens, plaintiffs right to recover from the
defendant. Such nullity clearly emphasizes the obligation of the payees to return the proceeds of the Checks. If a
failure of consideration is sufficient to warrant a finding that a payee is not entitled to payment or must return payment
99 Negotiable Instruments – Form and Interpretation (Sec 1-23)
already made, with more reason the defendant, who is neither the payee nor the person authorized by the payee,
should be compelled to surrender the proceeds of the Checks received by it. Defendant does not have any title to the
Checks; neither can it claim any derivative title to them.
III. Having Violated Its Warranty
On Validity Of All Endorsements,
Collecting Bank Cannot Deny
liability To Those Who Relied
On Its Warranty
In presenting the Checks for clearing and for payment, the defendant made an express guarantee on the validity of
"all prior endorsements." Thus, stamped at the bank of the checks are the defendant's clear warranty: ALL PRIOR
ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS GUARANTEED. Without such warranty, plaintiff would not
have paid on the checks.
No amount of legal jargon can reverse the clear meaning of defendant's warranty. As the warranty has proven to be
false and inaccurate, the defendant is liable for any damage arising out of the falsity of its representation.
The principle of estoppel effectively prevents the defendant from denying liability for any damages sustained by the
plaintiff which, relying upon an action or declaration of the defendant, paid on the Checks. The same principle of
estoppel effectively prevents the defendant from denying the existence of the Checks.
Whether the Checks have been issued for valuable considerations or not is of no serious moment to this case. These
Checks have been made the subject of contracts of endorsement wherein the defendant made expressed warranties
to induce payment by the drawer of the Checks; and the defendant cannot now refuse liability for breach of warranty
as a consequence of such forged endorsements. The defendant has falsely warranted in favor of plaintiff the validity
of all endorsements and the genuineness of the cheeks in all respects what they purport to be.
The damage that will result if judgment is not rendered for the plaintiff is irreparable. The collecting bank has privity
with the depositor who is the principal culprit in this case. The defendant knows the depositor; her address and her
history, Depositor is defendant's client. It has taken a risk on its depositor when it allowed her to collect on the
crossed-checks.
Having accepted the crossed checks from persons other than the payees, the defendant is guilty of negligence; the
risk of wrongful payment has to be assumed by the defendant.
On the matter of the award of the interest and attorney's fees, the Board of Directors finds no reason to reverse the
decision of the Arbiter. The defendant's failure to reimburse the plaintiff has constrained the plaintiff to regular the
services of counsel in order to protect its interest notwithstanding that plaintiffs claim is plainly valid just and
demandable. In addition, defendant's clear obligation is to reimburse plaintiff upon direct presentation of the checks;
and it is undenied that up to this time the defendant has failed to make such reimbursement.
WHEREFORE, the petition is DISMISSED for lack of merit without pronouncement as to costs. The decision of the respondent court of
24 March 1986 and its order of 3 June 1986 are hereby declared to be immediately executory. SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 102383 November 26, 1992


BANK OF THE PHILIPPINE ISLANDS, petitioner,
vs.
THE HON. COURT OF APPEALS (SEVENTH JUDICIAL), HON. JUDGE REGIONAL TRIAL COURT OF MAKATI, BRANCH 59,
CHINA BANKING CORP., and PHILIPPINE CLEARING HOUSE CORPORATION, respondents.

GUTIERREZ, JR., J.:


The present petition asks us to set aside the decision and resolution of the Court of Appeals in CA-G.R. SP No. 24306 which affirmed
the earlier decision of the Regional Trial Court of Makati, Branch 59 in Civil Case No. 14911 entitled Bank of the Philippine Islands v.
China Banking Corporation and the Philippine Clearing House Corporation, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered dismissing petitioner-appellant's (BPI's) appeal
and affirming the appealed order of August 26, 1986 (Annex B of BPI's Petition) with modification as follows:
1. Ordering the petitioner-appellant (BPI) to pay respondent-appellee (CBC):
(a) the amount of One Million Two Hundred Six Thousand, Six Hundred Seven Pesos and Fifty Eight Centavos
(P1,206,607.58) with interest at the legal rate of twelve percent (12%) per annum starting August 26, 1986, the date
when the order of the PCHC Board of Directors was issued until the full amount is finally paid; and

100 Negotiable Instruments – Form and Interpretation (Sec 1-23)


(b) the amount of P150,000.00 representing attorney's fees;
2. BPI shall also bear 75% or P5,437.50 and CBC, 25% or P1,812.50 of the cost of the arbitration proceedings
amounting to P7,250.00;
3. The ownership of respondent-appellee (CBC) of the other sum of One Million Two Hundred Six Thousand Six
Hundred Seven Pesos and Fifty Eight Centavos (P1,206,607.58) previously credited to its clearing account on August
12, 1983 per PCHC Stockholders' Resolution No. 6083 dated April 6, 1983, is hereby confirmed.
4. The PCHC is hereby directed to immediately debit the clearing account of BPI the sum of One Million Two
Hundred Six Thousand Six Hundred Pesos and Fifty Eight Centavos (P1,206,607.58) together with its interest as
decreed in paragraph 1 (a) herein above stated and credit the same to the clearing account of CBC;
5. The PCHC's counterclaim and cross-claim are dismissed for lack of merit; and
6. With costs against the petitioner-appellant. (Rollo, pp. 161-162)
The controversy in this case arose from the following facts as found by the Arbitration Committee of respondent Philippine Clearing
House Corporation in Arbicom Case No. 83-029 entitled Bank of the Philippine Island v. China Banking Corporation:
The story underlying this case began in the afternoon of October 9, 1981 with a phone call to BPI's Money Market
Department by a woman who identified herself as Eligia G. Fernando who had a money market placement as
evidenced by a promissory note with a maturity date of November 11, 1981 and a maturity value of P2,462,243.19.
The caller wanted to preterminate the placement, but Reginaldo Eustaquio, Dealer Trainee in BPI's Money Market
Department, who received the call and who happened to be alone in the trading room at the time, told her "trading
time" was over for the day, which was a Friday, and suggested that she call again the following week. The promissory
note the caller wanted to preterminate was a roll-over of an earlier 50-day money market placement that had matured
on September 24, 1981.
Later that afternoon, Eustaquio conveyed the request for pretermination to the officer who before had handled Eligia
G. Fernando's account, Penelope Bulan, but Eustaquio was left to attend to the pretermination process.
The next Monday, October 12, 1981, in the morning, the caller of the previous Friday followed up with Eustaquio,
merely by phone again, on the pretermination of the placement. Although not familiar with the voice of the real Eligia
G. Fernando, Eustaquio "made certain" that the caller was the real Eligia G. Fernando by "verifying" that the details
the caller gave about the placement tallied with the details in "the ledger/folder" of the account. Eustaquio knew the
real Eligia G. Fernando to be the Treasurer of Philippine American Life Insurance Company (Philamlife) since he was
handling Philamlife's corporate money market account. But neither Eustaquio nor Bulan who originally handled
Fernando's account, nor anybody else at BPI, bothered to call up Fernando at her Philamlife office to verify the
request for pretermination.
Informed that the placement would yield less than the maturity value because of its pretermination, the caller insisted
on the pretermination just the same and asked that two checks be issued for the proceeds, one for P1,800,000.00
and the second for the balance, and that the checks be delivered to her office at Philamlife.
Eustaquio, thus, proceeded to prepare the "purchase order slip" for the requested pretermination as required by office
procedure, and from his desk, the papers, following the processing route, passed through the position analyst,
securities clerk, verifier clerk and documentation clerk, before the two cashier's checks, nos. 021759 and 021760 for
P1,800,000.00 and P613,215.16, respectively, both payable to Eligia G. Fernando, covering the preterminated
placement, were prepared. The two cashier's checks, together with the papers consisting of the money market
placement was to be preterminated and the promissory note (No. 35623) to be preterminated, were sent to Gerlanda
E. de Castro and Celestino Sampiton, Jr., Manager and Administrative Assistant, respectively, in BPI's Treasury
Operations Department, both authorized signatories for BPI, who signed the two checks that very morning. Having
been singed, the checks now went to the dispatcher for delivery.
Later in the same morning, however, the same caller changed the delivery instructions; instead of the checks being
delivered to her office at Philamlife, she would herself pick up the checks or send her niece, Rosemarie Fernando, to
pick them up. Eustaquio then told her that if it were her niece who was going to get the checks, her niece would have
to being a written authorization from her to pick up the checks. This telephone conversation ended with the caller's
statement that "definitely" it would be her niece, Rosemarie Fernando, who would pick up the checks. Thus,
Eustaquio had to hurriedly go to the dispatcher, Bernardo Laderas, to tell him of the new delivery instructions for the
checks; in fact, he changed the delivery instruction on the purchase order slip, writing thereon "Rosemarie Fernando
release only with authority to pick up.
It was, in fact Rosemarie Fernando who got the two checks from the dispatcher, as shown by the delivery receipt.
Actually, as it turned out, the same impersonated both Eligia G. Fernando and Rosemarie Fernando. Although the
checks represented the termination proceeds of Eligia G. Fernando's placement, not just a roll-over of the placement,
the dispatcher failed to get or to require the surrender of the promissory note evidencing the placement. There is also
no showing that Eligia G. Fernando's purported signature on the letter requesting the pretermination and the latter
authorizing Rosemarie Fernando to pick up the two checks, both of which letters were presumably handed to the
dispatcher by Rosemarie Fernando, was compared or verified with Eligia G. Fernando's signature in BPI's file. Such
purported signature has been established to be forged although it has a "close similarity" to the real signature of
Eligia G. Fernando (TSN of January 15, 1985, pp. 24 and 26).
The story's scene now shifted when, in the afternoon of October 13, 1981, a woman who represented herself to be
Eligia G. Fernando applied at CBC's Head Office for the opening of a current account.
101 Negotiable Instruments – Form and Interpretation (Sec 1-23)
She was accompanied and introduced to Emily Sylianco Cuaso, Cash Supervisor, by Antonio Concepcion whom
Cuaso knew to have opened, earlier that year, an account upon the introduction of Valentin Co, a long-standing
"valued client" of CBC. What Cuaso indicated in the application form, however, was that the new client was
introduced by Valentin Co, and with her initials on the form signifying her approval, she referred the application to the
New Accounts Section for processing. As finally proceeds, the application form shows the signature of "Eligia G.
Fernando", "her" date of birth, sex, civil status, nationality, occupation ("business woman"), tax account number, and
initial deposit of P10,000.00. This final approval of the new current account is indicated on the application form by the
initials of Regina G. Dy, Cashier, who did not interview the new client but affixed her initials on the application form
after reviewing it. The new current account was given the number: 26310-3.
The following day, October 14, 1981, the woman holding herself out as Eligia G. Fernando deposited the two checks
in controversy with Current Account No. 126310-3. Her endorsement on the two checks was found to conform with
the depositor's specimen signature. CBC's guaranty of prior endorsements and/or lack of endorsement was then
stamped on the two checks, which CBC forthwith sent to clearing and which BPI cleared on the same day.
Two days after, withdrawals began on Current Account No. 26310-3: On October 16, 1981, by means of Check No.
240005 dated the same day for P1,000,000.00, payable to "cash", which the woman holding herself out as Eligia G.
Fernando encashed over the counter, and Check No. 240003 dated October 15, 1981 for P48,500.00, payable to
"cash" which was received through clearing from PNB Pasay Branch; on October 19, 1981, by means of Check No.
240006 dated the same day for P1,000,000.00, payable to "cash," which the woman identifying herself as Eligia G.
Fernando encashed over the counter; on October 22, 1981, by means of Check No. 240007 dated the same day for
P370,000.00, payable to "cash" which the woman herself also encashed over the counter; and on November 4, 1981,
by means of Check No. 240001 dated November 3, 1981 for P4,100.00, payable to "cash," which was received
through clearing from Far East Bank.
All these withdrawals were allowed on the basis of the verification of the drawer's signature with the specimen
signature on file and the sufficiency of the funds in the account. However, the balance shown in the computerized
teller terminal when a withdrawal is serviced at the counter, unlike the ledger or usual statement prepared at month-
end, does not show the account's opening date, the amounts and dates of deposits and withdrawals. The last
withdrawal on November 4, 1981 left Current Account No. 26310-3 with a balance of only P571.61.
The day of reckoning came on November 11, 1981, the maturity date of Eligia G. Fernado's money market placement
with BPI, when the real Eligia G. Fernando went to BPI for the roll-over of her placement. She disclaimed having
preterminated her placement on October 12, 1981. She executed an affidavit stating that while she was the payee of
the two checks in controversy, she never received nor endorsed them and that her purported signature on the back of
the checks was not hers but forged. With her surrender of the original of the promissory note (No. 35623 with maturity
value of P2,462,243.19) evidencing the placement which matured that day, BPI issued her a new promissory note
(No. 40314 with maturity date of December 23, 1981 and maturity value of P2,500.266.77) to evidence a roll-over of
the placement.
On November 12, 1981, supported by Eligia G. Fernando's affidavit, BPI returned the two checks in controversy to
CBC for the reason "Payee's endorsement forged". A ping-pong started when CBC, in turn, returned the checks for
reason "Beyond Clearing Time", and the stoppage of this ping-pong, as we mentioned at the outset, prompted the
filing of this case.
Investigation of the fraud by the Presidential Security Command led to the filing of criminal actions for "Estafa Thru
Falsification of Commercial Documents" against four employees of BPI, namely Quirino Victorio, Virgilio Gayon,
Bernardo Laderas and Jorge Atayan, and the woman who impersonated Eligia G. Fernando, Susan Lopez San Juan.
Victorio and Gayon were both bookkeepers in BPI's Money Market Operations Department, Laderas was a
dispatcher in the same department. . . . (Rollo, pp. 74-79)
The Arbitration Committee ruled in favor of petitioner BPI. The dispositive portion of the decision reads:
WHEREFORE, we adjudge in favor of the Bank of the Philippine Islands and hereby order China Banking
Corporation to pay the former the amount of P1,206,607.58 with interest thereon at 12% per annum from August 12,
1983, or the date when PCHC, pursuant to its procedure for compulsory arbitration of the ping-pong checks under
Stockholders' Resolution No. 6-83 was implemented, up to the date of actual payment.
Costs of suit in the total amount of P7,250.00 are to be assessed the litigant banks in the following proportion:
a) Plaintiff BPI —– P1,812.50
b) Defendant China — P5,437.50
Total Assessment — P7,250.00
conformably with PCHC Resolution Nos. 46-83 dated October 25, 1983 and 4-85 dated February 25, 1985.
The PCHC is hereby directed to effect the corresponding entries to the litigant banks' clearing accounts in
accordance with the foregoing decision. (Rollo, pp. 97-98)
However, upon motion for reconsideration filed by respondent CBC, the Board of Directors of the PCHC reversed the Arbitration
Committee's decision in its Order, the dispositive portion of which reads:
WHEREFORE, the Board hereby reconsiders the Decision of the Arbitration Committee dated March 24, 1986 in
Arbicom Case No. 183-029 and in lieu thereof, one is rendered modifying the decision so that the Complaint of BPI is
dismissed, and on the Counterclaim of CBC, BPI is sentenced to pay CBC the sum of P1,206,607.58. In view of the
102 Negotiable Instruments – Form and Interpretation (Sec 1-23)
facts, no interest nor attorney's fees are awarded. BPI shall also bear 75% or P5,437.50 and CBC, 25% or P1,812.50
of the cost of the Arbitration proceedings amounting to P7,250.00.
The PCHC is hereby directed to debit the clearing account of the BPI the sum of P1,206,607.58 and credit the same
to that of CBC. The cost of Arbitration proceedings are to be debited from the accounts of the parties in the proportion
above stated. (Rollo, pp. 112-113)
BPI then filed a petition for review of the abovestated order with the Regional Trial Court of Makati. The trial court dismissed the petition
but modified the order as can be gleaned from the dispositive portion of its decision quoted earlier.
Not satisfied with the trial court's decision petitioner BPI filed with us a petition for review on certiorari under Rule 45 of the Rules of
Court. The case was docketed as G.R. No. 96376. However, in a Resolution dated February 6, 1991, we referred the case to the Court
of Appeals for proper determination and disposition. The appellate court affirmed the trial court's decision.
Hence, this petition.
In a resolution dated May 20, 1992 we gave due course to the petition:
Petitioner BPI now asseverates:
I
THE DECISION AND RESOLUTION OF THE RESPONDENT COURT LEAVES THE UNDESIRABLE RESULT OF
RENDERING NUGATORY THE VERY PURPOSE FOR THE UNIFORM BANKING PRACTICE OF REQUIRING
THE CLEARING GUARANTEE OF COLLECTING BANKS.
II
CONTRARY TO THE RULING OF THE RESPONDENT COURT, THE PROXIMATE CAUSE FOR THE LOSS OF
THE PROCEEDS OF THE TWO CHECKS IN QUESTION WAS THE NEGLIGENCE OF THE EMPLOYEES OF CBC
AND NOT BPI; CONSEQUENTLY, EVEN UNDER SECTION 23 OF THE NEGOTIABLE INSTRUMENTS LAW, BPI
WAS NOT PRECLUDED FROM RAISING THE DEFENSE OF FORGERY.
III
THE RESPONDENT COURT COMMITTED REVERSIBLE ERROR IN FAILING TO APPRECIATE THE FACT THAT
CBC HAD THE "LAST CLEAR CHANCE" OF AVOIDING THE LOSS OCCASIONED BY THE FRAUDULENT ACTS
INVOLVED IN THE INSTANT CASE. (Rollo, p. 24)
The main issues raised in the assignment of errors are: When a bank (in this case CBC) presents checks for clearing and payment,
what is the extent of the bank's warranty of the validity of all prior endorsements stamped at the back of the checks? In the event that
the payee's signature is forged, may the drawer/drawee bank (in this case BPI) claim reimbursement from the collecting bank [CBC]
which earlier paid the proceeds of the checks after the same checks were cleared by petitioner BPI through the PCHC?
Anent the first issue, petitioner BPI contends that respondent CBC's clear warranty that "all prior endorsements and/or lack of
endorsements guaranteed" stamped at the back of the checks was an unrestrictive clearing guaranty that all prior endorsements in the
checks are genuine. Under this premise petitioner BPI asserts that the presenting or collecting bank, respondent CBC, had an
unquestioned liability when it turned out that the payee's signature on the checks were forged. With these circumstances, petitioner BPI
maintains that considerations of relative negligence becomes totally irrelevant.
In sum, petitioner BPI theorizes that the Negotiable Instruments Law, specifically Section 23 thereof is not applicable in the light of the
absolute liability of the representing or collecting bank as regards forged endorsements in consonance with the clearing guarantee
requirement imposed upon the presenting or collecting banks "as it is worded today."
Petitioner BPI first returned to CBC the two (2) checks on the ground that "Payee's endorsement (was) forged" on November 12, 1981.
At that time the clearing regulation then in force under PCHC's Clearing House Rules and Regulations as revised on September 19,
1980 provides:
Items which have been the subject of material alteration or items bearing a forged endorsement when such
endorsement is necessary for negotiation shall be returned within twenty four (24) hours after discovery of the
alteration or the forgery, but in no event beyond the period prescribed by law for the filing of a legal action by the
returning bank/branch institution or entity against the bank/branch, institution or entity sending the same. (Section 23)
In the case of Banco de Oro Savings and Mortgage Bank v. Equitable Banking Corporation (157 SCRA 188 [1988]) the clearing
regulation (this is the present clearing regulation) at the time the parties' dispute occurred was as follows:
Sec. 21. . . . .
Items which have been the subject of material alteration or items bearing forged endorsement when such
endorsement is necessary for negotiation shall be returned by direct presentation or demand to the Presenting Bank
and not through the regular clearing house facilities within the period prescribed by law for the filing of a legal action
by the returning bank/branch, institution or entity sending the same.
It is to be noted that the above-cited clearing regulations are substantially the same in that it allows a return of a check "bearing forged
endorsement when such endorsement is necessary for negotiation" even beyond the next regular clearing although not beyond the
prescriptive period "for the filing of a legal action by the returning bank."
Bearing in mind this similarity in the clearing regulation in force at the time the forged checks in the present case and the Banco de Oro
case were dishonored and returned to the presenting or collecting banks, we can be guided by the principles enunciated in the Banco
de Oro case on the relevance of negligence of the drawee vis-a-vis the forged checks.
103 Negotiable Instruments – Form and Interpretation (Sec 1-23)
The facts in the Banco de Oro case are as follows: Sometime in March, April, May and August 1983 Equitable Banking Corporation
through its Visa Card Department drew six (6) crossed Manager's check with the total amount of Forty Five Thousand Nine Hundred
and Eighty Two Pesos and Twenty Three Centavos (P45,982.23) and payable to certain member establishments of Visa Card. Later,
the checks were deposited with Banco de Oro to the credit of its depositor, a certain Aida Trencio. Following normal procedures, and
after stamping at the back of the checks the endorsements: "All prior and/or lack of endorsements guaranteed" Banco de Oro sent the
checks for clearing through the PCHC. Accordingly, Equitable Banking Corporation paid the checks; its clearing amount was debited for
the value of the checks and Banco de Oro's clearing account was credited for the same amount. When Equitable Banking Corporation
discovered that the endorsements at the back of the checks and purporting to be that of the payees were forged it presented the
checks directly to Banco de Oro for reimbursement. Banco de Oro refused to reimburse Equitable Banking Corporation for the value of
the checks. Equitable Banking Corporation then filed a complaint with the Arbitration Committees of the PCHC. The Arbiter, Atty.
Ceasar Querubin, ruled in favor of Equitable Banking Corporation. The Board of Directors of the PCHC affirmed the Arbiter's decision.
A petition for review of the decision filed by Banco de Oro with the Regional Trial Court of Quezon City was dismissed. The decision of
the PCHC was affirmed in toto.
One of the main issues threshed out in this case centered on the effect of Banco de Oro's (representing or collecting bank) guarantee
of "all prior endorsements and/or lack of endorsements" at the back of the checks. A corollary issue was the effect of the forged
endorsements of the payees which were late discovered by the Equitable Banking Corporation (drawee bank) resulting in the latter's
claim for reimbursement of the value of checks after it paid the proceeds of the checks.
We agreed with the following disquisition of the Regional Trial Court, to wit:
Anent petitioner's liability on said instruments, this court is in full accord with the ruling of the PCHC Board of
Directors that:
In presenting the checks for clearing and for payment, the defendant made an express guarantee on the validity of
"all prior endorsements." Thus, stamped at the back of the checks are the defendant's clear warranty: ALL PRIOR
ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS GUARANTEED. Without such warranty, plaintiff would not
have paid on the checks.
No amount of legal jargon can reverse the clear meaning of defendant's warranty. As the warranty has proven to be
false and inaccurate, the defendant is liable for any damage arising out of the falsity of its representation.
The principle of estoppel, effectively prevents the defendant from denying liability for any damage sustained by the
plaintiff which, relying upon an action or declaration of the defendant, paid on the checks. The same principle of
estoppel effectively prevents the defendant from denying the existence of the checks. (pp. 10-11, Decision, pp. 43-44,
Rollo) (at pp. 194-195)
We also ruled:
Apropos the matter of forgery in endorsements, this Court has presently succintly emphasized 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. This is laid down
in the case of PNB v. National City Bank. (63 Phil. 1711) In another case, this court held that if the drawee-bank
discovers that the signature of the payee was forged after it has paid the amount of the check to the holder thereof, it
can recover the amount paid from the collecting bank.
xxx xxx xxx
The point that comes uppermost is whether the drawee bank was negligent in failing to discover the alteration or the
forgery. (Emphasis supplied)
xxx xxx xxx
The court reproduces with approval the following disquisition of the PCHC in its decision.
xxx xxx xxx
III. Having Violated Its Warranty On Validity Of All Endorsements, Collecting Bank Cannot Deny Liability To Those
Who Relied On Its Warranty.
xxx xxx xxx
The damage that will result if judgment is not rendered for the plaintiff is irreparable. The collecting bank has privity
with the depositor who is the principal culprit in this case. The defendant knows the depositor; her address and her
history. Depositor is defendant's client. It has taken a risk on its depositor when it allowed her to collect on the
crossed-checks.
Having accepted the crossed checks from persons other than the payees, the defendant is guilty of negligence; the
risk of wrongful payment has to be assumed by the defendant. (Emphasis supplied, at pp. 198-202)
As can be gleaned from the decision, one of the main considerations in affirming the PCHC's decision was the finding that as between
the drawee bank (Equitable Bank) and the representing or collecting bank (Banco de Oro) the latter was negligent and thus responsible
for undue payment.
Parenthetically, petitioner BPI's theory that the present clearing guarantee requirement imposed on the representing or collecting bank
under the PCHC rules and regulations is independent of the Negotiable Instruments Law is not in order.

104 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Another reason why the petitioner's theory is uncalled for is the fact that the Negotiable Instruments Law (Act No. 2031) applied to
negotiable instruments as defined under section one thereof. Undeniably, the present case involves checks as defined by and under
the coverage of the Negotiable Instruments Law. To affirm the theory of the petitioner would, therefore, violate the rule that rules and
regulations implementing the law should conform to the law, otherwise the rules and regulations are null and void. Thus, we held Shell
Philippines, Inc. v. Central Bank of the Philippines (162 SCRA 628 [1988]):
. . . while it is true that under the same law the Central Bank was given the authority to promulgate rules and
regulations to implement the statutory provision in question, we reiterate the principle that this authority is limited only
to carrying into effect what the law being implemented provides.
In People v. Maceren (79 SCRA 450, 458 and 460), this Court ruled that:
Administrative regulations adopted under legislative authority by a particular department must be in harmony with the
provisions of the law, and should be for the sole purpose of carrying into effect its general provisions. By such
regulations, of course, the law itself cannot be extended. (U.S. v. Tupasi Molina, supra). An administrative agency
cannot amend an act of Congress (Santos v. Estenzo, 109 Phil. 419, 422; Teoxon v. Members of the Board of
Administrators, L-25619, June 30, 1970, 33 SCRA 585; Manuel v. General Auditing Office, L-28952, December 29,
1971, 42 SCRA 660; Deluao v. Casteel, L-21906, August 29, 1969, 29 SCRA 350).
The rule-making power must be confined to details for regulating the mode or proceeding to carry into effect the law
as it has been enacted. The power cannot be extended to amending or expanding the statutory requirements or to
embrace matters not covered by the statute. Rules that subvert the statute cannot be sanctioned. (University of Santo
Tomas v. Board of Tax Appeals, 93 Phil. 376, 382, citing 12 C.J. 845-46. as to invalid regulations, see Collector of
Internal Revenue v. Villaflor, 69 Phil. 319; Wise & Co. v. Meer, 78 Phil. 655, 676; Del Mar v. Phil. Veterans
Administration, L-27299, June 27, 1973, 51 SCRA 340, 349).
xxx xxx xxx
. . . The rule or regulation should be within the scope of the statutory authority granted by the legislature to the
administrative agency. (Davis, Administrative Law, p. 194, 197, cited in Victorias Milling Co., Inc. v. Social Security
Commission, 114 Phil. 555, 558).
In case of discrepancy between the basic law and a rule or regulation issued to implement said law the basic law
prevails because said rule or regulation cannot go beyond the terms and provisions of the basic law (People v. Lim
108 Phil. 1091). (at pp. 633-634)
Section 23 of the Negotiable Instruments Law states:
When 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 discharge therefore, or to enforce payment thereof, against
any party thereto, can be acquired through or under such forged signature, unless the party against whom it is sought
to enforce such right is precluded from setting up the forgery or want of authority.
There are two (2) parts of the provision. The first part states the general rule while the second part states the exception to the general
rule. The general rule is to the effect that a forged signature is "wholly inoperative", and payment made "through or under such
signature" is ineffectual or does not discharge the instrument. The exception to this rule is when the party relying in the forgery is
"precluded from setting up the forgery or want of authority. In this jurisdiction we recognize negligence of the party invoking forgery as
an exception to the general rule. (See Banco de Oro Savings and Mortgage Bank v. Equitable Banking Corporation supra; Philippine
National Bank v. Quimpo, 158 SCRA 582 [1988]; Philippine National Bank v. Court of Appeals, 25 SCRA 693 [1968]; Republic v.
Equitable Banking Corporation, 10 SCRA 8 [1964]; National Bank v. National City Bank of New York, 63 Phil. 711 [1936]; San Carlos
Milling Co. v. Bank of P.I., 59 Phil. 59 [1933]). In these cases we determined the rights and liabilities of the parties under a forged
endorsement by looking at the legal effects of the relative negligence of the parties thereto.
In the present petition the payee's names in the two (2) subject checks were forged. Following the general rule, the checks are "wholly
inoperative" and of no effect. However, the underlying circumstances of the case show that the general rule on forgery is not applicable.
The issue as to who between the parties should bear the loss in the payment of the forged checks necessities the determination of the
rights and liabilities of the parties involved in the controversy in relation to the forged checks.
The records show that petitioner BPI as drawee bank and respondent CBC as representing or collecting bank were both negligent
resulting in the encashment of the forged checks.
The Arbitration Committee in its decision analyzed the negligence of the employees of petitioner BPI involved in the processing of the
pre-termination of Eligia G. Fernando's money market placement and in the issuance and delivery of the subject checks in this wise:
a) The impostor could have been readily unmasked by a mere telephone call, which nobody in BPI bothered to make
to Eligia G. Fernando, a vice-president of Philamlife (Annex C, p. 13).
b) It is rather curious, too, that the officer who used to handle Eligia G. Fernando's account did not do anything about
the account's pre-termination (Ibid, p. 13).
c) Again no verification appears to have been made by (sic) Eligia G. Fernando's purported signature on the letter
requesting the pre-termination and the letter authorizing her niece to pick-up the checks, yet, her signature was in
BPI's file (Ibid., p. 13).
d) Another step that could have foiled the fraud, but which BPI neglected to take, was requiring before the two checks
in controversy were delivered, the surrender of the promissory note evidencing the money market placement that was
supposedly pre-terminated. (Rollo, p. 13).

105 Negotiable Instruments – Form and Interpretation (Sec 1-23)


The Arbitration Committee, however, belittled petitioner BPI's negligence compared to that of respondent CBC which it declared as
graver and the proximate cause of the loss of the subject checks to the impostor who impersonated Eligia G. Fernando. Petitioner BPI
now insists on the adoption of the Arbitration Committee's evaluation of the negligence of both parties, to wit:
a) But what about the lapses of BPI's employees who processed the pretermination of Eligia G. Fernando's
placement and issued the checks? We do not think it was a serious lapse not to confirm the telephone request for
pretermination purportedly made by Eligia G. Fernando, considering that it is common knowledge that business in the
money market is done mostly by telephone. Then, too, the initial request of the caller was for the two checks
representing the pretermination proceeds to be delivered to "her" office, meaning Eligia G. Fernando's office at
Philamlife, this clever ruse must have put off guard the employee preparing the "purchase order slip", enough at least
for him to do away with having to call Eligia G. Fernando at her office. (Annex C at p. 17).
b) We also do not think it unusual that Penelope Bulan, who used to handle Eligia G. Fernando's account, should do
nothing about the request for pretermination and leave it to Eustaquio to process the pretermination. In a bank the of
BPI, it would be quite normal for an officer to take over from another the handling of an account. (Ibid. p. 17)
c) The failure to verify or compare Eligia G. Fernando's purported signature on the letter requesting the
pretermination and the letter authorizing the pick-up of the checks in controversy with her signature in BPI's file
showed lack of care and prudence required by the circumstances, although it is doubtful that such comparison would
have disclosed the deception considering the "close similarity" between her purported signature and her signature in
BPI's file. (Ibid., p. 17).
d) A significant lapse was, however, committed when the two checks in controversy were delivered without requiring
the surrender of the promissory note evidencing the placement that was supposedly preterminated. Although, as we
already said, it is hard to determine whether the failure to require the surrender of the promissory note was a
deliberate act of Laderas, the dispatcher, or simply because the "purchase order slip" note, (sic) the fact remains that
such failure contributed to the consummation of the fraud. (Ibid., p. 17-18)
The Arbitration Committee Decision's conclusion was expressed thus —
Except for Laderas, not one of the BPI personnel tasked with the pretermination of Eligia G.
Fernando's placement and the issuance of the pretermination checks colluded in the fraud,
although there may have been lapses of negligence on their part which we shall discuss later. The
secreting out of BPI of Fernando's specimen signature, which, as admitted by the impostor herself
(Exhibit E-2, page 5), helped her in forging Fernando's signature was no doubt an "inside job" but
done by any of the four employees colluding in the fraud, not by the personnel directly charged with
the custody of Fernando's records. (Annex C, p. 15)
With respect to the negligence of the CBC employees in the payment of the two (2) BPI cashier's checks involved in
this case, the Arbitration Committee's Decision made incontrovertible findings undisputed in the statement of facts
found in the Court of Appeals' decision of 8 August 1991, the Regional Trial Court decision of 28 November 1990 and
the PCHC Board of Directors' Order of 26 August 1986 (Annexes A, E, D, respectively). These findings point to
negligence of the CBC employees which led to: (a) the opening of the impostor's current account in the name of
Eligia G. Fernando; (b) the deposit of said account of the two (2) checks in controversy and (c) the withdrawal of their
proceeds from said account.
The Arbitration Committee found that —
1. Since the impostor presented only her tax account number as a means of identification, we feel
that Emily Sylianco Cuaso, Cash Supervisor, approved the opening of her current account in the
name of Eligia G. Fernando on the strength of the introduction of Antonio Concepcion who had
himself opened an account earlier that year. That Mrs. Cuaso was not comfortable with the
introduction of the new depositor by Concepcion is betrayed by the fact that she made it appear in
the application form that the new depositor was introduced by Valentin Co a long-standing valued
client of CBC who had introduced Concepcion when he opened his account. We find this
misrepresentation significant because when she reviewed the application form she assumed that
the new client was introduced by Valentin Co as indicated in the application form (tsn of March 19,
1985, page 13). Thus we find that the impostor was able to open with CBC's current account in the
name of Eligia G. Fernando due to the negligence, if not misrepresentation, of its Cash Supervisor,
(Annex C, p. 18).
2. Even with negligence attending the impostor's opening of a current account, her encashment of
the two checks in controversy could still have been prevented if only the care and diligence
demanded by the circumstances were exercised. On October 14, 1981, just a day after she opened
her account, the impostor deposited the two checks which had an aggregate value of
P2,413,215.16, which was grossly disproportionate to her initial deposit of P10,000. The very date
of both checks, October 12, 1981, should have tipped off the real purpose of the opening of the
account on October 13, 1981. But what surely can be characterized only as abandonment of
caution was allowing the withdrawal of the checks' proceeds which started on October 16, 1981
only two days after the two checks were deposited; by October 22, 1981, the account had been
emptied of the checks' proceeds. (Annex C, p. 19).
3. We cannot accept CBC's contention that "big withdrawals" are "usual business" with it. Huge
withdrawals might be a matter of course with an established account but not for a newly opened

106 Negotiable Instruments – Form and Interpretation (Sec 1-23)


account, especially since the supposed check proceeds being withdrawn were grossly
disproportionate to the initial cash deposit. (Annex C, p. 19).
As intimated earlier, the foregoing findings of fact were not materially disputed either by the respondent PCHC Board
of Directors or by the respondent courts (compare statement of facts of respondent court as reproduced in pp. 9-11 of
this petition).
Having seen the negligence of the employees of both Banks, the relevant question is: which negligence was graver.
The Arbitration Committee's Decision found and concluded thus —
Since there were lapses by both BPI and CBC, the question is: whose negligence was the graver
and which was the proximate cause of the loss? Even viewing BPI's lapses in the worst light, it can
be said that while its negligence may have introduced the two checks in controversy into the
commercial stream. CBC's lack of care in approving the opening with it of the impostor's current
account, and its allowing the withdrawal's of the checks' proceeds, the aggregate value of which
was grossly disproportionate to the initial cash deposit, so soon after such checks were deposited,
caused the "payment" of the checks. Being closest to the vent of loss, therefore, CBC's negligence
must be held to be proximate cause of the loss. (Annex C, pp. 19-20) (Rollo, pp. 38-41)
While it is true that the PCHC Board of Directors, and the lower courts did not dispute the findings of facts of the Arbitration Committee,
the PCHC Board of Directors evaluated the negligence of the parties, to wit:
The Board finds the ruling that the negligence of the employees of CBC is graver than that of the BPI not warranted
by the facts because:
1. The acts and omissions of which BPI employees are guilty are not only negligent but criminal as found by the
decision.
2. The act of BPI's dealer-trainee Eustaquio of disclosing information about the money market placement of its client
over the telephone is a violation, if not of Republic Act 1405, of Sec. 87 (a) of the General Banking Act which
penalizes any officer-employee or agent of any banking institution who discloses to any unauthorized person any
information relative to the funds or properties in the custody of the bank belonging to private individual, corporations,
or any other entity; and the bland excuse given by the decision that "business in the money market is done mostly by
the telephone" cannot be accepted nor tolerated for it is an elementary rule of law that no custom or usage of
business can override what a law specifically provides. (Ang Tek v. CA, 87 Phil. 383).
3. The failure of BPI employees to verify or compare Eligia G. Fernando's purported signature on the letter requesting
for pre-termination and the letter authorizing the pick-up of the checks in controversy with the signatures on file is not
even justified but admitted in the decision as showing lack of care and prudence required by the circumstances. The
conjectural excuse made in the decision that "it is doubtful that such comparison would have disclosed the deception"
does not give an excuse for the omission by BPI employees of the act of verifying the signature, a duty which is the
basic requirement of all acts in the bank. From the very first time an employee enters the services of a bank up to the
time he becomes the highest officer thereof, the cautionary rule is drilled on him to always be sure that when he acts
on the basis of any signature presented before him, the signature is to be verified as genuine and that if the bank acts
on the basis of a forgery of such signature, the bank will be held liable. There can be no excuse therefore for such an
omission on the part of BPI employees.
4. The decision admits that:
A significant lapse was, however, committed when the two checks in controversy were delivered
without requiring the surrender of the promissory note evidencing the placement that was
supposedly preterminated.
This omission of the BPI to require the surrender of the promissory notes evidencing the placement is justified by the
decision by saying that Sec. 74 of the Negotiable Instrument Law is not violated by this omission of the BPI
employees because said provision is intended for the benefit of the person paying (in this case the BPI) so that since
the omission to surrender having been waived by BPI, so the non-surrender does not invalidate the payment. The
fallacy of this argument is that the in this case is: whether or not such non-surrender is a necessary ingredient in the
cause of the success of the fraud and not whether or not the payment was valid. This excuse may perhaps be
acceptable if the omission did not cause damage to any other person. In this case, however, it did cause tremendous
damage. Moreover, this statement obviously overlooks the provision in Art. 1240 of the Civil Code requiring the payor
(which in this case is the BPI) to be sure he pays to the right person and as Art. 1242 states, he can claim good faith
in paying to the right person only if he pays to the person possession of the credit (which in this case is the
promissory note evidencing the money market placement). Clearly therefore, the excuse given in the decision for the
non-surrender of this promissory note evidencing the money market placement cannot be accepted.
xxx xxx xxx
The decision, however, discusses in detail the negligent acts of the CBC in its lapses or certain requirements in the
opening of the account and in allowing withdrawals against the deposited checks soon after the deposit thereof. As
stated by the decision however, in computerized banks the history of the account is not shown in the computer
terminal whenever a withdrawal is made.
The Board therefore believes that these withdrawals, without any further showing that the CBC employees "had
actual knowledge of the infirmity or defect, or knowledge of such facts" (Sec. 56, Negotiable Instruments Law) that

107 Negotiable Instruments – Form and Interpretation (Sec 1-23)


their action in accepting their checks for deposit and allowing the withdrawals against the same "amounted to bad
faith" cannot be considered as basis for holding CBC liable. (Rollo, pp. 107-111)
Banks handle daily transactions involving millions of pesos. By the very nature of their work the degree of responsibility, care and
trustworthiness expected of their employees and officials is far greater than those of ordinary clerks and employees. For obvious
reasons, the banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees.
In the present case, there is no question that the banks were negligent in the selection and supervision of their employees. The
Arbitration Committee, the PCHC Board of Directors and the lower court, however disagree in the evaluation of the degree of
negligence of the banks. While the Arbitration Committee declared the negligence of respondent CBC graver, the PCHC Board of
Directors and the lower courts declared that petitioner BPI's negligence was graver. To the extent that the degree of negligence is
equated to the proximate cause of the loss, we rule that the issue as to whose negligence is graver is relevant. No matter how many
justifications both banks present to avoid responsibility, they cannot erase the fact that they were both guilty in not exercising
extraordinary diligence in the selection and supervision of their employees. The next issue hinges on whose negligence was the
proximate cause of the payment of the forged checks by an impostor.
Petitioner BPI accuses the Court of Appeals of inconsistency when it affirmed the PCHC's Board of Directors' Order but in the same
breath declared that the negligent acts of the CBC employees occurred immediately before the actual loss.
In this regard petitioner BPI insists that the doctrine of last clear chance enunciated in the case of Picart v. Smith (37 Phil. 809 [1918])
should have been applied considering the circumstances of the case.
In the Picart case, Amado Picart was then riding on his pony over the Carlatan Bridge at San Fernando, La Union when Frank Smith
approached from the opposite direction in a car. As Smith neared the bridge he saw Picart and blew his horn to give warning of his
approach. When he was already on the bridge Picart gave two more successive blasts as it appeared to him that Picart was not
observing the rule of the road. Picart saw the car coming and heard the warning signals. An accident then ensued resulting in the death
of the horse and physical injuries suffered by Picart which caused him temporary unconsciousness and required medical attention for
several days. Thereafter, Picart sued Smith for damages.
We ruled:
The question presented for decision is whether or not the defendant in maneuvering his car in the manner above
described was guilty of negligence such as gives rise to a civil obligation to repair the damage done; and we are of
the opinion that he is so liable. As the defendant started across the bridge, he had the right to assume that the horse
and rider would pass over to the proper side; but as he moved toward the center of the bridge it was demonstrated to
his eyes that this would not be done; and he must in a moment have perceived that it was too late for the horse to
cross with safety in front of the moving vehicle. In the nature of things this change of situation occurred while the
automobile was yet some distance away; and from this moment it was no longer within the power of the plaintiff to
escape being run down by going to a place of greater safety. The control of the situation had then passed entirely to
the defendant; and it was his duty to either to bring his car to an immediate stop or, seeing that there were no other
persons on the bridge, to take the other side and pass sufficiently far away from the horse to avoid the danger of
collision. Instead of doing this, the defendant ran starlight on until he was almost upon the horse. He was, we think,
deceived into doing this by the fact that the horse had not yet exhibited fright. But in view of the known nature of
horses, there was an appreciable risk that, if the animal in question was unacquainted with automobiles, he might get
excited and jump under the conditions which here confronted him. When the defendant exposed the horse and rider
to this danger he was, in our opinion, negligent in the eyes of the law.
The test by which by which to determine the existence of negligence in a particular case may be stated as follows:
Did the defendant in doing the alleged negligent act use that reasonable care and caution which an ordinarily prudent
person would have used in the same situation? If not, then he is guilty of negligence.
xxx xxx xxx
It goes without saying that the plaintiff himself was not free from fault, for he was guilty of antecedent negligence in
planting himself on the wrong side of the road. But as we have already stated, the defendant was also negligent; and
in such case the problem always is to discover which agent is immediately and directly responsible. It will be noted
that the negligent acts of the two parties were not contemporaneous, since the negligence of the defendant
succeeded the negligence of the plaintiff by an appreciable interval. Under these circumstances the law is that the
person who has the last fair chance to avoid the impending harm and fails to do so is chargeable with the
consequences, without reference to the prior negligence of the other party."
Applying these principles, petitioner BPI's reliance on the doctrine of last clear chance to clear it from liability is not well-taken. CBC had
no prior notice of the fraud perpetrated by BPI's employees on the pretermination of Eligia G. Fernando's money market placement.
Moreover, Fernando is not a depositor of CBC. Hence, a comparison of the signature of Eligia G. Fernando with that of the impostor
Eligia G. Fernando, which respondent CBC did, could not have resulted in the discovery of the fraud. Hence, unlike in the Picart case
herein the defendant, had he used reasonable care and caution, would have recognized the risk he was taking and would have
foreseen harm to the horse and the plaintiff but did not, respondent CBC had no way to discover the fraud at all. In fact the records fail
to show that respondent CBC had knowledge, actual or implied, of the fraud perpetrated by the impostor and the employees of BPI.
However, petitioner BPI insists that even if the doctrine of proximate cause is applied, still, respondent CBC should be held responsible
for the payment to the impostor of the two (2) checks. It argues that the acts and omissions of respondent CBC are the cause "that set
into motion the actual and continuous sequence of events that produced the injury and without which the result would not have
occurred." On the other hand, it assets that its acts and omissions did not end in a loss. Petitioner BPI anchors its argument on its
stance that there was "a gap, a hiatus, an interval between the issuance and delivery of said checks by petitioner BPI to the impostor
and their actual payment of CBC to the impostor. Petitioner BPI points out that the gap of one (1) day that elapsed from its issuance
108 Negotiable Instruments – Form and Interpretation (Sec 1-23)
and delivery of the checks to the impostor is material on the issue of proximate cause. At this stage, according to petitioner BPI, there
was yet no loss and the impostor could have decided to desist from completing the same plan and could have held to the checks
without negotiating them.
We are not persuaded.
In the case of Vda. de Bataclan, et al, v. Medina (102 Phil. 181 [1957]), we had occasion to discuss the doctrine of proximate cause.
Briefly, the facts of this case are as follows:
At about 2:00 o'clock in the morning of September 13, 1952 a bus carrying about eighteen (18) passengers on its way to Amandeo,
Cavite figured in an accident. While the bus was running, one of the front tires burst and the bus began to zigzag until it fell into a canal
on the right side of the road and turned turtle. Some passengers managed to get out from the overturned bus except for four (4)
passengers, among them, Bataclan. The passengers who got out heard shouts for help from Bataclan and another passenger Lara
who said they could not get out from the bus. After half an hour, about ten men came, one of them carrying a lighted torch made of
bamboo with a wick on one end fueled with petroleum. These men approached the overturned bus, and almost immediately, a fierce
fire started burning and all but consuming the bus including the four (4) passengers trapped inside. It turned out that as the bus
overturned, gasoline began to leak and escape from the gasoline tank on the side of the chassis spreading over and permeating the
body of the bus and the ground under and around it. The lighted torch brought by one of the men who answered the call for help set it
on fire. On the same day, the charred bodies of the trapped passengers were removed and identified. By reason of his death, Juan
Bataclan's wife and her children filed a suit for damages against Maximo Medina, the operator and owner of the bus in the then Court of
First Instance of Cavite. The trial court ruled in favor of the defendant. However, we reversed and set aside the trial court's decision and
said:
There is no question that under the circumstances, the defendant carrier is liable. The only question is to what
degree. The trial court was of the opinion that the proximate cause of the death of Bataclan was not the overturning of
the bus, but rather the fire that burned the bus, including himself and his co-passengers who were unable to leave it;
that at the time the fire started, Bataclan, though the must have suffered, physical injuries, perhaps serious, was still
alive and so damages were awarded, not for his death, but for the physical satisfactory definition of promote cause is
found in Volume 38, pages 695-696 of American Jurisprudence, cited by plaintiffs-appellants in their brief. It is as
follows:
. . . that cause, which, in natural and continuous sequence, unbroken by any efficient intervening
cause, produces the injury, and without which the result would not have occurred. And more
comprehensively, the proximate legal cause in that acting first and producing the injury, either
immediately or by setting other events in motion, all constituting a natural and continuous chain of
events, each having a close causal connection with its immediate predecessor, the final event in
the chain immediately effecting the injury as natural and probable result of the cause which first
acted, under such circumstances that the person responsible for the first event should, as an
ordinarily prudent and intelligent person, have reasonable ground to expect at the moment of his
act or default that an injury to some person might probably result therefrom.
It may be that ordinarily, when a passenger bus overturns, and pins down a passenger, merely causing him physical
injuries, if through some event, unexpected and extraordinary, the overturned bus is set on fire, say, by lightning, or if
some highwaymen after looting the vehicle sets it on fire, and the passenger is burned to death, on might still contend
that the proximate cause of his death was the fire and not the overturning of the vehicle. But in the present case and
under the circumstances obtaining in the same, we do not hesitate to hold that the proximate cause of the death of
Bataclan was the overturning of the bus, this for the reason that when the vehicle turned not only on its side but
completely on its back, the leaking of the gasoline from the tank was not unnatural or unexpected; that the coming of
the men with a lighted torch was in response to the call for help, made not only by the passengers, but most probably,
by the driver and the conductor themselves, and that because it was very dark (about 2:30 in the morning), the
rescuers had to carry a light with them; and coming as they did from a rural area where lanterns and flashlights were
not available, they had to use a torch, the most handy and available; and what was more natural than that said
rescuers should innocently approach the overturned vehicle to extend the aid and effect the rescue requested from
them. In other words, the coming of the men with the torch was to be expected and was natural sequence of the
overturning of the bus, the trapping of some of its passengers and the call for outside help. (Emphasis Supplied, at
pp. 185-187)
Again, applying the doctrine of proximate cause, petitioner BPI's contention that CBC alone should bear the loss must fail. The gap of
one (1) day between the issuance and delivery of the checks bearing the impostor's name as payee and the impostor's negotiating the
said forged checks by opening an account and depositing the same with respondent CBC is not controlling. It is not unnatural or
unexpected that after taking the risk of impersonating Eligia G. Fernando with the connivance of BPI's employees, the impostor would
complete her deception by encashing the forged checks. There is therefore, greater reason to rule that the proximate cause of the
payment of the forged checks by an impostor was due to the negligence of petitioner BPI. This finding, notwithstanding, we are not
inclined to rule that petitioner BPI must solely bear the loss of P2,413,215.16, the total amount of the two (2) forged checks. Due care
on the part of CBC could have prevented any loss.
The Court cannot ignore the fact that the CBC employees closed their eyes to the suspicious circumstances of huge over-the-counter
withdrawals made immediately after the account was opened. The opening of the account itself was accompanied by inexplicable acts
clearly showing negligence. And while we do not apply the last clear chance doctrine as controlling in this case, still the CBC
employees had ample opportunity to avoid the harm which befell both CBC and BPI. They let the opportunity slip by when the ordinary
prudence expected of bank employees would have sufficed to seize it.

109 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Both banks were negligent in the selection and supervision of their employees resulting in the encashment of the forged checks by an
impostor. Both banks were not able to overcome the presumption of negligence in the selection and supervision of their employees. It
was the gross negligence of the employees of both banks which resulted in the fraud and the subsequent loss. While it is true that
petitioner BPI's negligence may have been the proximate cause of the loss, respondent CBC's negligence contributed equally to the
success of the impostor in encashing the proceeds of the forged checks. Under these circumstances, we apply Article 2179 of the Civil
Code to the effect that while respondent CBC may recover its losses, such losses are subject to mitigation by the courts. (See Phoenix
Construction Inc. v. Intermediate Appellate Courts, 148 SCRA 353 [1987]).
Considering the comparative negligence of the two (2) banks, we rule that the demands of substantial justice are satisfied by allocating
the loss of P2,413,215.16 and the costs of the arbitration proceeding in the amount of P7,250.00 and the cost of litigation on a 60-40
ratio. Conformably with this ruling, no interests and attorney's fees can be awarded to either of the parties.
WHEREFORE, the questioned DECISION and RESOLUTION of the Court of Appeals are MODIFIED as outlined above. Petitioner
Bank of the Philippine Islands shall be responsible for sixty percent (60%) while respondent China Banking Corporation shall share forty
percent (40%) of the loss of TWO MILLION FOUR HUNDRED THIRTEEN THOUSAND, TWO HUNDRED FIFTEEN PESOS and
SIXTEEN CENTAVOS (2,413,215.16) and the arbitration costs of SEVEN THOUSAND, TWO HUNDRED FIFTY PESOS (7,250.00).
The Philippine Clearing House Corporation is hereby directed to effect the corresponding entries to the banks' clearing accounts in
accordance with this decision. Costs in the same proportion against the Bank of the Philippine Islands and the China Banking
Corporation.
SO ORDERED

110 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION

G.R. No. L-50373 February 15, 1990


MANILA LIGHTER TRANSPORTATION, INC., petitioner,
vs.
COURT OF APPEALS AND CHINA BANKING CORPORATION, respondents.
Sergio L. Guadiz and Jose Diokno & Associates for petitioner.
Sycip, Salazar, Hernandez & Gatmaitan for private respondent.

GRIÑO-AQUINO, J.:
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, namely: Go Fay and
Co., for P12,568.77; Peter Paul Phil. Corp. for P36,967.80; Central Azucarera Don Pedro for P11,190.14; and Helena
Cigar Co. for P4,296.90.
"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.)

111 Negotiable Instruments – Form and Interpretation (Sec 1-23)


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.
The dispositive portion of the trial court's decision reads:
WHEREFORE, judgment is hereby rendered:
1. Ordering defendant China Banking Corporation to pay plaintiff Manila Lighter Transportation, Inc., an amount equal
to 50% of the total amount of the checks Exhibits A to E-2;
2. Ordering plaintiff to pay defendant 50% of the amount of the Tabacalera checks Exhibits 2-A to 2-D;
3. Ordering third-party defendant Ko Lit to pay P90,500.24 and third-party defendant Cao Pek & Co. to pay Pl,215.05,
both to China Banking Corporation;
4. Ordering China Banking Corporation to pay plaintiff 50% of any amount it may recover from Ko Lit and Cao Pek &
Co.
The parties shall bear their own costs and attorney's fees. (p. 40, Rollo.)
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, the dispositive portion of which states:
WHEREFORE, the judgment appealed from is hereby modified such that the complaint is dismissed and the
defendant-appellant is freed from any liability to the plaintiff-appellant. The counterclaim of P3,453.53 is granted with
interests from the date the amended counterclaim was filed. The third-party defendants are adjudged directly liable to
the plaintiff-appellant for the checks they respectively indorsed. No costs. (p. 49, Rollo.)
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:
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.
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). (p. 117,
Rollo.)
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.

112 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION

G.R. No. L-40796 July 31, 1975


REPUBLIC BANK, plaintiff-appellee,
vs.
MAURICIA T. EBRADA, defendant-appellant.
Sabino de Leon, Jr. for plaintiff-appellee.
Julio Baldonado for defendant-appellant.

MARTIN, J.:
Appeal on a question of law of the decision of the Court of First Instance of Manila, Branch XXIII in Civil Case No. 69288, entitled
"Republic Bank vs. Mauricia T. Ebrada."
On or about February 27, 1963 defendant Mauricia T. Ebrada, encashed Back Pay Check No. 508060 dated January 15, 1963 for
P1,246.08 at the main office of the plaintiff Republic Bank at Escolta, Manila. The check was issued by the Bureau of Treasury. 1
Plaintiff Bank was later advised by the said bureau that the alleged indorsement on the reverse side of the aforesaid check by the
payee, "Martin Lorenzo" was a forgery 2 since the latter had allegedly died as of July 14, 1952. 3 Plaintiff Bank was then requested by
the Bureau of Treasury to refund the amount of P1,246.08. 4 To recover what it had refunded to the Bureau of Treasury, plaintiff Bank
made verbal and formal demands upon defendant Ebrada to account for the sum of P1,246.08, but said defendant refused to do so. So
plaintiff Bank sued defendant Ebrada before the City Court of Manila.
On July 11, 1966, defendant Ebrada filed her answer denying the material allegations of the complaint and as affirmative defenses
alleged that she was a holder in due course of the check in question, or at the very least, has acquired her rights from a holder in due
course and therefore entitled to the proceeds thereof. She also alleged that the plaintiff Bank has no cause of action against her; that it
is in estoppel, or so negligent as not to be entitled to recover anything from her. 5
About the same day, July 11, 1966 defendant Ebrada filed a Third-Party complaint against Adelaida Dominguez who, in turn, filed on
September 14, 1966 a Fourth-Party complaint against Justina Tinio.
On March 21, 1967, the City Court of Manila rendered judgment for the plaintiff Bank against defendant Ebrada; for Third-Party plaintiff
against Third-Party defendant, Adelaida Dominguez, and for Fourth-Party plaintiff against Fourth-Party defendant, Justina Tinio.
From the judgment of the City Court, defendant Ebrada took an appeal to the Court of First Instance of Manila where the parties
submitted a partial stipulation of facts as follows:
COME NOW the undersigned counsel for the plaintiff, defendant, Third-Party defendant and Fourth-Party plaintiff and
unto this Honorable Court most respectfully submit the following:
PARTIAL STIPULATION OF FACTS
1. That they admit their respective capacities to sue and be sued;
2. That on January 15, 1963 the Treasury of the Philippines issued its Check No. BP-508060, payable to the order of
one MARTIN LORENZO, in the sum of P1,246.08, and drawn on the Republic Bank, plaintiff herein, which check will
be marked as Exhibit "A" for the plaintiff;
3. That the back side of aforementioned check bears the following signatures, in this order:
1) MARTIN LORENZO;
2) RAMON R. LORENZO;
3) DELIA DOMINGUEZ; and
4) MAURICIA T. EBRADA;
4. That the aforementioned check was delivered to the defendant MAURICIA T. EBRADA by the Third-Party defendant and Fourth-
Party plaintiff ADELAIDA DOMINGUEZ, for the purpose of encashment;
5. That the signature of defendant MAURICIA T. EBRADA was affixed on said check on February 27, 1963 when she
encashed it with the plaintiff Bank;
6. That immediately after defendant MAURICIA T. EBRADA received the cash proceeds of said check in the sum of
P1,246.08 from the plaintiff Bank, she immediately turned over the said amount to the third-party defendant and
fourth-party plaintiff ADELAIDA DOMINGUEZ, who in turn handed the said amount to the fourth-party defendant
JUSTINA TINIO on the same date, as evidenced by the receipt signed by her which will be marked as Exhibit "1-
Dominguez"; and

113 Negotiable Instruments – Form and Interpretation (Sec 1-23)


7. That the parties hereto reserve the right to present evidence on any other fact not covered by the foregoing
stipulations,
Manila, Philippines, June 6, 1969.
Based on the foregoing stipulation of facts and the documentary evidence presented, the trial court rendered a decision, the dispositive
portion of which reads as follows:
WHEREFORE, the Court renders judgment ordering the defendant Mauricia T. Ebrada to pay the plaintiff the amount
of ONE THOUSAND TWO FORTY-SIX 08/100 (P1,246.08), with interest at the legal rate from the filing of the
complaint on June 16, 1966, until fully paid, plus the costs in both instances against Mauricia T. Ebrada.
The right of Mauricia T. Ebrada to file whatever claim she may have against Adelaida Dominguez in connection with
this case is hereby reserved. The right of the estate of Dominguez to file the fourth-party complaint against Justina
Tinio is also reserved.
SO ORDERED.
In her appeal, defendant-appellant presses that the lower court erred:
IN ORDERING THE APPELLANT TO PAY THE APPELLEE THE FACE VALUE OF THE SUBJECT CHECK AFTER
FINDING THAT THE DRAWER ISSUED THE SUBJECT CHECK TO A PERSON ALREADY DECEASED FOR 11-½
YEARS AND THAT THE APPELLANT DID NOT BENEFIT FROM ENCASHING SAID CHECK.
From the stipulation of facts it is admitted that the check in question was delivered to defendant-appellant by Adelaida Dominguez for
the purpose of encashment and that her signature was affixed on said check when she cashed it with the plaintiff Bank. Likewise it is
admitted that defendant-appellant was the last indorser of the said check. As such indorser, she was supposed to have warranted that
she has good title to said check; for under Section 65 of the Negotiable Instruments Law: 6
Every person negotiating an instrument by delivery or by qualified indorsement, warrants:
(a) That the instrument is genuine and in all respects what it purports to be.
(b) That she has good title to it.
xxx xxx xxx
and under Section 65 of the same Act:
Every indorser who indorses without qualification warrants to all subsequent holders in due course:
(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding sections;
(b) That the instrument is at the time of his indorsement valid and subsisting.
It turned out, however, that the signature of the original payee of the check, Martin Lorenzo was a forgery because he was already
dead 7 almost 11 years before the check in question was issued by the Bureau of Treasury. Under action 23 of the Negotiable
Instruments Law (Act 2031):
When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly
inoperative, and no right to retain the instruments, or to give a discharge thereof against any party thereto, can be
acquired through or under such signature unless the party against whom it is sought to enforce such right is
precluded from setting up the forgery or want of authority.
It is clear from the provision that where the signature on a negotiable instrument if forged, the negotiation of the check is without force
or effect. But does this mean that the existence of one forged signature therein will render void all the other negotiations of the check
with respect to the other parties whose signature are genuine?
In the case of Beam vs. Farrel, 135 Iowa 670, 113 N.W. 590, where a check has several indorsements on it, it was held that it is only
the negotiation based on the forged or unauthorized signature which is inoperative. Applying this principle to the case before Us, it can
be safely concluded that it is only the negotiation predicated on the forged indorsement that should be declared inoperative. This
means that the negotiation of the check in question from Martin Lorenzo, the original payee, to Ramon R. Lorenzo, the second indorser,
should be declared of no affect, but the negotiation of the aforesaid check from Ramon R. Lorenzo to Adelaida Dominguez, the third
indorser, and from Adelaida Dominguez to the defendant-appellant who did not know of the forgery, should be considered valid and
enforceable, barring any claim of forgery.
What happens then, if, after the drawee bank has paid the amount of the check to the holder thereof, it was discovered that the
signature of the payee was forged? Can the drawee bank recover from the one who encashed the check?
In the case of State v. Broadway Mut. Bank, 282 S.W. 196, 197, it was held that the drawee of a check can recover from the holder the
money paid to him on a forged instrument. It is not supposed to be its duty to ascertain whether the signatures of the payee or
indorsers are genuine or not. This is because the indorser is supposed to warrant to the drawee that the signatures of the payee and
previous indorsers are genuine, warranty not extending only to holders in due course. One who purchases a check or draft is bound to
satisfy himself that the paper is genuine and that by indorsing it or presenting it for payment or putting it into circulation before
presentation he impliedly asserts that he has performed his duty and the drawee who has paid the forged check, without actual
negligence on his part, may recover the money paid from such negligent purchasers. In such cases the recovery is permitted because
although the drawee was in a way negligent in failing to detect the forgery, yet if the encasher of the check had performed his duty, the
forgery would in all probability, have been detected and the fraud defeated. The reason for allowing the drawee bank to recover from
the encasher is:

114 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Every one with even the least experience in business knows that no business man would accept a check in exchange
for money or goods unless he is satisfied that the check is genuine. He accepts it only because he has proof that it is
genuine, or because he has sufficient confidence in the honesty and financial responsibility of the person who
vouches for it. If he is deceived he has suffered a loss of his cash or goods through his own mistake. His own
credulity or recklessness, or misplaced confidence was the sole cause of the loss. Why should he be permitted to
shift the loss due to his own fault in assuming the risk, upon the drawee, simply because of the accidental
circumstance that the drawee afterwards failed to detect the forgery when the check was presented? 8
Similarly, in the case before Us, the defendant-appellant, upon receiving the check in question from Adelaida Dominguez, was duty-
bound to ascertain whether the check in question was genuine before presenting it to plaintiff Bank for payment. Her failure to do so
makes her liable for the loss and the plaintiff Bank may recover from her the money she received for the check. As reasoned out above,
had she performed the duty of ascertaining the genuineness of the check, in all probability the forgery would have been detected and
the fraud defeated.
In our jurisdiction We have a case of similar import. 9 The Great Eastern Life Insurance Company drew its check for P2000.00 on the
Hongkong and Shanghai Banking Corporation payable to the order of Lazaro Melicor. A certain E. M. Maasin fraudulently obtained the
check and forged the signature of Melicor, as an indorser, and then personally indorsed and presented the check to the Philippine
National Bank where the amount of the check was placed to his (Maasin's) credit. On the next day, the Philippine National Bank
indorsed the cheek to the Hongkong and Shanghai Banking Corporation which paid it and charged the amount of the check to the
insurance company. The Court held that the Hongkong and Shanghai Banking Corporation was liable to the insurance company for the
amount of the check and that the Philippine National Bank was in turn liable to the Hongkong and Shanghai Banking Corporation. Said
the Court:
Where a check is drawn payable to the order of one person and is presented to a bank by another and purports upon
its face to have been duly indorsed by the payee of the check, it is the duty of the bank to know that the check was
duly indorsed by the original payee, and where the bank pays the amount of the check to a third person, who has
forged the signature of the payee, the loss falls upon the bank who cashed the check, and its only remedy is against
the person to whom it paid the money.
With the foregoing doctrine We are to concede that the plaintiff Bank should suffer the loss when it paid the amount of the check in
question to defendant-appellant, but it has the remedy to recover from the latter the amount it paid to her. Although the defendant-
appellant to whom the plaintiff Bank paid the check was not proven to be the author of the supposed forgery, yet as last indorser of the
check, she has warranted that she has good title to it 10 even if in fact she did not have it because the payee of the check was already
dead 11 years before the check was issued. The fact that immediately after receiving title cash proceeds of the check in question in the
amount of P1,246.08 from the plaintiff Bank, defendant-appellant immediately turned over said amount to Adelaida Dominguez (Third-
Party defendant and the Fourth-Party plaintiff) who in turn handed the amount to Justina Tinio on the same date would not exempt her
from liability because by doing so, she acted as an accommodation party in the check for which she is also liable under Section 29 of
the Negotiable Instruments Law (Act 2031), thus: .An accommodation party is one who has signed the instrument as maker, drawer,
acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is
liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew him to be only an
accommodation party.
IN VIEW OF THE FOREGOING, the judgment appealed from is hereby affirmed in toto with costs against defendant-appellant.
SO ORDERED.

115 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 107382/G.R. No. 107612 January 31, 1996
ASSOCIATED BANK, petitioner,
vs.
HON. COURT OF APPEALS, PROVINCE OF TARLAC and PHILIPPINE NATIONAL BANK, respondents.
xxxxxxxxxxxxxxxxxxxxx
G.R. No. 107612 January 31, 1996
PHILIPPINE NATIONAL BANK, petitioner,
vs.
HONORABLE COURT OF APPEALS, PROVINCE OF TARLAC, and ASSOCIATED BANK, respondents.
DECISION
ROMERO, J.:
Where thirty checks bearing forged endorsements are paid, who bears the loss, the drawer, the drawee bank or the collecting bank?
This is the main issue in these consolidated petitions for review assailing the decision of the Court of Appeals in "Province of Tarlac v.
Philippine National Bank v. Associated Bank v. Fausto Pangilinan, et. al." (CA-G.R. No. CV No. 17962). 1
The facts of the case are as follows:
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. 2 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.
In January 1981, the books of account of the Provincial Treasurer were post-audited by the Provincial Auditor. 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. 3 Pangilinan sought to encash the first check 4 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, 5 as well as for twenty-eight other checks of various amounts and
on various dates. The last check negotiated by Pangilinan was for f8,000.00 and dated February 10, 1981. 6 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. 7 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. 8
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. 9
In turn, the PNB manager demanded reimbursement from the Associated Bank on May 15, 1981. 10
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. 11
After trial on the merits, the lower court rendered its decision on March 21, 1988, disposing as follows:
WHEREFORE, in view of the foregoing, judgment is hereby rendered:
1. On the basic complaint, in favor of plaintiff Province of Tarlac and against defendant Philippine National Bank (PNB),
ordering the latter to pay to the former, the sum of Two Hundred Three Thousand Three Hundred (P203,300.00) Pesos with
legal interest thereon from March 20, 1981 until fully paid;
116 Negotiable Instruments – Form and Interpretation (Sec 1-23)
2. On the third-party complaint, in favor of defendant/third-party plaintiff Philippine National Bank (PNB) and against third-party
defendant/fourth-party plaintiff Associated Bank ordering the latter to reimburse to the former the amount of Two Hundred
Three Thousand Three Hundred (P203,300.00) Pesos with legal interests thereon from March 20, 1981 until fully paid;.
3. On the fourth-party complaint, the same is hereby ordered dismissed for lack of cause of action as against fourth-party
defendant Adena Canlas and lack of jurisdiction over the person of fourth-party defendant Fausto Pangilinan as against the
latter.
4. On the counterclaims on the complaint, third-party complaint and fourth-party complaint, the same are hereby ordered
dismissed for lack of merit.
SO ORDERED. 12
PNB and Associated Bank appealed to the Court of Appeals. 13
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.
PNB assigned two errors. First, the bank contends that respondent court erred in exempting the Province of Tarlac from liability when,
in fact, the latter was negligent because it delivered and released the questioned checks to Fausto Pangilinan who was then already
retired as the hospital's cashier and administrative officer. PNB also maintains its innocence and alleges that as between two innocent
persons, the one whose act was the cause of the loss, in this case the Province of Tarlac, bears the loss.
Next, PNB asserts that it was error for the court to order it to pay the province and then seek reimbursement from Associated Bank.
According to petitioner bank, respondent appellate Court should have directed Associated Bank to pay the adjudged liability directly to
the Province of Tarlac to avoid circuity. 14
Associated Bank, on the other hand, argues that the order of liability should be totally reversed, with the drawee bank (PNB) solely and
ultimately bearing the loss.
Respondent court allegedly erred in applying Section 23 of the Philippine Clearing House Rules instead of Central Bank Circular No.
580, which, being an administrative regulation issued pursuant to law, has the force and effect of law. 15 The PCHC Rules are merely
contractual stipulations among and between member-banks. As such, they cannot prevail over the aforesaid CB Circular.
It likewise contends that PNB, the drawee bank, is estopped from asserting the defense of guarantee of prior indorsements against
Associated Bank, the collecting bank. In stamping the guarantee (for all prior indorsements), it merely followed a mandatory
requirement for clearing and had no choice but to place the stamp of guarantee; otherwise, there would be no clearing. The bank will be
in a "no-win" situation and will always bear the loss as against the drawee bank. 16
Associated Bank also claims that since PNB already cleared and paid the value of the forged checks in question, it is now estopped
from asserting the defense that Associated Bank guaranteed prior indorsements. The drawee bank allegedly has the primary duty to
verify the genuineness of payee's indorsement before paying the check. 17
While both banks are innocent of the forgery, Associated Bank claims that PNB was at fault and should solely bear the loss because it
cleared and paid the forged checks.
xxx xxx xxx
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. 18 Section 23 does not avoid the instrument but only the forged signature. 19 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. 20
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. 21
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.

117 Negotiable Instruments – Form and Interpretation (Sec 1-23)


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. 22
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." 23
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. 24 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. 25 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. 26
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. 27
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. 28 In other words, the drawee bank canseek
reimbursement or a return of the amount it paid from the presentor bank or person. 29 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. 30
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. 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." 31
The drawee bank is not similarly situated as the collecting bank because the former makes no warranty as to the genuineness. of any
indorsement. 32 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. 33
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 bank-PNB 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.

118 Negotiable Instruments – Form and Interpretation (Sec 1-23)


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 Province of Tarlac permitted Fausto Pangilinan to collect the checks when the latter, having already retired from government
service, was no longer connected with the hospital. With the exception of the first check (dated January 17, 1978), all the checks were
issued and released after Pangilinan's retirement on February 28, 1978. After nearly three years, the Treasurer's office was still
releasing the checks to the retired cashier. In addition, some of the aid allotment checks were released to Pangilinan and the others to
Elizabeth Juco, the new cashier. The fact that there were now two persons collecting the checks for the hospital is an unmistakable sign
of an irregularity which should have alerted employees in the Treasurer's office of the fraud being committed. There is also evidence
indicating that the provincial employees were aware of Pangilinan's retirement and consequent dissociation from the hospital. Jose
Meru, the Provincial Treasurer, testified:.
ATTY. MORGA:
Q Now, is it true that for a given month there were two releases of checks, one went to Mr. Pangilinan and one went to Miss
Juco?
JOSE MERU:
A Yes, sir.
Q Will you please tell us how at the time (sic) when the authorized representative of Concepcion Emergency Hospital is and
was supposed to be Miss Juco?
A Well, as far as my investigation show (sic) the assistant cashier told me that Pangilinan represented himself as also
authorized to help in the release of these checks and we were apparently misled because they accepted the representation of
Pangilinan that he was helping them in the release of the checks and besides according to them they were, Pangilinan, like the
rest, was able to present an official receipt to acknowledge these receipts and according to them since this is a government
check and believed that it will eventually go to the hospital following the standard procedure of negotiating government checks,
they released the checks to Pangilinan aside from Miss Juco.34
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.
In the case of Associated Bank v. CA, 35 six crossed checks with forged indorsements were deposited in the forger's account with the
collecting bank and were later paid by four different drawee banks. The Court found the collecting bank (Associated) to be negligent
and held:
The Bank should have first verified his right to endorse the crossed checks, of which he was not the payee, and to deposit the
proceeds of the checks to his own account. The Bank was by reason of the nature of the checks put upon notice that they
were issued for deposit only to the private respondent's account. . . .
The situation in the case at bench is analogous to the above case, for it was not the payee who deposited the checks with the collecting
bank. Here, the checks were all payable to Concepcion Emergency Hospital but it was Fausto Pangilinan who deposited the checks in
his personal savings account.
Although Associated Bank claims that the guarantee stamped on the checks (All prior and/or lack of endorsements guaranteed) is
merely a requirement forced upon it by clearing house rules, it cannot but remain liable. The stamp guaranteeing prior indorsements is
not an empty rubric which a bank must fulfill for the sake of convenience. A bank is not required to accept all the checks negotiated to it.
It is within the bank's discretion to receive a check for no banking institution would consciously or deliberately accept a check bearing a
forged indorsement. When a check is deposited with the collecting bank, it takes a risk on its depositor. It is only logical that this bank
be held accountable for checks deposited by its customers.
A delay in informing the collecting bank (Associated Bank) of the forgery, which deprives it of the opportunity to go after the forger,
signifies negligence on the part of the drawee bank (PNB) and will preclude it from claiming reimbursement.
It is here that Associated Bank's assignment of error concerning C.B. Circular No. 580 and Section 23 of the Philippine Clearing House
Corporation Rules comes to fore. Under Section 4(c) of CB Circular No. 580, items bearing a forged endorsement shall be returned
within twenty-Sour (24) hours after discovery of the forgery but in no event beyond the period fixed or provided by law for filing of a legal
action by the returning bank. Section 23 of the PCHC Rules deleted the requirement that items bearing a forged endorsement should
be returned within twenty-four hours. Associated Bank now argues that the aforementioned Central Bank Circular is applicable. Since
PNB did not return the questioned checks within twenty-four hours, but several days later, Associated Bank alleges that PNB should be
considered negligent and not entitled to reimbursement of the amount it paid on the checks.
The Court deems it unnecessary to discuss Associated Bank's assertions that CB Circular No. 580 is an administrative regulation
issued pursuant to law and as such, must prevail over the PCHC rule. The Central Bank circular was in force for all banks until June
1980 when the Philippine Clearing House Corporation (PCHC) was set up and commenced operations. Banks in Metro Manila were
covered by the PCHC while banks located elsewhere still had to go through Central Bank Clearing. In any event, the twenty-four-hour
return rule was adopted by the PCHC until it was changed in 1982. The contending banks herein, which are both branches in Tarlac

119 Negotiable Instruments – Form and Interpretation (Sec 1-23)


province, are therefore not covered by PCHC Rules but by CB Circular No. 580. Clearly then, the CB circular was applicable when the
forgery of the checks was discovered in 1981.
The rule mandates that the checks be returned within twenty-four hours after discovery of the forgery but in no event beyond the period
fixed by law for filing a legal action. The rationale of the rule is to give the collecting bank (which indorsed the check) adequate
opportunity to proceed against the forger. If prompt notice is not given, the collecting bank maybe prejudiced and lose the opportunity to
go after its depositor.
The Court finds that even if PNB did not return the questioned checks to Associated Bank within twenty-four hours, as mandated by the
rule, PNB did not commit negligent delay. Under the circumstances, PNB gave prompt notice to Associated Bank and the latter bank
was not prejudiced in going after Fausto Pangilinan. After the Province of Tarlac informed PNB of the forgeries, PNB necessarily had to
inspect the checks and conduct its own investigation. Thereafter, it requested the Provincial Treasurer's office on March 31, 1981 to
return the checks for verification. The Province of Tarlac returned the checks only on April 22, 1981. Two days later, Associated Bank
received the checks from PNB. 36
Associated Bank was also furnished a copy of the Province's letter of demand to PNB dated March 20, 1981, thus giving it notice of the
forgeries. At this time, however, Pangilinan's account with Associated had only P24.63 in it. 37 Had Associated Bank decided to debit
Pangilinan's account, it could not have recovered the amounts paid on the questioned checks. In addition, while Associated Bank filed a
fourth-party complaint against Fausto Pangilinan, it did not present evidence against Pangilinan and even presented him as its rebuttal
witness. 38 Hence, Associated Bank was not prejudiced by PNB's failure to comply with the twenty-four-hour return rule.
Next, Associated Bank contends that PNB is estopped from requiring reimbursement because the latter paid and cleared the checks.
The Court finds this contention unmeritorious. Even if PNB cleared and paid the checks, it can still recover from Associated Bank. This
is true even if the payee's Chief Officer who was supposed to have indorsed the checks is also a customer of the drawee bank. 39
PNB's duty was to verify the genuineness of the drawer's signature and not the genuineness of payee's indorsement. Associated Bank,
as the collecting bank, is the entity with the duty to verify the genuineness of the payee's indorsement.
PNB also avers that respondent court erred in adjudging circuitous liability by directing PNB to return to the Province of Tarlac the
amount of the checks and then directing Associated Bank to reimburse PNB. The Court finds nothing wrong with the mode of the
award. The drawer, Province of Tarlac, is a clientor customer of the PNB, not of Associated Bank. There is no privity of contract
between the drawer and the collecting bank.
The trial court made PNB and Associated Bank liable with legal interest from March 20, 1981, the date of extrajudicial demand made by
the Province of Tarlac on PNB. The payments to be made in this case stem from the deposits of the Province of Tarlac in its current
account with the PNB. Bank deposits are considered under the law as loans. 40 Central Bank Circular No. 416 prescribes a twelve
percent (12%) interest per annum for loans, forebearance of money, goods or credits in the absence of express stipulation. Normally,
current accounts are likewise interest-bearing, by express contract, thus excluding them from the coverage of CB Circular No. 416. In
this case, however, the actual interest rate, if any, for the current account opened by the Province of Tarlac with PNB was not given in
evidence. Hence, the Court deems it wise to affirm the trial court's use of the legal interest rate, or six percent (6%) per annum. The
interest rate shall be computed from the date of default, or the date of judicial or extrajudicial demand. 41 The trial court did not err in
granting legal interest from March 20, 1981, the date of extrajudicial demand.
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.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 89802 May 7, 1992


ASSOCIATED BANK and CONRADO CRUZ, petitioners,
vs.
HON. COURT OF APPEALS, and MERLE V. REYES, doing business under the name and style "Melissa's RTW," respondents.
Soluta, Leonidas, Marifosque, Javier, Liboon & aguila Law Offices for petitioners.
Roberto B. Lugue for private respondent.
120 Negotiable Instruments – Form and Interpretation (Sec 1-23)
CRUZ, J.:
The sole issue raised in this case is whether or not the private respondent has a cause of action against the petitioners for their
encashment and payment to another person of certain crossed checks issued in her favor.
The private respondent is engaged in the business of ready-to-wear garments under the firm name "Melissa's RTW." She deals with,
among other customers, Robinson's Department Store, Payless Department Store, Rempson Department Store, and the Corona
Bazaar.
These companies issued in payment of their respective accounts crossed checks payable to Melissa's RTW in the amounts and on the
dates indicated below:
PAYOR BANK AMOUNT DATE
Payless Solid Bank P3,960.00 January 19, 1982
Robinson's FEBTC 4,140.00 December 18, 1981
Robinson's FEBTC 1,650.00 December 24, 1981
Robinson's FEBTC 1,980.00 January 12, 1982
Rempson TRB 1,575.00 January 9, 1982
Corona RCBC 2,500.00 December 22, 1981
When she went to these companies to collect on what she thought were still unpaid accounts, she was informed of the issuance of the
above-listed crossed checks. Further inquiry revealed that the said checks had been deposited with the Associated Bank (hereinafter,
"the Bank") and subsequently paid by it to one Rafael Sayson, one of its "trusted depositors," in the words of its branch manager and
co-petitioner, Conrado Cruz, Sayson had not been authorized by the private respondent to deposit and encash the said checks.
The private respondent sued the petitioners in the Regional Trial Court of Quezon City for recovery of the total value of the checks plus
damages. After trial, judgment was rendered requiring them to pay the private respondent the total value of the subject checks in the
amount of P15,805.00 plus 12% interest, P50,000.00 actual damages, P25,000.00 exemplary damages, P5,000.00 attorney's fees, and
the costs of the suit. 1
The petitioners appealed to the respondent court, reiterating their argument that the private respondent had no cause of action against
them and should have proceeded instead against the companies that issued the checks. In disposing of this contention, the Court of
Appeals 2 said:
The cause of action of the appellee in the case at bar arose from the illegal, anomalous and irregular acts of the
appellants in violating common banking practices to the damage and prejudice of the appellees, in allowing to be
deposited and encashed as well as paying to improper parties without the knowledge, consent, authority or
endorsement of the appellee which totalled P15,805.00, the six (6) checks in dispute which were "crossed checks" or
"for payee's account only," the appellee being the payee.
The three (3) elements of a cause of action are present in the case at bar, namely: (1) a right in favor of the plaintiff
by whatever means and under whatever law it arises or is created; (2) an obligation on the part of the named
defendant to respect or not to violate such right; and (3) an act or omission on the part of such defendant violative of
the right of the plaintiff or constituting a breach thereof. (Republic Planters Bank vs. Intermediate Appellate Court, 131
SCRA 631).
And such cause of action has been proved by evidence of great weight. The contents of the said checks issued by
the customers of the appellee had not been questioned. There is no dispute that the same are crossed checks or for
payee's account only, which is Melissa's RTW. The appellee had clearly shown that she had never authorized
anyone to deposit the said checks nor to encash the same; that the appellants had allowed all said checks to be
deposited, cleared and paid to one Rafael Sayson in violation of the instructions in the said crossed checks that the
same were for payee's account only; and that the appellee maintained a savings account with the Prudential Bank,
Cubao Branch, Quezon City which never cleared the said checks and the appellee had been damaged by such
encashment of the same.
We affirm.
Under accepted banking practice, crossing a check is done by writing two parallel lines diagonally on the left top portion of the checks.
The crossing is special where the name of a bank or a business institution is written between the two parallel lines, which means that
the drawee should pay only with the intervention of that company. 3 The crossing is general where the words written between the two
parallel lines are "and Co." or "for payee's account only," as in the case at bar. This means that the drawee bank should not encash the
check but merely accept it for deposit. 4
In State Investment House vs. IAC, 5 this Court declared that "the effects of crossing a check are: (1) that the check may not be
encashed but only deposited in the bank; (2) that the check may be negotiated only once –– to one who has an account with a bank;
and (3) that the act of crossing the check serves as a warning to the holder that the check has been issued for a definite purpose so
that he must inquire if he has received the check pursuant to that purpose."
The effects therefore of crossing a check relate to the mode of its presentment for payment. Under Sec. 72 of the Negotiable
Instruments Law, presentment for payment, to be sufficient, must be made by the holder or by some person authorized to receive
payment on his behalf. Who the holder or authorized person is depends on the instruction stated on the face of the check.
The six checks in the case at bar had been crossed and issued "for payee's account only." This could only signify that the drawers had
intended the same for deposit only by the person indicated, to wit, Melissa's RTW.

121 Negotiable Instruments – Form and Interpretation (Sec 1-23)


The petitioners argue that the cause of action for violation of the common instruction found on the face of the checks exclusively
belongs to the issuers thereof and not to the payee. Moreover, having acted in good faith as they merely facilitated the encashment of
the checks, they cannot be made liable to the private respondent.
The subject checks were accepted for deposit by the Bank for the account of Rafael Sayson although they were crossed checks and
the payee was not Sayson but Melissa's RTW. The Bank stamped thereon its guarantee that "all prior endorsements and/or lack of
endorsements (were) guaranteed." By such deliberate and positive act, the Bank had for all legal intents and purposes treated the said
checks as negotiable instruments and, accordingly, assumed the warranty of the endorser.
The weight of authority is to the effect that "the possession of check on a forged or unauthorized indorsement is wrongful, and when the
money is collected on the check, the bank can be held 'for moneys had and received." 6 The proceeds are held for the rightful owner of
the payment and may be recovered by him. The position of the bank taking the check on the forged or unauthorized indorsement is the
same as if it had taken the check and collected without indorsement at all. The act of the bank amounts to conversion of the check. 7
It is not disputed that the proceeds of the subject checks belonged to the private respondent. As she had not at any time authorized
Rafael Sayson to endorse or encash them, there was conversion of the funds by the Bank.
When the Bank paid the checks so endorsed notwithstanding that title had not passed to the endorser, it did so at its peril and became
liable to the payee for the value of the checks. This liability attached whether or not the Bank was aware of the unauthorized
endorsement. 8
The petitioners were negligent when they permitted the encashment of the checks by Sayson. The Bank should have first verified his
right to endorse the crossed checks, of which he was not the payee, and to deposit the proceeds of the checks to his own account. The
Bank was by reason of the nature of the checks put upon notice that they were issued for deposit only to the private respondent's
account. Its failure to inquire into Sayson's authority was a breach of a duty it owed to the private respondent.
As the Court stressed in Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corp., 9 "the law imposes a duty of diligence
on the collecting bank to scrutinize checks deposited with it, for the purpose of determining their genuineness and regularity. The
collecting bank, being primarily engaged in banking, holds itself out to the public as the expert on this field, and the law thus holds it to a
high standard of conduct."
The petitioners insist that the private respondent has no cause of action against them because they have no privity of contract with her.
They also argue that it was Eddie Reyes, the private respondent's own husband, who endorsed the checks.
Assuming that Eddie Reyes did endorse the crossed checks, we hold that the Bank would still be liable to the private respondent
because he was not authorized to make the endorsements. And even if the endorsements were forged, as alleged, the Bank would still
be liable to the private respondent for not verifying the endorser's authority. There is no substantial difference between an actual forging
of a name to a check as an endorsement by a person not authorized to make the signature and the affixing of a name to a check as an
endorsement by a person not authorized to endorse it. 10
The Bank does not deny collecting the money on the endorsement. It was its responsibility to inquire as to the authority of Rafael
Sayson to deposit crossed checks payable to Melissa's RTW upon a prior endorsement by Eddie Reyes. The failure of the Bank to
make this inquiry was a breach of duty that made it liable to the private respondent for the amount of the checks.
There being no evidence that the crossed checks were actually received by the private respondent, she would have a right of action
against the drawer companies, which in turn could go against their respective drawee banks, which in turn could sue the herein
petitioner as collecting bank. In a similar situation, it was held that, to simplify proceedings, the payee of the illegally encashed checks
should be allowed to recover directly from the bank responsible for such encashment regardless of whether or not the checks were
actually delivered to the payee. 11 We approve such direct action in the case at bar.
It is worth repeating that before presenting the checks for clearing and for payment, the Bank had stamped on the back thereof the
words: "All prior endorsements and/or lack of endorsements guaranteed," and thus made the assurance that it had ascertained the
genuineness of all prior endorsements.
We find that the respondent court committed no reversible error in holding that the private respondent had a valid cause of action
against the petitioners and that the latter are indeed liable to her for their unauthorized encashment of the subject checks. We also
agree with the reduction of the award of the exemplary damages for lack of sufficient evidence to support them.
WHEREFORE, the petition is DENIED, with costs against the petitioner. It is so ordered.

122 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Republic of the Philippines
SUPREME COURT
Manila
EN BANC
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.
L. D. Lockwood for appellant.
Camus and Delgado for appellee.

RECTO, J.:
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, with office as principal place of business at the Masonic Temple Bldg., Escolta, Manila, P. I.; 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, with branch office and place of business in the National City Bank Bldg.,
City of Manila, P. I., 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, with office and principal place of business at 408 Rizal Avenue,
City of Manila, P. I., engaged in the purchase and sale of automobile spare parts and accessories.
2. That on April 7 and 9, 1933, an unknown person or persons negotiated with defendant Motor Service Company, Inc., the
checks marked as Exhibits A and A-1, respectively, which are made parts of the stipulation, in payment for automobile tires
purchased from said defendant's stores, purporting to have been 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, for
P144.50 and P215.75; 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, or P144.50 and P215.75.
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.
7. Exhibits B, C, D, E, F, and G, which were introduced at the trial in the municipal court of Manila and forming part of the
record of the present case, are admitted by the parties as genuine and are made part of this stipulation as well as Exhibit H
hereto attached and made a part hereof.
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.
Before us is the preliminary question of whether the original appeal taken by the plaintiff from the decision of the municipal court
of Manila where this case originated, became perfected because of plaintiff's failure to attach to the record within 15 days from receipt
of notice of said decision, the certificate of appeal bond required by section 76 of the Code of Civil Procedure. It is not disputed that
both the appeal docket fee and the appeal cash bond were paid and deposited within the prescribed time. The issue is whether the
mere failure to file the official receipt showing that such deposit was made within the said period is a sufficient ground to dismiss
plaintiff's appeal. This question was settled by our decision in the case of Blanco vs. Bernabe and lawyers Cooperative Publishing Co.
(page 124, ante), and no further consideration. No error was committed in allowing said appeal.
We now pass on to consider and determine the main question presented by this appeal, namely, whether the appellee has the
right to recover from the appellant, under the circumstances of this case, the value of the checks on which the signatures of the drawer
were forged. The appellant maintains that the question should be answered in the negative and in support of its contention appellant
advanced various reasons presently to be examined carefully.
I. It is contended, first of all, that the payment of the checks in question made by the drawee bank constitutes an "acceptance",
and, consequently, the case should be governed by the provisions of section 62 of the Negotiable Instruments Law, which says:
123 Negotiable Instruments – Form and Interpretation (Sec 1-23)
SEC. 62. Liability of acceptor. —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.
This contention is without merit. A check is a bill of exchange payable on demand and only the rules governing bills of exchange
payable on demand are applicable to it, according to section 185 of the Negotiable Instruments Law. In view of the fact that acceptance
is a step unnecessary, in so far as bills of exchange payable on demand are concerned (sec. 143), it follows that the provisions relative
to "acceptance" are without application to checks. Acceptance implies, in effect, subsequent negotiation of the instrument, which is not
true in case of the payment of a check because from the moment a check is paid it is withdrawn from circulation. The warranty
established by section 62, is in favor of holders of the instrument after its acceptance. When the drawee bank 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 warranty provided
in section 62 against the drawee. Moreover, according to section 191, "acceptance" means "an acceptance completed by delivery or
notification" and this concept is entirely incompatible with payment, because when payment is made the check is retained by the bank,
and there is no such thing as delivery or notification to the party receiving the payment. Checks are not to be accepted, but presented
at once for payment. (1 Bouvier's Law Dictionary, 476.) There can be no such thing as "acceptance" in the ordinary sense of the term.
A check being payable immediately and on demand, the bank can fulfill its duty to the depositor only by paying the amount demanded.
The holder has no right to demand from the bank anything but payment of the check, and the bank has no right, as against the drawer,
to do anything but pay it. (5 R. C. L., p. 516, par. 38.) A check is not an instrument which in the ordinary course of business calls for
acceptance. The holder can never claim acceptance as his legal right. He can present for payment, and only for payment. (1 Morse on
Banks and Banking, 6th ed., pp. 898, 899.)
There is, however, nothing in the law or in, business practice against the presentation of checks for acceptance, before they are
paid, in which case we have a "certification" equivalent to "acceptance" according to section 187, which provides that "where a check is
certified by the bank on which it is drawn, the certification is equivalent to an acceptance", and it is then that the warranty under section
62 exists. This certification or acceptance consists in the signification by the drawee of his assent to the order of the drawer, which must
not express that the drawee will perform his promise by any other means than the payment of money. (Sec. 132.) When the holder of a
check procures it to be accepted or certified, the drawer and all indorsers are discharged from liability thereon (sec. 188), and then the
check operates as an assignment of a part of the funds to the credit of the drawer with the bank. (Sec. 189.) There is nothing in the
nature of the check which intrinsically precludes its acceptance, in like manner and with like effect as a bill of exchange or draft may be
accepted. The bank may accept if it chooses; and it is frequently induced by convenience, by the exigencies of business, or by the
desire to oblige customers, voluntarily to incur the obligation. The act by which the bank places itself under obligation to pay to the
holder the sum called for by a check must be the expressed promise or undertaking of the bank signifying its intent to assume the
obligation, or some act from which the law will imperatively imply such valid promise or undertaking. The most ordinary form which such
an act assumes is the acceptance by the bank of the check, or, as it is perhaps more often called, the certifying of the check. (1 Morse
on Banks and Banking, pp. 898, 899; 5 R. C. L., p. 520.)
No doubt a bank may by an unequivocal promise in writing make itself liable in any event to pay the check upon demand, but this
is not an "acceptance" of the check in the true sense of that term. Although a check does not call for acceptance, and the holder can
present it only for payment, the certification of checks is a means in constant and extensive use in the business of banking, and its
effects and consequences are regulated by the law merchant. Checks drawn upon banks or bankers, thus marked and certified, enter
largely into the commercial and financial transactions of the country; they pass from hand to hand, in the payment of debts, the
purchase of property, and in the transfer of balances from one house and one bank to another. In the great commercial centers, they
make up no inconsiderable portion of the circulation, and thus perform a useful, valuable, and an almost indispensable office. The
purpose of procuring a check to be certified is to impart strength and credit to the paper by obtaining an acknowledgment from the
certifying bank that the drawer has funds therein sufficient to cover the check and securing the engagement of the bank that the check
will be paid upon presentation. A certified check has a distinctive character as a species of commercial paper, and performs important
functions in banking and commercial business. When a check is certified, it ceases to possess the character, or to perform the
functions, of a check, and represents so much money on deposit, payable to the holder on demand. The check becomes a basis of
credit — an easy mode of passing money from hand to hand, and answers the purposes of money. (5 R. C. L., pp. 516,
517.)lâwphi1.nêt
All the authorities, both English and American, hold that a check may be accepted, though acceptance is not usual. By the law
merchant, the certificate of the bank that a check is good is equivalent to acceptance. It implies that the check is drawn upon sufficient
funds in the hands of the drawee, that they have been set apart for its satisfaction, and that they shall be so applied whenever the
check is presented for payment. It is an undertaking that the check is good then, and shall continue good, and this agreement is as
binding on the bank as its notes of circulation, a certificate of deposit payable to the order of the depositor, or any other obligation it can
assume. The object of certifying a check, as regards both parties is to enable the holder to use it as money. The transferee takes it with
the same readiness and sense of security that he would take the notes of the bank. It is available also to him for all the purposes of
money. Thus it continues to perform its important functions until in the course of business it goes back to the bank for redemption, and
is extinguished by payment. It cannot be doubted that the certifying bank intended these consequences, and it is liable accordingly. To
hold otherwise would render these important securities only a snare and a delusion. A bank incurs no greater risk in certifying a check
than in giving a certificate of deposit. In well-regulated banks the practice is at once to charge the check to the account of the drawer, to
credit it in a certified check account, and, when the check is paid, to debit that account with the amount. Nothing can be simpler or safer
than this process. (Merchants' Bank vs. States Bank, 10 Wall., 604, at p. 647; 19 Law. ed., 1008, 1019.)
Ordinarily the acceptance or certification of a check is performed and evidenced by some word or mark, usually the words
"good", "certified" or "accepted" written upon the check by the banker or bank officer. (1 Morse, Banks and Banking, 915; 1 Bouvier's
Law Dictionary, 476.) The bank virtually says, that check is good; we have the money of the drawer here ready to pay it. We will pay it

124 Negotiable Instruments – Form and Interpretation (Sec 1-23)


now if you will receive it. The holder says, No, I will not take the money; you may certify the check and retain the money for me until this
check is presented. The law will not permit a check, when due, to be thus presented, and the money to be left with the bank for the
accommodation of the holder without discharging the drawer. The money being due and the check presented, it is his own fault if the
holder declines to receive the pay, and for his own convenience has the money appropriated to that check subject to its future
presentment at any time within the statute of limitations. (1 Morse on Banks and Banking, p. 920.)
The theory of the appellant and of the decisions on which it relies to support its view is vitiated by the fact that they take the word
"acceptance" in its ordinary meaning and not in the technical sense in which it is used in the Negotiable Instruments Law. Appellant
says that when payment is made, such payment amounts to an acceptance, because he who pays accepts. This is true in common
parlance but "acceptance" in legal contemplation. The word "acceptance" has a peculiar meaning in the Negotiable Instruments Law,
and, as has been above stated, in the instant case there was payment but no acceptatance, or what is equivalent to acceptance,
certification.
With few exceptions, the weight of authority is to the effect that "payment" neither includes nor implies "acceptance".
In National Bank vs. First National Bank ([19101, 141 Mo. App., 719; 125 S. W., 513), the court asks, if a mere promise to pay a
check is binding on a bank, why should not the absolute payment of the check have the same effect? In response, it is submitted that
the two things, — that is acceptance and payment, — are entirely different. If the drawee accepts the paper after seeing it, and then
permits it to go into circulation as genuine, on all the principles of estoppel, he ought to be prevented from setting up forgery to defeat
liability to one who has taken the paper on the faith of the acceptance, or certification. On the other hand, mere payment of the paper at
the termination of its course does not act as an estoppel. The attempt to state a general rule covering both acceptance and payment is
responsible for a large part of the conflicting arguments which have been advanced by the courts with respect to the rule. (Annotation at
12 A. L. R., 1090 1921].)
In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079, 1085), the court said:
We are of the opinion that "payment is not acceptance". Acceptance, as defined by section 131, cannot be confounded
with payment. . . .
Acceptance, certification, or payment of a check, by the express language of the statute, discharges the liability only of
the persons named in the statute, to wit, the drawer and all indorsers, and the contract of indorsement by the negotiator if the
check is discharged by acceptance, certification, or payment. But clearly the statute does not say that the contract of warranty
of the negotiator, created by section 65, is discharged by these acts.
The rule supported by the majority of the cases (14 A. L. R. 764), that payment of a check on a forged or unauthorized
indorsement of the payee's name, and charging the same to the drawer's account, do not amount to an acceptance so as to make the
bank liable to the payee, is supported by all of the recent cases in which the question is considered. (Cases cited, Annotation at 69 A. L.
R., 1076, 1077 [1930].)
Merely stamping a check "Paid" upon its payment on a forged or unauthorized indorsement is not an acceptance thereof so as to
render the drawee bank liable to the true payee. (Anderson vs. Tacoma National Bank [1928], 146 Wash., 520; 264 Pac., 8; Annotation
at 69 A. L. R., 1077, [1930].)
In State Bank of Chicago vs. Mid-City Trust & Savings Bank (12 A. L. R., 989, 991, 992), the court said:
The defendant in error contends that the payment of the check shows acceptance by the bank, urging that there can be no more
definite act by the bank upon which a check has been drawn, showing acceptance than the payment of the check. Section 184 of the
Negotiable Instruments Act (sec. 202) provides that the provisions of the act applicable to bills of exchange apply to a check, and
section 131 (sec. 149), that the acceptance of a bill must be in writing signed by the drawee. Payment is the final act which extinguishes
a bill. Acceptance is a promise to pay in the future and continues the life of the bill. It was held in the First National Bank vs. Whitman
(94 U. S., 343; 24 L. ed., 229), that payment of a check upon a forged indorsement did not operate as an acceptance in favor of the
true owner. The contrary was held in Pickle vs. Muse (Fickle vs. People's Nat. Bank, 88 Tenn., 380; 7 L.R.A., 93; 17 Am. St. Rep., 900;
12 S. W., 919), and Seventh National Bank vs. Cook (73 Pa., 483; 13 Am. Rep., 751) at a time when the Negotiable Instruments Act
was not in force in those states. The opinion of the Supreme Court of the United States seems more logical, and the provision of the
Negotiable Instruments Act now require an acceptance to be in writing. Under this statute the payment of a check on a forged
indorsement, stamping it "paid," and charging it to the account of the drawer, do not constitute an acceptance of the check or create a
liability of the bank to the true holder or the payee. (Elyria Sav. & Bkg. Co. vs. Walker Bin Co., 92 Ohio St., 406; L. R. A., 1916D, 433;
111 N. E., 147; Ann. Cas. 1917D, 1055; Baltimore & O. R. Co. vs. First National Bank, 102 Va., 753; 47 S. E., 837; State Bank of
Chicago vs. Mid-City Trust & Savings Bank 12 A. L. R., pp. 989, 991, 992.)
Before drawee's acceptance of check there is no privity of contract between drawee and payee. Drawee's payment of check on
unauthorized indorsement does not constitute "acceptance" of check. (Sinclair Refining Co. vs. Moultrie Banking Co., 165 S. E., 860
[1932].)
The great weight of authority is to the effect that the payment of a check upon a forged or unauthorized indorsement and the
stamping of it "paid" does not constitute an acceptance. (Dakota Radio Apparatus Co. vs. First Nat. Bank of Rapid City, 244 N. W., 351,
352 [1932].)
Payment of the check, cashing it on presentment is not acceptance. (South Boston Trust Co. vs. Levin, 249 Mass., 45, 48, 49;
143 N. E., 816; Blocker, Shepard Co. vs. Granite Trust Company, 187 Me., 53, 54 [1933].)
In Rauch vs. Bankers National Bank of Chicago (143 Ill. App., 625, 636, 637 [1908]), the language of the decision was as follows:
. . . The plaintiffs say that this acceptance was made by the very unauthorized payments of which they complain. This
suggestion does not seem forceful to us. It is the contention which was made before the Supreme Court of the United States in

125 Negotiable Instruments – Form and Interpretation (Sec 1-23)


First National Bank vs. Whitman (94 U. S., 343), and repudiated by that court. The language of the opinion in that case is so
apt in the present case that we quote it:
"It is further contended that such an acceptance of a check as creates a privity between the payee and the bank is
established by the payment of the amount of this check in the manner described. This argument is based upon the erroneous
assumption that the bank has paid this check. If this were true, it would have discharged all of its duty, and there would be an
end to the claim against it. The bank supposed that it had paid the check, but this was an error. The money it paid was upon a
pretended and not a real indorsement of the name of the payee. . . . We cannot recognize the argument that payment of the
amount of the check or sight draft under such circumstances amounts to an acceptance creating a privity of contract with the
real owner.
"It is difficult to construe a payment as an acceptance under any circumstances. . . . A banker or individual may be ready
to make actual payment of a check or draft when presented, while unwilling to make a promise to pay at a future time. Many,
on the other hand, are more ready to promise to pay than to meet the promise when required. The difference between the
transactions is essential and inherent."
And in Wharf vs. Seattle National Bank (24 Pac. [2d]), 120, 123 [1933]):
It is the rule that payment of a check on unauthorized or forged indorsement does not operate as an acceptance of the
check so as to authorize an action by the real owner to recover its amount from the drawee bank. (Michie on Banks and
Banking, vol. 5, sec. 278, p. 521.) A full list of the authorities supporting the rule will be found in a footnote to the foregoing
citation. (See also, Federal Land Bank vs. Collins, 156 Miss., 893; 127 So., 570; 69 A. L. R., 1068.)
In a very recent case, Federal Land Bank vs. Collins (69 A. L. R., 1068, 1072-1074), this question was discussed at considerable
length. The court said:
In the light of the first of these statutes, counsel for appellant is forced to stand upon the narrow ledge that the payment of the
check by the two banks will constitute an acceptance. The drawee bank simply marked it "paid" and did not write anything else except
the date. The bank first paying the check, the Commercial National Bank and Trust Company, simply wrote its name as indorser and
passed the check on to the drawee bank; does this constitute an acceptance? The precise question has not been presented to this
court for decision. Without reference to authorities in other jurisdictions it would appear that the drawee bank had never written its name
across the paper and therefore, under the strict terms of the statute, could not be bound as an acceptor; in the second place, it does not
appear to us to be illogical and unsound to say that the payment of a check by the drawee, and the stamping of it "paid", is equivalent to
the same thing as the acceptance of a check; however, there is a variety of opinions in the various jurisdictions on this question.
Counsel correctly states that the theory upon which the numerous courts hold that the payment of a check creates privity between the
holder of the check and the drawee bank is tantamount to a pro tanto assignment of that part of the funds. It is most easily understood
how the payment of the check, when not authorized to be done by the drawee bank, might under such circumstances create liability on
the part of the drawee to the drawer. Counsel cites the case of Pickle vs. Muse (88 Tenn, 380; 12 S. W., 919; 7 L. R. A., 93; 17 Am. St.
Rep., 900), wherein Judge Lurton held that the acceptance of a check was necessary in order to give the holder thereof a right of action
thereon against the bank, and further held in a case similar to this, so far as this question is concerned, that the acceptance of a check
so as to give a right of action to the payee is inferred from the retention of the check by the bank and its subsequent charge of the
amount to the drawer, although it was presented by, and payment made, an unauthorized person. Judge Lurton cited the case of
National Bank of the Republic vs. Millard (10 Wall., 152; 19 L. ed., 897), wherein the Supreme Court of the United States, not having
such a case before it, threw out the suggestion that, if it was shown that a bank had charged the check on its books against the drawer
and made settlement with the drawee that the holder could recover on account of money had and received, invoking the rule of justice
and fairness, it might be said there was an implied promise to the holder to pay it on demand. (See National Bank of the Republic vs.
Millard, 10 Wall. [77 U. S.], 152; 19 L. ed., 899.) The Tennessee court then argued that it would be inequitable and unconscionable for
the owner and payee of the check to be limited to an action against an insolvent drawer and might thereby lose the debt. They
recognized the legal principle that there is no privity between the drawer bank and the holder, or payee, of the check, and proceeded to
hold that no particular kind of writing was necessary to constitute an acceptance and that it became a question of fact, and the bank
became liable when it stamped it "paid" and charged it to the account of the drawer, and cites, in support of its opinion, Seventh
National Bank vs. Cook (73 Pa., 483; 13 Am. Rep., 751); Saylor vs. Bushong (100 Pa., 23; 45 Am. Rep., 353); and Dodge vs. Bank (20
Ohio St., 234; 5 Am. Rep., 648).
This decision was in 1890, prior to the enactment of the Negotiable Instruments Law by the State of Tennessee.
However, in this case Judge Snodgrass points out that the Millard case, supra, was dicta. The Dodge case, from the Ohio
court, held exactly as the Tennessee court, but subsequently in the case of Elyria Bank vs. Walker Bin Co. (92 Ohio St., 406;
111 N. E., 147; L. R. A. 1916D, 433; Ann. Cas. 1917D, 1055), the court held to the contrary, called attention to the fact that the
Dodge case was no longer the law, and proceeded to announce that, whatever might have been the law before the passage of
the Negotiable Instrument Act in that state, it was no longer the law; that the rule announced in the Dodge case had been
"discarded." The court, in the latter case, expressed its doubts that the courts of Tennessee and Pennsylvania would adhere to
the rule announced in the Pickle case, quoted supra, in the face of the Negotiable Instrument Law. Subsequent to the Millard
case, the Supreme Court of the United States, in the case of First National Bank of Washington vs. Whitman (94 U. S., 343,
347; 24 L. ed., 229), where the bank, without any knowledge that the indorsement of the payee was unauthorized, paid the
check, and it was contended that by the payment the privity of contract existing between the drawer and drawee was imparted
to the payee, said:
"It is further contended that such an acceptance of the check as creates a privity between the payee and the bank is
established by the payment of the amount of this check in the manner described. This argument is based upon the erroneous
assumption that the bank has paid this check. If this were true, it would have discharged all of its duty, and there would be an
end of the claim against it. The bank supposed that it had paid the check; but this was an error. The money it paid was upon a
pretended and not a real indorsement of the name of the payee. The real indorsement of the payee was as necessary to a
valid payment as the real signature of the drawer; and in law the check remains unpaid. Its pretended payment did not
126 Negotiable Instruments – Form and Interpretation (Sec 1-23)
diminish the funds of the drawer in the bank, or put money in the pocket of the person entitled to the payment. The state of the
account was the same after the pretended payment as it was before.
"We cannot recognize the argument that a payment of the amount of a check or sight draft under such circumstances
amounts to an acceptance, creating a privity of contract with the real owner. It is difficult to construe a payment as an
acceptance under any circumstances. The two things are essentially different. One is a promise to perform an act, the other an
actual performance. A banker or an individual may be ready to make actual payment of a check or draft when presented, while
unwilling to make a promise to pay at a future time. Many, on the other hand, are more ready to promise to pay than to meet
the promise when required. The difference between the transactions is essential and inherent."
Counsel for the appellant cite other cases holding that the stamping of the check "paid" and the charging of the amount
thereof to the drawer constituted an acceptance, but we are of opinion that none of these cases cited hold that it is in
compliance with the Negotiable Instruments Act; paying the check and stamping same is not the equivalent of accepting the
check in writing signed by the drawee. The cases holding that payment as indicated above constituted acceptance were
rendered prior to the adoption of the Negotiable Instruments Act in the particular state, and these decisions are divided into
two classes: the one holding that the check delivered by the drawer to the holder and presented to the bank or drawee
constitutes an assignment pro tanto; the other holding that the payment of the check and the charging of same to the drawee
although paid to an unauthorized person creates privity of contract between the holder and the drawee bank.
We have already seen that our own court has repudiated the assignment pro tanto theory, and since the adoption of the
Negotiable Instrument Act by this state we are compelled to say that payment of a check is not equivalent to accepting a check
in writing and signing the name of the acceptor thereon. Payment of the check and the charging of same to the drawer does
not constitute an acceptance. Payment of the check is the end of the voyage; acceptance of the check is to fuel the vessel and
strengthen it for continued operation on the commercial sea. What we have said applies to the holder and not to the drawer of
the check. On this question we conclude that the general rule is that an action cannot be maintained by a payee of the check
against the bank on which is draw unless the check has been certified or accepted by the bank in compliance with the statute,
even though at the time the check is that an action cannot be maintained by a payee of the drawer of the check out of which
the check is legally payable; and that the payment of the check by the bank on which it is drawn, even though paid on the
unauthorized indorsement of the name of the holder (without notice of the defect by the bank), does not constitute a
certification thereof, neither is it an acceptance thereof; and without acceptance or certification, as provided by statute, there is
no privity of contract between the drawee bank and the payee, or holder of the check. Neither is there an assignment pro tanto
of the funds where the check is not drawn on a particular fund, or does not show on its face that it is an assignment of a
particular fund. The above rule as stated seems to have been the rule in the majority of the states even before the passage of
the uniform Negotiable Instruments Act in the several states.
The decision in the case of First National Bank vs. Bank of Cottage Grove (59 Or., 388), which appellant cites in its brief (pp. 12,
13 ) has been expressly overruled by the Supreme Court of Massachusetts in South Boston Trust Co. vs. Levin (143 N. E., 816, 817),
in the following language:
In First National Bank vs. Bank of Cottage Grove (59 Or., 388; 117 Pac., 293, 296, at page 396), it was said: "The
payment of a bill or check by the drawee amounts to more than an acceptance. The rule, holding that such a payment has all
the efficacy of an acceptance, is founded upon the principle that the greater includes the less." We are unable to agree with
this statement as there is no similarity between acceptance and payment; payment discharges the instrument, and no one else
is expected to advance anything on the faith of it; acceptance, contemplates further circulation, induced by the fact of
acceptance. The rule that the acceptor made certain admissions which will inure to the benefit of subsequent holders, has no
applicability to payment of the instrument where subsequent holders can never exist.
II. The old doctrine that a bank was bound to know its correspondent's signature and that a drawee could not recover money paid
upon a forgery of the drawer's name, because it was said, the drawee was negligent not to know the forgery and it must bear the
consequence of its negligence, is fast fading into the misty past, where it belongs. It was founded in misconception of the fundamental
principles of law and common sense. (2 Morse, Banks and Banking, p. 1031.)
Some of the cases carried the rule to its furthest limit and held that under no circumstances (except, of course, where the
purchaser of the bill has participated in the fraud upon the drawee) would the drawee be allowed to recover bank money paid under a
mistake of fact upon a bill of exchange to which the name of the drawer had been forged. This doctrine has been freely criticized by the
eminent authorities, as a rule too favorable to the holder, not the most fair, nor best calculated to effectuate justice between the drawee
and the drawer. (5 R.C.L., p. 556.)
The old rule which was originally announced by Lord Mansfield in the leading case of Price vs. Neal (3 Burr., 1354), elicited the
following comment from Justice Holmes, then Chief Justice of the Supreme Court of Massachusetts, in the case of Dedham National
Bank vs. Everett National Bank (177 Mass., 392). "Probably the rule was adopted from an impression of convenience rather than for
any more academic reason; or perhaps we may say that Lord Mansfield took the case out of the doctrine as to payments under a
mistake of fact by the assumption that a holder who simply presents negotiable paper for payment makes no representation as to the
signature, and that the drawee pays at his peril."
Such was the reaction that followed Lord Mansfield's rule which Justice Story of the United States Supreme adopted in the case
of Bank of United States vs. Georgia (10 Wheat., 333), that in B. B. Ford & Co. vs. People's Bank of Orangeburg (74 S. C., 180), it was
held that "an unrestricted indorsement of a draft and presentation to the drawee is a representation that the signature of the drawer is
genuine", and in Lisbon First National Bank vs. Wyndmere Bank (15 N. D., 299), it was also held that "the drawee of a forged check
who has paid the same without detecting the forgery, may upon discovery of the forgery, recover the money paid from the party who
received the money, even though the latter was a good faith holder, provided the latter has not been misled or prejudiced by the
drawee's failure to detect the forgery."
Daniel, in his treatise on Negotiable Instruments, has the following to say:
127 Negotiable Instruments – Form and Interpretation (Sec 1-23)
In all the cases which hold the drawee absolutely estoppel by acceptance or payment from denying genuineness of the drawer's
name, the loss is thrown upon him on the ground of negligence on his part in accepting or paying, until he has ascertained the bill to be
genuine. But the holder has preceded him in negligence, by himself not ascertaining the true character of the paper before he received
it, or presented it for acceptance or payment. And although, as a general rule, the drawee is more likely to know the drawer's
handwriting than a stranger is, if he is in fact deceived as to its genuineness, we do not perceive that he should suffer more deeply by
mistake than a stranger, who, without knowing the handwriting, has taken the paper without previously ascertaining its genuineness.
And the mistake of the drawee should always be allowed to be corrected, unless the holder, acting upon faith and confidence induced
by his honoring the draft, would be placed in a worse position by according such privilege to him. This view has been applied in a well
considered case, and is intimidated in another; and is forcibly presented by Mr. Chitty, who says it is going a great way to charge the
acceptor with knowledge of his correspondent's handwriting, "unless some bona fide holder has purchased the paper on the faith of
such an act." Negligence in making payment under a mistake of fact is not now deemed a bar to recovery of it, and we do not see why
any exception should be made to the principle, which would apply as well as to release an obligation not consummated by payment.
( Vol. 2, 6th edition, pp. 1537-1539.)
III. But now the rule is perfectly well settled that in determining the relative rights of a drawee who, under a mistake of fact, has
paid, and 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 or negligence of the parties in respect thereto. (Woods and Malone vs. Colony Bank [1902], 56 L. R.
A., 929, 932.) The responsibility of the drawee who pays a forged check, for the genuineness of the drawer's 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. (National
Bank of America vs. Bangs, 106 Mass., 441; 8 Am. Rep., 349; Woods and Malone vs. Colony Bank, supra; De Feriet vs. Bank of
America, 23 La. Ann., 310; B. B. Ford & Co. vs. People's Bank of Orangeburg, 74 S. C., 180; 10 L. R. A. [N. S.], 63.) If it appears that
the one to whom payment was made was not an innocent sufferer, but was guilty of negligence in not doing something, which plain
duty demanded, and which, if it had been done, would have avoided entailing loss on any one, he is not entitled to retain the moneys
paid through a mistake on the part of the drawee bank. (First Nat. Bank of Danvers vs. First Nat. Bank of Salem, 151 Mass., 280; 24 N.
E., 44; 21 A. S. R., 450; First Nat. Bank of Orleans vs. State Bank of Alma, 22 Neb., 769; 36 N. W., 289; 3 A. S. R., 294; American Exp.
Co. vs. State Nat. Bank, 27 Okla., 824; 113 Pac., 711; 33 L. R. A. [N. S.], 188; B. B. Ford & Co. vs. People's Bank of Orangeburg, 74 S.
C., 180; 54 S. E., 204; 114 A. S. R., 986; 7 Ann. Cas., 744; 10 L. R. A. [N. S.], 63; People's Bank vs. Franklin Bank, 88 Tenn. 299; 12 S.
W., 716; 17 A. S. R.) 884; 6 L. R. A., 724; Canadian Bank of Commerce vs. Bingham, 30 Wash., 484; 71 Pac., 43; 60 L. R. A., 955.) In
other words, to entitle the holder of a forged check to retain the money obtained he must be able to show that the whole responsibility
of determining the validity of the signature was upon the drawee, and that the negligence of such drawee was not lessened by any
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. (Ellis vs. Ohio Life Insurance & Trust Co., 4 Ohio St., 628; Rouvant vs. Bank, 63 Tex., 610; Bank vs. Ricker, 71
Ill., 429; First National Bank of Danvers vs. First Nat. Bank of Salem, 24 N. E., 44, 45; B. B. Ford & Co. vs. People's Bank of
Orangeburg, supra.) The recovery is permitted in such case, because, although the drawee was constructively negligent in failing to
detect the forgery, yet if the purchaser had performed his duty, the forgery would in all probability have been detected and the fraud
defeated. (First National Bank of Lisbon vs. Bank of Wyndmere, 15 N. D., 209; 10 L. R. A. [N. S.], 49.) 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 not preclude his
recovery from one who took the check under circumstances of suspicion 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.
(National Bank of America vs. Bangs, supra; First National Bank vs. Indiana National Bank, 30 N. E., 808-810; Woods and Malone vs.
Colony Bank, supra; First National Bank of Danvers vs. First Nat. Bank of Salem, 151 Mass., 280.) 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 unreasonable that it would be borne by
him, even if innocent of any intentional fraud, through whose means it has succeeded. (Gloucester Bank vs. Salem Bank, 17 Mass., 33;
First Nat. Bank of Danvers vs. First National Bank of Salem, supra; B. B. Ford & Co. vs. People's Bank of Orangeburg, supra.) Again if
the indorser is guilty of negligence in receiving and paying the check or draft, or has reason to believe that the instrument is not
genuine, but fails to inform the drawee of his suspicions the indorser according to the reasoning of some courts will be held liable to the
drawee upon his implied warranty that the instrument is genuine. (B. B. Ford & Co. vs. People's Bank of Orangeburg, supra; Newberry
Sav. Bank vs. Bank of Columbia, 93 S. C., 294; 38 L. R. A. [N. S], 1200.) Most of the courts now agree that one who purchases a check
or draft is bound to satisfy himself that the paper is genuine; and that by indorsing it or presenting it for payment or putting it into
circulation before presentation he impliedly asserts that he has performed his duty, the drawee, who has, without actual negligence on
his part, paid the forged demand, may recover the money paid from such negligent purchaser. (Lisbon First National Bank vs.
Wyndmere Bank, supra.) Of course, the drawee must, in order to recover back the holder, show that he himself was free from fault.
(See also 5 R. C. L., pp. 556-558.)
So, if a collecting bank is alone culpable, and, on account of its negligence only, the loss has occurred, the drawee may recover
the amount it paid on the forged draft or check. (Security Commercial & Sav. Bank vs. Southern Trust & C. Bank [1925], 74 Cal. App.,
734; 241 Pac., 945.)
But we are aware of no case in which the principle that the drawee is bound to know the signature of the drawer of a bill or check
which he undertakes to pay has been held to be decisive in favor of a payee of a forged bill or check to which he has himself given
credit by his indorsement. (Secalso, Mckleroy vs. Bank, 14 La. Ann., 458; Canal Bank vs. Bank of Albany, 1 Hill, 287; Rouvant vs.
Bank, supra, First Nat. Bank vs. Indiana National Bank; 30 N. E., 808-810.)
In First Nat. Bank vs. United States National Bank ([1921], 100 Or., 264; 14 A. L. R., 479; 197 Pac., 547), the court declared: "A
holder cannot profit by a mistake which his negligent disregard of duty has contributed to induce the drawee to commit. . . . The holder
must refund, if by his negligence he has contributed to the consummation of the mistake on the part of the drawee by misleading him. . .
. If the only fault attributable to the drawee is the constructive fault which the law raises from the bald fact that he has failed to detect the
forgery, and if he is not chargeable with actual fault in addition to such constructive fault, then he is not precluded from recovery from a
holder whose conduct has been such as to mislead the drawee or induce him to pay the check or bill of exchange without the usual
security against fraud. The holder must refund to a drawee who is not guilty of actual fault if the holder was negligent in not making due

128 Negotiable Instruments – Form and Interpretation (Sec 1-23)


inquiry concerning the validity of the check before he took it, and if the drawee can be said to have been excused from making inquiry
before taking the check because of having had a right to, presume that the holder had made such inquiry."
The rule that one who first negotiates forged paper without taking some precaution to learn whether or not it is genuine should
not be allowed to retain the proceeds of the draft or check from the drawee, whose sole fault was that he did not discover the forgery
before he paid the draft or check, has been followed by the later cases. (Security Commercial & Savings Bank vs. Southern Trust & C.
Bank [1925], 74 Cal. App., 734; 241 Pac., 945; Hutcheson Hardware Co. vs. Planters State Bank [1921], 26 Ga. App., 321; 105 S. E.,
854; [Annotation at 71 A. L. R., 337].)
Where a bank, without inquiry or identification of the person presenting a forged check, purchases it, indorses it, generally, and
presents it to the drawee bank, which pays it, the latter may recover if its only negligence was its mistake in having failed to detect the
forgery, since its mistake, did not mislead the purchaser or bring about a change in position. (Security Commercial & Savings Bank vs.
Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945.)
Also, a drawee could recover from another bank the portion of the proceeds of a forged check cashed by the latter and deposited
by the forger in the second bank and never withdrawn, upon the discovery of the forgery three months later, after the drawee had paid
the check and returned the voucher to the purported drawer, where the purchasing bank was negligent in taking the check, and was not
injured by the drawee's negligence in discovering and reporting the forgery as to the amount left on deposit, since it was not a
purchaser for value. (First State Bank & T. Co. vs. First Nat. Bank [1924], 314 Ill., 269; 145 N. E., 382.)
Similarly, it has been held that the drawee of a check could recover the amount paid on the check, after discovery of the forgery,
from another bank, which put the check into circulation by cashing it for the one who had forged the signature of both drawer and payee
without making any inquiry as to who he was although he was a stranger, after which the check reached, and was paid by, the drawee,
after going through the hands of several intermediate indorsees. (71 A. L. R., p. 340.)
In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079, 1085), the following statement was made:
We are clearly of opinion, therefore that the warranty of genuineness, arising upon the act of the Brule National Bank in putting
the check in circulation, was not discharged by payment of the check by the drawee (First National Bank), nor was the Brule National
Bank deceived or misled to its prejudice by such payment. The Brule National Bank by its indorsement and delivery warranted its own
identification of Kost and the genuineness of his signature. The indorsement of the check by the Brule National Bank was such as to
assign the title to the check to its assignee, the Whitbeck National Bank, and the amount was credited to the indorser. The check bore
no indication that it was deposited for collection, and was not in any manner restricted so as to constitute the indorsee the agent of the
indorser, nor did it prohibit farther negotiation of the instrument, nor did it appear to be in trust for, or to the use of, any other person, nor
was it conditional. Certainly the Pukwana Bank was justified in relying upon the warrant of genuineness, which implied the full
identification of Kost, and his signature by the defendant bank. This view of the statute is in accord with the decisions of many courts.
(First National Bank vs. State Bank, 22 Neb., 769; 3 Am. St. Rep., 294; 36 N. W., 289; First National Bank vs. First National Bank, 151
Mass., 280; 21 Am. St. Rep., 450; 24 N. E., 44; People's Bank vs. Franklin Bank, 88 Tenn., 299; 6 L. R. A., 727; 17 Am. St. Rep., 884;
12 S. W., 716.)"
The appellant leans heavily on the case of Fidelity & Co. vs. Planenscheck (71 A. L. R., 331), decided in 1929. We have carefully
examined this decision and we do not feel justified in accepting its conclusions. It is but a restatement of the long abandoned rule of
Neal vs. Price, and it predicated on the wrong premise that the payment includes acceptance, and that a bank drawee paying a check
drawn on it becomes ipso facto an acceptor within the meaning of section 62 of the Negotiable Instruments Act. Moreover in a more
recent decision, that of Louisa National Bank vs. Kentucky National Bank (39 S. W. [2nd] 497, 501) decided in 1931, the Court of
Appeals of Kentucky held the following:
The appellee, on presentation for payment of $600 check, failed to discover it was a forgery. It was bound to know the
signature of its customer, Armstrong, and it was derelict in failing to give his signature to the check sufficient attention and
examination to enable it to discover instantly the forgery. The appellant, when the check was presented to it by Banfield, failed
to make an inquiry of or about him and did not cause or have him to be identified. Its act in so paying to him the check is a
degree of negligence on its part equivalent to positive negligence. It indorsed the check, and, while such indorsement may not
be regarded within the meaning of the Negotiable Instrument Law as amounting to a warranty to appellant of that which it
indorsed, it at least substantially served as a representation to it that it had exercised ordinary care and had complied with the
rules and customs of prudent banking. Its indorsement was calculated, if it did not in fact do so, to lull the drawee bank into
indifference as to the drawer's signature to it when paying the check and charging it to its customer's account and remitting its
proceeds to appellant's correspondent.
If in such a transaction between the drawee and the holder of a check both are without fault, no recovery may be had of
the money so paid. (Deposit Bank of Georgetown vs. Fayette National Bank, supra, and cases cited.) Or the rule may be more
accurately stated that, where the drawee pays the money, he cannot recover it back from a holder in good faith, for value and
without fault.
If, on the other hand, the holder acts in bad faith, or is guilty of culpable negligence, a recovery may be had by the
drawee of such holder. The negligence of the Bank of Louisa in failing to inquire of and about Banfield, and to cause or to
have him identified before it parted with its money on the forged check, may be regarded as the primary and proximate cause
of the loss. Its negligence in this respect reached in its effect the appellee, and induced incaution on its part. In comparison of
the degrees of the negligence of the two, it is apparent that of the appellant excels in culpability. Both appellant and appellee
inadvertently made a mistake, doubtless due to a hurry incident to business. The first and most grievous one was made by the
appellant , amounting to its disregard of the duty, it owed itself as well as the duty it owed to the appellee, and it cannot on
account thereof retain as against the appellee the money which it so received. It cannot shift the loss to the appellee, for such
disregard of its duty inevitably contributed to induce the appellee to omit its duty critically to examine the signature of
Armstrong, even if it did not know it instantly at the time it paid the check. (Farmers' Bank of Augusta vs. Farmer's Bank of
Maysville, supra, and cases cited.)
129 Negotiable Instruments – Form and Interpretation (Sec 1-23)
IV. The question now is to determine whether the appellant's negligence in purchasing the checks in question is such as to give
the appellee the right to recover upon said checks, and on the other hand, whether the drawee bank was not itself negligent, except for
its constructive fault in not knowing the signature of the drawer and detecting the forgery.
We quote with approval the following conclusions of the court a quo:
Check Exhibit A bears number 637023-D and is dated April 6, 1933, whereas check Exhibit A-1 bears number 637020-
D and is dated April 7, 1933. Therefore, the latter check, which is prior in number to the former check, is however, issued on a
later date. This circumstance must have aroused at least the curiosity of the Motor Service Co., Inc.
The Motor Service Co., Inc., accepted the two checks from unknown persons. And not only this; check Exhibit A is
indorsed by a subagent of the agent of the payee, International Auto Repair Shop. The Motor Service Co., Inc., made no
inquiry whatsoever as to the extent of the authority of these unknown persons. Our Supreme Court said once that "any person
taking checks made payable to a corporation, which can act only by agents, does so at his peril, and must abide by the
consequences if the agent who indorses the same is without authority" (Insular Drug Co. vs. National Bank, 58, Phil., 684).
xxx xxx xxx
Check Exhibit A-1, aside from having been indorsed by a supposed agent of the international Auto Repair Shop is
crossed generally. The existence of two parallel lines transversally drawn on the face of this check was a warning that the
check could only be collected through a banking institution (Jacobs, Law of Bills of Exchange, etc., pp., 179, 180; Bills of
Exchange Act of England, secs. 76 and 79). Yet the Motor Service Co., Inc., accepted the check in payment for merchandise.
. . . In Exhibit H attached to the stipulation of facts as an integral part thereof, the Motor Service Co., Inc., stated the
following:
"The Pangasinan Transportation Co. is a good customer of this firm and we received checks from them every month in
payment of their account. The two checks in question seem to be exactly similar to the checks which we received from the
Pangasinan Transportation Co. every month."
If the failure of the Motor Service Co., Inc., to detect the forgery of the drawer's signature in the two checks, may be
considered as an omission in good faith because of the similarity stated in the letter, then the same consideration applies to
the Philippine National Bank, for the drawer is a customer of both the Motor Service Co., Inc., and the Philippine National
Bank. (B. of E., pp. 25, 28, 35.)
We are of opinion that the facts of the present case do not make it one between two equally innocent persons, the drawee bank
and the holder, and that they are governed by the authorities already cited and also the following:
The point in issue has sometimes been said to be that of negligence. The drawee who has paid upon the forged
signature is held to bear the loss, because he has been negligent in failing to recognize that the handwriting is not that of his
customer. But it follows obviously that if the payee, holder, or presenter of the forged paper has himself been in default, if he
has himself been guilty of a negligence prior to that of the banker, or if by any act of his own he has at all contributed to induce
the banker's negligence, then he may lose his right to cast the loss upon the banker. The courts have shown a steadily
increasing disposition to extend the application of this rule over the new conditions of fact which from time to time arise, until it
can now rarely happen that the holder, payee, or presenter can escape the imputation of having been in some degree
contributory towards the mistake. Without any actual change in the abstract doctrines of the law, which are clear, just, and
simple enough, the gradual but sure tendency and effect of the decisions have been to put as heavy a burden of responsibility
upon the payee as upon the drawee, contrary to the original custom. . . . (2 Morse on Banks and Banking, 5th ed., secs. 464
and 466, pp. 82-85 and 86, 87.)
In First National Bank vs. Brule National Bank (12 A. L. R., 1079, 1088, 1089), the following statement appears in the concurring
opinion:
What, then, should be the rule? The drawee asks to recover for money had and received. If his claim did not rest upon a
transaction relating to a negotiable instrument plaintiff could recover as for money paid under mistake, unless defendant could
show some equitable reason, such as changed condition since, and relying upon, payment by plaintiff. In the Wyndmere Case,
the North Dakota court holds that this rule giving right to recover money paid under mistake should extend to negotiable paper,
and it rejects in its entirety the theory of estoppel and puts a case of this kind on exactly the same basis as the ordinary case
of payment under mistake. But the great weight of authority, and that based on the better reasoning, holds that the exigencies
of business demand a different rule in relation to negotiable paper. What is that rule? Is it an absolute estoppel against the
drawee in favor of a holder, no matter how negligent such holder has been? It surely is not. The correct rule recognizes the
fact that, in case of payment without a prior acceptance or certification, the holder takes the paper upon the of the prior
indorsers and the credit of the drawer, and not upon the credit of the drawee, in making payment, has a right to rely upon the
assumption that the payee used due diligence, especially where such payee negotiated the bill or check to a holder, thus
representing that it had so fully satisfied itself as to the identity and signature of the maker that it was willing to warrant as
relates thereto to all subsequent holders. (Uniform Act, secs. 65 and 66.) Such correct rule denies the drawee the right to
recover when the holder was without fault or when there has been some change of position calling for equitable relief. When a
holder of a bill of exchange uses all due care in the taking of bill or check and the drawee thereafter pays same, the
transaction is absolutely closed — modern business could not be done on any other basis. While the correct rule promotes the
fluidity of two recognized mediums of exchange, those mediums by which the great bulk of business is carried on, checks and
drafts, upon the other hand it encourages and demands prudent business methods upon the part of those receiving such
mediums of exchange. (Pennington County Bank vs. First State Bank, 110 Minn., 263; 26 L. R. A. [N. S.], 849; 136 Am. St.
Rep., 496; 125 N. W., 119; First National Bank vs. State Bank, 22 Neb., 769; 3 Am. St. Rep., 294; 36 N. W., 289; Bank of
Williamson, vs. McDowell County Bank, 66 W. Va., 545; 36 L. R. A. [N. S.], 605; 66 S. E., 761; Germania Bank vs. Boutell, 60
Minn., 189; 27 L. R. A., 635; 51 Am. St. Rep., 519; 62 N. W., 327; American Express Co. vs. State National Bank, 27 Okla.,
130 Negotiable Instruments – Form and Interpretation (Sec 1-23)
824; 33 L. R. A. [N. S.], 188; 113 Pac., 711; Farmers' National Bank vs. Farmers' & Traders Bank, L. R. A., 1915A, 77, and
note (159 Ky., 141; 166 S. W., 986].)
That the defendant bank did not use reasonable business prudence is clear. It took this check from a stranger without
other identification than that given by another stranger; its cashier witnessed the mark of such stranger thus vouching for the
identity and signature of the maker; and it indorsed the check as "Paid," thus further throwing plaintiff off guard. Defendant
could not but have known, when negotiating such check and putting it into the channel through which it would finally be
presented to plaintiff for payment, that plaintiff, if it paid such check, as defendant was asking it to do, would have to rely solely
upon the apparent faith and credit that defendant had placed in the drawer. From the very circumstances of this case plaintiff
had to act on the facts as presented to it by defendant, upon such facts only.
But appellant argues that it so changed its position, after payment by plaintiff, that in "equity and good conscience"
plaintiff should not recover — it says it did not pay over any money to the forger until after plaintiff had paid the check. There
would be merit in such contention if defendant had indorsed the check for "collection," thus advising plaintiff that it was relying
on plaintiff and not on the drawer. It stands in court where it would have been if it had done as it represented.
In Woods and Malone vs. Colony Bank (56 L. R. A., 929, 932), the court said:
. . . If the holder has been negligent in paying the forged paper, or has by his conduct, however innocent, misled or
deceived the drawee to his damage, it would be unjust for him to be allowed to shield himself from the results of his own
carelessness by asserting that the drawee was bound in law to know his drawer's signature.
V. Section 23 of the Negotiable Instruments Act provides that "when a signature is forged or made without the authority of the
person whose signature it purports to be, 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.
It not appearing that the appellee bank did not warrant to the appellant the genuineness of the checks in question, by its
acceptance thereof, nor did it perform any act which would have induced the appellant to believe in the genuineness of said
instruments before appellant purchased them for value, it can not be said that the appellee is precluded from setting up the forgery and,
therefore, the appellant is not entitled to retain the amount of the forged check paid to it by the appellee.
VI. It has been held by many courts that a drawee of a check, who is deceived by a forgery of the drawer's signature may recover
the payment back, unless his mistake has placed an innocent holder of the paper in a worse position than he would have been in if the
discovery of the forgery had been made on presentation. (5 R. C. L., p. 559; 2 Daniel on Negotiable Instruments, 1538.) Forgeries often
deceived the eye of the most cautious experts; and when a bank has been deceived, it is a harsh rule which compels it to suffer
although no one has suffered by its being deceived. (17 A. L. R. 891; 5 R. C. L., 559.)
In the instant case should the drawee bank be allowed recovery, the appellant's position would not become worse than if the
drawee had refused the payment of these checks upon their presentation. The appellant has lost nothing by anything which the drawee
has done. It had in its hands some forged worthless papers. It did not purchase or acquire these papers because of any representation
made to it by the drawee. It purchased them from unknown persons and under suspicious circumstances. It had no valid title to them,
because the persons from whom it received them did not have such title. The appellant could not have compelled the drawee to pay
them, and the drawee could have refused payment had it been able to detect the forgery. By making a refund, the appellant would only
returning what it had received without any title or right. And when appellant pays back the money it had received it will be entitled to
have restored to it the forged papers it parted with. There is no good reason why the accidental payment made by the appellant should
inure to the benefit of the appellant. If there were injury to the appellant said injury was caused not by the failure of the appellee to
detect the forgery but by the very negligence of the appellant in purchasing commercial papers from unknown persons without making
inquiry as to their genuineness.
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;
131 Negotiable Instruments – Form and Interpretation (Sec 1-23)
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.

132 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-18657 August 23, 1922
THE GREAT EASTERN LIFE INSURANCE CO., plaintiff-appellant,
vs.
HONGKONG & SHANGHAI BANKING CORPORATION and PHILIPPINE NATIONAL BANK, defendants-appellees.
Camus and Delgado for appellant.
Fisher and DeWitt and A. M. Opisso for Hongkong and Shanghai Bank.
Roman J. Lacson for Philippine National Bank.
STATEMENT
The plaintiff is an insurance corporation, and the defendants are banking corporations, and each is duly licensed to do its respective
business in the Philippines Islands.
May 3, 1920, the plaintiff drew its check for P2,000 on the Hongkong and Shanghai Banking Corporation with whom it had an account,
payable to the order of Lazaro Melicor. E. M. Maasim fraudulently obtained possession of the check, forged Melicor's signature, as an
endorser, and then personally endorsed and presented it to the Philippine National Bank where the amount of the check was placed to
his credit. After having paid the check, and on the next day, the Philippine national Bank endorsed the check to the Hongkong and
Shanghai Banking Corporation which paid it and charged the amount of the check to the account of the plaintiff. In the ordinary course
of business, the Hongkong Shanghai Banking Corporation rendered a bank statement to the plaintiff showing that the amount of the
check was charged to its account, and no objection was then made to the statement. About four months after the check was charged to
the account of the plaintiff, it developed that Lazaro Melicor, to whom the check was made payable, had never received it, and that his
signature, as an endorser, was forged by Maasim, who presented and deposited it to his private account in the Philippine National
Bank. With this knowledge , the plaintiff promptly made a demand upon the Hongkong and Shanghai Banking Corporation that it should
be given credit for the amount of the forged check, which the bank refused to do, and the plaintiff commenced this action to recover the
P2,000 which was paid on the forged check. On the petition of the Shanghai Bank, the Philippine National Bank was made defendant.
The Shanghai Bank denies any liability, but prays that, if a judgment should be rendered against it, in turn, it should have like judgment
against the Philippine National Bank which denies all liability to either party.
Upon the issues being joined, a trial was had and judgment was rendered against the plaintiff and in favor of the defendants, from
which the plaintiff appeals, claiming that the court erred in dismissing the case, notwithstanding its finding of fact, and in not rendering a
judgment in its favor, as prayed for in its complaint.

JOHNS, J.:
There is no dispute about any of the findings of fact made by the trial court, and the plaintiff relies upon them for a reversal. Among
other things, the trial court says:
Who is responsible for the refund to the drawer of the amount of the check drawn and payable to order, when its value was
collected by a third person by means of forgery of the signature of the payee? Is it the drawee or the last indorser, who ignored
the forgery at the time of making the payment, or the forger?
To lower court found that Melicor's name was forged to the check. "So that the person to whose order the check was issued did not
receive the money, which was collected by E. M. Maasim," and then says:
Now then, the National Bank should not be held responsible for the payment of made to Maasim in good faith of the amount of
the check, because the indorsement of Maasim is unquestionable and his signature perfectly genuine, and the bank was not
obliged to identify the signature of the former indorser. Neither could the Hongkong and Shanghai Banking Corporation be
held responsible in making payment in good faith to the National Bank, because the latter is a holder in due course of the
check in question. In other words, the two defendant banks can not be held civilly responsible for the consequences of the
falsification or forgery of the signature of Lazaro Melicor, the National Bank having had no notice of said forgery in making
payment to Maasim, nor the Hongkong bank in making payment to National Bank. Neither bank incurred in any responsibility
arising from that crime, nor was either of the said banks by subsequent acts, guilty of negligence or fault.
This was fundamental error.
Plaintiff's check was drawn on Shanghai Bank payable to the order of Melicor. In other words, the plaintiff authorized and directed the
Shanghai Bank to pay Melicor, or his order, P2,000. It did not authorize or direct the bank to pay the check to any other person than
Melicor, or his order, and the testimony is undisputed that Melicor never did part with his title or endorse the check, and never received
any of its proceeds. Neither is the plaintiff estopped or bound by the banks statement, which was made to it by the Shanghai Bank. This
is not a case where the plaintiff's own signature was forged to one of it checks. In such a case, the plaintiff would have known of the
forgery, and it would have been its duty to have promptly notified the bank of any forged signature, and any failure on its part would
have released bank from any liability. That is not this case. Here, the forgery was that of Melicor, who was the payee of the check, and
the legal presumption is that the bank would not honor the check without the genuine endorsement of Melicor. In other words, when the
plaintiff received it banks statement, it had a right to assume that Melicor had personally endorsed the check, and that, otherwise, the
bank would not have paid it.
133 Negotiable Instruments – Form and Interpretation (Sec 1-23)
Section 23 of Act No. 2031, known as the Negotiable Instruments Law, says:
When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly
inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any
party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such
right is precluded from setting up the forgery or want of authority.
That section is square in point.
The money was on deposit in the Shanghai Bank, and it had no legal right to pay it out to anyone except the plaintiff or its order. Here,
the plaintiff ordered the Shanghai Bank to pay the P2,000 to Melicor, and the money was actually paid to Maasim and was never paid
to Melicor, and he never paid to Melicor, and he never personally endorsed the check, or authorized any one to endorse it for him, and
the alleged endorsement was a forgery. Hence, upon the undisputed facts, it must follow that the Shanghai Bank has no defense to this
action.
It is admitted that the Philippine National Bank cashed the check upon a forged signature, and placed the money to the credit of
Maasim, who was a forger. That the Philippine National Bank then endorsed the check and forwarded it to the Shanghai Bank by whom
it was paid. The Philippine National Bank had no license or authority to pay the money to Maasim or anyone else upon a forge
signature. It was its legal duty to know that Melicor's endorsment was genuine before cashing the check. Its remedy is against Maasim
to whom it paid the money.
The judgment of the lower court is reversed, and one will be entered here in favor of the plaintiff and against the Hongkong and
Shanghai Banking Corporation for the P2,000, with interest thereon from November 8, 1920 at the rate of 6 per cent per annum, and
the costs of this action, and a corresponding judgment will be entered in favor of the Hongkong Shanghai Banking Corporation against
the Philippine National Bank for the same amount, together with the amount of its costs in this action. So ordered.

134 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Republic of the Philippines
SUPREME COURT
Manila
EN BANC

G.R. No. L-28226 September 30, 1970


HONGKONG & SHANGHAI BANKING CORPORATION, plaintiff-appellant,
vs.
PEOPLES BANK & TRUST COMPANY, defendant-appellee.
Siguion Reyna, Montecillo, Belo and Ongsiako for plaintiff-appellant.
J. R. Balonkita for defendant-appellee.

FERNANDO, J.:
Defendant, now appellee Peoples Bank & Trust Company, is sought to be held liable in the amount of P14,608.05, the sum payable in
a check issued by the Philippine Long Distance Telephone Company drawn on plaintiff Hongkong & Shanghai Banking Corporation,
now appellant, with itself as payee, the check thereafter falling into the hands of a third party who substituted his name thereon and was
able to collect such amount from defendant Bank where it was deposited. Plaintiff was unsuccessful, the Court of First Instance of
Manila, the Honorable Jesus de Veyra presiding, dismissing the complaint. It considered as decisive the fact that plaintiff Bank allowed
27 days to elapse after clearing before notifying defendant Bank as to such alteration, the applicable Central Bank regulation providing
for a 24-hour period. Hence, this appeal. Relying as the lower court did on a controlling decision, 1 its decision cannot be reversed. We
affirm.
The undisputed facts, as noted in the appealed decision, follow: "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." 2
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). 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." 3
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, 4 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: " "Items which should be returned for any reason whatsoever shall be returned directly
to the bank, institution or entity from which the item was received. For this purpose, the Receipt for Returned Checks (Cash Form No.
9) should be used. The original and duplicate copies of said Receipt shall be given to the bank, institution or entity which returned the
items and the triplicate copy should be retained by the bank, institution or entity whose demand is being returned. At the following
clearing, the original of the Receipt for Returned Checks shall be presented through the Clearing Office as a demand against the bank,
135 Negotiable Instruments – Form and Interpretation (Sec 1-23)
institution or entity whose item has been returned. Nothing in this section shall prevent the returned items from being settled by direct
reimbursement to the bank, institution or entity returning the items. All items cleared at 11:00 o'clock a.m. shall be returned not later
than 2:00 o'clock p.m. on the same day and all items cleared at 3:00 o'clock p.m. shall be returned not later than 8:30 a.m. of the
following business day, except for items cleared on Saturday which may be returned not later than 8:30 of the following day. (Emphasis
supplied)" 5 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.
An excerpt from the opinion of the Chief Justice is likewise relevant as indicative of the correctness of the decision appealed from.
Thus: "At any rate, the aforementioned twenty-eight (28) warrants were cleared and paid by the Treasurer, in view of which the PI Bank
and the Equitable Bank credited the corresponding amounts to the respective depositors of the warrants and then honored their checks
for said amounts. Thus, the Treasury had not only been negligent in clearing its own warrants, but had, also, thereby induced the PI
Bank and the Equitable Bank to pay the amounts thereof to said depositors. The gross nature of the negligence of the Treasury
becomes more apparent when we consider that each one of the twenty-four (24) warrants involved in G.R. No. L-15895 was for over
P5,000, and, hence; beyond the authority of the auditor of the Treasury — whose signature thereon had been forged — to approve. In
other words, the irregularity of said warrants was apparent on the fact thereof, from the viewpoint of the Treasury. Moreover, the same
had not advertised the loss of genuine forms of its warrants. Neither had the PI Bank nor the Equitable Bank been informed of any
irregularity in connection with any of the warrants involved in these two (2) cases, until after December 23, 1952, — or after the
warrants had been cleared and honored — when the Treasury gave notice of the forgeries adverted to above. As a consequence, the
loss of the amounts thereof is mainly imputable to acts and omissions of the Treasury, for which the PI Bank and the Equitable Bank
should not and cannot be penalized." 6
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." 7 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." 8
WHEREFORE, the appealed decision of April 24, 1967, dismissing the complaint, is affirmed. With costs against plaintiff Hongkong &
Shanghai Banking Corporation.

136 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-55079 November 19, 1982
METROPOLITAN BANK and TRUST COMPANY, petitioner,
vs.
THE FIRST NATIONAL CITY BANK and THE COURT OF APPEALS, respondents.
Resales, Perez & Assoc. for petitioner.
Siguion, Reyna, Montecillo and Ongsiako for respondent PNCB.

MELENCIO-HERRERA, J.:
This is a Petition for Review on certiorari of the Decision of the Court of Appeals in CA-G.R. No. 57129-R entitled, First National City
Bank vs. Metropolitan Bank and Trust Company, which affirmed in toto the Decision of the Court of First Instance of Manila, Branch
VIII, in Civil Case No. 61488, ordering petitioner herein, Metropolitan Bank, to reimburse respondent First National City Bank the
amount of P50,000.00, with legal rate of interest from June 25, 1965, and to pay attorney's fees of P5,000.00 and costs.
The controversy arose from the following facts:
On August 25, 1964, Check No. 7166 dated July 8, 1964 for P50,000.00, payable to CASH, drawn by Joaquin Cunanan & Company on
First National City Bank (FNCB for brevity) was deposited with Metropolitan Bank and Trust Company (Metro Bank for short) by a
certain Salvador Sales. Earlier that day, Sales had opened a current account with Metro Bank depositing P500.00 in cash. 1 Metro Bank
immediately sent the cash check to the Clearing House of the Central Bank with the following words stamped at the back of the check:
Metropolitan Bank and Trust Company Cleared (illegible) office All prior endorsements and/or Lack of endorsements
Guaranteed. 2
The check was cleared the same day. Private respondent paid petitioner through clearing the amount of P50,000.00, and Sales was
credited with the said amount in his deposit with Metro Bank.
On August 26, 1964, Sales made his first withdrawal of P480.00 from his current account. On August 28, 1964, he withdrew
P32,100.00. Then on August 31, 1964, he withdrew the balance of P17,920.00 and closed his account with Metro Bank.
On September 3, 1964, or nine (9) days later, FNCB returned cancelled Check No. 7166 to drawer Joaquin Cunanan & Company,
together with the monthly statement of the company's account with FNCB. That same day, the company notified FNCB that the check
had been altered. The actual amount of P50.00 was raised to P50,000.00, and over the name of the payee, Manila Polo Club, was
superimposed the word CASH.
FNCB notified Metro Bank of the alteration by telephone, confirming it the same day with a letter, which was received by Metro Bank on
the following day, September 4, 1964.
On September 10, 1964, FNCB wrote Metro Bank asking for reimbursement of the amount of P50,000.00. The latter did not oblige, so
that FNCB reiterated its request on September 29, 1964. Metro Bank was adamant in its refusal.
On June 29, 1965, FNCB filed in the Court of First Instance of Manila, Branch VIII, Civil Case No. 61488 against Metro Bank for
recovery of the amount of P50,000.00.
On January 27, 1975, the Trial Court rendered its Decision ordering Metro Bank to reimburse FNCB the amount of P50,000.00 with
legal rate of interest from June 25, 1965 until fully paid, to pay attorney's fees of P5,000.00, and costs.
Petitioner appealed said Decision to the Court of Appeals (CA-G.R. No. 57129-R). On August 29, 1980, respondent Appellate Court 3
affirmed in toto the judgment of the Trial Court.
Petitioner came to this instance on appeal by Certiorari, alleging:
I
The Respondent Court of Appeals erred in completely ignoring and disregarding the 24-hour clearing house rule
provided for under Central Bank Circular No. 9, as amended, although:
1. The 24-hour regulation of the Central Bank in clearing house operations is valid and banks are subject to and are
bound by the same; and
2. The 24-hour clearing house rule applies to the present case of the petitioner and the private respondent.
II
The Respondent Court of Appeals erred in relying heavily on its decision in Gallaites, et al. vs. RCA, etc.,
promulgated on October 23, 1950 for the same is not controlling and is not applicable to the present case.
III

137 Negotiable Instruments – Form and Interpretation (Sec 1-23)


The Respondent Court of Appeals erred in disregarding and in not applying the doctrines in the cases of Republic of
the Philippines vs. Equitable Banking Corporation (10 SCRA 8) and Hongkong & Shanghai Banking Corporation vs.
People's Bank and Trust Company (35 SCRA 140) for the same are controlling and apply four square to the present
case.
IV
The Respondent Court of Appeals erred in not finding the private respondent guilty of operative negligence which is
the proximate cause of the loss.
The material facts of the case are not disputed. The issue for resolution is, which bank is liable for the payment of the altered check, the
drawee bank (FNCB) or the collecting bank (Metro Bank)?
The transaction occurred during the effectivity of Central Bank Circular No. 9 (February 17, 1949) as amended by Circular No. 138
(January 30, 1962), and Circular No. 169 (March 30, 1964). Section 4 of said Circular, as amended, states:
Section 4. Clearing Procedures.
(c) Procedures for Returned Items
Items which should be returned for any reason whatsoever shall be delivered to and received through the clearing
Office in the special red envelopes and shall be considered and accounted as debits to the banks to which the items
are returned. Nothing in this section shall prevent the returned items from being settled by reinbursement to the bank,
institution or entity returning the items. All items cleared on a particular clearing shall be returned not later than 3:30
P.M. on the following business day.
xxx xxx xxx
The facts of this case fall within said Circular. Under the procedure prescribed, the drawee bank receiving the check for clearing from
the Central Bank Clearing House must return the check to the collecting bank within the 24-hour period if the check is defective for any
reason.
Metro Bank invokes this 24-hour regulation of the Central Bank as its defense. FNCB on the other hand, relies on the guarantee of all
previous indorsements made by Metro Bank which guarantee had allegedly misled FNCB into believing that the check in question was
regular and the payee's indorsements genuine; as well as on "the general rule of law founded on equity and justice that a drawee or
payor bank which in good faith pays the amount of materially altered check to the holder thereof is entitled to recover its payment from
the said holder, even if he be an innocent holder. 4
The validity of the 24-hour clearing house regulation has been upheld by this Court in Republic vs. Equitable Banking Corporation, 10
SCRA 8 (1964). As held therein, since both parties are part of our banking system, and both are subject to the regulations of the
Central Bank, they are bound by the 24-hour clearing house rule of the Central Bank.
In this case, the check was not returned to Metro Bank in accordance with the 24-hour clearing house period, but was cleared by
FNCB. Failure of FNCB, therefore, to call the attention of Metro Bank to the alteration of the check in question until after the lapse of
nine days, negates whatever right it might have had against Metro Bank in the light of the said Central Bank Circular. Its remedy lies not
against Metro Bank, but against the party responsible for the changing the name of the payee 5 and the amount on the face of the
check.
FNCB contends that the stamp reading,
Metropolitan Bank and Trust Company Cleared (illegible) office All prior endorsements and/or Lack of endorsements
Guaranteed. 6
made by Metro Bank is an unqualified representation that the endorsement on the check was that of the true payee, and that the
amount thereon was the correct amount. In that connection, this Court in the Hongkong & Shanghai Bank case, supra, ruled:
.. But Plaintiff Bank insists that Defendant Bank is liable on its indorsement during clearing house operations. The
indorsement, itself, is very clear when it begins with words 'For clearance, clearing office **** In other words, such an
indorsement must be read together with the 24-hour regulation on clearing House Operations of the Central Bank.
Once that 24- hour period is over, the liability on such an indorsement has ceased. This being so, Plaintiff Bank has
not made out a case for relief. 7
Consistent with this ruling, Metro Bank can not be held liable for the payment of the altered check.
Moreover, FNCB did not deny the allegation of Metro Bank that before it allowed the withdrawal of the balance of P17,920.00 by
Salvador Sales, Metro Bank withheld payment and first verified, through its Assistant Cashier Federico Uy, the regularity and
genuineness of the check deposit from Marcelo Mirasol, Department Officer of FNCB, because its (Metro Bank) attention was called by
the fast movement of the account. Only upon being assured that the same is not unusual' did Metro Bank allow the withdrawal of the
balance.
Reliance by respondent Court of Appeals, on its own ruling in Gallaites vs. RCA, CA-G.R. No. 3805, October 23, 1950, by stating:
... The laxity of appellant in its dealing with customers, particularly in cases where the Identity of the person is new to
them (as in the case at bar) and in the obvious carelessness of the appellant in handling checks which can easily be
forged or altered boil down to one conclusion-negligence in the first order. This negligence enabled a swindler to
succeed in fraudulently encashing the chock in question thereby defrauding drawee bank (appellee) in the amount
thereof.

138 Negotiable Instruments – Form and Interpretation (Sec 1-23)


is misplaced not only because the factual milieu is not four square with this case but more so because it cannot prevail over the
doctrine laid down by this Court in the Hongkong & Shanghai Bank case which is more in point and, hence, controlling:
WHEREFORE, the challenged Decision of respondent Court of Appeals of August 29, 1980 is hereby set aside, and Civil Case No.
61488 is hereby dismissed.
Costs against private respondent The First National City Bank.
SO ORDERED.

139 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Haystack: Republic Bank vs. Court of Appeals (GR 42725, 22 April 1991)
Republic Bank vs. CA
[G.R. No. 42725. April 22, 1991.]
First Division, Grino-Aquino (J): 3 concurring, 1 took no part
Facts: On 25 January 1966, San Miguel Corporation (SMC), drew a dividend Check 108854 for P240, Philippine currency, on its
account in First National City Bank (FNCB) 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 14 March 1966 by Delgado in his account with the Republic Bank. Republic
accepted the check for deposit without ascertaining its genuineness and regularity. 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 15 March 1966. On 19 April 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 19
May 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 15 August 1966, FNCB demanded that Republic refund the P9,240 on
the basis of the latter's endorsement and guaranty. Republic refused, claiming there was delay in giving it notice of the alteration; that it
was not guilty of negligence; that it was the drawer's (SMC's) fault in drawing the check in such a way as to permit the insertion of
numerals increasing the amount; that FNCB, as drawee, was absolved of any liability to the drawer (SMC), thus, FNCB had no right of
recourse against Republic.
On 8 April 1968, the trial court rendered judgment ordering Republic to pay P9,240 to FNCB with 6% interest per annum from 27
February 1967 until fully paid, plus P2,000 for attorney's fees and costs of the suit. The Court of Appeals affirmed that decision, but
modified the award of attorney's fees by reducing it to P1,000 without pronouncement as to costs (CA-GR 41691-R, 22 December
1975). Hence, the petition for review.
The Supreme Court granted the petition for review, reversed and set aside the decision of the Court of Appeals, and entered another
absolving the 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; without costs.
1. 24-hour clearing house rule; Section 4(c) of the Central Bank Circular 9
The 24-hour clearing house rule embodied in Section 4(c) of Central Bank Circular 9, as amended, provides, "Items which should be
returned for any reason whatsoever shall be returned directly to the bank, institution or entity from which the item was received. For this
purpose, the Receipt for Returned Checks (Cash Form 9) should be used. The original and duplicate copies of said Receipt shall be
given to the Bank, institution or entity which returned the items and the triplicate copy should be retained by the bank, institution or
entity whose demand is being returned. At the following clearing, the original of the Receipt for Returned Checks shall be presented
through the Clearing Office as a demand against the bank, institution or entity whose item has been returned. Nothing in this section
shall prevent the returned items from being settled by direct reimbursement to the bank, institution or entity returning the items. All items
cleared at 11:00 o'clock A.M. shall be returned not later than 2:00 o'clock P.M. on the same day and all items cleared at 3:00 o'clock
P.M. shall be returned not later than 8:30 A.M. of the following business day except for items cleared on Saturday which may be
returned not later than 8:30 A.M. of the following day."
2. 24-hour clearing house rule applicable to commercial banks
The 24-hour clearing house rule is a valid rule applicable to commercial banks (Republic vs. Equitable Banking Corporation, 10 SCRA 8
[1964]; Metropolitan Bank & Trust Co. vs. First National City Bank, 118 SCRA 537).
3. Collecting bank absolved from liability if drawee bank fails to return forged or altered check within the 24-hour clearing
period
It is true that when an endorsement is forged, the collecting bank or last endorser, as a general rule, bears the loss (Banco de Oro
Savings & Mortgage Bank vs. Equitable Banking Corp., 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. vs. First National
City Bank, supra). Thus, when the drawee bank fails to return a forged or altered check to the collecting bank within the 24-hour
clearing period, the collecting bank is absolved from liability.
4. Hongkong & Shanghai Bank vs. People’s Bank; Facts
In Hongkong & Shanghai Banking Corp. vs. People's Bank & Trust Co. (35 SCRA 140), a check for P14,608.05 was drawn by the
Philippine Long Distance Telephone Company on the Hongkong & Shanghai Banking Corporation payable to the same bank. It was
mailed to the payee but fell into the hands of a certain Florentino Changco who erased the name of the payee, typed his own name,
and thereafter deposited the altered check in his account in the People's Bank & Trust Co. which presented it to the drawee bank with
the following indorsement: "For clearance, clearing office. All prior endorsements and or lack of endorsements guaranteed. People's
Bank and Trust Company." The check was cleared by the drawee bank (Hongkong & Shanghai Bank), whereupon the People's Bank
credited Changco with the amount of the check. Changco thereafter withdrew the contents of his bank account. A month later, when the
check was returned to PLDT, the alteration was discovered. The Hongkong & Shanghai Bank sued to recover from the People's Bank
the sum of P14,608.05. The complaint was dismissed.
5. Hongkong & Shanghai Bank vs. People’s Bank; Indorsement must be read with 24-hour regulation
In the Hongkong Bank case, the indorsement 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, the Hongkong & Shanghai Bank has not made
out a case for relief."

140 Negotiable Instruments – Form and Interpretation (Sec 1-23)


6. Hongkong & Shanghai Bank vs. People’s Bank; Hongkong Bank’s relief lies with party responsible for changing the name
of the payee, not People’s bank
It is a settled rule that a person who presents for payment checks such guarantees the genuineness of the check, and the drawee bank
need concern itself with nothing but the genuineness of the signature, and the state of the account with it of the drawee.' (Interstate
Trust Co. vs. United States National Bank, 185 Pac. 260 [1919]). Whatever remedy the Hongkong & Shanghai Bank has would lie not
against People’s Bank but as against the party responsible for changing the name of the payee. Its failure to call the attention of the
People’s Bank as to such alteration until after the lapse of 27 days would, in the light of the Central Bank circular, negate whatever right
it might have had against People’s Bank." (35 SCRA 140, 142-143; 145-146.)
6. Metropolitan Bank vs. First National City Bank; Facts
In Metropolitan Bank & Trust Co. vs. First National City Bank, et al. (118 SCRA 537, 542) a check for P50, drawn by Joaquin Cunanan
and Company on its account at FNCB and payable to Manila Polo Club, was altered by changing the amount to P50,000 and the payee
was changed to "Cash." It was deposited by a certain Salvador Sales in his current account in the Metropolitan Bank which sent it to the
clearing house. The check was cleared the same day by FNCB which paid the amount of P50,000 to Metro Bank. Sales immediately
withdrew the whole amount and closed his account. 9 days later, the alteration was discovered and FNCB sought to recover from Metro
Bank what it had paid. The trial court and the Court of Appeals rendered judgment for FNCB but the Supreme Court reversed it.
7. Metropolitan Bank vs. First National City Bank; Validity of the 24-hour clearing house regulation
In MetroBank vs. FNCB, it was held that “the validity of the 24-hour clearing house regulation has been upheld by the Court in Republic
vs. Equitable Banking Corporation (10 SCRA 8 [1964]). As held therein, since both parties are part of our banking system, and both are
subject to the regulations of the Central Bank, they are bound by the 24-hour clearing house rule of the Central Bank.“
8. Metropolitan Bank vs. First National City Bank; Delay in the notice of alteration negates right to claim; FNCB’s claim should
be against party responsible changing the name of the payee, and not Metro Bank
In MetroBank vs. FNCB, the check was not returned to Metro Bank in accordance with the 24-hour clearing house period, but was
cleared by FNCB. Failure of FNCB, therefore, to call the attention of Metro Bank to the alteration of the check in question until after the
lapse of 9 days, negates whatever right it might have had against Metro Bank in the light of the said Central Bank Circular. Its remedy
lies not against Metro Bank, but against the party responsible for changing the name of the payee (Hongkong & Shanghai Banking
Corp. vs. People's Bank & Trust Co., 35 SCRA 140) and the amount on the face of the check."
9. Bank issuing checks has duty to determine genuineness of drawer’s signature, sufficiency of funds in drawer’s account,
and detection of alterations, erasures, superimpositions or intercalations thereon
Every bank that issues checks for the use of its customers should know whether or not the drawer's signature thereon is genuine,
whether there are sufficient funds in the 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 drawer's
account, and it is supposed to be familiar with the drawer's signature. It should possess appropriate detecting devices for uncovering
forgeries and/or alterations on these instruments.
10. Remedy of drawee bank that negligently clears a forged and/or altered check for payment
Unless an alteration is attributable to the fault or negligence of the drawer himself, such as when he leaves spaces on the check which
would allow the fraudulent insertion of additional numerals in the amount appearing thereon, the remedy of the drawee bank that
negligently clears a forged and/or altered check for payment is against the party responsible for the forgery or alteration (Hongkong &
Shanghai Banking Corp. vs. People's Bank & Trust Co., 35 SCRA 140), otherwise, it bears the loss. It may not charge the amount so
paid to the account of the drawer, if the latter was free from blame, nor recover it from the collecting bank if the latter made payment
after proper clearance from the drawee.
11. Philippine National Bank vs. Quimpo; Drawee bank bears loss if such results from its negligence
In Philippine National Bank vs. Quimpo (158 SCRA 582, 584), it was stated that "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."
12. Court of Appeals ruling erroneous; Loss borne by one negligent, though innocent of any intentional fraud
The Court of Appeals erred in laying upon Republic, instead of on FNCB the drawee bank, the burden of loss for the payment of the
altered SMC check, the fraudulent character of which FNCB failed to detect and warn Republic about, within the 24-hour clearing house
rule. The Court of Appeals departed from the ruling of this Court in an earlier PNB case, that "Where a loss, which must be borne by
one of two parties alike innocent of forgery, can be traced to the neglect or fault of either, it is reasonable that it would be borne by him,
even if innocent of any intentional fraud, through whose means it has succeeded. (Phil. National Bank vs. National City Bank of New
York, 63 Phil. 711, 733.)"

141 Negotiable Instruments – Form and Interpretation (Sec 1-23)


G.R. No. 139130 November 27, 2002
RAMON K. ILUSORIO, petitioner,
vs.
HON. COURT OF APPEALS, and THE MANILA BANKING CORPORATION, respondents.
DECISION
QUISUMBING, J.:
This petition for review seeks to reverse the decision1 promulgated on January 28, 1999 by the Court of Appeals in CA-G.R. CV No.
47942, affirming the decision of the then Court of First Instance of Rizal, Branch XV (now the Regional Trial Court of Makati, Branch
138) dismissing Civil Case No. 43907, for damages.
The facts as summarized by the Court of Appeals are as follows:
Petitioner is a prominent businessman who, at the time material to this case, was the Managing Director of Multinational Investment
Bancorporation and the Chairman and/or President of several other corporations. He was a depositor in good standing of respondent
bank, the Manila Banking Corporation, under current Checking Account No. 06-09037-0. As he was then running about 20 corporations,
and was going out of the country a number of times, petitioner entrusted to his secretary, Katherine2 E. Eugenio, his credit cards and
his checkbook with blank checks. It was also Eugenio who verified and reconciled the statements of said checking account.3
Between the dates September 5, 1980 and January 23, 1981, Eugenio was able to encash and deposit to her personal account about
seventeen (17) checks drawn against the account of the petitioner at the respondent bank, with an aggregate amount of P119,634.34.
Petitioner did not bother to check his statement of account until a business partner apprised him that he saw Eugenio use his credit
cards. Petitioner fired Eugenio immediately, and instituted a criminal action against her for estafa thru falsification before the Office of
the Provincial Fiscal of Rizal. Private respondent, through an affidavit executed by its employee, Mr. Dante Razon, also lodged a
complaint for estafa thru falsification of commercial documents against Eugenio on the basis of petitioner’s statement that his
signatures in the checks were forged.4 Mr. Razon’s affidavit states:
That I have examined and scrutinized the following checks in accordance with prescribed verification procedures with utmost care and
diligence by comparing the signatures affixed thereat against the specimen signatures of Mr. Ramon K. Ilusorio which we have on file at
our said office on such dates,
xxx
That the aforementioned checks were among those issued by Manilabank in favor of its client MR. RAMON K. ILUSORIO,…
That the same were personally encashed by KATHERINE E. ESTEBAN, an executive secretary of MR. RAMON K. ILUSORIO in said
Investment Corporation;
That I have met and known her as KATHERINE E. ESTEBAN the attending verifier when she personally encashed the above-
mentioned checks at our said office;
That MR. RAMON K. ILUSORIO executed an affidavit expressly disowning his signature appearing on the checks further alleged to
have not authorized the issuance and encashment of the same.…5
Petitioner then requested the respondent bank to credit back and restore to its account the value of the checks which were wrongfully
encashed but respondent bank refused. Hence, petitioner filed the instant case.6
At the trial, petitioner testified on his own behalf, attesting to the truth of the circumstances as narrated above, and how he discovered
the alleged forgeries. Several employees of Manila Bank were also called to the witness stand as hostile witnesses. They testified that it
is the bank’s standard operating procedure that whenever a check is presented for encashment or clearing, the signature on the check
is first verified against the specimen signature cards on file with the bank.
Manila Bank also sought the expertise of the National Bureau of Investigation (NBI) in determining the genuineness of the signatures
appearing on the checks. However, in a letter dated March 25, 1987, the NBI informed the trial court that they could not conduct the
desired examination for the reason that the standard specimens submitted were not sufficient for purposes of rendering a definitive
opinion. The NBI then suggested that petitioner be asked to submit seven (7) or more additional standard signatures executed before or
about, and immediately after the dates of the questioned checks. Petitioner, however, failed to comply with this request.
After evaluating the evidence on both sides, the court a quo rendered judgment on May 12, 1994 with the following dispositive portion:
WHEREFORE, finding no sufficient basis for plaintiff's cause herein against defendant bank, in the light of the foregoing considerations
and established facts, this case would have to be, as it is hereby DISMISSED.
Defendant’s counterclaim is likewise DISMISSED for lack of sufficient basis.
SO ORDERED.7
Aggrieved, petitioner elevated the case to the Court of Appeals by way of a petition for review but without success. The appellate court
held that petitioner’s own negligence was the proximate cause of his loss. The appellate court disposed as follows:
WHEREFORE, the judgment appealed from is AFFIRMED. Costs against the appellant.
SO ORDERED.8
142 Negotiable Instruments – Form and Interpretation (Sec 1-23)
Before us, petitioner ascribes the following errors to the Court of Appeals:
A. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE RESPONDENT BANK IS ESTOPPED FROM
RAISING THE DEFENSE THAT THERE WAS NO FORGERY OF THE SIGNATURES OF THE PETITIONER IN THE
CHECK BECAUSE THE RESPONDENT FILED A CRIMINAL COMPLAINT FOR ESTAFA THRU FALSIFICATION OF
COMMERCIAL DOCUMENTS AGAINST KATHERINE EUGENIO USING THE AFFIDAVIT OF PETITIONER STATING
THAT HIS SIGNATURES WERE FORGED AS PART OF THE AFFIDAVIT-COMPLAINT.9

B. THE COURT OF APPEALS ERRED IN NOT APPLYING SEC. 23, NEGOTIABLE INSTRUMENTS LAW.10

C. THE COURT OF APPEALS ERRED IN NOT HOLDING THE BURDEN OF PROOF IS WITH THE RESPONDENT
BANK TO PROVE THE DUE DILIGENCE TO PREVENT DAMAGE, TO THE PETITIONER, AND THAT IT WAS NOT
NEGLIGENT IN THE SELECTION AND SUPERVISION OF ITS EMPLOYEES.11

D. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT BANK SHOULD BEAR THE LOSS,
AND SHOULD BE MADE TO PAY PETITIONER, WITH RECOURSE AGAINST KATHERINE EUGENIO ESTEBAN.12

Essentially the issues in this case are: (1) whether or not petitioner has a cause of action against private respondent; and (2) whether or
not private respondent, in filing an estafa case against petitioner’s secretary, is barred from raising the defense that the fact of forgery
was not established.
Petitioner contends that Manila Bank is liable for damages for its negligence in failing to detect the discrepant checks. He adds that as a
general rule a bank which has obtained possession of a check upon an unauthorized or forged endorsement of the payee’s signature
and which collects the amount of the check from the drawee is liable for the proceeds thereof to the payee. Petitioner invokes the
doctrine of estoppel, saying that having itself instituted a forgery case against Eugenio, Manila Bank is now estopped from asserting
that the fact of forgery was never proven.
For its part, Manila Bank contends that respondent appellate court did not depart from the accepted and usual course of judicial
proceedings, hence there is no reason for the reversal of its ruling. Manila Bank additionally points out that Section 2313 of the
Negotiable Instruments Law is inapplicable, considering that the fact of forgery was never proven. Lastly, the bank negates petitioner’s
claim of estoppel.14
On the first issue, we find that petitioner has no cause of action against Manila Bank. To be entitled to damages, petitioner has the
burden of proving negligence on the part of the bank for failure to detect the discrepancy in the signatures on the checks. It is
incumbent upon petitioner to establish the fact of forgery, i.e., by submitting his specimen signatures and comparing them with those on
the questioned checks. Curiously though, petitioner failed to submit additional specimen signatures as requested by the National
Bureau of Investigation from which to draw a conclusive finding regarding forgery. The Court of Appeals found that petitioner, by his
own inaction, was precluded from setting up forgery. Said the appellate court:
We cannot fault the court a quo for such declaration, considering that the plaintiff’s evidence on the alleged forgery is not convincing
enough. The burden to prove forgery was upon the plaintiff, which burden he failed to discharge. Aside from his own testimony, the
appellant presented no other evidence to prove the fact of forgery. He did not even submit his own specimen signatures, taken on or
about the date of the questioned checks, for examination and comparison with those of the subject checks. On the other hand, the
appellee presented specimen signature cards of the appellant, taken at various years, namely, in 1976, 1979 and 1981 (Exhibits "1",
"2", "3" and "7"), showing variances in the appellant’s unquestioned signatures. The evidence further shows that the appellee, as soon
as it was informed by the appellant about his questioned signatures, sought to borrow the questioned checks from the appellant for
purposes of analysis and examination (Exhibit "9"), but the same was denied by the appellant. It was also the former which sought the
assistance of the NBI for an expert analysis of the signatures on the questioned checks, but the same was unsuccessful for lack of
sufficient specimen signatures.15
Moreover, petitioner’s contention that Manila Bank was remiss in the exercise of its duty as drawee lacks factual basis. Consistently, the
CA and the RTC found that Manila Bank employees exercised due diligence in cashing the checks. The bank’s employees in the
present case did not have a hint as to Eugenio’s modus operandi because she was a regular customer of the bank, having been
designated by petitioner himself to transact in his behalf. According to the appellate court, the employees of the bank exercised due
diligence in the performance of their duties. Thus, it found that:
The evidence on both sides indicates that TMBC’s employees exercised due diligence before encashing the checks. Its verifiers first
verified the drawer’s signatures thereon as against his specimen signature cards, and when in doubt, the verifier went further, such as
by referring to a more experienced verifier for further verification. In some instances the verifier made a confirmation by calling the
depositor by phone. It is only after taking such precautionary measures that the subject checks were given to the teller for payment.
Of course it is possible that the verifiers of TMBC might have made a mistake in failing to detect any forgery -- if indeed there was.
However, a mistake is not equivalent to negligence if they were honest mistakes. In the instant case, we believe and so hold that if
there were mistakes, the same were not deliberate, since the bank took all the precautions.16
As borne by the records, it was petitioner, not the bank, who was negligent. Negligence is the omission to do something which a
reasonable man, guided by those considerations which ordinarily regulate the conduct of human affairs, would do, or the doing of
something which a prudent and reasonable man would do.17 In the present case, it appears that petitioner accorded his secretary
unusual degree of trust and unrestricted access to his credit cards, passbooks, check books, bank statements, including custody and
possession of cancelled checks and reconciliation of accounts. Said the Court of Appeals on this matter:

143 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Moreover, the appellant had introduced his secretary to the bank for purposes of reconciliation of his account, through a letter dated
July 14, 1980 (Exhibit "8"). Thus, the said secretary became a familiar figure in the bank. What is worse, whenever the bank verifiers
call the office of the appellant, it is the same secretary who answers and confirms the checks.
The trouble is, the appellant had put so much trust and confidence in the said secretary, by entrusting not only his credit cards with her
but also his checkbook with blank checks. He also entrusted to her the verification and reconciliation of his account. Further adding to
his injury was the fact that while the bank was sending him the monthly Statements of Accounts, he was not personally checking the
same. His testimony did not indicate that he was out of the country during the period covered by the checks. Thus, he had all the
opportunities to verify his account as well as the cancelled checks issued thereunder -- month after month. But he did not, until his
partner asked him whether he had entrusted his credit card to his secretary because the said partner had seen her use the same. It
was only then that he was minded to verify the records of his account. 18
The abovecited findings are binding upon the reviewing court. We stress the rule that the factual findings of a trial court, especially
when affirmed by the appellate court, are binding upon us19 and entitled to utmost respect20 and even finality. We find no palpable
error that would warrant a reversal of the appellate court’s assessment of facts anchored upon the evidence on record.
Petitioner’s failure to examine his bank statements appears as the proximate cause of his own damage. Proximate cause is that cause,
which, in natural and continuous sequence, unbroken by any efficient intervening cause, produces the injury, and without which the
result would not have occurred.21 In the instant case, the bank was not shown to be remiss in its duty of sending monthly bank
statements to petitioner so that any error or discrepancy in the entries therein could be brought to the bank’s attention at the earliest
opportunity. But, petitioner failed to examine these bank statements not because he was prevented by some cause in not doing so, but
because he did not pay sufficient attention to the matter. Had he done so, he could have been alerted to any anomaly committed
against him. In other words, petitioner had sufficient opportunity to prevent or detect any misappropriation by his secretary had he only
reviewed the status of his accounts based on the bank statements sent to him regularly. In view of Article 2179 of the New Civil
Code,22 when the plaintiff’s own negligence was the immediate and proximate cause of his injury, no recovery could be had for
damages.
Petitioner further contends that under Section 23 of the Negotiable Instruments Law a forged check is inoperative, and that Manila Bank
had no authority to pay the forged checks. True, it is a rule that when a signature is forged or made without the authority of the person
whose signature it purports to be, the check is wholly inoperative. No right to retain the instrument, or to give a discharge therefor, or to
enforce payment thereof against any party, can be acquired through or under such signature. However, the rule does provide for an
exception, namely: "unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of
authority." In the instant case, it is the exception that applies. In our view, petitioner is precluded from setting up the forgery, assuming
there is forgery, due to his own negligence in entrusting to his secretary his credit cards and checkbook including the verification of his
statements of account.
Petitioner’s reliance on Associated Bank vs. Court of Appeals23 and Philippine Bank of Commerce vs. CA24 to buttress his contention
that respondent Manila Bank as the collecting or last endorser generally suffers the loss because it has the duty to ascertain the
genuineness of all prior endorsements is misplaced. In the cited cases, the fact of forgery was not in issue. In the present case, the fact
of forgery was not established with certainty. In those cited cases, the collecting banks were held to be negligent for failing to observe
precautionary measures to detect the forgery. In the case before us, both courts below uniformly found that Manila Bank’s personnel
diligently performed their duties, having compared the signature in the checks from the specimen signatures on record and satisfied
themselves that it was petitioner’s.
On the second issue, the fact that Manila Bank had filed a case for estafa against Eugenio would not estop it from asserting the fact
that forgery has not been clearly established. Petitioner cannot hold private respondent in estoppel for the latter is not the actual party
to the criminal action. In a criminal action, the State is the plaintiff, for the commission of a felony is an offense against the
State.25 Thus, under Section 2, Rule 110 of the Rules of Court the complaint or information filed in court is required to be brought in the
name of the "People of the Philippines." 26
Further, as petitioner himself stated in his petition, respondent bank filed the estafa case against Eugenio on the basis of petitioner’s
own affidavit,27 but without admitting that he had any personal knowledge of the alleged forgery. It is, therefore, easy to understand
that the filing of the estafa case by respondent bank was a last ditch effort to salvage its ties with the petitioner as a valuable client, by
bolstering the estafa case which he filed against his secretary.
All told, we find no reversible error that can be ascribed to the Court of Appeals.
WHEREFORE, the instant petition is DENIED for lack of merit. The assailed decision of the Court of Appeals dated January 28, 1999 in
CA-G.R. CV No. 47942, is AFFIRMED.
Costs against petitioner.
SO ORDERED.

144 Negotiable Instruments – Form and Interpretation (Sec 1-23)


G.R. No. 121413 January 29, 2001
PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly INSULAR BANK OF ASIA AND AMERICA),petitioner,
vs.
COURT OF APPEALS and FORD PHILIPPINES, INC. and CITIBANK, N.A., respondents.

G.R. No. 121479 January 29, 2001


FORD PHILIPPINES, INC., petitioner-plaintiff,
vs.
COURT OF APPEALS and CITIBANK, N.A. and PHILIPPINE COMMERCIAL INTERNATIONAL BANK,respondents.

G.R. No. 128604 January 29, 2001


FORD PHILIPPINES, INC., petitioner,
vs.
CITIBANK, N.A., PHILIPPINE COMMERCIAL INTERNATIONAL BANK and COURT OF APPEALS, respondents.
QUISUMBING, J.:
These consolidated petitions involve several fraudulently negotiated checks.
The original actions a quo were instituted by Ford Philippines to recover from the drawee bank, CITIBANK, N.A. (Citibank) and
collecting bank, Philippine Commercial International Bank (PCIBank) [formerly Insular Bank of Asia and America], the value of several
checks payable to the Commissioner of Internal Revenue, which were embezzled allegedly by an organized syndicate.1âwphi1.nêt
G.R. Nos. 121413 and 121479 are twin petitions for review of the March 27, 1995 Decision1 of the Court of Appeals in CA-G.R. CV No.
25017, entitled "Ford Philippines, Inc. vs. Citibank, N.A. and Insular Bank of Asia and America (now Philipppine Commercial
International Bank), and the August 8, 1995 Resolution,2 ordering the collecting bank, Philippine Commercial International Bank, to pay
the amount of Citibank Check No. SN-04867.
In G.R. No. 128604, petitioner Ford Philippines assails the October 15, 1996 Decision3 of the Court of Appeals and its March 5, 1997
Resolution4 in CA-G.R. No. 28430 entitled "Ford Philippines, Inc. vs. Citibank, N.A. and Philippine Commercial International Bank,"
affirming in toto the judgment of the trial court holding the defendant drawee bank, Citibank, N.A., solely liable to pay the amount of
P12,163,298.10 as damages for the misapplied proceeds of the plaintiff's Citibanl Check Numbers SN-10597 and 16508.
I. G.R. Nos. 121413 and 121479
The stipulated facts submitted by the parties as accepted by the Court of Appeals are as follows:
"On October 19, 1977, the plaintiff Ford drew and issued its Citibank Check No. SN-04867 in the amount of P4,746,114.41, in favor of
the Commissioner of Internal Revenue as payment of plaintiff;s percentage or manufacturer's sales taxes for the third quarter of 1977.
The aforesaid check was deposited with the degendant IBAA (now PCIBank) and was subsequently cleared at the Central Bank. Upon
presentment with the defendant Citibank, the proceeds of the check was paid to IBAA as collecting or depository bank.
The proceeds of the same Citibank check of the plaintiff was never paid to or received by the payee thereof, the Commissioner of
Internal Revenue.
As a consequence, upon demand of the Bureau and/or Commissioner of Internal Revenue, the plaintiff was compelled to make a
second payment to the Bureau of Internal Revenue of its percentage/manufacturers' sales taxes for the third quarter of 1977 and that
said second payment of plaintiff in the amount of P4,746,114.41 was duly received by the Bureau of Internal Revenue.
It is further admitted by defendant Citibank that during the time of the transactions in question, plaintiff had been maintaining a checking
account with defendant Citibank; that Citibank Check No. SN-04867 which was drawn and issued by the plaintiff in favor of the
Commissioner of Internal Revenue was a crossed check in that, on its face were two parallel lines and written in between said lines was
the phrase "Payee's Account Only"; and that defendant Citibank paid the full face value of the check in the amount of P4,746,114.41 to
the defendant IBAA.
It has been duly established that for the payment of plaintiff's percentage tax for the last quarter of 1977, the Bureau of Internal
Revenue issued Revenue Tax Receipt No. 18747002, dated October 20, 1977, designating therein in Muntinlupa, Metro Manila, as the
authorized agent bank of Metrobanl, Alabang branch to receive the tax payment of the plaintiff.
On December 19, 1977, plaintiff's Citibank Check No. SN-04867, together with the Revenue Tax Receipt No. 18747002, was deposited
with defendant IBAA, through its Ermita Branch. The latter accepted the check and sent it to the Central Clearing House for clearing on
the samd day, with the indorsement at the back "all prior indorsements and/or lack of indorsements guaranteed." Thereafter, defendant
IBAA presented the check for payment to defendant Citibank on same date, December 19, 1977, and the latter paid the face value of
the check in the amount of P4,746,114.41. Consequently, the amount of P4,746,114.41 was debited in plaintiff's account with the
defendant Citibank and the check was returned to the plaintiff.

145 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Upon verification, plaintiff discovered that its Citibank Check No. SN-04867 in the amount of P4,746,114.41 was not paid to the
Commissioner of Internal Revenue. Hence, in separate letters dated October 26, 1979, addressed to the defendants, the plaintiff
notified the latter that in case it will be re-assessed by the BIR for the payment of the taxes covered by the said checks, then plaintiff
shall hold the defendants liable for reimbursement of the face value of the same. Both defendants denied liability and refused to pay.
In a letter dated February 28, 1980 by the Acting Commissioner of Internal Revenue addressed to the plaintiff - supposed to be Exhibit
"D", the latter was officially informed, among others, that its check in the amount of P4, 746,114.41 was not paid to the government or
its authorized agent and instead encashed by unauthorized persons, hence, plaintiff has to pay the said amount within fifteen days from
receipt of the letter. Upon advice of the plaintiff's lawyers, plaintiff on March 11, 1982, paid to the Bureau of Internal Revenue, the
amount of P4,746,114.41, representing payment of plaintiff's percentage tax for the third quarter of 1977.
As a consequence of defendant's refusal to reimburse plaintiff of the payment it had made for the second time to the BIR of its
percentage taxes, plaintiff filed on January 20, 1983 its original complaint before this Court.
On December 24, 1985, defendant IBAA was merged with the Philippine Commercial International Bank (PCI Bank) with the latter as
the surviving entity.
Defendant Citibank maintains that; the payment it made of plaintiff's Citibank Check No. SN-04867 in the amount of P4,746,114.41
"was in due course"; it merely relied on the clearing stamp of the depository/collecting bank, the defendant IBAA that "all prior
indorsements and/or lack of indorsements guaranteed"; and the proximate cause of plaintiff's injury is the gross negligence of
defendant IBAA in indorsing the plaintiff's Citibank check in question.
It is admitted that on December 19, 1977 when the proceeds of plaintiff's Citibank Check No. SN-048867 was paid to defendant IBAA
as collecting bank, plaintiff was maintaining a checking account with defendant Citibank."5
Although it was not among the stipulated facts, an investigation by the National Bureau of Investigation (NBI) revealed that Citibank
Check No. SN-04867 was recalled by Godofredo Rivera, the General Ledger Accountant of Ford. He purportedly needed to hold back
the check because there was an error in the computation of the tax due to the Bureau of Internal Revenue (BIR). With Rivera's
instruction, PCIBank replaced the check with two of its own Manager's Checks (MCs). Alleged members of a syndicate later deposited
the two MCs with the Pacific Banking Corporation.
Ford, with leave of court, filed a third-party complaint before the trial court impleading Pacific Banking Corporation (PBC) and
Godofredo Rivera, as third party defendants. But the court dismissed the complaint against PBC for lack of cause of action. The course
likewise dismissed the third-party complaint against Godofredo Rivera because he could not be served with summons as the NBI
declared him as a "fugitive from justice".
On June 15, 1989, the trial court rendered its decision, as follows:
"Premises considered, judgment is hereby rendered as follows:
"1. Ordering the defendants Citibank and IBAA (now PCI Bank), jointly and severally, to pay the plaintiff the amount of P4,746,114.41
representing the face value of plaintiff's Citibank Check No. SN-04867, with interest thereon at the legal rate starting January 20, 1983,
the date when the original complaint was filed until the amount is fully paid, plus costs;
"2. On defendant Citibank's cross-claim: ordering the cross-defendant IBAA (now PCI Bank) to reimburse defendant Citibank for
whatever amount the latter has paid or may pay to the plaintiff in accordance with next preceding paragraph;
"3. The counterclaims asserted by the defendants against the plaintiff, as well as that asserted by the cross-defendant against the
cross-claimant are dismissed, for lack of merits; and
"4. With costs against the defendants.
SO ORDERED."6
Not satisfied with the said decision, both defendants, Citibank and PCIBank, elevated their respective petitions for review on certiorari
to the Courts of Appeals. On March 27, 1995, the appellate court issued its judgment as follows:
"WHEREFORE, in view of the foregoing, the court AFFIRMS the appealed decision with modifications.
The court hereby renderes judgment:
1. Dismissing the complaint in Civil Case No. 49287 insofar as defendant Citibank N.A. is concerned;
2. Ordering the defendant IBAA now PCI Bank to pay the plaintiff the amount of P4,746,114.41 representing the face value of plaintiff's
Citibank Check No. SN-04867, with interest thereon at the legal rate starting January 20, 1983, the date when the original complaint
was filed until the amount is fully paid;
3. Dismissing the counterclaims asserted by the defendants against the plaintiff as well as that asserted by the cross-defendant against
the cross-claimant, for lack of merits.
Costs against the defendant IBAA (now PCI Bank).
IT IS SO ORDERED."7
PCI Bank moved to reconsider the above-quoted decision of the Court of Appeals, while Ford filed a "Motion for Partial
Reconsideration." Both motions were denied for lack of merit.
Separately, PCIBank and Ford filed before this Court, petitions for review by certiorari under Rule 45.

146 Negotiable Instruments – Form and Interpretation (Sec 1-23)


In G.R. No. 121413, PCIBank seeks the reversal of the decision and resolution of the Twelfth Division of the Court of Appeals
contending that it merely acted on the instruction of Ford and such casue of action had already prescribed.
PCIBank sets forth the following issues for consideration:
I. Did the respondent court err when, after finding that the petitioner acted on the check drawn by respondent Ford on the said
respondent's instructions, it nevertheless found the petitioner liable to the said respondent for the full amount of the said check.
II. Did the respondent court err when it did not find prescription in favor of the petitioner.8
In a counter move, Ford filed its petition docketed as G.R. No. 121479, questioning the same decision and resolution of the Court of
Appeals, and praying for the reinstatement in toto of the decision of the trial court which found both PCIBank and Citibank jointly and
severally liable for the loss.
In G.R. No. 121479, appellant Ford presents the following propositions for consideration:
I. Respondent Citibank is liable to petitioner Ford considering that:
1. As drawee bank, respondent Citibank owes to petitioner Ford, as the drawer of the subject check and a depositor of respondent
Citibank, an absolute and contractual duty to pay the proceeds of the subject check only to the payee thereof, the Commissioner of
Internal Revenue.
2. Respondent Citibank failed to observe its duty as banker with respect to the subject check, which was crossed and payable to
"Payee's Account Only."
3. Respondent Citibank raises an issue for the first time on appeal; thus the same should not be considered by the Honorable Court.
4. As correctly held by the trial court, there is no evidence of gross negligence on the part of petitioner Ford.9
II. PCI Bank is liable to petitioner Ford considering that:
1. There were no instructions from petitioner Ford to deliver the proceeds of the subject check to a person other than the payee named
therein, the Commissioner of the Bureau of Internal Revenue; thus, PCIBank's only obligation is to deliver the proceeds to the
Commissioner of the Bureau of Internal Revenue.10
2. PCIBank which affixed its indorsement on the subject check ("All prior indorsement and/or lack of indorsement guaranteed"), is liable
as collecting bank.11
3. PCIBank is barred from raising issues of fact in the instant proceedings.12
4. Petitioner Ford's cause of action had not prescribed.13
II. G.R. No. 128604
The same sysndicate apparently embezzled the proceeds of checks intended, this time, to settle Ford's percentage taxes appertaining
to the second quarter of 1978 and the first quarter of 1979.
The facts as narrated by the Court of Appeals are as follows:
Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount of P5,851,706.37 representing the percentage tax due for the
second quarter of 1978 payable to the Commissioner of Internal Revenue. A BIR Revenue Tax Receipt No. 28645385 was issued for
the said purpose.
On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in the amount of P6,311,591.73, representing the payment of
percentage tax for the first quarter of 1979 and payable to the Commissioner of Internal Revenue. Again a BIR Revenue Tax Receipt
No. A-1697160 was issued for the said purpose.
Both checks were "crossed checks" and contain two diagonal lines on its upper corner between, which were written the words "payable
to the payee's account only."
The checks never reached the payee, CIR. Thus, in a letter dated February 28, 1980, the BIR, Region 4-B, demanded for the said tax
payments the corresponding periods above-mentioned.
As far as the BIR is concernced, the said two BIR Revenue Tax Receipts were considered "fake and spurious". This anomaly was
confirmed by the NBI upon the initiative of the BIR. The findings forced Ford to pay the BIR a new, while an action was filed against
Citibank and PCIBank for the recovery of the amount of Citibank Check Numbers SN-10597 and 16508.
The Regional Trial Court of Makati, Branch 57, which tried the case, made its findings on the modus operandi of the syndicate, as
follows:
"A certain Mr. Godofredo Rivera was employed by the plaintiff FORD as its General Ledger Accountant. As such, he prepared the
plaintiff's check marked Ex. 'A' [Citibank Check No. Sn-10597] for payment to the BIR. Instead, however, fo delivering the same of the
payee, he passed on the check to a co-conspirator named Remberto Castro who was a pro-manager of the San Andres Branch of
PCIB.* In connivance with one Winston Dulay, Castro himself subsequently opened a Checking Account in the name of a fictitious
person denominated as 'Reynaldo reyes' in the Meralco Branch of PCIBank where Dulay works as Assistant Manager.
After an initial deposit of P100.00 to validate the account, Castro deposited a worthless Bank of America Check in exactly the same
amount as the first FORD check (Exh. "A", P5,851,706.37) while this worthless check was coursed through PCIB's main office enroute
to the Central Bank for clearing, replaced this worthless check with FORD's Exhibit 'A' and accordingly tampered the accompanying

147 Negotiable Instruments – Form and Interpretation (Sec 1-23)


documents to cover the replacement. As a result, Exhibit 'A' was cleared by defendant CITIBANK, and the fictitious deposit account of
'Reynaldo Reyes' was credited at the PCIB Meralco Branch with the total amount of the FORD check Exhibit 'A'. The same method was
again utilized by the syndicate in profiting from Exh. 'B' [Citibank Check No. SN-16508] which was subsequently pilfered by Alexis
Marindo, Rivera's Assistant at FORD.
From this 'Reynaldo Reyes' account, Castro drew various checks distributing the sahres of the other participating conspirators namely
(1) CRISANTO BERNABE, the mastermind who formulated the method for the embezzlement; (2) RODOLFO R. DE LEON a customs
broker who negotiated the initial contact between Bernabe, FORD's Godofredo Rivera and PCIB's Remberto Castro; (3) JUAN
VASTILLO who assisted de Leon in the initial arrangements; (4) GODOFREDO RIVERA, FORD's accountant who passed on the first
check (Exhibit "A") to Castro; (5) REMERTO CASTRO, PCIB's pro-manager at San Andres who performed the switching of checks in
the clearing process and opened the fictitious Reynaldo Reyes account at the PCIB Meralco Branch; (6) WINSTON DULAY, PCIB's
Assistant Manager at its Meralco Branch, who assisted Castro in switching the checks in the clearing process and facilitated the
opening of the fictitious Reynaldo Reyes' bank account; (7) ALEXIS MARINDO, Rivera's Assistant at FORD, who gave the second
check (Exh. "B") to Castro; (8) ELEUTERIO JIMENEZ, BIR Collection Agent who provided the fake and spurious revenue tax receipts
to make it appear that the BIR had received FORD's tax payments.
Several other persons and entities were utilized by the syndicate as conduits in the disbursements of the proceeds of the two checks,
but like the aforementioned participants in the conspiracy, have not been impleaded in the present case. The manner by which the said
funds were distributed among them are traceable from the record of checks drawn against the original "Reynaldo Reyes" account and
indubitably identify the parties who illegally benefited therefrom and readily indicate in what amounts they did so."14
On December 9, 1988, Regional Trial Court of Makati, Branch 57, held drawee-bank, Citibank, liable for the value of the two checks
while adsolving PCIBank from any liability, disposing as follows:
"WHEREFORE, judgment is hereby rendered sentencing defendant CITIBANK to reimburse plaintiff FORD the total amount of
P12,163,298.10 prayed for in its complaint, with 6% interest thereon from date of first written demand until full payment, plus
P300,000.00 attorney's fees and expenses litigation, and to pay the defendant, PCIB (on its counterclaim to crossclaim) the sum of
P300,000.00 as attorney's fees and costs of litigation, and pay the costs.
SO ORDERED."15
Both Ford and Citibank appealed to the Court of Appeals which affirmed, in toto, the decision of the trial court. Hence, this petition.
Petitioner Ford prays that judgment be rendered setting aside the portion of the Court of Appeals decision and its resolution dated
March 5, 1997, with respect to the dismissal of the complaint against PCIBank and holding Citibank solely responsible for the proceeds
of Citibank Check Numbers SN-10597 and 16508 for P5,851,706.73 and P6,311,591.73 respectively.
Ford avers that the Court of Appeals erred in dismissing the complaint against defendant PCIBank considering that:
I. Defendant PCIBank was clearly negligent when it failed to exercise the diligence required to be exercised by it as a banking insitution.
II. Defendant PCIBank clearly failed to observe the diligence required in the selection and supervision of its officers and employees.
III. Defendant PCIBank was, due to its negligence, clearly liable for the loss or damage resulting to the plaintiff Ford as a consequence
of the substitution of the check consistent with Section 5 of Central Bank Circular No. 580 series of 1977.
IV. Assuming arguedo that defedant PCIBank did not accept, endorse or negotiate in due course the subject checks, it is liable, under
Article 2154 of the Civil Code, to return the money which it admits having received, and which was credited to it its Central bank
account.16
The main issue presented for our consideration by these petitions could be simplified as follows: Has petitioner Ford the right to recover
from the collecting bank (PCIBank) and the drawee bank (Citibank) the value of the checks intended as payment to the Commissioner
of Internal Revenue? Or has Ford's cause of action already prescribed?
Note that in these cases, the checks were drawn against the drawee bank, but the title of the person negotiating the same was
allegedly defective because the instrument was obtained by fraud and unlawful means, and the proceeds of the checks were not
remitted to the payee. It was established that instead of paying the checks to the CIR, for the settlement of the approprite quarterly
percentage taxes of Ford, the checks were diverted and encashed for the eventual distribution among the mmbers of the syndicate. As
to the unlawful negotiation of the check the applicable law is Section 55 of the Negotiable Instruments Law (NIL), which provides:
"When title defective -- The title of a person who negotiates an instrument is defective within the meaning of this Act when he obtained
the instrument, or any signature thereto, by fraud, duress, or fore and fear, or other unlawful means, or for an illegal consideration, or
when he negotiates it in breach of faith or under such circumstances as amount to a fraud."
Pursuant to this provision, it is vital to show that the negotiation is made by the perpetator in breach of faith amounting to fraud. The
person negotiating the checks must have gone beyond the authority given by his principal. If the principal could prove that there was no
negligence in the performance of his duties, he may set up the personal defense to escape liability and recover from other parties who.
Though their own negligence, alowed the commission of the crime.
In this case, we note that the direct perpetrators of the offense, namely the embezzlers belonging to a syndicate, are now fugitives from
justice. They have, even if temporarily, escaped liability for the embezzlement of millions of pesos. We are thus left only with the task of
determining who of the present parties before us must bear the burden of loss of these millions. It all boils down to thequestion of
liability based on the degree of negligence among the parties concerned.

148 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Foremost, we must resolve whether the injured party, Ford, is guilty of the "imputed contributory negligence" that would defeat its claim
for reimbursement, bearing ing mind that its employees, Godofredo Rivera and Alexis Marindo, were among the members of the
syndicate.
Citibank points out that Ford allowed its very own employee, Godofredo Rivera, to negotiate the checks to his co-conspirators, instead
of delivering them to the designated authorized collecting bank (Metrobank-Alabang) of the payee, CIR. Citibank bewails the fact that
Ford was remiss in the supervision and control of its own employees, inasmuch as it only discovered the syndicate's activities through
the information given by the payee of the checks after an unreasonable period of time.
PCIBank also blames Ford of negligence when it allegedly authorized Godofredo Rivera to divert the proceeds of Citibank Check No.
SN-04867, instead of using it to pay the BIR. As to the subsequent run-around of unds of Citibank Check Nos. SN-10597 and 16508,
PCIBank claims that the proximate cause of the damge to Ford lies in its own officers and employees who carried out the fradulent
schemes and the transactions. These circumstances were not checked by other officers of the company including its comptroller or
internal auditor. PCIBank contends that the inaction of Ford despite the enormity of the amount involved was a sheer negligence and
stated that, as between two innocent persons, one of whom must suffer the consequences of a breach of trust, the one who made it
possible, by his act of negligence, must bear the loss.
For its part, Ford denies any negligence in the performance of its duties. It avers that there was no evidence presented before the trial
court showing lack of diligence on the part of Ford. And, citing the case of Gempesaw vs. Court of Appeals,17 Ford argues that even if
there was a finding therein that the drawer was negligent, the drawee bank was still ordered to pay damages.
Furthermore, Ford contends the Godofredo rivera was not authorized to make any representation in its behalf, specifically, to divert the
proceeds of the checks. It adds that Citibank raised the issue of imputed negligence against Ford for the first time on appeal. Thus, it
should not be considered by this Court.
On this point, jurisprudence regarding the imputed negligence of employer in a master-servant relationship is instructive. Since a
master may be held for his servant's wrongful act, the law imputes to the master the act of the servant, and if that act is negligent or
wrongful and proximately results in injury to a third person, the negligence or wrongful conduct is the negligence or wrongful conduct of
the master, for which he is liable.18 The general rule is that if the master is injured by the negligence of a third person and by the
concuring contributory negligence of his own servant or agent, the latter's negligence is imputed to his superior and will defeat the
superior's action against the third person, asuming, of course that the contributory negligence was the proximate cause of the injury of
which complaint is made.19
Accordingly, we need to determine whether or not the action of Godofredo Rivera, Ford's General Ledger Accountant, and/or Alexis
Marindo, his assistant, was the proximate cause of the loss or damage. AS defined, proximate cause is that which, in the natural and
continuous sequence, unbroken by any efficient, intervening cause produces the injury and without the result would not have
occurred.20
It appears that although the employees of Ford initiated the transactions attributable to an organized syndicate, in our view, their actions
were not the proximate cause of encashing the checks payable to the CIR. The degree of Ford's negligence, if any, could not be
characterized as the proximate cause of the injury to the parties.
The Board of Directors of Ford, we note, did not confirm the request of Godofredo Rivera to recall Citibank Check No. SN-04867.
Rivera's instruction to replace the said check with PCIBank's Manager's Check was not in theordinary course of business which could
have prompted PCIBank to validate the same.
As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it was established that these checks were made payable to the
CIR. Both were crossed checks. These checks were apparently turned around by Ford's emploees, who were acting on their own
personal capacity.
Given these circumstances, the mere fact that the forgery was committed by a drawer-payor's confidential employee or agent, who by
virtue of his position had unusual facilities for perpertrating the fraud and imposing the forged paper upon the bank, does notentitle the
bank toshift the loss to the drawer-payor, in the absence of some circumstance raising estoppel against the drawer.21 This rule likewise
applies to the checks fraudulently negotiated or diverted by the confidential employees who hold them in their possession.
With respect to the negligence of PCIBank in the payment of the three checks involved, separately, the trial courts found variations
between the negotiation of Citibank Check No. SN-04867 and the misapplication of total proceeds of Checks SN-10597 and 16508.
Therefore, we have to scrutinize, separately, PCIBank's share of negligence when the syndicate achieved its ultimate agenda of
stealing the proceeds of these checks.
G.R. Nos. 121413 and 121479
Citibank Check No. SN-04867 was deposited at PCIBank through its Ermita Branch. It was coursed through the ordinary banking
transaction, sent to Central Clearing with the indorsement at the back "all prior indorsements and/or lack of indorsements guaranteed,"
and was presented to Citibank for payment. Thereafter PCIBank, instead of remitting the proceeds to the CIR, prepared two of its
Manager's checks and enabled the syndicate to encash the same.
On record, PCIBank failed to verify the authority of Mr. Rivera to negotiate the checks. The neglect of PCIBank employees to verify
whether his letter requesting for the replacement of the Citibank Check No. SN-04867 was duly authorized, showed lack of care and
prudence required in the circumstances.
Furthermore, it was admitted that PCIBank is authorized to collect the payment of taxpayers in behalf of the BIR. As an agent of BIR,
PCIBank is duty bound to consult its principal regarding the unwarranted instructions given by the payor or its agent. As aptly stated by
the trial court, to wit:

149 Negotiable Instruments – Form and Interpretation (Sec 1-23)


"xxx. Since the questioned crossed check was deposited with IBAA [now PCIBank], which claimed to be a depository/collecting bank of
BIR, it has the responsibility to make sure that the check in question is deposited in Payee's account only.
xxx xxx xxx
As agent of the BIR (the payee of the check), defendant IBAA should receive instructions only from its principal BIR and not from any
other person especially so when that person is not known to the defendant. It is very imprudent on the part of the defendant IBAA to just
rely on the alleged telephone call of the one Godofredo Rivera and in his signature considering that the plaintiff is not a client of the
defendant IBAA."
It is a well-settled rule that the relationship between the payee or holder of commercial paper and the bank to which it is sent for
collection is, in the absence of an argreement to the contrary, that of principal and agent.22 A bank which receives such paper for
collection is the agent of the payee or holder.23
Even considering arguendo, that the diversion of the amount of a check payable to the collecting bank in behalf of the designated
payee may be allowed, still such diversion must be properly authorized by the payor. Otherwise stated, the diversion can be justified
only by proof of authority from the drawer, or that the drawer has clothed his agent with apparent authority to receive the proceeds of
such check.
Citibank further argues that PCI Bank's clearing stamp appearing at the back of the questioned checks stating that ALL PRIOR
INDORSEMENTS AND/OR LACK OF INDORSEMENTS GURANTEED should render PCIBank liable because it made it pass through
the clearing house and therefore Citibank had no other option but to pay it. Thus, Citibank had no other option but to pay it. Thus,
Citibank assets that the proximate cause of Ford's injury is the gross negligence of PCIBank. Since the questione dcrossed check was
deposited with PCIBank, which claimed to be a depository/collecting bank of the BIR, it had the responsibility to make sure that the
check in questions is deposited in Payee's account only.
Indeed, the crossing of the check with the phrase "Payee's Account Only," is a warning that the check should be deposited only in the
account of the CIR. Thus, it is the duty of the collecting bank PCIBank to ascertain that the check be deposited in payee's account only.
Therefore, it is the collecting bank (PCIBank) which is bound to scruninize the check and to know its depositors before it could make the
clearing indorsement "all prior indorsements and/or lack of indorsement guaranteed".
In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corporation,24 we ruled:
"Anent petitioner's liability on said instruments, this court is in full accord with the ruling of the PCHC's Board of Directors that:
'In presenting the checks for clearing and for payment, the defendant made an express guarantee on the validity of "all prior
endorsements." Thus, stamped at the back of the checks are the defedant's clear warranty: ALL PRIOR ENDORSEMENTS AND/OR
LACK OF ENDORSEMENTS GUARANTEED. Without such warranty, plaintiff would not have paid on the checks.'
No amount of legal jargon can reverse the clear meaning of defendant's warranty. As the warranty has proven to be false and
inaccurate, the defendant is liable for any damage arising out of the falsity of its representation."25
Lastly, banking business requires that the one who first cashes and negotiates the check must take some percautions to learn whether
or not it is genuine. And if the one cashing the check through indifference or othe circumstance assists the forger in committing the
fraud, he should not be permitted to retain the proceeds of the check from the drawee whose sole fault was that it did not discover the
forgery or the defect in the title of the person negotiating the instrument before paying the check. For this reason, a bank which cashes
a check drawn upon another bank, without requiring proof as to the identity of persons presenting it, or making inquiries with regard to
them, cannot hold the proceeds against the drawee when the proceeds of the checks were afterwards diverted to the hands of a third
party. In such cases the drawee bank has a right to believe that the cashing bank (or the collecting bank) had, by the usual proper
investigation, satisfied itself of the authenticity of the negotiation of the checks. Thus, one who encashed a check which had been
forged or diverted and in turn received payment thereon from the drawee, is guilty of negligence which proximately contributed to the
success of the fraud practiced on the drawee bank. The latter may recover from the holder the money paid on the check.26
Having established that the collecting bank's negligence is the proximate cause of the loss, we conclude that PCIBank is liable in the
amount corresponding to the proceeds of Citibank Check No. SN-04867.
G.R. No. 128604
The trial court and the Court of Appeals found that PCIBank had no official act in the ordinary course of business that would attribute to
it the case of the embezzlement of Citibank Check Numbers SN-10597 and 16508, because PCIBank did not actually receive nor hold
the two Ford checks at all. The trial court held, thus:
"Neither is there any proof that defendant PCIBank contributed any official or conscious participation in the process of the
embezzlement. This Court is convinced that the switching operation (involving the checks while in transit for "clearing") were the
clandestine or hidden actuations performed by the members of the syndicate in their own personl, covert and private capacity and done
without the knowledge of the defendant PCIBank…"27
In this case, there was no evidence presented confirming the conscious particiapation of PCIBank in the embezzlement. As a general
rule, however, a banking corporation is liable for the wrongful or tortuous acts and declarations of its officers or agents within the course
and scope of their employment.28 A bank will be held liable for the negligence of its officers or agents when acting within the course
and scope of their employment. It may be liable for the tortuous acts of its officers even as regards that species of tort of which malice is
an essential element. In this case, we find a situation where the PCIBank appears also to be the victim of the scheme hatched by a
syndicate in which its own management employees had particiapted.
The pro-manager of San Andres Branch of PCIBank, Remberto Castro, received Citibank Check Numbers SN-10597 and 16508. He
passed the checks to a co-conspirator, an Assistant Manager of PCIBank's Meralco Branch, who helped Castro open a Checking
150 Negotiable Instruments – Form and Interpretation (Sec 1-23)
account of a fictitious person named "Reynaldo Reyes." Castro deposited a worthless Bank of America Check in exactly the same
amount of Ford checks. The syndicate tampered with the checks and succeeded in replacing the worthless checks and the eventual
encashment of Citibank Check Nos. SN 10597 and 16508. The PCIBank Ptro-manager, Castro, and his co-conspirator Assistant
Manager apparently performed their activities using facilities in their official capacity or authority but for their personal and private gain
or benefit.
A bank holding out its officers and agents as worthy of confidence will not be permitted to profit by the frauds these officers or agents
were enabled to perpetrate in the apparent course of their employment; nor will t be permitted to shirk its responsibility for such frauds,
even though no benefit may accrue to the bank therefrom. For the general rule is that a bank is liable for the fraudulent acts or
representations of an officer or agent acting within the course and apparent scope of his employment or authority.29 And if an officer or
employee of a bank, in his official capacity, receives money to satisfy an evidence of indebetedness lodged with his bank for collection,
the bank is liable for his misappropriation of such sum.30
Moreover, as correctly pointed out by Ford, Section 531 of Central Bank Circular No. 580, Series of 1977 provides that any theft
affecting items in transit for clearing, shall be for the account of sending bank, which in this case is PCIBank.
But in this case, responsibility for negligence does not lie on PCIBank's shoulders alone.
The evidence on record shows that Citibank as drawee bank was likewise negligent in the performance of its duties. Citibank failed to
establish that its payment of Ford's checjs were made in due course and legally in order. In its defense, Citibank claims the
genuineness and due execution of said checks, considering that Citibank (1) has no knowledge of any informity in the issuance of the
checks in question (2) coupled by the fact that said checks were sufficiently funded and (3) the endorsement of the Payee or lack
thereof was guaranteed by PCI Bank (formerly IBAA), thus, it has the obligation to honor and pay the same.
For its part, Ford contends that Citibank as the drawee bank owes to Ford an absolute and contractual duty to pay the proceeds of the
subject check only to the payee thereof, the CIR. Citing Section 6232 of the Negotiable Instruments Law, Ford argues that by accepting
the instrument, the acceptro which is Citibank engages that it will pay according to the tenor of its acceptance, and that it will pay only to
the payee, (the CIR), considering the fact that here the check was crossed with annotation "Payees Account Only."
As ruled by the Court of Appeals, Citibank must likewise answer for the damages incurred by Ford on Citibank Checks Numbers SN
10597 and 16508, because of the contractual relationship existing between the two. Citibank, as the drawee bank breached its
contractual obligation with Ford and such degree of culpability contributed to the damage caused to the latter. On this score, we agree
with the respondent court's ruling.
Citibank should have scrutinized Citibank Check Numbers SN 10597 and 16508 before paying the amount of the proceeds thereof to
the collecting bank of the BIR. One thing is clear from the record: the clearing stamps at the back of Citibank Check Nos. SN 10597 and
16508 do not bear any initials. Citibank failed to notice and verify the absence of the clearing stamps. Had this been duly examined, the
switching of the worthless checks to Citibank Check Nos. 10597 and 16508 would have been discovered in time. For this reason,
Citibank had indeed failed to perform what was incumbent upon it, which is to ensure that the amount of the checks should be paid only
to its designated payee. The fact that the drawee bank did not discover the irregularity seasonably, in our view, consitutes negligence in
carrying out the bank's duty to its depositors. The point is that as a business affected with public interest and because of the nature of
its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the
fiduciary nature of their relationship.33
Thus, invoking the doctrine of comparative negligence, we are of the view that both PCIBank and Citibank failed in their respective
obligations and both were negligent in the selection and supervision of their employees resulting in the encashment of Citibank Check
Nos. SN 10597 AND 16508. Thus, we are constrained to hold them equally liable for the loss of the proceeds of said checks issued by
Ford in favor of the CIR.
Time and again, we have stressed that banking business is so impressed with public interest where the trust and confidence of the
public in general is of paramount umportance such that the appropriate standard of diligence must be very high, if not the highest,
degree of diligence.34 A bank's liability as obligor is not merely vicarious but primary, wherein the defense of exercise of due diligence
in the selection and supervision of its employees is of no moment.35
Banks handle daily transactions involving millions of pesos.36 By the very nature of their work the degree of responsibility, care and
trustworthiness expected of their employees and officials is far greater than those of ordinary clerks and employees.37 Banks are
expected to exercise the highest degree of diligence in the selection and supervision of their employees.38
On the issue of prescription, PCIBank claims that the action of Ford had prescribed because of its inability to seek judicial relief
seasonably, considering that the alleged negligent act took place prior to December 19, 1977 but the relief was sought only in 1983, or
seven years thereafter.
The statute of limitations begins to run when the bank gives the depositor notice of the payment, which is ordinarily when the check is
returned to the alleged drawer as a voucher with a statement of his account,39 and an action upon a check is ordinarily governed by
the statutory period applicable to instruments in writing.40
Our laws on the matter provide that the action upon a written contract must be brought within ten year from the time the right of action
accrues.41 hence, the reckoning time for the prescriptive period begins when the instrument was issued and the corresponding check
was returned by the bank to its depositor (normally a month thereafter). Applying the same rule, the cause of action for the recovery of
the proceeds of Citibank Check No. SN 04867 would normally be a month after December 19, 1977, when Citibank paid the face value
of the check in the amount of P4,746,114.41. Since the original complaint for the cause of action was filed on January 20, 1984, barely
six years had lapsed. Thus, we conclude that Ford's cause of action to recover the amount of Citibank Check No. SN 04867 was
seasonably filed within the period provided by law.

151 Negotiable Instruments – Form and Interpretation (Sec 1-23)


Finally, we also find thet Ford is not completely blameless in its failure to detect the fraud. Failure on the part of the depositor to
examine its passbook, statements of account, and cancelled checks and to give notice within a reasonable time (or as required by
statute) of any discrepancy which it may in the exercise of due care and diligence find therein, serves to mitigate the banks' liability by
reducing the award of interest from twelve percent (12%) to six percent (6%) per annum. As provided in Article 1172 of the Civil Code of
the Philippines, respondibility arising from negligence in the performance of every kind of obligation is also demandable, but such
liability may be regulated by the courts, according to the circumstances. In quasi-delicts, the contributory negligence of the plaintiff shall
reduce the damages that he may recover.42
WHEREFORE, the assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 25017 areAFFIRMED. PCIBank, know
formerly as Insular Bank of Asia and America, id declared solely responsible for the loss of the proceeds of Citibank Check No SN
04867 in the amount P4,746,114.41, which shall be paid together with six percent (6%) interest thereon to Ford Philippines Inc. from the
date when the original complaint was filed until said amount is fully paid.
However, the Decision and Resolution of the Court of Appeals in CA-G.R. No. 28430 are MODIFIED as follows: PCIBank and Citibank
are adjudged liable for and must share the loss, (concerning the proceeds of Citibank Check Numbers SN 10597 and 16508 totalling
P12,163,298.10) on a fifty-fifty ratio, and each bank is ORDEREDto pay Ford Philippines Inc. P6,081,649.05, with six percent (6%)
interest thereon, from the date the complaint was filed until full payment of said amount.1âwphi1.nêt
Costs against Philippine Commercial International Bank and Citibank N.A.
SO ORDERED.

152 Negotiable Instruments – Form and Interpretation (Sec 1-23)


[G.R. No. 132560. January 30, 2002]

WESTMONT BANK (formerly ASSOCIATED BANKING CORP.),petitioner, vs. EUGENE ONG, respondent.

DECISION

QUISUMBING, J.:

This is a petition for review of the decision[1] dated January 13, 1998, of the Court of Appeals in CA-G.R. CV No. 28304 ordering the
petitioner to pay respondent P1,754,787.50 plus twelve percent (12%) interest per annum computed from October 7, 1977, the date of
the first extrajudicial demand, plus damages.

The facts of this case are undisputed.

Respondent Eugene Ong maintained a current account with petitioner, formerly the Associated Banking Corporation, but now known as
Westmont Bank. Sometime in May 1976, he sold certain shares of stocks through Island Securities Corporation. To pay Ong, Island
Securities purchased two (2) Pacific Banking Corporation manager’s checks,[2] both dated May 4, 1976, issued in the name of Eugene
Ong as payee. Before Ong could get hold of the checks, his friend Paciano Tanlimco got hold of them, forged Ong’s signature and
deposited these with petitioner, where Tanlimco was also a depositor. Even though Ong’s specimen signature was on file, petitioner
accepted and credited both checks to the account of Tanlimco, without verifying the ‘signature indorsements’ appearing at the back
thereof. Tanlimco then immediately withdrew the money and absconded.

Instead of going straight to the bank to stop or question the payment, Ong first sought the help of Tanlimco’s family to recover the
amount. Later, he reported the incident to the Central Bank, which like the first effort, unfortunately proved futile.

It was only on October 7, 1977, about five (5) months from discovery of the fraud, did Ong cry foul and demanded in his complaint that
petitioner pay the value of the two checks from the bank on whose gross negligence he imputed his loss. In his suit, he insisted that he
did not “deliver, negotiate, endorse or transfer to any person or entity” the subject checks issued to him and asserted that the signatures
on the back were spurious.[3]

The bank did not present evidence to the contrary, but simply contended that since plaintiff Ong claimed to have never received the
originals of the two (2) checks in question from Island Securities, much less to have authorized Tanlimco to receive the same, he never
acquired ownership of these checks. Thus, he had no legal personality to sue as he is not a real party in interest. The bank then filed a
demurrer to evidence which was denied.

On February 8, 1989, after trial on the merits, the Regional Trial Court of Manila, Branch 38, rendered a decision, thus:

IN VIEW OF THE FOREGOING, the court hereby renders judgment for the plaintiff and against the defendant, and orders the
defendant to pay the plaintiff:

1. The sum of P1,754,787.50 representing the total face value of the two checks in question, exhibits “A” and “B”, respectively, with
interest thereon at the legal rate of twelve percent (12%) per annum computed from October 7, 1977 (the date of the first extrajudicial
demand) up to and until the same shall have been paid in full;

2. Moral damages in the amount of P250,000.00;

3. Exemplary or corrective damages in the sum of P100,000.00 by way of example or correction for the public good;

4. Attorney’s fees of P50,000.00 and costs of suit.

Defendant’s counterclaims are dismissed for lack of merit.

SO ORDERED.[4]

Petitioner elevated the case to the Court of Appeals without success. In its decision, the appellate court held:

WHEREFORE, in view of the foregoing, the appealed decision is AFFIRMED in toto.[5]

Petitioner now comes before this Court on a petition for review, alleging that the Court of Appeals erred:

153 Negotiable Instruments – Form and Interpretation (Sec 1-23)


... IN AFFIRMING THE TRIAL COURT’S CONCLUSION THAT RESPONDENT HAS A CAUSE OF ACTION AGAINST THE
PETITIONER.

II

... IN AFFIRMING THE TRIAL COURT’S DECISION FINDING PETITIONER LIABLE TO RESPONDENT AND DECLARING THAT THE
LATTER MAY RECOVER DIRECTLY FROM THE FORMER; AND

III

... IN NOT ADJUDGING RESPONDENT GUILTY OF LACHES AND IN NOT ABSOLVING PETITIONER FROM LIABILITY.

Essentially the issues in this case are: (1) whether or not respondent Ong has a cause of action against petitioner Westmont Bank; and
(2) whether or not Ong is barred to recover the money from Westmont Bank due to laches.

Respondent admitted that he was never in actual or physical possession of the two (2) checks of the Island Securities nor did he
authorize Tanlimco or any of the latter’s representative to demand, accept and receive the same. For this reason, petitioner argues,
respondent cannot sue petitioner because under Section 51 of the Negotiable Instruments Law[6] it is only when a person becomes a
holder of a negotiable instrument can he sue in his own name. Conversely, prior to his becoming a holder, he had no right or cause of
action under such negotiable instrument. Petitioner further argues that since Section 191[7] of the Negotiable Instruments Law defines
a “holder” as the ‘payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof,’ in order to be a holder, it is a
requirement that he be in possession of the instrument or the bearer thereof. Simply stated, since Ong never had possession of the
checks nor did he authorize anybody, he did not become a holder thereof hence he cannot sue in his own name.[8]

Petitioner also cites Article 1249[9] of the Civil Code explaining that a check, even if it is a manager’s check, is not legal tender. Hence,
the creditor cannot be compelled to accept payment thru this means.[10] It is petitioner’s position that for all intents and purposes,
Island Securities has not yet tendered payment to respondent Ong, thus, any action by Ong should be directed towards collecting the
amount from Island Securities. Petitioner claims that Ong’s cause of action against it has not ripened as of yet. It may be that
petitioner would be liable to the drawee bank - - but that is a matter between petitioner and drawee-bank, Pacific Banking Corporation.
[11]

For its part, respondent Ong leans on the ruling of the trial court and the Court of Appeals which held that the suit of Ong against the
petitioner bank is a desirable shortcut to reach the party who ought in any event to be ultimately liable.[12] It likewise cites the ruling of
the courts a quo which held that according to the general rule, a bank who has obtained possession of a check upon an unauthorized
or forged indorsement of the payee’s signature and who collects the amount of the check from the drawee is liable for the proceeds
thereof to the payee. The theory of said rule is that the collecting bank’s possession of such check is wrongful.[13]

Respondent also cites Associated Bank vs. Court of Appeals[14]which held that the collecting bank or last endorser generally suffers
the loss because it has the duty to ascertain the genuineness of all prior endorsements. The collecting bank is also made liable
because it is privy to the depositor who negotiated the check. The bank knows him, his address and history because he is a client.
Hence, it is in a better position to detect forgery, fraud or irregularity in the indorsement.[15]

Anent Article 1249 of the Civil Code, Ong points out that bank checks are specifically governed by the Negotiable Instruments Law
which is a special law and only in the absence of specific provisions or deficiency in the special law may the Civil Code be invoked.[16]

Considering the contentions of the parties and the evidence on record, we find no reversible error in the assailed decisions of the
appellate and trial courts, hence there is no justifiable reason to grant the petition.

Petitioner’s claim that respondent has no cause of action against the bank is clearly misplaced. As defined, a cause of action is the act
or omission by which a party violates a right of another.[17] The essential elements of a cause of action are: (a) a legal right or rights of
the plaintiff, (b) a correlative obligation of the defendant, and (c) an act or omission of the defendant in violation of said legal right.[18]

The complaint filed before the trial court expressly alleged respondent’s right as payee of the manager’s checks to receive the amount
involved, petitioner’s correlative duty as collecting bank to ensure that the amount gets to the rightful payee or his order, and
a breach of that duty because of a blatant act of negligence on the part of petitioner which violated respondent’s rights.[19]

Under Section 23 of the Negotiable Instruments Law:

154 Negotiable Instruments – Form and Interpretation (Sec 1-23)


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.

Since the signature of the payee, in the case at bar, was forged to make it appear that he had made an indorsement in favor of the
forger, such signature should be deemed as inoperative and ineffectual. Petitioner, as the collecting bank, grossly erred in making
payment by virtue of said forged signature. The payee, herein respondent, should therefore be allowed to recover from the collecting
bank.

The collecting bank is liable to the payee and must bear the loss because it is its legal duty to ascertain that the payee’s endorsement
was genuine before cashing the check.[20] As a general rule, a bank or corporation who has obtained possession of a check upon an
unauthorized or forged indorsement of the payee’s signature and who collects the amount of the check from the drawee, is liable for the
proceeds thereof to the payee or other owner, notwithstanding that the amount has been paid to the person from whom the check was
obtained.[21]

The theory of the rule is that the possession of the check on the forged or unauthorized indorsement is wrongful, and when the money
had been collected on the check, the bank or other person or corporation can be held as for moneys had and received, and the
proceeds are held for the rightful owners who may recover them. The position of the bank taking the check on the forged or
unauthorized indorsement is the same as if it had taken the check and collected the money without indorsement at all and the act of the
bank amounts to conversion of the check.[22]

Petitioner’s claim that since there was no delivery yet and respondent has never acquired possession of the checks, respondent’s
remedy is with the drawer and not with petitioner bank. Petitioner relies on the view to the effect that where there is no delivery to the
payee and no title vests in him, he ought not to be allowed to recover on the ground that he lost nothing because he never became the
owner of the check and still retained his claim of debt against the drawer.[23] However, another view in certain cases holds that even if
the absence of delivery is considered, such consideration is not material. The rationale for this view is that in said cases the plaintiff
uses one action to reach, by a desirable short cut, the person who ought in any event to be ultimately liable as among the innocent
persons involved in the transaction. In other words, the payee ought to be allowed to recover directly from the collecting bank,
regardless of whether the check was delivered to the payee or not.[24]

Considering the circumstances in this case, in our view, petitioner could not escape liability for its negligent acts. Admittedly,
respondent Eugene Ong at the time the fraudulent transaction took place was a depositor of petitioner bank. Banks are engaged in a
business impressed with public interest, and it is their duty to protect in return their many clients and depositors who transact business
with them.[25] They have the obligation to treat their client’s account meticulously and with the highest degree of care, considering the
fiduciary nature of their relationship. The diligence required of banks, therefore, is more than that of a good father of a family.[26] In the
present case, petitioner was held to be grossly negligent in performing its duties. As found by the trial court:

xxx (A)t the time the questioned checks were accepted for deposit to Paciano Tanlimco’s account by defendant bank, defendant bank,
admittedly had in its files specimen signatures of plaintiff who maintained a current account with them (Exhibits “L-1” and “M-1”;
testimony of Emmanuel Torio). Given the substantial face value of the two checks, totalling P1,754,787.50, and the fact that they were
being deposited by a person not the payee, the very least defendant bank should have done, as any reasonable prudent man would
have done, was to verify the genuineness of the indorsements thereon. The Court cannot help but note that had defendant conducted
even the most cursory comparison with plaintiff’s specimen signatures in its files (Exhibit “L-1” and “M-1”) it would have at once seen
that the alleged indorsements were falsified and were not those of the plaintiff-payee. However, defendant apparently failed to make
such a verification or, what is worse did so but, chose to disregard the obvious dissimilarity of the signatures. The first omission makes
it guilty of gross negligence; the second of bad faith. In either case, defendant is liable to plaintiff for the proceeds of the checks in
question.[27]

These findings are binding and conclusive on the appellate and the reviewing courts.

On the second issue, petitioner avers that respondent Ong is barred by laches for failing to assert his right for recovery from the bank
as soon as he discovered the scam. The lapse of five months before he went to seek relief from the bank, according to petitioner,
constitutes laches.

155 Negotiable Instruments – Form and Interpretation (Sec 1-23)


In turn, respondent contends that petitioner presented no evidence to support its claim of laches. On the contrary, the established facts
of the case as found by the trial court and affirmed by the Court of Appeals are that respondent left no stone unturned to obtain relief
from his predicament.

On the matter of delay in reporting the loss, respondent calls attention to the fact that the checks were issued on May 4, 1976, and on
the very next day, May 5, 1976, these were already credited to the account of Paciano Tanlimco and presented for payment to Pacific
Banking Corporation. So even if the theft of the checks were discovered and reported earlier, respondent argues, it would not have
altered the situation as the encashment of the checks was consummated within twenty four hours and facilitated by the gross
negligence of the petitioner bank.[28]

Laches may be defined as the failure or neglect for an unreasonable and unexplained length of time, to do that which, by exercising
due diligence, could or should have been done earlier. It is negligence or omission to assert a right within a reasonable time,
warranting a presumption that the party entitled thereto has either abandoned or declined to assert it.[29] It concerns itself with whether
or not by reason of long inaction or inexcusable neglect, a person claiming a right should be barred from asserting the same, because
to allow him to do so would be unjust to the person against whom such right is sought to be enforced.[30]

In the case at bar, it cannot be said that respondent sat on his rights. He immediately acted after knowing of the forgery by proceeding
to seek help from the Tanlimco family and later the Central Bank, to remedy the situation and recover his money from the forger,
Paciano Tanlimco. Only after he had exhausted possibilities of settling the matter amicably with the family of Tanlimco and through the
CB, about five months after the unlawful transaction took place, did he resort to making the demand upon the petitioner and eventually
before the court for recovery of the money value of the two checks. These acts cannot be construed as undue delay in or
abandonment of the assertion of his rights.

Moreover, the claim of petitioner that respondent should be barred by laches is clearly a vain attempt to deflect responsibility for its
negligent act. As explained by the appellate court, it is petitioner which had the last clear chance to stop the fraudulent encashment of
the subject checks had it exercised due diligence and followed the proper and regular banking procedures in clearing checks.[31] As we
had earlier ruled, the one who had the last clear opportunity to avoid the impending harm but failed to do so is chargeable with the
consequences thereof.[32]

WHEREFORE, the instant petition is DENIED for lack of merit. The assailed decision of the Court of Appeals, sustaining the judgment
of the Regional Trial Court of Manila, is AFFIRMED.

Costs against petitioner.

SO ORDERED.

156 Negotiable Instruments – Form and Interpretation (Sec 1-23)


G.R. No. 129910 September 5, 2006

THE INTERNATIONAL CORPORATE BANK, INC., petitioner,


vs.
COURT OF APPEALS and PHILIPPINE NATIONAL BANK, respondents.

DECISION

CARPIO, J.:

The Case

Before the Court is a petition for review1 assailing the 9 August 1994 Amended Decision2 and the 16 July 1997 Resolution3 of the
Court of Appeals in CA-G.R. CV No. 25209.

The Antecedent Facts

The case originated from an action for collection of sum of money filed on 16 March 1982 by the International Corporate Bank,
Inc.4 ("petitioner") against the Philippine National Bank ("respondent"). The case was raffled to the then Court of First Instance (CFI) of
Manila, Branch 6. The complaint was amended on 19 March 1982. The case was eventually re-raffled to the Regional Trial Court of
Manila, Branch 52 ("trial court").

The Ministry of Education and Culture issued 15 checks5 drawn against respondent which petitioner accepted for deposit on various
dates. The checks are as follows:

Check Number Date Payee Amount

7-3694621-4 7-20-81 Trade Factors, Inc. P 97,500.00

7-3694609-6 7-27-81 Romero D. Palmares 98,500.50

7-3666224-4 8-03-81 Trade Factors, Inc. 99,800.00

7-3528348-4 8-07-81 Trade Factors, Inc. 98,600.00

7-3666225-5 8-10-81 Antonio Lisan 98,900.00

7-3688945-6 8-10-81 Antonio Lisan 97,700.00

7-4535674-1 8-21-81 Golden City Trading 95,300.00

7-4535675-2 8-21-81 Red Arrow Trading 96,400.00

7-4535699-5 8-24-81 Antonio Lisan 94,200.00

7-4535700-6 8-24-81 Antonio Lisan 95,100.00

7-4697902-2 9-18-81 Ace Enterprises, Inc. 96,000.00

7-4697925-6 9-18-81 Golden City Trading 93,030.00

7-4697011-6 10-02-81 Wintrade Marketing 90,960.00

157 Negotiable Instruments – Form and Interpretation (Sec 1-23)


7-4697909-4 10-02-81 ABC Trading, Inc. 99,300.00

7-4697922-3 10-05-81 Golden Enterprises 96,630.00

The checks were deposited on the following dates for the following accounts:

Check Number Date Deposited Account Deposited

7-3694621-4 7-23-81 CA 0060 02360 3

7-3694609-6 7-28-81 CA 0060 02360 3

7-3666224-4 8-4-81 CA 0060 02360 3

7-3528348-4 8-11-81 CA 0060 02360 3

7-3666225-5 8-11-81 SA 0061 32331 7

7-3688945-6 8-17-81 CA 0060 30982 5

7-4535674-1 8-26-81 CA 0060 02360 3

7-4535675-2 8-27-81 CA 0060 02360 3

7-4535699-5 8-31-81 CA 0060 30982 5

7-4535700-6 8-24-81 SA 0061 32331 7

7-4697902-2 9-23-81 CA 0060 02360 3

7-4697925-6 9-23-81 CA 0060 30982 5

7-4697011-6 10-7-81 CA 0060 02360 3

7-4697909-4 10-7-81 CA 0060 30982 56

After 24 hours from submission of the checks to respondent for clearing, petitioner paid the value of the checks and allowed the
withdrawals of the deposits. However, on 14 October 1981, respondent returned all the checks to petitioner without clearing them on
the ground that they were materially altered. Thus, petitioner instituted an action for collection of sums of money against respondent to
recover the value of the checks.

The Ruling of the Trial Court

The trial court ruled that respondent is expected to use reasonable business practices in accepting and paying the checks presented to
it. Thus, respondent cannot be faulted for the delay in clearing the checks considering the ingenuity in which the alterations were
effected. The trial court observed that there was no attempt from petitioner to verify the status of the checks before petitioner paid the
value of the checks or allowed withdrawal of the deposits. According to the trial court, petitioner, as collecting bank, could have inquired
by telephone from respondent, as drawee bank, about the status of the checks before paying their value. Since the immediate cause of
petitioner’s loss was the lack of caution of its personnel, the trial court held that petitioner is not entitled to recover the value of the
checks from respondent.

The dispositive portion of the trial court’s Decision reads:

WHEREFORE, judgment is hereby rendered dismissing both the complaint and the counterclaim. Costs shall, however be assessed

158 Negotiable Instruments – Form and Interpretation (Sec 1-23)


against the plaintiff.

SO ORDERED.7

Petitioner appealed the trial court’s Decision before the Court of Appeals.

The Ruling of the Court of Appeals

In its 10 October 1991 Decision,8 the Court of Appeals reversed the trial court’s Decision. Applying Section 4(c) of Central Bank
Circular No. 580, series of 1977,9 the Court of Appeals held that checks that have been materially altered shall be returned within 24
hours after discovery of the alteration. However, the Court of Appeals ruled that even if the drawee bank returns a check with material
alterations after discovery of the alteration, the return would not relieve the drawee bank from any liability for its failure to return the
checks within the 24-hour clearing period. The Court of Appeals explained:

Does this mean that, as long as the drawee bank returns a check with material alteration within 24 hour[s] after discovery of such
alteration, such return would have the effect of relieving the bank of any liability whatsoever despite its failure to return the check within
the 24- hour clearing house rule?

We do not think so.

Obviously, such bank cannot be held liable for its failure to return the check in question not later than the next regular clearing.
However, this Court is of the opinion and so holds that it could still be held liable if it fails to exercise due diligence in verifying the
alterations made. In other words, such bank would still be expected, nay required, to make the proper verification before the 24-hour
regular clearing period lapses, or in cases where such lapses may be deemed inevitable, that the required verification should be made
within a reasonable time.

The implication of the rule that a check shall be returned within the 24-hour clearing period is that if the collecting bank paid the check
before the end of the aforesaid 24-hour clearing period, it would be responsible therefor such that if the said check is dishonored and
returned within the 24-hour clearing period, the drawee bank cannot be held liable. Would such an implication apply in the case of
materially altered checks returned within 24 hours after discovery? This Court finds nothing in the letter of the above-cited C.B. Circular
that would justify a negative answer. Nonetheless, the drawee bank could still be held liable in certain instances. Even if the return of
the check/s in question is done within 24 hours after discovery, if it can be shown that the drawee bank had been patently negligent in
the performance of its verification function, this Court finds no reason why the said bank should be relieved of liability.

Although banking practice has it that the presumption of clearance is conclusive when it comes to the application of the 24-hour
clearing period, the same principle may not be applied to the 24-hour period vis-a-vis material alterations in the sense that the drawee
bank which returns materially altered checks within 24 hours after discovery would be conclusively relieved of any liability thereon. This
is because there could well be various intervening events or factors that could affect the rights and obligations of the parties in cases
such as the instant one including patent negligence on the part of the drawee bank resulting in an unreasonable delay in detecting the
alterations. While it is true that the pertinent proviso in C.B. Circular No. 580 allows the drawee bank to return the altered check within
the period "provided by law for filing a legal action", this does not mean that this would entitle or allow the drawee bank to be grossly
negligent and, inspite thereof, avail itself of the maximum period allowed by the above-cited Circular. The discovery must be made
within a reasonable time taking into consideration the facts and circumstances of the case. In other words, the aforementioned C.B.
Circular does not provide the drawee bank the license to be grossly negligent on the one hand nor does it preclude the collecting bank
from raising available defenses even if the check is properly returned within the 24-hour period after discovery of the material
alteration.10

The Court of Appeals rejected the trial court’s opinion that petitioner could have verified the status of the checks by telephone call since
such imposition is not required under Central Bank rules. The dispositive portion of the 10 October 1991 Decision reads:

PREMISES CONSIDERED, the decision appealed from is hereby REVERSED and the defendant-appellee Philippine National Bank is
declared liable for the value of the fifteen checks specified and enumerated in the decision of the trial court (page 3