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-% per annum from September 27, 1961, which is
the rate of interest being paid by plaintiff on its overdraft account;
(b) To pay to the plaintiff out of their own personal funds, jointly and severally, actual
and moral damages in the amount of P1,000.00 or in such amount as will be proved
and/or determined by this Honorable Court: exemplary damages in the amount of
P1,000.00, attorney's fees of P1,000.00, and the costs of action.
Plaintiff also prays for such other and further relief as may be deemed just and
equitable.
On November 17, 1962, after the parties had submitted the stipulation of facts reproduced at pages
12 to 15 of the Record on Appeal, the above-named court rendered judgment as follows:
WHEREFORE, judgment is hereby rendered, ordering the defendants to
countermand the notice given to the Bank of America on September 27, 1961,
deducting from said Bank's clearing account the sum of P200.00 representing the
amount of postal money order No. 124688, or in the alternative, to indemnify the
plaintiff in the said sum of P200.00 with interest thereon at the rate of 8-% per
annum from September 27, 1961 until fully paid; without any pronouncement as to
cost and attorney's fees.
The case was appealed to the Court of First Instance of Manila where, after the parties had
resubmitted the same stipulation of facts, the appealed decision dismissing the complaint, with
costs, was rendered.
The first, second and fifth assignments of error discussed in appellant's brief are related to the other
and will therefore be discussed jointly. They raise this main issue: that the postal money order in
question is a negotiable instrument; that its nature as such is not in anyway affected by the letter
dated October 26, 1948 signed by the Director of Posts and addressed to all banks with a clearing
account with the Post Office, and that money orders, once issued, create a contractual relationship
of debtor and creditor, respectively, between the government, on the one hand, and the remitters
payees or endorses, on the other.
It is not disputed that our postal statutes were patterned after statutes in force in the United States.
For this reason, ours are generally construed in accordance with the construction given in the United
States to their own postal statutes, in the absence of any special reason justifying a departure from
this policy or practice. The weight of authority in the United States is that postal money orders are
not negotiable instruments (Bolognesi vs. U.S. 189 Fed. 395; U.S. vs. Stock Drawers National Bank,
30 Fed. 912), the reason behind this rule being that, in establishing and operating a postal money
order system, the government is not engaging in commercial transactions but merely exercises a
governmental power for the public benefit.
It is to be noted in this connection that some of the restrictions imposed upon money orders by
postal laws and regulations are inconsistent with the character of negotiable instruments. For
instance, such laws and regulations usually provide for not more than one endorsement; payment of
money orders may be withheld under a variety of circumstances (49 C.J. 1153).
Of particular application to the postal money order in question are the conditions laid down in the
letter of the Director of Posts of October 26, 1948 (Exhibit 3) to the Bank of America for the
redemption of postal money orders received by it from its depositors. Among others, the condition is
imposed that "in cases of adverse claim, the money order or money orders involved will be returned
to you (the bank) and the, corresponding amount will have to be refunded to the Postmaster, Manila,
who reserves the right to deduct the value thereof from any amount due you if such step is deemed
necessary." The conditions thus imposed in order to enable the bank to continue enjoying the
facilities theretofore enjoyed by its depositors, were accepted by the Bank of America. The latter is
therefore bound by them. That it is so is clearly referred from the fact that, upon receiving advice that
the amount represented by the money order in question had been deducted from its clearing
account with the Manila Post Office, it did not file any protest against such action.
Moreover, not being a party to the understanding existing between the postal officers, on the one
hand, and the Bank of America, on the other, appellant has no right to assail the terms and
conditions thereof on the ground that the letter setting forth the terms and conditions aforesaid is
void because it was not issued by a Department Head in accordance with Sec. 79 (B) of the Revised
Administrative Code. In reality, however, said legal provision does not apply to the letter in question
because it does not provide for a department regulation but merely sets down certain conditions
upon the privilege granted to the Bank of Amrica to accept and pay postal money orders presented
for payment at the Manila Post Office. Such being the case, it is clear that the Director of Posts had
ample authority to issue it pursuant to Sec. 1190 of the Revised Administrative Code.
In view of the foregoing, We do not find it necessary to resolve the issues raised in the third and
fourth assignments of error.
WHEREFORE, the appealed decision being in accordance with law, the same is hereby affirmed
with costs.
Concepcion, C.J., Reyes, J.B.L., Makalintal, Zaldivar, Fernando, Teehankee, Barredo and Villamor,
JJ., concur.
Castro and Makasiar, JJ., took no part.
G.R. No. 97753 August 10, 1992
CALTEX (PHILIPPINES), INC., petitioner,
vs.
COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.
Bito, Lozada, Ortega & Castillo for petitioners.
Nepomuceno, Hofilea & 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.
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:
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

Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs.
Philippine National Bank, et al.
20
is apropos:
. . . Adverting again to the Court's pronouncements in Lopez, supra, we quote
therefrom:
The character of the transaction between the parties is to be
determined by their intention, regardless of what language was used
or what the form of the transfer was. If it was intended to secure the
payment of money, it must be construed as a pledge; but if there was
some other intention, it is not a pledge. However, even though a
transfer, if regarded by itself, appears to have been absolute, its
object and character might still be qualified and explained by
contemporaneous writing declaring it to have been a deposit of the
property as collateral security. It has been said that a transfer of
property by the debtor to a creditor, even if sufficient on its face to
make an absolute conveyance, should be treated as a pledge if the
debt continues in inexistence and is not discharged by the transfer,
and that accordingly the use of the terms ordinarily importing
conveyance of absolute ownership will not be given that effect in such
a transaction if they are also commonly used in pledges and
mortgages and therefore do not unqualifiedly indicate a transfer of
absolute ownership, in the absence of clear and unambiguous
language or other circumstances excluding an intent to pledge.
Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the Negotiable
Instruments Law, an instrument is negotiated when it is transferred from one person to another in
such a manner as to constitute the transferee the holder thereof,
21
and a holder may be the payee or
indorsee of a bill or note, who is in possession of it, or the bearer thereof.
22
In the present case, however,
there was no negotiation in the sense of a transfer of the legal title to the CTDs in favor of petitioner in
which situation, for obvious reasons, mere delivery of the bearer CTDs would have sufficed. Here, the
delivery thereof only as security for the purchases of Angel de la Cruz (and we even disregard the fact
that the amount involved was not disclosed) could at the most constitute petitioner only as a holder for
value by reason of his lien. Accordingly, a negotiation for such purpose cannot be effected by mere
delivery of the instrument since, necessarily, the terms thereof and the subsequent disposition of such
security, in the event of non-payment of the principal obligation, must be contractually provided for.
The pertinent law on this point is that where the holder has a lien on the instrument arising from
contract, he is deemed a holder for value to the extent of his lien.
23
As such holder of collateral
security, he would be a pledgee but the requirements therefor and the effects thereof, not being provided
for by the Negotiable Instruments Law, shall be governed by the Civil Code provisions on pledge of
incorporeal rights,
24
which inceptively provide:
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be
pledged. The instrument proving the right pledged shall be delivered to the creditor,
and if negotiable, must be indorsed.
Art. 2096. A pledge shall not take effect against third persons if a description of the
thing pledged and the date of the pledge do not appear in a public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of
respondent court quoted at the start of this opinion show that petitioner failed to produce any
document evidencing any contract of pledge or guarantee agreement between it and Angel de la
Cruz.
25
Consequently, the mere delivery of the CTDs did not legally vest in petitioner any right effective
against and binding upon respondent bank. The requirement under Article 2096 aforementioned is not a
mere rule of adjective law prescribing the mode whereby proof may be made of the date of a pledge
contract, but a rule of substantive law prescribing a condition without which the execution of a pledge
contract cannot affect third persons adversely.
26

On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of respondent
bank was embodied in a public instrument.
27
With regard to this other mode of transfer, the Civil Code
specifically declares:
Art. 1625. An assignment of credit, right or action shall produce no effect as against
third persons, unless it appears in a public instrument, or the instrument is recorded
in the Registry of Property in case the assignment involves real property.
Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether as
purchaser, assignee or lien holder of the CTDs, neither proved the amount of its credit or the extent
of its lien nor the execution of any public instrument which could affect or bind private respondent.
Necessarily, therefore, as between petitioner and respondent bank, the latter has definitely the better
right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the question of whether or not
private respondent observed the requirements of the law in the case of lost negotiable instruments
and the issuance of replacement certificates therefor, on the ground that petitioner failed to raised
that issue in the lower court.
28

On this matter, we uphold respondent court's finding that the aspect of alleged negligence of private
respondent was not included in the stipulation of the parties and in the statement of issues submitted
by them to the trial court.
29
The issues agreed upon by them for resolution in this case are:
1. Whether or not the CTDs as worded are negotiable instruments.
2. Whether or not defendant could legally apply the amount covered by the CTDs
against the depositor's loan by virtue of the assignment (Annex "C").
3. Whether or not there was legal compensation or set off involving the amount
covered by the CTDs and the depositor's outstanding account with defendant, if any.
4. Whether or not plaintiff could compel defendant to preterminate the CTDs before
the maturity date provided therein.
5. Whether or not plaintiff is entitled to the proceeds of the CTDs.
6. Whether or not the parties can recover damages, attorney's fees and litigation
expenses from each other.
As respondent court correctly observed, with appropriate citation of some doctrinal authorities, the
foregoing enumeration does not include the issue of negligence on the part of respondent bank. An
issue raised for the first time on appeal and not raised timely in the proceedings in the lower court is
barred by estoppel.
30
Questions raised on appeal must be within the issues framed by the parties and,
consequently, issues not raised in the trial court cannot be raised for the first time on appeal.
31

Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a case
are properly raised. Thus, to obviate the element of surprise, parties are expected to disclose at a
pre-trial conference all issues of law and fact which they intend to raise at the trial, except such as
may involve privileged or impeaching matters. The determination of issues at a pre-trial conference
bars the consideration of other questions on appeal.
32

To accept petitioner's suggestion that respondent bank's supposed negligence may be considered
encompassed by the issues on its right to preterminate and receive the proceeds of the CTDs would
be tantamount to saying that petitioner could raise on appeal any issue. We agree with private
respondent that the broad ultimate issue of petitioner's entitlement to the proceeds of the questioned
certificates can be premised on a multitude of other legal reasons and causes of action, of which
respondent bank's supposed negligence is only one. Hence, petitioner's submission, if accepted,
would render a pre-trial delimitation of issues a useless exercise.
33

Still, even assuming arguendo that said issue of negligence was raised in the court below, petitioner
still cannot have the odds in its favor. A close scrutiny of the provisions of the Code of Commerce
laying down the rules to be followed in case of lost instruments payable to bearer, which it invokes,
will reveal that said provisions, even assuming their applicability to the CTDs in the case at bar, are
merely permissive and not mandatory. The very first article cited by petitioner speaks for itself.
Art 548. The dispossessed owner, no matter for what cause it may be, may apply to
the judge or court of competent jurisdiction, asking that the principal, interest or
dividends due or about to become due, be not paid a third person, as well as in order
to prevent the ownership of the instrument that a duplicate be issued him. (Emphasis
ours.)
xxx xxx xxx
The use of the word "may" in said provision shows that it is not mandatory but discretionary on the
part of the "dispossessed owner" to apply to the judge or court of competent jurisdiction for the
issuance of a duplicate of the lost instrument. Where the provision reads "may," this word shows that
it is not mandatory but discretional.
34
The word "may" is usually permissive, not mandatory.
35
It is an
auxiliary verb indicating liberty, opportunity, permission and possibility.
36

Moreover, as correctly analyzed by private respondent,
37
Articles 548 to 558 of the Code of
Commerce, on which petitioner seeks to anchor respondent bank's supposed negligence, merely
established, on the one hand, a right of recourse in favor of a dispossessed owner or holder of a bearer
instrument so that he may obtain a duplicate of the same, and, on the other, an option in favor of the party
liable thereon who, for some valid ground, may elect to refuse to issue a replacement of the instrument.
Significantly, none of the provisions cited by petitioner categorically restricts or prohibits the issuance a
duplicate or replacement instrument sans compliance with the procedure outlined therein, and none
establishes a mandatory precedent requirement therefor.
WHEREFORE, on the modified premises above set forth, the petition is DENIED and the appealed
decision is hereby AFFIRMED.
SO ORDERED.
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.
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, butthrice 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 orany other reason. (Emphasis supplied.)
According to Metrobank, the said conditions clearly show that it was acting only as a collecting agent
for Golden Savings and give it the right to "charge back to the depositor's account any amount
previously credited, whether or not such item is returned. This also applies to checks ". . . which are
unpaid due to insufficiency of funds, forgery, unauthorized overdraft of any other reason." It is
claimed that the said conditions are in the nature of contractual stipulations and became binding on
Golden Savings when Gloria Castillo, as its Cashier, signed the deposit slips.
Doubt may be expressed about the binding force of the conditions, considering that they have
apparently been imposed by the bank unilaterally, without the consent of the depositor. Indeed, it
could be argued that the depositor, in signing the deposit slip, does so only to identify himself and
not to agree to the conditions set forth in the given permit at the back of the deposit slip. We do not
have to rule on this matter at this time. At any rate, the Court feels that even if the deposit slip were
considered a contract, the petitioner could still not validly disclaim responsibility thereunder in the
light of the circumstances of this case.
In stressing that it was acting only as a collecting agent for Golden Savings, Metrobank seems to be
suggesting that as a mere agent it cannot be liable to the principal. This is not exactly true. On the
contrary, Article 1909 of the Civil Code clearly provides that
Art. 1909. The agent is responsible not only for fraud, but also for negligence,
which shall be judged 'with more or less rigor by the courts, according to whether the
agency was or was not for a compensation.
The negligence of Metrobank has been sufficiently established. To repeat for emphasis, it was the
clearance given by it that assured Golden Savings it was already safe to allow Gomez to withdraw
the proceeds of the treasury warrants he had deposited Metrobank misled Golden Savings. There
may have been no express clearance, as Metrobank insists (although this is refuted by Golden
Savings) but in any case that clearance could be implied from its allowing Golden Savings to
withdraw from its account not only once or even twice but three times. The total withdrawal was in
excess of its original balance before the treasury warrants were deposited, which only added to its
belief that the treasury warrants had indeed been cleared.
Metrobank's argument that it may recover the disputed amount if the warrants are not paid for any
reason is not acceptable. Any reason does not mean no reason at all. Otherwise, there would have
been no need at all for Golden Savings to deposit the treasury warrants with it for clearance. There
would have been no need for it to wait until the warrants had been cleared before paying the
proceeds thereof to Gomez. Such a condition, if interpreted in the way the petitioner suggests, is not
binding for being arbitrary and unconscionable. And it becomes more so in the case at bar when it is
considered that the supposed dishonor of the warrants was not communicated to Golden Savings
before it made its own payment to Gomez.
The belated notification aggravated the petitioner's earlier negligence in giving express or at least
implied clearance to the treasury warrants and allowing payments therefrom to Golden Savings. But
that is not all. On top of this, the supposed reason for the dishonor, to wit, the forgery of the
signatures of the general manager and the auditor of the drawer corporation, has not been
established.
9
This was the finding of the lower courts which we see no reason to disturb. And as we said
in MWSS v. Court of Appeals:
10

Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA 238). It must be
established by clear, positive and convincing evidence. This was not done in the
present case.
A no less important consideration is the circumstance that the treasury warrants in question are not
negotiable instruments. Clearly stamped on their face is the word "non-negotiable." Moreover, and
this is of equal significance, it is indicated that they are payable from a particular fund, to wit, Fund
501.
The following sections of the Negotiable Instruments Law, especially the underscored parts, are
pertinent:
Sec. 1. Form of negotiable instruments. An instrument to be negotiable must
conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.
xxx xxx xxx
Sec. 3. When promise is unconditional. An unqualified order or promise to pay is
unconditional within the meaning of this Act though coupled with
(a) An indication of a particular fund out of which reimbursement is to be made or a
particular account to be debited with the amount; or
(b) A statement of the transaction which gives rise to the instrument judgment.
But an order or promise to pay out of a particular fund is not unconditional.
The indication of Fund 501 as the source of the payment to be made on the treasury warrants
makes the order or promise to pay "not unconditional" and the warrants themselves non-negotiable.
There should be no question that the exception on Section 3 of the Negotiable Instruments Law is
applicable in the case at bar. This conclusion conforms to Abubakar vs. Auditor General
11
where the
Court held:
The petitioner argues that he is a holder in good faith and for value of a negotiable
instrument and is entitled to the rights and privileges of a holder in due course, free
from defenses. But this treasury warrant is not within the scope of the negotiable
instrument law. For one thing, the document bearing on its face the words "payable
from the appropriation for food administration, is actually an Order for payment out of
"a particular fund," and is not unconditional and does not fulfill one of the essential
requirements of a negotiable instrument (Sec. 3 last sentence and section [1(b)] of
the Negotiable Instruments Law).
Metrobank cannot contend that by indorsing the warrants in general, Golden Savings assumed that
they were "genuine and in all respects what they purport to be," in accordance with Section 66 of the
Negotiable Instruments Law. The simple reason is that this law is not applicable to the non-
negotiable treasury warrants. The indorsement was made by Gloria Castillo not for the purpose of
guaranteeing the genuineness of the warrants but merely to deposit them with Metrobank for
clearing. It was in fact Metrobank that made the guarantee when it stamped on the back of the
warrants: "All prior indorsement and/or lack of endorsements guaranteed, Metropolitan Bank & Trust
Co., Calapan Branch."
The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the Philippine Islands,
12
but we
feel this case is inapplicable to the present controversy. That case involved checks whereas this case
involves treasury warrants. Golden Savings never represented that the warrants were negotiable but
signed them only for the purpose of depositing them for clearance. Also, the fact of forgery was proved in
that case but not in the case before us. Finally, the Court found the Jai Alai Corporation negligent in
accepting the checks without question from one Antonio Ramirez notwithstanding that the payee was the
Inter-Island Gas Services, Inc. and it did not appear that he was authorized to indorse it. No similar
negligence can be imputed to Golden Savings.
We find the challenged decision to be basically correct. However, we will have to amend it insofar as
it directs the petitioner to credit Golden Savings with the full amount of the treasury checks deposited
to its account.
The total value of the 32 treasury warrants dishonored was P1,754,089.00, from which Gomez was
allowed to withdraw P1,167,500.00 before Golden Savings was notified of the dishonor. The amount
he has withdrawn must be charged not to Golden Savings but to Metrobank, which must bear the
consequences of its own negligence. But the balance of P586,589.00 should be debited to Golden
Savings, as obviously Gomez can no longer be permitted to withdraw this amount from his deposit
because of the dishonor of the warrants. Gomez has in fact disappeared. To also credit the balance
to Golden Savings would unduly enrich it at the expense of Metrobank, let alone the fact that it has
already been informed of the dishonor of the treasury warrants.
WHEREFORE, the challenged decision is AFFIRMED, with the modification that Paragraph 3 of the
dispositive portion of the judgment of the lower court shall be reworded as follows:
3. Debiting Savings Account No. 2498 in the sum of P586,589.00 only and thereafter
allowing defendant Golden Savings & Loan Association, Inc. to withdraw the amount
outstanding thereon, if any, after the debit.
SO ORDERED.
Narvasa, Gancayco, Grio-Aquino and Medialdea, JJ., concur.
G.R. No. 89252 May 24, 1993
RAUL SESBREO, petitioner,
vs.
HON. COURT OF APPEALS, DELTA MOTORS CORPORATION AND PILIPINAS
BANK, respondents.
Salva, Villanueva & Associates for Delta Motors Corporation.
Reyes, Salazar & Associates for Pilipinas Bank.

FELICIANO, J .:
On 9 February 1981, petitioner Raul Sesbreo made a money market placement in the amount of
P300,000.00 with the Philippine Underwriters Finance Corporation ("Philfinance"), Cebu Branch; the
placement, with a term of thirty-two (32) days, would mature on 13 March 1981, Philfinance, also on
9 February 1981, issued the following documents to petitioner:
(a) the Certificate of Confirmation of Sale, "without recourse," No. 20496 of one (1)
Delta Motors Corporation Promissory Note ("DMC PN") No. 2731 for a term of 32
days at 17.0% per annum;
(b) the Certificate of securities Delivery Receipt No. 16587 indicating the sale of DMC
PN No. 2731 to petitioner, with the notation that the said security was in
custodianship of Pilipinas Bank, as per Denominated Custodian Receipt ("DCR") No.
10805 dated 9 February 1981; and
(c) post-dated checks payable on 13 March 1981 (i.e., the maturity date of
petitioner's investment), with petitioner as payee, Philfinance as drawer, and Insular
Bank of Asia and America as drawee, in the total amount of P304,533.33.
On 13 March 1981, petitioner sought to encash the postdated checks issued by Philfinance.
However, the checks were dishonored for having been drawn against insufficient funds.
On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued by private
respondent Pilipinas Bank ("Pilipinas"). It reads as follows:
PILIPINAS BANK
Makati Stock Exchange Bldg.,
Ayala Avenue, Makati,
Metro Manila
F
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9
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1
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5
DENOMINATED CUSTODIAN RECEIPT
This confirms that as a duly Custodian Bank, and upon instruction of PHILIPPINE
UNDERWRITES FINANCE CORPORATION, we have in our custody the following
securities to you [sic] the extent herein indicated.
SERIAL MAT. FACE ISSUED REGISTERED AMOUNT
NUMBER DATE VALUE BY HOLDER PAYEE
2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33
UNDERWRITERS
FINANCE CORP.
We further certify that these securities may be inspected by you or your duly
authorized representative at any time during regular banking hours.
Upon your written instructions we shall undertake physical delivery of the above
securities fully assigned to you should this Denominated Custodianship Receipt
remain outstanding in your favor thirty (30) days after its maturity.
P
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)
1

On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private respondent Pilipinas, Makati
Branch, and handed her a demand letter informing the bank that his placement with Philfinance in
the amount reflected in the DCR No. 10805 had remained unpaid and outstanding, and that he in
effect was asking for the physical delivery of the underlying promissory note. Petitioner then
examined the original of the DMC PN No. 2731 and found: that the security had been issued on 10
April 1980; that it would mature on 6 April 1981; that it had a face value of P2,300,833.33, with the
Philfinance as "payee" and private respondent Delta Motors Corporation ("Delta") as "maker;" and
that on face of the promissory note was stamped "NON NEGOTIABLE." Pilipinas did not deliver the
Note, nor any certificate of participation in respect thereof, to petitioner.
Petitioner later made similar demand letters, dated 3 July 1981 and 3 August 1981,
2
again asking
private respondent Pilipinas for physical delivery of the original of DMC PN No. 2731. Pilipinas allegedly
referred all of petitioner's demand letters to Philfinance for written instructions, as has been supposedly
agreed upon in "Securities Custodianship Agreement" between Pilipinas and Philfinance. Philfinance did
not provide the appropriate instructions; Pilipinas never released DMC PN No. 2731, nor any other
instrument in respect thereof, to petitioner.
Petitioner also made a written demand on 14 July 1981
3
upon private respondent Delta for the partial
satisfaction of DMC PN No. 2731, explaining that Philfinance, as payee thereof, had assigned to him said
Note to the extent of P307,933.33. Delta, however, denied any liability to petitioner on the promissory
note, and explained in turn that it had previously agreed with Philfinance to offset its DMC PN No. 2731
(along with DMC PN No. 2730) against Philfinance PN No. 143-A issued in favor of Delta.
In the meantime, Philfinance, on 18 June 1981, was placed under the joint management of the
Securities and exchange commission ("SEC") and the Central Bank. Pilipinas delivered to the SEC
DMC PN No. 2731, which to date apparently remains in the custody of the SEC.
4

As petitioner had failed to collect his investment and interest thereon, he filed on 28 September 1982
an action for damages with the Regional Trial Court ("RTC") of Cebu City, Branch 21, against private
respondents Delta and Pilipinas.
5
The trial court, in a decision dated 5 August 1987, dismissed the
complaint and counterclaims for lack of merit and for lack of cause of action, with costs against petitioner.
Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In a Decision dated
21 March 1989, the Court of Appeals denied the appeal and held:
6

Be that as it may, from the evidence on record, if there is anyone that appears liable
for the travails of plaintiff-appellant, it is Philfinance. As correctly observed by the trial
court:
This act of Philfinance in accepting the investment of plaintiff and
charging it against DMC PN No. 2731 when its entire face value was
already obligated or earmarked for set-off or compensation is difficult
to comprehend and may have been motivated with bad faith.
Philfinance, therefore, is solely and legally obligated to return the
investment of plaintiff, together with its earnings, and to answer all the
damages plaintiff has suffered incident thereto. Unfortunately for
plaintiff, Philfinance was not impleaded as one of the defendants in
this case at bar; hence, this Court is without jurisdiction to pronounce
judgement against it. (p. 11, Decision)
WHEREFORE, finding no reversible error in the decision appealed from, the same is
hereby affirmed in toto. Cost against plaintiff-appellant.
Petitioner moved for reconsideration of the above Decision, without success.
Hence, this Petition for Review on Certiorari.
After consideration of the allegations contained and issues raised in the pleadings, the Court
resolved to give due course to the petition and required the parties to file their respective
memoranda.
7

Petitioner reiterates the assignment of errors he directed at the trial court decision, and contends
that respondent court of Appeals gravely erred: (i) in concluding that he cannot recover from private
respondent Delta his assigned portion of DMC PN No. 2731; (ii) in failing to hold private respondent
Pilipinas solidarily liable on the DMC PN No. 2731 in view of the provisions stipulated in DCR No.
10805 issued in favor r of petitioner, and (iii) in refusing to pierce the veil of corporate entity between
Philfinance, and private respondents Delta and Pilipinas, considering that the three (3) entities
belong to the "Silverio Group of Companies" under the leadership of Mr. Ricardo Silverio, Sr.
8

There are at least two (2) sets of relationships which we need to address: firstly, the relationship of
petitioner vis-a-visDelta; secondly, the relationship of petitioner in respect of Pilipinas. Actually, of
course, there is a third relationship that is of critical importance: the relationship of petitioner and
Philfinance. However, since Philfinance has not been impleaded in this case, neither the trial court
nor the Court of Appeals acquired jurisdiction over the person of Philfinance. It is, consequently, not
necessary for present purposes to deal with this third relationship, except to the extent it necessarily
impinges upon or intersects the first and second relationships.
I.
We consider first the relationship between petitioner and Delta.
The Court of appeals in effect held that petitioner acquired no rights vis-a-vis Delta in respect of the
Delta promissory note (DMC PN No. 2731) which Philfinance sold "without recourse" to petitioner, to
the extent of P304,533.33. The Court of Appeals said on this point:
Nor could plaintiff-appellant have acquired any right over DMC PN No. 2731 as the
same is "non-negotiable" as stamped on its face (Exhibit "6"), negotiation being
defined as the transfer of an instrument from one person to another so as to
constitute the transferee the holder of the instrument (Sec. 30, Negotiable
Instruments Law). A person not a holder cannot sue on the instrument in his own
name and cannot demand or receive payment (Section 51, id.)
9

Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that the Note had been
validly transferred, in part to him by assignment and that as a result of such transfer, Delta as
debtor-maker of the Note, was obligated to pay petitioner the portion of that Note assigned to him by
the payee Philfinance.
Delta, however, disputes petitioner's contention and argues:
(1) that DMC PN No. 2731 was not intended to be negotiated or otherwise
transferred by Philfinance as manifested by the word "non-negotiable" stamp across
the face of the Note
10
and because maker Delta and payee Philfinance intended that
this Note would be offset against the outstanding obligation of Philfinance represented by
Philfinance PN No. 143-A issued to Delta as payee;
(2) that the assignment of DMC PN No. 2731 by Philfinance was without Delta's
consent, if not against its instructions; and
(3) assuming (arguendo only) that the partial assignment in favor of petitioner was
valid, petitioner took the Note subject to the defenses available to Delta, in particular,
the offsetting of DMC PN No. 2731 against Philfinance PN No. 143-A.
11

We consider Delta's arguments seriatim.
Firstly, it is important to bear in mind that the negotiation of a negotiable instrument must be
distinguished from theassignment or transfer of an instrument whether that be negotiable or non-
negotiable. Only an instrument qualifying as a negotiable instrument under the relevant statute may
be negotiated either by indorsement thereof coupled with delivery, or by delivery alone where the
negotiable instrument is in bearer form. A negotiable instrument may, however, instead of being
negotiated, also be assigned or transferred. The legal consequences of negotiation as distinguished
from assignment of a negotiable instrument are, of course, different. A non-negotiable instrument
may, obviously, not be negotiated; but it may be assigned or transferred, absent an express
prohibition against assignment or transfer written in the face of the instrument:
The words "not negotiable," stamped on the face of the bill of lading, did not destroy
its assignability, but the sole effect was to exempt the bill from the statutory
provisions relative thereto, and a bill, though not negotiable, may be transferred by
assignment; the assignee taking subject to the equities between the original
parties.
12
(Emphasis added)
DMC PN No. 2731, while marked "non-negotiable," was not at the same time stamped "non-
transferable" or "non-assignable." It contained no stipulation which prohibited Philfinance from
assigning or transferring, in whole or in part, that Note.
Delta adduced the "Letter of Agreement" which it had entered into with Philfinance and which should
be quoted in full:
A
p
r
i
l

1
0
,

1
9
8
0
Philippine Underwriters Finance Corp.
Benavidez St., Makati,
Metro Manila.
Attention: Mr. Alfredo O. Banaria
SVP-Treasurer
GENTLEMEN:
This refers to our outstanding placement of P4,601,666.67 as evidenced by your
Promissory Note No. 143-A, dated April 10, 1980, to mature on April 6, 1981.
As agreed upon, we enclose our non-negotiable Promissory Note No. 2730 and 2731
for P2,000,000.00 each, dated April 10, 1980, to be offsetted [sic] against your PN
No. 143-A upon co-terminal maturity.
Please deliver the proceeds of our PNs to our representative, Mr. Eric Castillo.
V
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y

T
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y

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We find nothing in his "Letter of Agreement" which can be reasonably construed as a prohibition
upon Philfinance assigning or transferring all or part of DMC PN No. 2731, before the maturity
thereof. It is scarcely necessary to add that, even had this "Letter of Agreement" set forth an explicit
prohibition of transfer upon Philfinance, such a prohibition cannot be invoked against an assignee or
transferee of the Note who parted with valuable consideration in good faith and without notice of
such prohibition. It is not disputed that petitioner was such an assignee or transferee. Our conclusion
on this point is reinforced by the fact that what Philfinance and Delta were doing by their exchange of
their promissory notes was this: Delta invested, by making a money market placement with
Philfinance, approximately P4,600,000.00 on 10 April 1980; but promptly, on the same day,
borrowed back the bulk of that placement, i.e., P4,000,000.00, by issuing its two (2) promissory
notes: DMC PN No. 2730 and DMC PN No. 2731, both also dated 10 April 1980. Thus, Philfinance
was left with not P4,600,000.00 but only P600,000.00 in cash and the two (2) Delta promissory
notes.
Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN No. 2731 had been
effected without the consent of Delta, we note that such consent was not necessary for the validity
and enforceability of the assignment in favor of petitioner.
14
Delta's argument that Philfinance's sale or
assignment of part of its rights to DMC PN No. 2731 constituted conventional subrogation, which required
its (Delta's) consent, is quite mistaken. Conventional subrogation, which in the first place is never lightly
inferred,
15
must be clearly established by the unequivocal terms of the substituting obligation or by the
evident incompatibility of the new and old obligations on every point.
16
Nothing of the sort is present in the
instant case.
It is in fact difficult to be impressed with Delta's complaint, since it released its DMC PN No. 2731 to
Philfinance, an entity engaged in the business of buying and selling debt instruments and other
securities, and more generally, in money market transactions. In Perez v. Court of Appeals,
17
the
Court, speaking through Mme. Justice Herrera, made the following important statement:
There is another aspect to this case. What is involved here is a money market
transaction. As defined by Lawrence Smith "the money market is a market dealing in
standardized short-term credit instruments (involving large amounts) where lenders
and borrowers do not deal directly with each other but through a middle manor a
dealer in the open market." It involves "commercial papers" which are instruments
"evidencing indebtness of any person or entity. . ., which are issued, endorsed, sold
or transferred or in any manner conveyed to another person or entity, with or without
recourse". The fundamental function of the money market device in its operation is to
match and bring together in a most impersonal manner both the "fund users" and the
"fund suppliers." The money market is an "impersonal market", free from personal
considerations. "The market mechanism is intended to provide quick mobility of
money and securities."
The impersonal character of the money market device overlooks the individuals or
entities concerned. The issuer of a commercial paper in the money market
necessarily knows in advance that it would be expenditiously transacted and
transferred to any investor/lender without need of notice to said issuer. In practice, no
notification is given to the borrower or issuer of commercial paper of the sale or
transfer to the investor.
xxx xxx xxx
There is need to individuate a money market transaction, a relatively novel institution
in the Philippine commercial scene. It has been intended to facilitate the flow and
acquisition of capital on an impersonal basis. And as specifically required by
Presidential Decree No. 678, the investing public must be given adequate and
effective protection in availing of the credit of a borrower in the commercial paper
market.
18
(Citations omitted; emphasis supplied)
We turn to Delta's arguments concerning alleged compensation or offsetting between DMC PN No.
2731 and Philfinance PN No. 143-A. It is important to note that at the time Philfinance sold part of its
rights under DMC PN No. 2731 to petitioner on 9 February 1981, no compensation had as yet taken
place and indeed none could have taken place. The essential requirements of compensation are
listed in the Civil Code as follows:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other;
(2) That both debts consists in a sum of money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts are due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by
third persons and communicated in due time to the debtor. (Emphasis supplied)
On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due. This was
explicitly recognized by Delta in its 10 April 1980 "Letter of Agreement" with Philfinance, where Delta
acknowledged that the relevant promissory notes were "to be offsetted (sic) against [Philfinance] PN
No. 143-A upon co-terminal maturity."
As noted, the assignment to petitioner was made on 9 February 1981 or from forty-nine (49) days
before the "co-terminal maturity" date, that is to say, before any compensation had taken place.
Further, the assignment to petitioner would have prevented compensation had taken place between
Philfinance and Delta, to the extent of P304,533.33, because upon execution of the assignment in
favor of petitioner, Philfinance and Delta would have ceased to be creditors and debtors of each
other in their own right to the extent of the amount assigned by Philfinance to petitioner. Thus, we
conclude that the assignment effected by Philfinance in favor of petitioner was a valid one and that
petitioner accordingly became owner of DMC PN No. 2731 to the extent of the portion thereof
assigned to him.
The record shows, however, that petitioner notified Delta of the fact of the assignment to him only on
14 July 1981,
19
that is, after the maturity not only of the money market placement made by petitioner but
also of both DMC PN No. 2731 and Philfinance PN No. 143-A. In other words, petitioner notified Delta of
his rights as assignee after compensation had taken place by operation of law because the offsetting
instruments had both reached maturity. It is a firmly settled doctrine that the rights of an assignee are not
any greater that the rights of the assignor, since the assignee is merely substituted in the place of the
assignor
20
and that the assignee acquires his rights subject to the equities i.e., the defenses which
the debtor could have set up against the original assignor before notice of the assignment was given to
the debtor. Article 1285 of the Civil Code provides that:
Art. 1285. The debtor who has consented to the assignment of rights made by a
creditor in favor of a third person, cannot set up against the assignee the
compensation which would pertain to him against the assignor, unless the assignor
was notified by the debtor at the time he gave his consent, that he reserved his right
to the compensation.
If the creditor communicated the cession to him but the debtor did not
consent thereto, the latter may set up the compensation of debts previous to the
cession, but not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he may set up the
compensation of all credits prior to the same and also later ones until he
had knowledge of the assignment. (Emphasis supplied)
Article 1626 of the same code states that: "the debtor who, before having knowledge of the
assignment, pays his creditor shall be released from the obligation." In Sison v. Yap-Tico,
21
the Court
explained that:
[n]o man is bound to remain a debtor; he may pay to him with whom he contacted to
pay; and if he pay before notice that his debt has been assigned, the law holds him
exonerated, for the reason that it is the duty of the person who has acquired a title by
transfer to demand payment of the debt, to give his debt or notice.
22

At the time that Delta was first put to notice of the assignment in petitioner's favor on 14 July 1981,
DMC PN No. 2731 had already been discharged by compensation. Since the assignor Philfinance
could not have then compelled payment anew by Delta of DMC PN No. 2731, petitioner, as assignee
of Philfinance, is similarly disabled from collecting from Delta the portion of the Note assigned to him.
It bears some emphasis that petitioner could have notified Delta of the assignment or sale was
effected on 9 February 1981. He could have notified Delta as soon as his money market placement
matured on 13 March 1981 without payment thereof being made by Philfinance; at that time,
compensation had yet to set in and discharge DMC PN No. 2731. Again petitioner could have
notified Delta on 26 March 1981 when petitioner received from Philfinance the Denominated
Custodianship Receipt ("DCR") No. 10805 issued by private respondent Pilipinas in favor of
petitioner. Petitioner could, in fine, have notified Delta at any time before the maturity date of DMC
PN No. 2731. Because petitioner failed to do so, and because the record is bare of any indication
that Philfinance had itself notified Delta of the assignment to petitioner, the Court is compelled to
uphold the defense of compensation raised by private respondent Delta. Of course, Philfinance
remains liable to petitioner under the terms of the assignment made by Philfinance to petitioner.
II.
We turn now to the relationship between petitioner and private respondent Pilipinas. Petitioner
contends that Pilipinas became solidarily liable with Philfinance and Delta when Pilipinas issued
DCR No. 10805 with the following words:
Upon your written instruction, we [Pilipinas] shall undertake physical delivery of the
above securities fully assigned to you .
23

The Court is not persuaded. We find nothing in the DCR that establishes an obligation on the part of
Pilipinas to pay petitioner the amount of P307,933.33 nor any assumption of liability in solidum with
Philfinance and Delta under DMC PN No. 2731. We read the DCR as a confirmation on the part of
Pilipinas that:
(1) it has in its custody, as duly constituted custodian bank, DMC PN No. 2731 of a
certain face value, to mature on 6 April 1981 and payable to the order of Philfinance;
(2) Pilipinas was, from and after said date of the assignment by Philfinance to
petitioner (9 February 1981), holding that Note on behalf and for the benefit of
petitioner, at least to the extent it had been assigned to petitioner by payee
Philfinance;
24

(3) petitioner may inspect the Note either "personally or by authorized representative", at
any time during regular bank hours; and
(4) upon written instructions of petitioner, Pilipinas would physically deliver the DMC
PN No. 2731 (or a participation therein to the extent of P307,933.33) "should this
Denominated Custodianship receipt remain outstanding in [petitioner's] favor thirty
(30) days after its maturity."
Thus, we find nothing written in printers ink on the DCR which could reasonably be read as
converting Pilipinas into an obligor under the terms of DMC PN No. 2731 assigned to petitioner,
either upon maturity thereof or any other time. We note that both in his complaint and in his
testimony before the trial court, petitioner referred merely to the obligation of private respondent
Pilipinas to effect the physical delivery to him of DMC PN No. 2731.
25
Accordingly, petitioner's theory
that Pilipinas had assumed a solidary obligation to pay the amount represented by a portion of the Note
assigned to him by Philfinance, appears to be a new theory constructed only after the trial court had ruled
against him. The solidary liability that petitioner seeks to impute Pilipinas cannot, however, be lightly
inferred. Under article 1207 of the Civil Code, "there is a solidary liability only when the law or the nature
of the obligation requires solidarity," The record here exhibits no express assumption of solidary
liability vis-a-vis petitioner, on the part of Pilipinas. Petitioner has not pointed to us to any law which
imposed such liability upon Pilipinas nor has petitioner argued that the very nature of the custodianship
assumed by private respondent Pilipinas necessarily implies solidary liability under the securities, custody
of which was taken by Pilipinas. Accordingly, we are unable to hold Pilipinas solidarily liable with
Philfinance and private respondent Delta under DMC PN No. 2731.
We do not, however, mean to suggest that Pilipinas has no responsibility and liability in respect of
petitioner under the terms of the DCR. To the contrary, we find, after prolonged analysis and
deliberation, that private respondent Pilipinas had breached its undertaking under the DCR to
petitioner Sesbreo.
We believe and so hold that a contract of deposit was constituted by the act of Philfinance in
designating Pilipinas as custodian or depositary bank. The depositor was initially Philfinance; the
obligation of the depository was owed, however, to petitioner Sesbreo as beneficiary of the
custodianship or depository agreement. We do not consider that this is a simple case of a
stipulation pour autri. The custodianship or depositary agreement was established as an integral part
of the money market transaction entered into by petitioner with Philfinance. Petitioner bought a
portion of DMC PN No. 2731; Philfinance as assignor-vendor deposited that Note with Pilipinas in
order that the thing sold would be placed outside the control of the vendor. Indeed, the constituting
of the depositary or custodianship agreement was equivalent to constructive delivery of the Note (to
the extent it had been sold or assigned to petitioner) to petitioner. It will be seen that custodianship
agreements are designed to facilitate transactions in the money market by providing a basis for
confidence on the part of the investors or placers that the instruments bought by them are effectively
taken out of the pocket, as it were, of the vendors and placed safely beyond their reach, that those
instruments will be there available to the placers of funds should they have need of them. The
depositary in a contract of deposit is obliged to return the security or the thing deposited upon
demand of the depositor (or, in the presented case, of the beneficiary) of the contract, even though a
term for such return may have been established in the said contract.
26
Accordingly, any stipulation in
the contract of deposit or custodianship that runs counter to the fundamental purpose of that agreement
or which was not brought to the notice of and accepted by the placer-beneficiary, cannot be enforced as
against such beneficiary-placer.
We believe that the position taken above is supported by considerations of public policy. If there is
any party that needs the equalizing protection of the law in money market transactions, it is the
members of the general public whom place their savings in such market for the purpose of
generating interest revenues.
27
The custodian bank, if it is not related either in terms of equity ownership
or management control to the borrower of the funds, or the commercial paper dealer, is normally a
preferred or traditional banker of such borrower or dealer (here, Philfinance). The custodian bank would
have every incentive to protect the interest of its client the borrower or dealer as against the placer of
funds. The providers of such funds must be safeguarded from the impact of stipulations privately made
between the borrowers or dealers and the custodian banks, and disclosed to fund-providers only after
trouble has erupted.
In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the security deposited
with it when petitioner first demanded physical delivery thereof on 2 April 1981. We must again note,
in this connection, that on 2 April 1981, DMC PN No. 2731 had not yet matured and therefore,
compensation or offsetting against Philfinance PN No. 143-A had not yet taken place. Instead of
complying with the demand of the petitioner, Pilipinas purported to require and await the instructions
of Philfinance, in obvious contravention of its undertaking under the DCR to effect physical delivery
of the Note upon receipt of "written instructions" from petitioner Sesbreo. The ostensible term
written into the DCR (i.e., "should this [DCR] remain outstanding in your favor thirty [30] days after its
maturity") was not a defense against petitioner's demand for physical surrender of the Note on at
least three grounds: firstly, such term was never brought to the attention of petitioner Sesbreo at
the time the money market placement with Philfinance was made; secondly, such term runs counter
to the very purpose of the custodianship or depositary agreement as an integral part of a money
market transaction; and thirdly, it is inconsistent with the provisions of Article 1988 of the Civil Code
noted above. Indeed, in principle, petitioner became entitled to demand physical delivery of the Note
held by Pilipinas as soon as petitioner's money market placement matured on 13 March 1981
without payment from Philfinance.
We conclude, therefore, that private respondent Pilipinas must respond to petitioner for damages
sustained by arising out of its breach of duty. By failing to deliver the Note to the petitioner as
depositor-beneficiary of the thing deposited, Pilipinas effectively and unlawfully deprived petitioner of
the Note deposited with it. Whether or not Pilipinas itself benefitted from such conversion or unlawful
deprivation inflicted upon petitioner, is of no moment for present purposes.Prima facie, the damages
suffered by petitioner consisted of P304,533.33, the portion of the DMC PN No. 2731 assigned to
petitioner but lost by him by reason of discharge of the Note by compensation, plus legal interest of
six percent (6%) per annum containing from 14 March 1981.
The conclusion we have reached is, of course, without prejudice to such right of reimbursement as
Pilipinas may havevis-a-vis Philfinance.
III.
The third principal contention of petitioner that Philfinance and private respondents Delta and
Pilipinas should be treated as one corporate entity need not detain us for long.
In the first place, as already noted, jurisdiction over the person of Philfinance was never acquired
either by the trial court nor by the respondent Court of Appeals. Petitioner similarly did not seek to
implead Philfinance in the Petition before us.
Secondly, it is not disputed that Philfinance and private respondents Delta and Pilipinas have been
organized as separate corporate entities. Petitioner asks us to pierce their separate corporate
entities, but has been able only to cite the presence of a common Director Mr. Ricardo Silverio,
Sr., sitting on the Board of Directors of all three (3) companies. Petitioner has neither alleged nor
proved that one or another of the three (3) concededly related companies used the other two (2) as
mere alter egos or that the corporate affairs of the other two (2) were administered and managed for
the benefit of one. There is simply not enough evidence of record to justify disregarding the separate
corporate personalities of delta and Pilipinas and to hold them liable for any assumed or
undetermined liability of Philfinance to petitioner.
28

WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of Appeals in C.A.-
G.R. CV No. 15195 dated 21 march 1989 and 17 July 1989, respectively, are hereby MODIFIED and
SET ASIDE, to the extent that such Decision and Resolution had dismissed petitioner's complaint
against Pilipinas Bank. Private respondent Pilipinas bank is hereby ORDERED to indemnify
petitioner for damages in the amount of P304,533.33, plus legal interest thereon at the rate of six
percent (6%) per annum counted from 2 April 1981. As so modified, the Decision and Resolution of
the Court of Appeals are hereby AFFIRMED. No pronouncement as to costs.
SO ORDERED.
FIRESTONE TIRE & RUBBER COMPANY OF THE
PHILIPPINES, petitioner, vs., COURT OF APPEALS and LUZON
DEVELOPMENT BANK,respondents.
D E C I S I O N
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
Firestones 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 plaintiffs 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:
DATE WITHDRAWAL AMOUNT
SLIP 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 plaintiffs 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-Arcas 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 plaintiffs 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 defendants 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 defendants
refusal to pay plaintiffs claim, plaintiff has been constrained to file this complaint,
thereby compelling plaintiff to incur litigation expenses and attorneys 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 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]

Petitioners complaint
[4]
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 2176
[5]
in
relation to Articles 19
[6]
and 20
[7]
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
depositors 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 petitioners 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 petitioners
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-Arcas special savings account with respondent bank. Petitioner in
turn deposited these withdrawal slips with Citibank. The latter credited the same to
petitioners 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-Arcas 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 petitioners account, causing the alleged
pecuniary damage subject of petitioners 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 petitioners 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 latters 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 petitioners 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 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.

II. PAYABLE TO BEARER
G.R. No. L-2516 September 25, 1950
ANG TEK LIAN, petitioner,
vs.
THE COURT OF APPEALS, respondent.
Laurel, Sabido, Almario and Laurel for petitioner.
Office of the Solicitor General Felix Bautista Angelo and Solicitor Manuel Tomacruz for
respondent.
BENGZON, J .:
For having issued a rubber check, Ang Tek Lian was convicted of estafa in the Court of First
Instance of Manila. The Court of Appeals affirmed the verdict.
It appears that, knowing he had no funds therefor, Ang Tek Lian drew on Saturday, November
16, 1946, the check Exhibits A upon the China Banking Corporation for the sum of P4,000,
payable to the order of "cash". He delivered it to Lee Hua Hong in exchange for money which
the latter handed in act. On November 18, 1946, the next business day, the check was
presented by Lee Hua Hong to the drawee bank for payment, but it was dishonored for
insufficiency of funds, the balance of the deposit of Ang Tek Lian on both dates being P335
only.
The Court of Appeals believed the version of Lee Huan Hong who testified that "on November
16, 1946, appellant went to his (complainant's) office, at 1217 Herran, Paco, Manila, and asked
him to exchange Exhibit A which he (appellant) then brought with him with cash alleging
that he needed badly the sum of P4,000 represented by the check, but could not withdraw it
from the bank, it being then already closed; that in view of this request and relying upon
appellant's assurance that he had sufficient funds in the blank to meet Exhibit A, and because
they used to borrow money from each other, even before the war, and appellant owns a hotel
and restaurant known as the North Bay Hotel, said complainant delivered to him, on the same
date, the sum of P4,000 in cash; that despite repeated efforts to notify him that the check had
been dishonored by the bank, appellant could not be located any-where, until he was
summoned in the City Fiscal's Office in view of the complaint for estafa filed in connection
therewith; and that appellant has not paid as yet the amount of the check, or any part thereof."
Inasmuch as the findings of fact of the Court of Appeals are final, the only question of law for
decision is whether under the facts found, estafa had been accomplished.
Article 315, paragraph (d), subsection 2 of the Revised Penal Code, punishes swindling
committed "By post dating a check, or issuing such check in payment of an obligation the
offender knowing that at the time he had no funds in the bank, or the funds deposited by him in
the bank were not sufficient to cover the amount of the check, and without informing the payee
of such circumstances".
We believe that under this provision of law Ang Tek Lian was properly held liable. In this
connection, it must be stated that, as explained in People vs. Fernandez (59 Phil.,
615), estafa is committed by issuing either a postdated check or an ordinary check to
accomplish the deceit.
It is argued, however, that as the check had been made payable to "cash" and had not been
endorsed by Ang Tek Lian, the defendant is not guilty of the offense charged. Based on the
proposition that "by uniform practice of all banks in the Philippines a check so drawn is
invariably dishonored," the following line of reasoning is advanced in support of the argument:
. . . When, therefore, he (the offended party ) accepted the check (Exhibit A) from the
appellant, he did so with full knowledge that it would be dishonored upon presentment. In
that sense, the appellant could not be said to have acted fraudulently because the
complainant, in so accepting the check as it was drawn, must be considered, by every
rational consideration, to have done so fully aware of the risk he was running thereby." (Brief
for the appellant, p. 11.)
We are not aware of the uniformity of such practice. Instances have undoubtedly occurred
wherein the Bank required the indorsement of the drawer before honoring a check payable to
"cash." But cases there are too, where no such requirement had been made . It depends upon
the circumstances of each transaction.
Under the Negotiable Instruments Law (sec. 9 [d], a check drawn payable to the order of "cash"
is a check payable to bearer, and the bank may pay it to the person presenting it for payment
without the drawer's indorsement.
A check payable to the order of cash is a bearer instrument. Bacal vs. National City Bank of
New York (1933), 146 Misc., 732; 262 N. Y. S., 839; Cleary vs. De Beck Plate Glass Co.
(1907), 54 Misc., 537; 104 N. Y. S., 831; Massachusetts Bonding & Insurance
Co. vs. Pittsburgh Pipe & Supply Co. (Tex. Civ. App., 1939), 135 S. W. (2d), 818. See
also H. Cook & Son vs. Moody (1916), 17 Ga. App., 465; 87 S. E., 713.
Where a check is made payable to the order of "cash", the word cash "does not purport to be
the name of any person", and hence the instrument is payable to bearer. The drawee bank
need not obtain any indorsement of the check, but may pay it to the person presenting it
without any indorsement. . . . (Zollmann, Banks and Banking, Permanent Edition, Vol. 6, p.
494.)
Of course, if the bank is not sure of the bearer's identity or financial solvency, it has the right to
demand identification and /or assurance against possible complications, for instance, (a)
forgery of drawer's signature, (b) loss of the check by the rightful owner, (c) raising of the
amount payable, etc. The bank may therefore require, for its protection, that the indorsement of
the drawer or of some other person known to it be obtained. But where the Bank is
satisfied of the identity and /or the economic standing of the bearer who tenders the check for
collection, it will pay the instrument without further question; and it would incur no liability to the
drawer in thus acting.
A check payable to bearer is authority for payment to holder. Where a check is in the
ordinary form, and is payable to bearer, so that no indorsement is required, a bank, to which
it is presented for payment, need not have the holder identified, and is not negligent in falling
to do so. . . . (Michie on Banks and Banking, Permanent Edition, Vol. 5, p. 343.)
. . . Consequently, a drawee bank to which a bearer check is presented for payment need
not necessarily have the holder identified and ordinarily may not be charged with negligence
in failing to do so. See Opinions 6C:2 and 6C:3 If the bank has no reasonable cause for
suspecting any irregularity, it will be protected in paying a bearer check, "no matter what
facts unknown to it may have occurred prior to the presentment." 1 Morse, Banks and
Banking, sec. 393.
Although a bank is entitled to pay the amount of a bearer check without further inquiry, it is
entirely reasonable for the bank to insist that holder give satisfactory proof of his identity. . . .
(Paton's Digest, Vol. I, p. 1089.)
Anyway, it is significant, and conclusive, that the form of the check Exhibit A was totally
unconnected with its dishonor. The Court of Appeals declared that it was returned
unsatisfied because the drawer had insufficient funds not because the drawer's indorsement
was lacking.
Wherefore, there being no question as to the correctness of the penalty imposed on the
appellant, the writ ofcertiorari is denied and the decision of the Court of Appeals is hereby
affirmed, with costs.
III. COMPLETE BUT UNDELIVERED
G.R. No. 85419 March 9, 1993
DEVELOPMENT BANK OF RIZAL, plaintiff-petitioner,
vs.
SIMA WEI and/or LEE KIAN HUAT, MARY CHENG UY, SAMSON TUNG, ASIAN INDUSTRIAL
PLASTIC CORPORATION and PRODUCERS BANK OF THE PHILIPPINES, defendants-
respondents.
Yngson & Associates for petitioner.
Henry A. Reyes & Associates for Samso Tung & Asian Industrial Plastic Corporation.
Eduardo G. Castelo for Sima Wei.
Monsod, Tamargo & Associates for Producers Bank.
Rafael S. Santayana for Mary Cheng Uy.

CAMPOS, JR., J .:
On July 6, 1986, the Development Bank of Rizal (petitioner Bank for brevity) filed a complaint for a
sum of money against respondents Sima Wei and/or Lee Kian Huat, Mary Cheng Uy, Samson Tung,
Asian Industrial Plastic Corporation (Plastic Corporation for short) and the Producers Bank of the
Philippines, on two causes of action:
(1) To enforce payment of the balance of P1,032,450.02 on a promissory note
executed by respondent Sima Wei on June 9, 1983; and
(2) To enforce payment of two checks executed by Sima Wei, payable to petitioner,
and drawn against the China Banking Corporation, to pay the balance due on the
promissory note.
Except for Lee Kian Huat, defendants filed their separate Motions to Dismiss alleging a common
ground that the complaint states no cause of action. The trial court granted the defendants' Motions
to Dismiss. The Court of Appeals affirmed this decision, * to which the petitioner Bank, represented
by its Legal Liquidator, filed this Petition for Review by Certiorari, assigning the following as the
alleged errors of the Court of Appeals:
1

(1) THE COURT OF APPEALS ERRED IN HOLDING THAT THE PLAINTIFF-
PETITIONER HAS NO CAUSE OF ACTION AGAINST DEFENDANTS-
RESPONDENTS HEREIN.
(2) THE COURT OF APPEALS ERRED IN HOLDING THAT SECTION 13, RULE 3
OF THE REVISED RULES OF COURT ON ALTERNATIVE DEFENDANTS IS NOT
APPLICABLE TO HEREIN DEFENDANTS-RESPONDENTS.
The antecedent facts of this case are as follows:
In consideration for a loan extended by petitioner Bank to respondent Sima Wei, the latter executed
and delivered to the former a promissory note, engaging to pay the petitioner Bank or order the
amount of P1,820,000.00 on or before June 24, 1983 with interest at 32% per annum. Sima Wei
made partial payments on the note, leaving a balance of P1,032,450.02. On November 18, 1983,
Sima Wei issued two crossed checks payable to petitioner Bank drawn against China Banking
Corporation, bearing respectively the serial numbers 384934, for the amount of P550,000.00 and
384935, for the amount of P500,000.00. The said checks were allegedly issued in full settlement of
the drawer's account evidenced by the promissory note. These two checks were not delivered to the
petitioner-payee or to any of its authorized representatives. For reasons not shown, these checks
came into the possession of respondent Lee Kian Huat, who deposited the checks without the
petitioner-payee's indorsement (forged or otherwise) to the account of respondent Plastic
Corporation, at the Balintawak branch, Caloocan City, of the Producers Bank. Cheng Uy, Branch
Manager of the Balintawak branch of Producers Bank, relying on the assurance of respondent
Samson Tung, President of Plastic Corporation, that the transaction was legal and regular,
instructed the cashier of Producers Bank to accept the checks for deposit and to credit them to the
account of said Plastic Corporation, inspite of the fact that the checks were crossed and payable to
petitioner Bank and bore no indorsement of the latter. Hence, petitioner filed the complaint as
aforestated.
The main issue before Us is whether petitioner Bank has a cause of action against any or all of the
defendants, in the alternative or otherwise.
A cause of action is defined as an act or omission of one party in violation of the legal right or rights
of another. The essential elements are: (1) legal right of the plaintiff; (2) correlative obligation of the
defendant; and (3) an act or omission of the defendant in violation of said legal right.
2

The normal parties to a check are the drawer, the payee and the drawee bank. Courts have long
recognized the business custom of using printed checks where blanks are provided for the date of
issuance, the name of the payee, the amount payable and the drawer's signature. All the drawer has
to do when he wishes to issue a check is to properly fill up the blanks and sign it. However, the mere
fact that he has done these does not give rise to any liability on his part, until and unless the check is
delivered to the payee or his representative. A negotiable instrument, of which a check is, is not only
a written evidence of a contract right but is also a species of property. Just as a deed to a piece of
land must be delivered in order to convey title to the grantee, so must a negotiable instrument be
delivered to the payee in order to evidence its existence as a binding contract. Section 16 of the
Negotiable Instruments Law, which governs checks, provides in part:
Every contract on a negotiable instrument is incomplete and revocable until delivery
of the instrument for the purpose of giving effect thereto. . . .
Thus, the payee of a negotiable instrument acquires no interest with respect thereto until its delivery
to him.
3
Delivery of an instrument means transfer of possession, actual or constructive, from one person
to another.
4
Without the initial delivery of the instrument from the drawer to the payee, there can be no
liability on the instrument. Moreover, such delivery must be intended to give effect to the instrument.
The allegations of the petitioner in the original complaint show that the two (2) China Bank checks,
numbered 384934 and 384935, were not delivered to the payee, the petitioner herein. Without the
delivery of said checks to petitioner-payee, the former did not acquire any right or interest therein
and cannot therefore assert any cause of action, founded on said checks, whether against the
drawer Sima Wei or against the Producers Bank or any of the other respondents.
In the original complaint, petitioner Bank, as plaintiff, sued respondent Sima Wei on the promissory
note, and the alternative defendants, including Sima Wei, on the two checks. On appeal from the
orders of dismissal of the Regional Trial Court, petitioner Bank alleged that its cause of action was
not based on collecting the sum of money evidenced by the negotiable instruments stated but
on quasi-delict a claim for damages on the ground of fraudulent acts and evident bad faith of the
alternative respondents. This was clearly an attempt by the petitioner Bank to change not only the
theory of its case but the basis of his cause of action. It is well-settled that a party cannot change his
theory on appeal, as this would in effect deprive the other party of his day in court.
5

Notwithstanding the above, it does not necessarily follow that the drawer Sima Wei is freed from
liability to petitioner Bank under the loan evidenced by the promissory note agreed to by her. Her
allegation that she has paid the balance of her loan with the two checks payable to petitioner Bank
has no merit for, as We have earlier explained, these checks were never delivered to petitioner
Bank. And even granting, without admitting, that there was delivery to petitioner Bank, the delivery of
checks in payment of an obligation does not constitute payment unless they are cashed or their
value is impaired through the fault of the creditor.
6
None of these exceptions were alleged by
respondent Sima Wei.
Therefore, unless respondent Sima Wei proves that she has been relieved from liability on the
promissory note by some other cause, petitioner Bank has a right of action against her for the
balance due thereon.
However, insofar as the other respondents are concerned, petitioner Bank has no privity with them.
Since petitioner Bank never received the checks on which it based its action against said
respondents, it never owned them (the checks) nor did it acquire any interest therein. Thus, anything
which the respondents may have done with respect to said checks could not have prejudiced
petitioner Bank. It had no right or interest in the checks which could have been violated by said
respondents. Petitioner Bank has therefore no cause of action against said respondents, in the
alternative or otherwise. If at all, it is Sima Wei, the drawer, who would have a cause of action
against her co-respondents, if the allegations in the complaint are found to be true.
With respect to the second assignment of error raised by petitioner Bank regarding the applicability
of Section 13, Rule 3 of the Rules of Court, We find it unnecessary to discuss the same in view of
Our finding that the petitioner Bank did not acquire any right or interest in the checks due to lack of
delivery. It therefore has no cause of action against the respondents, in the alternative or otherwise.
In the light of the foregoing, the judgment of the Court of Appeals dismissing the petitioner's
complaint is AFFIRMED insofar as the second cause of action is concerned. On the first cause of
action, the case is REMANDED to the trial court for a trial on the merits, consistent with this
decision, in order to determine whether respondent Sima Wei is liable to the Development Bank of
Rizal for any amount under the promissory note allegedly signed by her.
SO ORDERED.
Narvasa, C.J., Padilla, Regalado and Nocon, JJ., concur.
IV. LIABILITY OF PERSONS SIGNING AS AGENT
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 the total amount of his obligation to the said plaintiff under the twenty-two (22)
causes of action alleged in the complaint as of November 15, 1957 and the sum of P10,000.00 as
attorney's fees.
21

On May 9, 1960 the defendant filed a notice of appeal from the order dated March 25, 1961 denying
his motion to set aside the order declaring him in default, an appeal bond in the amount of P60.00,
and his record on appeal. The plaintiff filed his opposition to the approval of defendant's record on
appeal on May 13, 1960. The following day, May 14, 1960, the lower court dismissed defendant's
appeal from the order dated March 25, 1960 denying his motion to set aside the order of
default.
22
On May 19, 1960, the defendant filed a motion for reconsideration of the trial court's order
dismissing his appeal.
23
The plaintiff, on May 20, 1960, opposed the defendant's motion for
reconsideration of the order dismissing appeal.
24
On May 21, 1960, the trial court reconsidered its
previous order dismissing the appeal and approved the defendant's record on appeal.
25
On May 30,
1960, the defendant received a copy of a notice from the Clerk of Court dated May 26, 1960, informing
the defendant that the record on appeal filed ed by the defendant was forwarded to the Clerk of Court of
Appeals.
26

On June 1, 1960 Aruego filed a motion to set aside the judgment rendered after he was declared in
default reiterating the same ground previously advanced by him in his motion for relief from the order
of default.
27
Upon opposition of the plaintiff filed on June 3, 1960,
28
the trial court denied the defendant's
motion to set aside the judgment by default in an order of June 11, 1960.
29
On June 20, 1960, the
defendant filed his notice of appeal from the order of the court denying his motion to set aside the
judgment by default, his appeal bond, and his record on appeal. The defendant's record on appeal was
approved by the trial court on June 25, 1960.
30
Thus, the defendant had two appeals with the Court of
Appeals: (1) Appeal from the order of the lower court denying his motion to set aside the order of default
docketed as CA-G.R. NO. 27734-R; (2) Appeal from the order denying his motion to set aside the
judgment by default docketed as CA-G.R. NO. 27940-R.
In his brief, the defendant-appellant assigned the following errors:
I
THE LOWER COURT ERRED IN HOLDING THAT THE DEFENDANT WAS IN
DEFAULT.
II
THE LOWER COURT ERRED IN ENTERTAINING THE MOTION TO DECLARE
DEFENDANT IN DEFAULT ALTHOUGH AT THE TIME THERE WAS ALREADY ON
FILE AN ANSWER BY HIM WITHOUT FIRST DISPOSING OF SAID ANSWER IN
AN APPROPRIATE ACTION.
III
THE LOWER COURT ERRED IN DENYING DEFENDANT'S PETITION FOR
RELIEF OF ORDER OF DEFAULT AND FROM JUDGMENT BY DEFAULT
AGAINST DEFENDANT.
31

It has been held that to entitle a party to relief from a judgment taken against him through his
mistake, inadvertence, surprise or excusable neglect, he must show to the court that he has a
meritorious defense.
32
In other words, in order to set aside the order of default, the defendant must not
only show that his failure to answer was due to fraud, accident, mistake or excusable negligence but also
that he has a meritorious defense.
The record discloses that Aruego received a copy of the complaint together with the summons on
December 2, 1960; that on December 17, 1960, the last day for filing his answer, Aruego filed a
motion to dismiss; that on December 22, 1960 the lower court dismissed the complaint; that on
January 23, 1960, the plaintiff filed a motion for reconsideration and on March 7, 1960, acting upon
the motion for reconsideration, the trial court issued an order setting aside the order of dismissal;
that a copy of the order was received by the defendant on March 11, 1960 at 5:00 o'clock in the
afternoon as shown in the affidavit of the deputy sheriff; and that on the following day, March 12,
1960, the defendant filed his answer to the complaint.
The failure then of the defendant to file his answer on the last day for pleading is excusable. The
order setting aside the dismissal of the complaint was received at 5:00 o'clock in the afternoon. It
was therefore impossible for him to have filed his answer on that same day because the courts then
held office only up to 5:00 o'clock in the afternoon. Moreover, the defendant immediately filed his
answer on the following day.
However, while the defendant successfully proved that his failure to answer was due to excusable
negligence, he has failed to show that he has a meritorious defense. The defendant does not have a
good and substantial defense.
Defendant Aruego's defenses consist of the following:
a) The defendant signed the bills of exchange referred to in the plaintiff's complaint in a
representative capacity, as the then President of the Philippine Education Foundation Company,
publisher of "World Current Events and Decision Law Journal," printed by Encal Press and Photo-
Engraving, drawer of the said bills of exchange in favor of the plaintiff bank;
b) The defendant signed these bills of exchange not as principal obligor, but as accommodation or
additional party obligor, to add to the security of said plaintiff bank. The reason for this statement is
that unlike real bills of exchange, where payment of the face value is advanced to the drawer only
upon acceptance of the same by the drawee, in the case in question, payment for the supposed bills
of exchange were made before acceptance; so that in effect, although these documents are labelled
bills of exchange, legally they are not bills of exchange but mere instruments evidencing
indebtedness of the drawee who received the face value thereof, with the defendant as only
additional security of the same.
33

The first defense of the defendant is that he signed the supposed bills of exchange as an agent of
the Philippine Education Foundation Company where he is president. Section 20 of the Negotiable
Instruments Law provides that "Where the instrument contains or a person adds to his signature
words indicating that he signs for or on behalf of a principal or in a representative capacity, he is not
liable on the instrument if he was duly authorized; but the mere addition of words describing him as
an agent or as filing a representative character, without disclosing his principal, does not exempt him
from personal liability."
An inspection of the drafts accepted by the defendant shows that nowhere has he disclosed that he
was signing as a representative of the Philippine Education Foundation Company.
34
He merely
signed as follows: "JOSE ARUEGO (Acceptor) (SGD) JOSE ARGUEGO For failure to disclose his
principal, Aruego is personally liable for the drafts he accepted.
The defendant also contends that he signed the drafts only as an accommodation party and as such,
should be made liable only after a showing that the drawer is incapable of paying. This contention is
also without merit.
An accommodation party is one who has signed the instrument as maker, drawer, indorser, without
receiving value therefor and for the purpose of lending his name to some other person. Such person
is liable on the instrument to a holder for value, notwithstanding such holder, at the time of the taking
of the instrument knew him to be only an accommodation party.
35
In lending his name to the
accommodated party, the accommodation party is in effect a surety for the latter. He lends his name to
enable the accommodated party to obtain credit or to raise money. He receives no part of the
consideration for the instrument but assumes liability to the other parties thereto because he wants to
accommodate another. In the instant case, the defendant signed as a drawee/acceptor. Under the
Negotiable Instrument Law, a drawee is primarily liable. Thus, if the defendant who is a lawyer, he should
not have signed as an acceptor/drawee. In doing so, he became primarily and personally liable for the
drafts.
The defendant also contends that the drafts signed by him were not really bills of exchange but mere
pieces of evidence of indebtedness because payments were made before acceptance. This is also
without merit. Under the Negotiable Instruments Law, a bill of exchange is an unconditional order in
writting addressed by one person to another, signed by the person giving it, requiring the person to
whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in
money to order or to bearer.
36
As long as a commercial paper conforms with the definition of a bill of
exchange, that paper is considered a bill of exchange. The nature of acceptance is important only in the
determination of the kind of liabilities of the parties involved, but not in the determination of whether a
commercial paper is a bill of exchange or not.
It is evident then that the defendant's appeal 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.
ADALIA FRANCISCO, petitioner, vs. COURT OF APPEALS , HERBY
COMMERCIAL & CONSTRUCTION CORPORATION AND JAIME
C. ONG, respondents.
D E C I S I O N
GONZAGA
_
REYES, J .:
Assailed in this petition for review on certiorari is the decision
[1]
of the Court of Appeals
affirming the decision
[2]
rendered by Branch 168 of the Regional Trial Court of Pasig in Civil
Case No. 35231 in favor of private respondents.
The controversy before this Court finds its origins in a Land Development and Construction
Contract which was entered into on June 23, 1977 by A. Francisco Realty & Development
Corporation (AFRDC), of which petitioner Adalia Francisco (Francisco) is the president, and
private respondent Herby Commercial & Construction Corporation (HCCC), represented by its
President and General Manager private respondent Jaime C. Ong (Ong), pursuant to a housing
project of AFRDC at San Jose del Monte, Bulacan, financed by the Government Service
Insurance System (GSIS). Under the contract, HCCC agreed to undertake the construction of 35
housing units and the development of 35 hectares of land. The payment of HCCC for its services
was on a turn-key basis, that is, HCCC was to be paid on the basis of the completed houses and
developed lands delivered to and accepted by AFRDC and the GSIS. To facilitate payment,
AFRDC executed a Deed of Assignment in favor of HCCC to enable the latter to collect
payments directly from the GSIS. Furthermore, the GSIS and AFRDC put up an Executive
Committee Account with the Insular Bank of Asia & America (IBAA) in the amount of
P4,000,000.00 from which checks would be issued and co-signed by petitioner Francisco and the
GSIS Vice-President Armando Diaz (Diaz).
On February 10, 1978, HCCC filed a complaint
[3]
with the Regional Trial Court of Quezon
City against Francisco, AFRDC and the GSIS for the collection of the unpaid balance under the
Land Development and Construction Contract in the amount of P515,493.89 for completed and
delivered housing units and land development. However, the parties eventually arrived at an
amicable settlement of their differences, which was embodied in a Memorandum Agreement
executed by HCCC and AFRDC on July 21, 1978. Under the agreement, the parties stipulated
that HCCC had turned over 83 housing units which have been accepted and paid for by the
GSIS. The GSIS acknowledged that it still owed HCCC P520,177.50 representing incomplete
construction of housing units, incomplete land development and 5% retention, which amount
will be discharged when the defects and deficiencies are finally completed by HCCC. It was
also provided that HCCC was indebted to AFRDC in the amount of P180,234.91 which the
former agreed would be paid out of the proceeds from the 40 housing units still to be turned over
by HCCC or from any amount due to HCCC from the GSIS. Consequently, the trial court
dismissed the case upon the filing by the parties of a joint motion to dismiss.
Sometime in 1979, after an examination of the records of the GSIS, Ong discovered that
Diaz and Francisco had executed and signed seven checks
[4]
, of various dates and amounts, drawn
against the IBAA and payable to HCCC for completed and delivered work under the contract.
Ong, however, claims that these checks were never delivered to HCCC. Upon inquiry with Diaz,
Ong learned that the GSIS gave Francisco custody of the checks since she promised that she
would deliver the same to HCCC. Instead, Francisco forged the signature of Ong, without his
knowledge or consent, at the dorsal portion of the said checks to make it appear that HCCC had
indorsed the checks; Francisco then indorsed the checks for a second time by signing her name at
the back of the checks and deposited the checks in her IBAA savings account. IBAA credited
Franciscos account with the amount of the checks and the latter withdrew the amount so
credited.
On June 7, 1979, Ong filed complaints with the office of the city fiscal of Quezon City,
charging Francisco with estafa thru falsification of commercial documents. Francisco denied
having forged Ongs signature on the checks, claiming that Ong himself indorsed the seven
checks in behalf of HCCC and delivered the same to Francisco in payment of the loans extended
by Francisco to HCCC. According to Francisco, she agreed to grant HCCC the loans in the total
amount of P585,000.00 and covered by eighteen promissory notes in order to obviate the risk of
the non-completion of the project. As a means of repayment, Ong allegedly issued a
Certification authorizing Francisco to collect HCCCs receivables from the GSIS. Assistant City
Fiscal Ramon M. Gerona gave credence to Franciscos claims and accordingly, dismissed the
complaints, which dismissal was affirmed by the Minister of Justice in a resolution issued on
June 5, 1981.
The present case was brought by private respondents on November 19, 1979 against
Francisco and IBAA for the recovery of P370,475.00, representing the total value of the seven
checks, and for damages, attorneys fees, expenses of litigation and costs. After trial on the
merits, the trial court rendered its decision in favor of private respondents, the dispositive portion
of which provides -
WHEREFORE, premises considered, judgment is hereby rendered in favor of the
plaintiffs and against the defendants INSULAR BANK OF ASIA & AMERICA and
ATTY. ADALIA FRANCISCO, to jointly and severally pay the plaintiffs the amount
of P370.475.00 plus interest thereon at the rate of 12% per annum from the date of the
filing of the complaint until the full amount is paid; moral damages to plaintiff Jaime
Ong in the sum of P50,000.00; exemplary damages of P50,000.00; litigation expenses
of P5,000.00; and attorneys fees of P50,000.00.
With respect to the cross-claim of the defendant IBAA against its co-defendant Atty.
Adalia Francisco, the latter is ordered to reimburse the former for the sums that the
Bank shall pay to the plaintiff on the forged checks including the interests paid
thereon.
Further, the defendants are ordered to pay the costs.
Based upon the findings of handwriting experts from the National Bureau of Investigation
(NBI), the trial court held that Francisco had indeed forged the signature of Ong to make it
appear that he had indorsed the checks. Also, the court ruled that there were no loans extended,
reasoning that it was unbelievable that HCCC was experiencing financial difficulties so as to
compel it to obtain the loans from AFRDC in view of the fact that the GSIS had issued checks in
favor of HCCC at about the same time that the alleged advances were made. The trial court
stated that it was plausible that Francisco concealed the fact of issuance of the checks from
private respondents in order to make it appear as if she were accommodating private
respondents, when in truth she was lending HCCC its own money.
With regards to the Memorandum Agreement entered into between AFRDC and HCCC in
Civil Case No. Q-24628, the trial court held that the same did not make any mention of the
forged checks since private respondents were as of yet unaware of their existence, that fact
having been effectively concealed by Francisco, until private respondents acquired knowledge of
Franciscos misdeeds in 1979.
IBAA was held liable to private respondents for having honored the checks despite such
obvious irregularities as the lack of initials to validate the alterations made on the check, the
absence of the signature of a co-signatory in the corporate checks of HCCC and the deposit of
the checks on a second indorsement in the savings account of Francisco. However, the trial court
allowed IBAA recourse against Francisco, who was ordered to reimburse the IBAA for any sums
it shall have to pay to private respondents.
[5]

Both Francisco and IBAA appealed the trial courts decision, but the Court of Appeals
dismissed IBAAs appeal for its failure to file its brief within the 45-day extension granted by the
appellate court. IBAAs motion for reconsideration and petition for review on certiorari filed
with this Court were also similarly denied. On November 21, 1989, IBAA and HCCC entered
into a Compromise Agreement which was approved by the trial court, wherein HCCC
acknowledged receipt of the amount of P370,475.00 in full satisfaction of its claims against
IBAA, without prejudice to the right of the latter to pursue its claims against Francisco.
On June 29, 1992, the Court of Appeals affirmed the trial courts ruling, hence this petition
for review on certiorari filed by petitioner, assigning the following errors to the appealed
decision
1. The respondent Court of Appeals erred in concluding that private respondents did
not owe Petitioner the sum covered by the Promissory Notes Exh.2-2-A-2-P
(FRANCISCO). Such conclusion was based mainly on conjectures, surmises and
speculation contrary to the unrebutted pleadings and evidence presented by petitioner.
2. The respondent Court of Appeals erred in holding that Petitioner falsified the
signature of private respondent ONG on the checks in question without any authority
therefor which is patently contradictory to the unrebutted pleading and evidence that
petitioner was expressly authorized by respondent HERBY thru ONG to collect all
receivables of HERBY from GSIS to pay the loans extended to them. (Exhibit 3).
3. That respondent Court of Appeals erred in holding that the seven checks in
question were not taken up in the liquidation and reconciliation of all outstanding
account between AFRDC and HERBY as acknowledged by the parties in
Memorandum Agreement (Exh. 5) is a pure conjecture, surmise and speculation
contrary to the unrebutted evidence presented by petitioners. It is an inference made
which is manifestly mistaken.
4. The respondent Court of Appeals erred in affirming the decision of the lower court
and dismissing the appeal.
[6]

The pivotal issue in this case is whether or not Francisco forged the signature of Ong on the
seven checks. In this connection, we uphold the lower courts finding that the subject matter of
the present case, specifically the seven checks, drawn by GSIS and AFRDC, dated between
October to November 1977, in the total amount of P370,475.00 and payable to HCCC, was not
included in the Memorandum Agreement executed by HCCC and AFRDC in Civil Case No. Q-
24628. As observed by the trial court, aside from there being absolutely no mention of the checks
in the said agreement, the amounts represented by said checks could not have been included in
the Memorandum Agreement executed in 1978 because private respondents only discovered
Franciscos acts of forgery in 1979. The lower courts found that Francisco was able to easily
conceal from private respondents even the fact of the issuance of the checks since she was a co-
signatory thereof.
[7]
We also note that Francisco had custody of the checks, as proven by the
check vouchers bearing her uncontested signature,
[8]
by which she, in effect, acknowledged
having received the checks intended for HCCC. This contradicts Franciscos claims that the
checks were issued to Ong who delivered them to Francisco already indorsed.
[9]

As regards the forgery, we concur with the lower courts finding that Francisco forged the
signature of Ong on the checks to make it appear as if Ong had indorsed said checks and that,
after indorsing the checks for a second time by signing her name at the back of the checks,
Francisco deposited said checks in her savings account with IBAA. The forgery was
satisfactorily established in the trial court upon the strength of the findings of the NBI
handwriting expert.
[10]
Other than petitioners self-serving denials, there is nothing in the records
to rebut the NBIs findings. Well-entrenched is the rule that findings of trial courts which are
factual in nature, especially when affirmed by the Court of Appeals, deserve to be respected and
affirmed by the Supreme Court, provided it is supported by substantial evidence on record,
[11]
as
it is in the case at bench.
Petitioner claims that she was, in any event, authorized to sign Ongs name on the checks by
virtue of the Certification executed by Ong in her favor giving her the authority to collect all the
receivables of HCCC from the GSIS, including the questioned checks.
[12]
Petitioners alternative
defense must similarly fail. The Negotiable Instruments Law provides that where any person is
under obligation to indorse in a representative capacity, he may indorse in such terms as to
negative personal liability.
[13]
An agent, when so signing, should indicate that he is merely
signing in behalf of the principal and must disclose the name of his principal; otherwise he shall
be held personally liable.
[14]
Even assuming that Francisco was authorized by HCCC to sign
Ongs name, still, Francisco did not indorse the instrument in accordance with law. Instead of
signing Ongs name, Francisco should have signed her own name and expressly indicated that
she was signing as an agent of HCCC. Thus, the Certification cannot be used by Francisco to
validate her act of forgery.
Every person who, contrary to law, wilfully or negligently causes damage to another, shall
indemnify the latter for the same.
[15]
Due to her forgery of Ongs signature which enabled her to
deposit the checks in her own account, Francisco deprived HCCC of the money due it from the
GSIS pursuant to the Land Development and Construction Contract. Thus, we affirm respondent
courts award of compensatory damages in the amount of P370,475.00, but with a modification
as to the interest rate which shall be six percent (6%) per annum, to be computed from the date of
the filing of the complaint since the amount of damages was alleged in the
complaint;
[16]
however, the rate of interest shall be twelve percent (12%) per annum from the time
the judgment in this case becomes final and executory until its satisfaction and the basis for the
computation of this twelve percent (12%) rate of interest shall be the amount of
P370,475.00. This is in accordance with the doctrine enunciated in Eastern Shipping Lines, Inc.
vs. Court of Appeals, et al.,
[17]
which was reiterated inPhilippine National Bank vs. Court of
Appeals,
[18]
Philippine Airlines, Inc. vs. Court of Appeals
[19]
and in Keng Hua Paper Products Co.,
Inc. vs. Court of Appeals,
[20]
which provides that -
1. When an obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the court at the
rate of six percent (6%) per annum. No interest, however, shall be adjudged on unliquidated
claims or damages except when or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with reasonable certainty, the interest
shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil
Code) but when such certainty cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date the judgment of the court is made (at
which time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any case, be on the
amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory,
the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be
twelve percent (12%) per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit.
We also sustain the award of exemplary damages in the amount of P50,000.00. Under
Article 2229 of the Civil Code, exemplary damages are imposed by way of example or
correction for the public good, in addition to the moral, temperate, liquidated or compensatory
damages. Considering petitioners fraudulent act, we hold that an award of P50,000.00 would be
adequate, fair and reasonable. The grant of exemplary damages justifies the award of attorneys
fees in the amount of P50,000.00, and the award of P5,000.00 for litigation expenses.
[21]

The appellate courts award of P50,000.00 in moral damages is warranted. Under Article
2217 of the Civil Code, moral damages may be granted upon proof of physical suffering, mental
anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social
humiliation and similar injury.
[22]
Ong testitified that he suffered sleepless nights, embarrassment,
humiliation and anxiety upon discovering that the checks due his company were forged by
petitioner and that petitioner had filed baseless criminal complaints against him before the
fiscals office of Quezon City which disrupted HCCCs business operations.
[23]

WHEREFORE, we AFFIRM the respondent courts decision promulgated on June 29,
1992, upholding the February 16, 1988 decision of the trial court in favor of private respondents,
with the modification that the interest upon the actual damages awarded shall be at six percent
(6%) per annum, which interest rate shall be computed from the time of the filing of the
complaint on November 19, 1979. However, the interest rate shall be twelve percent (12%) per
annum from the time the judgment in this case becomes final and executory and until such
amount is fully paid. The basis for computation of the six percent and twelve percent rates of
interest shall be the amount of P370,475.00. No pronouncement as to costs.
SO ORDERED.
V. FORGERY
JAI-ALAI CORPORATION OF THE
PHILIPPINES, Petitioner, v. BANK OF THE PHILIPPINE
ISLAND, Respondent.
CASTRO, J.:
This is a petition by the Jai-Alai Corporation of the Philippines
(hereinafter referred to as the petitioner) for review of the decision
of the Court of Appeals in C.A.-G.R. 34042-R dated June 25, 1968
in favor of the Bank of the Philippine Islands (hereinafter referred to
as the respondent).

From April 2, 1959 to May 18, 1959, ten checks with a total face
value of P8,030.58 were deposited by the petitioner in its current
account with the respondent bank. The particulars of these checks
are as follows:

1. Drawn by the Delta Engineering Service upon the Pacific Banking
Corporation and payable to the Inter-Island Gas Service Inc. or
order:

Date Check Exhibit

Deposited Number Amount Number

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

4/20/59 A-156907 372.32 19

4/24/59 A-156924 397.82 20

5/4/59 B-364764 250.00 23

5/6/59 B-364775 250.00 24

2. Drawn by the Enrique Cortiz & Co. upon the Pacific Banking
Corporation and payable to the Inter-Island Gas Service, Inc. or
bearer:

4/13/59 B-335063 P 2108.70 21

4/27/59 B-335072 P2210.94 22

3. Drawn by the Luzon Tinsmith & Company upon the China
Banking Corporation and payable to the Inter-Island Gas Service,
Inc. or bearer:

5/18/59 VN430188 P940.80 25

4. Drawn by the Roxas Manufacturing, Inc. upon the Philippine
National Bank and payable to the Inter-Island Gas Service, Inc.
order:

5/14/59 1860160 P 500.00 26

5/18/59 1860660 P 500.00 27

All the foregoing checks, which were acquired by the petitioner from
one Antonio J. Ramirez, a sales agent of the Inter-Island Gas and a
regular bettor at jai-alai games, were, upon deposit, temporarily
credited to the petitioner's account in accordance with the clause
printed on the deposit slips issued by the respondent and which
reads:

"Any credit allowed the depositor on the books of the Bank for
checks or drafts hereby received for deposit, is provisional only,
until such time as the proceeds thereof, in current funds or solvent
credits, shall have been actually received by the Bank and the latter
reserves to itself the right to charge back the item to the account of
its depositor, at any time before that event, regardless of whether
or not the item itself can be returned."

About the latter part of July 1959, after Ramirez had resigned from
the Inter-Island Gas and after the checks had been submitted to
inter-bank clearing, the Inter-Island Gas discovered that all the
indorsements made on the checks purportedly by its cashiers,
Santiago Amplayo and Vicenta Mucor (who were merely authorized
to deposit checks issued payable to the said company) as well as
the rubber stamp impression thereon reading "Inter-Island Gas
Service, Inc.," were forgeries. In due time, the Inter-Island Gas
advised the petitioner, the respondent, the drawers and the drawee-
banks of the said checks about the forgeries, and filed a criminal
complaint against Ramirez with the Office of the City Fiscal of
Manila. 1

The respondent's cashier, Ramon Sarthou, upon receipt of the latter
of Inter-Island Gas dated August 31, 1959, called up the petitioner's
cashier, Manuel Garcia, and advised the latter that in view of the
circumstances he would debit the value of the checks against the
petitioner's account as soon as they were returned by the respective
drawee-banks.

Meanwhile, the drawers of the checks, having been notified of the
forgeries, demanded reimbursement to their respective accounts
from the drawee-banks, which in turn demanded from the
respondent, as collecting bank, the return of the amounts they had
paid on account thereof. When the drawee-banks returned the
checks to the respondent, the latter paid their value which the
former in turn paid to the Inter-Island Gas. The respondent, for its
part, debited the petitioner's current account and forwarded to the
latter the checks containing the forged indorsements, which the
petitioner, however, refused to accept.

On October 8, 1959 the petitioner drew against its current account
with the respondent a check for P135,000 payable to the order of
the Mariano Olondriz y Cia. in payment of certain shares of stock.
The check was, however, dishonored by the respondent as its
records showed that as of October 8, 1959 the current account of
the petitioner, after netting out the value of the checks P8,030.58)
with the forged indorsements, had a balance of only P128,257.65.

The petitioner then filed a complaint against the respondent with
the Court of First Instance of Manila, which was however dismissed
by the trial court after due trial, and as well by the Court of Appeals,
on appeal.

Hence, the present recourse.

The issues posed by the petitioner in the instant petition may be
briefly stated as follows:

(a) Whether the respondent had the right to debit the petitioner's
current account in the amount corresponding to the total value of
the checks in question after more than three months had elapsed
from the date their value was credited to the petitioner's
account:(b) Whether the respondent is estopped from claiming that
the amount of P8,030.58, representing the total value of the checks
with the forged indorsements, had not been properly credited to the
petitioner's account, since the same had already been paid by the
drawee-banks and received in due course by the respondent; and(c)
On the assumption that the respondent had improperly debited the
petitioner's current account, whether the latter is entitled to
damages.

These three issues interlock and will be resolved jointly.

In our opinion, the respondent acted within legal bounds when it
debited the petitioner's account. When the petitioner deposited the
checks with the respondent, the nature of the relationship created
at that stage was one of agency, that is, the bank was to collect
from the drawees of the checks the corresponding proceeds. It is
true that the respondent had already collected the proceeds of the
checks when it debited the petitioner's account, so that following
the rule in Gullas vs. Philippine National Bank 2 it might be argued
that the relationship between the parties had become that of
creditor and debtor as to preclude the respondent from using the
petitioner's funds to make payments not authorized by the latter. It
is our view nonetheless that no creditor-debtor relationship was
created between the parties.

Section 23 of the Negotiable Instruments Law (Act 2031) states that
3

"When a signature is forged or made without the authority of the
person whose signature it purports to be, it is wholly inoperative,
and no right to retain the instrument, or to 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 under the foregoing provision, a forged signature in a
negotiable instrument is wholly inoperative and no right to
discharge it or enforce its payment can be acquired through or
under the forged signature except against a party who cannot
invoke the forgery, it stands to reason, upon the facts of record,
that the respondent, as a collecting bank which indorsed the checks
to the drawee-banks for clearing, should be liable to the latter for
reimbursement, for, as found by the court a quo and by the
appellate court, the indorsements on the checks had been forged
prior to their delivery to the petitioner. In legal contemplation,
therefore, the payments made by the drawee-banks to the
respondent on account of the said checks were ineffective; and,
such being the case, the relationship of creditor and debtor between
the petitioner and the respondent had not been validly effected, the
checks not having been properly and legitimately converted into
cash. 4

In Great Eastern Life Ins. Co. vs. Hongkong & Shanghai Bank, 5 the
Court ruled that it is the obligation of the collecting bank to
reimburse the drawee-bank the value of the checks subsequently
found to contain the forged indorsement of the payee. The reason is
that the bank with which the check was deposited has no right to
pay the sum stated therein to the forger "or anyone else upon a
forged signature." "It was its duty to know," said the Court, "that
[the payee's] endorsement was genuine before cashing the check."
The petitioner must in turn shoulder the loss of the amounts which
the respondent; as its collecting agent, had to reimburse to the
drawee-banks.

We do not consider material for the purposes of the case at bar that
more than three months had elapsed since the proceeds of the
checks in question were collected by the respondent. The record
shows that the respondent had acted promptly after being informed
that the indorsements on the checks were forged. Moreover, having
received the checks merely for collection and deposit, the
respondent cannot he expected to know or ascertain the
genuineness of all prior indorsements on the said checks. Indeed,
having itself indorsed them to the respondent in accordance with
the rules and practices of commercial banks, of which the Court
takes due cognizance, the petitioner is deemed to have given the
warranty prescribed in Section 66 of the Negotiable Instruments
Law that every single one of those checks "is genuine and in all
respects what it purports to be.".

The petitioner was, moreover, grossly recreant in accepting the
checks in question from Ramirez. It could not have escaped the
attention of the petitioner that the payee of all the checks was a
corporation the Inter-Island Gas Service, Inc. Yet, the petitioner
cashed these checks to a mere individual who was admittedly a
habitue at its jai-alai games without making any inquiry as to his
authority to exchange checks belonging to the payee-corporation. In
Insular Drug Co. vs. National 6 the Court made the pronouncement
that.

". . . 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 agents, does so at his peril, and must abide by the
consequences if the agent who indorses the same is without
authority." (underscoring supplied)

It must be noted further that three of the checks in question are
crossed checks, namely, exhs. 21, 25 and 27, which may only be
deposited, but not encashed; yet, the petitioner negligently
accepted them for cash. That two of the crossed checks, namely,
exhs. 21 and 25, are bearer instruments would not, in our view,
exculpate the petitioner from liability with respect to them. The fact
that they are bearer checks and at the same time crossed checks
should have aroused the petitioner's suspicion as to the title of
Ramirez over them and his authority to cash them (apparently to
purchase jai-alai tickets from the petitioner), it appearing on their
face that a corporate entity the Inter Island Gas Service, Inc.
was the payee thereof and Ramirez delivered the said checks to the
petitioner ostensibly on the strength of the payee's cashiers'
indorsements.

At all events, under Section 67 of the Negotiable Instruments Law,
"Where a person places his indorsement on an instrument
negotiable by delivery he incurs all the liability of an indorser," and
under Section 66 of the same statute a general indorser warrants
that the instrument "is genuine and in all respects what it purports
to be." Considering that the petitioner indorsed the said checks
when it deposited them with the respondent, the petitioner as an
indorser guaranteed the genuineness of all prior indorsements
thereon. The respondent which relied upon the petitioner's warranty
should not be held liable for the resulting loss. This conclusion
applied similarly to exh. 22 which is an uncrossed bearer
instrument, for under Section 65 of the Negotiable Instrument Law.
"Every person negotiating an instrument by delivery . . . warrants
(a) That the instrument is genuine and in all respects what it
purports to be." Under that same section this warranty "extends in
favor of no holder other than the immediate transferee," which, in
the case at bar, would be the respondent.

The provision in the deposit slip issued by the respondent which
stipulates that it "reserves to itself the right to charge back the item
to the account of its depositor," at any time before "current funds or
solvent credits shall have been actually received by the Bank,"
would not materially affect the conclusion we have reached. That
stipulation prescribes that there must be an actual receipt by the
bank of current funds or solvent credits; but as we have earlier
indicated the transfer by the drawee-banks of funds to the
respondent on account of the checks in question was ineffectual
because made under the mistaken and valid assumption that the
indorsements of the payee thereon were genuine. Under article
2154 of the New Civil Code "If something is received when there is
no right to demand it and it was unduly delivered through mistake,
the obligation to return it arises." There was, therefore, in
contemplation of law, no valid payment of money made by the
drawee-banks to the respondent on account of the questioned
checks.

ACCORDINGLY, the judgment of the Court of Appeals is affirmed, at
petitioner's cost.
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
7. That the parties hereto reserve the right to present evidence on any other fact not
covered by the foregoing stipulations,
Manila, Philippines, June 6, 1969.
Based on the foregoing stipulation of facts and the documentary evidence presented, the trial court
rendered a decision, the dispositive portion of which reads as follows:
WHEREFORE, the Court renders judgment ordering the defendant Mauricia T.
Ebrada to pay the plaintiff the amount of ONE THOUSAND TWO FORTY-SIX 08/100
(P1,246.08), with interest at the legal rate from the filing of the complaint on June 16,
1966, until fully paid, plus the costs in both instances against Mauricia T. Ebrada.
The right of Mauricia T. Ebrada to file whatever claim she may have against Adelaida
Dominguez in connection with this case is hereby reserved. The right of the estate of
Dominguez to file the fourth-party complaint against Justina Tinio is also reserved.
SO ORDERED.
In her appeal, defendant-appellant presses that the lower court erred:
IN ORDERING THE APPELLANT TO PAY THE APPELLEE THE FACE VALUE OF
THE SUBJECT CHECK AFTER FINDING THAT THE DRAWER ISSUED THE
SUBJECT CHECK TO A PERSON ALREADY DECEASED FOR 11- YEARS AND
THAT THE APPELLANT DID NOT BENEFIT FROM ENCASHING SAID CHECK.
From the stipulation of facts it is admitted that the check in question was delivered to defendant-
appellant by Adelaida Dominguez for the purpose of encashment and that her signature was affixed
on said check when she cashed it with the plaintiff Bank. Likewise it is admitted that defendant-
appellant was the last indorser of the said check. As such indorser, she was supposed to have
warranted that she has good title to said check; for under Section 65 of the Negotiable Instruments
Law:
6

Every person negotiating an instrument by delivery or by qualified indorsement,
warrants:
(a) That the instrument is genuine and in all respects what it purports to be.
(b) That she has good title to it.
xxx xxx xxx
and under Section 65 of the same Act:
Every indorser who indorses without qualification warrants to all subsequent holders
in due course:
(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next
preceding sections;
(b) That the instrument is at the time of his indorsement valid and subsisting.
It turned out, however, that the signature of the original payee of the check, Martin Lorenzo was a
forgery because he was already dead 7 almost 11 years before the check in question was issued by
the Bureau of Treasury. Under section 23 of the Negotiable Instruments Law (Act 2031):
When a signature is forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no right to retain the
instruments, or to give a discharge thereof against any party thereto, can be acquired
through or under such signature unless the party against whom it is sought to
enforce such right is precluded from setting up the forgery or want of authority.
It is clear from the provision that where the signature on a negotiable instrument if forged, the
negotiation of the check is without force or effect. But does this mean that the existence of one
forged signature therein will render void all the other negotiations of the check with respect to the
other parties whose signature are genuine?
In the case of Beam vs. Farrel, 135 Iowa 670, 113 N.W. 590, where a check has several
indorsements on it, it was held that it is only the negotiation based on the forged or unauthorized
signature which is inoperative. Applying this principle to the case before Us, it can be safely
concluded that it is only the negotiation predicated on the forged indorsement that should be
declared inoperative. This means that the negotiation of the check in question from Martin Lorenzo,
the original payee, to Ramon R. Lorenzo, the second indorser, should be declared of no affect, but
the negotiation of the aforesaid check from Ramon R. Lorenzo to Adelaida Dominguez, the third
indorser, and from Adelaida Dominguez to the defendant-appellant who did not know of the forgery,
should be considered valid and enforceable, barring any claim of forgery.
What happens then, if, after the drawee bank has paid the amount of the check to the holder thereof,
it was discovered that the signature of the payee was forged? Can the drawee bank recover from the
one who encashed the check?
In the case of State v. Broadway Mut. Bank, 282 S.W. 196, 197, it was held that the drawee of a
check can recover from the holder the money paid to him on a forged instrument. It is not supposed
to be its duty to ascertain whether the signatures of the payee or indorsers are genuine or not. This
is because the indorser is supposed to warrant to the drawee that the signatures of the payee and
previous indorsers are genuine, warranty not extending only to holders in due course. One who
purchases a check or draft is bound to satisfy himself that the paper is genuine and that by indorsing
it or presenting it for payment or putting it into circulation before presentation he impliedly asserts
that he has performed his duty and the drawee who has paid the forged check, without actual
negligence on his part, may recover the money paid from such negligent purchasers. In such cases
the recovery is permitted because although the drawee was in a way negligent in failing to detect the
forgery, yet if the encasher of the check had performed his duty, the forgery would in all probability,
have been detected and the fraud defeated. The reason for allowing the drawee bank to recover
from the encasher is:
Every one with even the least experience in business knows that no business man
would accept a check in exchange for money or goods unless he is satisfied that the
check is genuine. He accepts it only because he has proof that it is genuine, or
because he has sufficient confidence in the honesty and financial responsibility of the
person who vouches for it. If he is deceived he has suffered a loss of his cash or
goods through his own mistake. His own credulity or recklessness, or misplaced
confidence was the sole cause of the loss. Why should he be permitted to shift the
loss due to his own fault in assuming the risk, upon the drawee, simply because of
the accidental circumstance that the drawee afterwards failed to detect the forgery
when the check was presented?
8

Similarly, in the case before Us, the defendant-appellant, upon receiving the check in question from
Adelaida Dominguez, was duty-bound to ascertain whether the check in question was genuine
before presenting it to plaintiff Bank for payment. Her failure to do so makes her liable for the loss
and the plaintiff Bank may recover from her the money she received for the check. As reasoned out
above, had she performed the duty of ascertaining the genuineness of the check, in all probability
the forgery would have been detected and the fraud defeated.
In our jurisdiction We have a case of similar import. 9 The Great Eastern Life Insurance Company drew its check for
P2000.00 on the Hongkong and Shanghai Banking Corporation payable to the order of Lazaro Melicor. A certain E. M. Maasin fraudulently
obtained the check and forged the signature of Melicor, as an indorser, and then personally indorsed and presented the check to the
Philippine National Bank where the amount of the check was placed to his (Maasin's) credit. On the next day, the Philippine National Bank
indorsed the cheek to the Hongkong and Shanghai Banking Corporation which paid it and charged the amount of the check to the insurance
company. The Court held that the Hongkong and Shanghai Banking Corporation was liable to the insurance company for the amount of the
check and that the Philippine National Bank was in turn liable to the Hongkong and Shanghai Banking Corporation. Said the Court:
Where a check is drawn payable to the order of one person and is presented to a
bank by another and purports upon its face to have been duly indorsed by the payee
of the check, it is the duty of the bank to know that the check was duly indorsed by
the original payee, and where the bank pays the amount of the check to a third
person, who has forged the signature of the payee, the loss falls upon the bank who
cashed the check, and its only remedy is against the person to whom it paid the
money.
With the foregoing doctrine We are to concede that the plaintiff Bank should suffer the loss when it
paid the amount of the check in question to defendant-appellant, but it has the remedy to recover
from the latter the amount it paid to her. Although the defendant-appellant to whom the plaintiff Bank
paid the check was not proven to be the author of the supposed forgery, yet as last indorser of the
check, she has warranted that she has good title to it
10
even if in fact she did not have it because the
payee of the check was already dead 11 years before the check was issued. The fact that immediately
after receiving title cash proceeds of the check in question in the amount of P1,246.08 from the plaintiff
Bank, defendant-appellant immediately turned over said amount to Adelaida Dominguez (Third-Party
defendant and the Fourth-Party plaintiff) who in turn handed the amount to Justina Tinio on the same date
would not exempt her from liability because by doing so, she acted as an accommodation party in the
check for which she is also liable under Section 29 of the Negotiable Instruments Law (Act 2031), thus:
.An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose of lending his name to some other person. Such a
person is liable on the instrument to a holder for value, notwithstanding such holder at the time of taking
the instrument knew him to be only an accommodation party.
IN VIEW OF THE FOREGOING, the judgment appealed from is hereby affirmed in toto with costs
against defendant-appellant.
SO ORDERED.
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
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
17.59588 4-16-69 Arturo Sison 176,000.00 5-8-69
18.59587 4-16-69 Arturo Sison 300,000.00 5-12-69
19.59589 4-18-69 Arturo Sison 122,000.00 5-14-69
20.59594 4-18-69 Arturo Sison 280,000.00 5-15-69
21.59577 4-14-69 Antonio 260,000.00 5-16-69
Mendoza
22.59601 4-18-69 Arturo Sison 400,000.00 5-19-69
23.59595 4-28-69 Arturo Sison 190,800.00 5-21-69
---------------
P3,457,903.00
The foregoing checks were deposited by the payees Raul Dizon, Arturo Sison and
Antonio Mendoza in their respective current accounts with the Philippine Commercial
and Industrial Bank (PCIB) and Philippine Bank of Commerce (PBC) in the months of
March, April and May 1969. Thru the Central Bank Clearing, these checks were
presented for payment by PBC and PCIB to the defendant PNB, and paid, also in the
months of March, April and May 1969. At the time of their presentation to PNB these
checks bear the standard indorsement which reads 'all prior indorsement and/or lack
of endorsement guaranteed.'
Subsequent investigation however, conducted by the NBI showed that Raul Dizon,
Arturo Sison and Antonio Mendoza were all fictitious persons. The respective
balances in their current account with the PBC and/or PCIB stood as follows: Raul
Dizon P3,455.00 as of April 30, 1969; Antonio Mendoza P18,182.00 as of May 23,
1969; and Arturo Sison Pl,398.92 as of June 30, 1969.
On June 11, 1969, NWSA addressed a letter to PNB requesting the immediate
restoration to its Account No. 6, of the total sum of P3,457,903.00 corresponding to
the total amount of these twenty-three (23) checks claimed by NWSA to be forged
and/or spurious checks. "In view of the refusal of PNB to credit back to Account No. 6
the said total sum of P3,457,903.00 MWSS filed the instant complaint on November
10, 1972 before the Court of First Instance of Manila and docketed thereat as Civil
Case No. 88950.
In its answer, PNB contended among others, that the checks in question were
regular on its face in all respects, including the genuineness of the signatures of
authorized NWSA signing officers and there was nothing on its face that could have
aroused any suspicion as to its genuineness and due execution and; that NWSA was
guilty of negligence which was the proximate cause of the loss.
PNB also filed a third party complaint against the negotiating banks PBC and PCIB
on the ground that they failed to ascertain the Identity of the payees and their title to
the checks which were deposited in the respective new accounts of the payees with
them.
xxx xxx xxx
On February 6, 1976, the Court of First Instance of Manila rendered judgment in favor of the MWSS.
The dispositive portion of the decision reads:
WHEREFORE, on the COMPLAINT by a clear preponderance of evidence and in
accordance with Section 23 of the Negotiable Instruments Law, the Court hereby
renders judgment in favor of the plaintiff Metropolitan Waterworks and Sewerage
System (MWSS) by ordering the defendant Philippine National Bank (PNB) to restore
the total sum of THREE MILLION FOUR HUNDRED FIFTY SEVEN THOUSAND
NINE HUNDRED THREE PESOS (P3,457,903.00) to plaintiff's Account No. 6,
otherwise known as Account No. 010-50030-3, with legal interest thereon computed
from the date of the filing of the complaint and until as restored in the said Account
No. 6.
On the THIRD PARTY COMPLAINT, the Court, for lack of evidence, hereby renders
judgment in favor of the third party defendants Philippine Bank of Commerce (PBC)
and Philippine Commercial and Industrial Bank (PCIB) by dismissing the Third Party
Complaint.
The counterclaims of the third party defendants are likewise dismissed for lack of
evidence.
No pronouncement as to costs.
As earlier stated, the respondent court reversed the decision of the Court of First Instance of Manila
and rendered judgment in favor of the respondent Philippine National Bank.
A motion for reconsideration filed by the petitioner MWSS was denied by the respondent court in a
resolution dated January 3, 1983.
The petitioner now raises the following assignments of errors for the grant of this petition:
I. IN NOT HOLDING THAT AS THE SIGNATURES ON THE CHECKS WERE
FORGED, THE DRAWEE BANK WAS LIABLE FOR THE LOSS UNDER SECTION
23 OF THE NEGOTIABLE INSTRUMENTS LAW.
II. IN FAILING TO CONSIDER THE PROXIMATE NEGLIGENCE OF PNB IN
ACCEPTING THE SPURIOUS CHECKS DESPITE THE OBVIOUS IRREGULARITY
OF TWO SETS OF CHECKS BEARING IdENTICAL NUMBER BEING ENCASHED
WITHIN DAYS OF EACH OTHER.
III. IN NOT HOLDING THAT THE SIGNATURES OF THE DRAWEE MWSS BEING
CLEARLY FORGED, AND THE CHECKS SPURIOUS, SAME ARE INOPERATIVE
AS AGAINST THE ALLEGED DRAWEE.
The appellate court applied Section 24 of the Negotiable Instruments Law which provides:
Every negotiable instrument is deemed prima facie to have been issued for valuable
consideration and every person whose signature appears thereon to have become a
party thereto for value.
The petitioner submits that the above provision does not apply to the facts of the instant case
because the questioned checks were not those of the MWSS and neither were they drawn by its
authorized signatories. The petitioner states that granting that Section 24 of the Negotiable
Instruments Law is applicable, the same creates only a prima facie presumption which was
overcome by the following documents, to wit: (1) the NBI Report of November 2, 1970; (2) the NBI
Report of November 21, 1974; (3) the NBI Chemistry Report No. C-74891; (4) the Memorandum of
Mr. Juan Dino, 3rd Assistant Auditor of the respondent drawee bank addressed to the Chief Auditor
of the petitioner; (5) the admission of the respondent bank's counsel in open court that the National
Bureau of Investigation found the signature on the twenty-three (23) checks in question to be
forgeries; and (6) the admission of the respondent bank's witness, Mr. Faustino Mesina, Jr. that the
checks in question were not printed by his printing press. The petitioner contends that since the
signatures of the checks were forgeries, the respondent drawee bank must bear the loss under the
rulings of this Court.
A bank is bound to know the signatures of its customers; and if it pays a forged
check it must be considered as making the payment out of its obligation funds, and
cannot ordinarily charge the amount so paid to the account of the depositor whose
name was forged.
xxx xxx xxx
The signatures to the checks being forged, under Section 23 of the Negotiable
Instruments Law they are not a charge against plaintiff nor are the checks of any
value to the defendant.
It must therefore be held that the proximate cause of loss was due to the negligence
of the Bank of the Philippine Islands in honoring and cashing the two forged checks.
(San Carlos Milling Co. v. Bank of the P. I., 59 Phil. 59)
It is admitted that the Philippine National Bank cashed the check upon a forged
signature, and placed the money to the credit of Maasim, who was the forger. That
the Philippine National Bank then endorsed the chock and forwarded it to the
Shanghai Bank by whom it was paid. The Philippine National Bank had no license or
authority to pay the money to Maasim or anyone else upon a forged signature. It was
its legal duty to know that Malicor's endorsement was genuine before cashing the
check. Its remedy is against Maasim to whom it paid the money. (Great Eastern Life
Ins. Co. v. Hongkong & Shanghai Bank, 43 Phil. 678).
We have carefully reviewed the documents cited by the petitioner. There is no express and
categorical finding in these documents that the twenty-three (23) questioned checks were indeed
signed by persons other than the authorized MWSS signatories. On the contrary, the findings of the
National Bureau of Investigation in its Report dated November 2, 1970 show that the MWSS fraud
was an "inside job" and that the petitioner's delay in the reconciliation of bank statements and the
laxity and loose records control in the printing of its personalized checks facilitated the fraud.
Likewise, the questioned Documents Report No. 159-1074 dated November 21, 1974 of the National
Bureau of Investigation does not declare or prove that the signatures appearing on the questioned
checks are forgeries. The report merely mentions the alleged differences in the type face,
checkwriting, and printing characteristics appearing in the standard or submitted models and the
questioned typewritings. The NBI Chemistry Report No. C-74-891 merely describes the inks and
pens used in writing the alleged forged signatures.
It is clear that these three (3) NBI Reports relied upon by the petitioner are inadequate to sustain its
allegations of forgery. These reports did not touch on the inherent qualities of the signatures which
are indispensable in the determination of the existence of forgery. There must be conclusive findings
that there is a variance in the inherent characteristics of the signatures and that they were written by
two or more different persons.
Forgery cannot be presumed (Siasat, et al. v. Intermediate Appellate Court, et al, 139 SCRA 238). It
must be established by clear, positive, and convincing evidence. This was not done in the present
case.
The cases of San Carlos Milling Co. Ltd. v. Bank of the Philippine Islands, et al. (59 Phil. 59)
and Great Eastern Life Ins., Co. v. Hongkong and Shanghai Bank (43 Phil. 678) relied upon by the
petitioner are inapplicable in this case because the forgeries in those cases were either clearly
established or admitted while in the instant case, the allegations of forgery were not clearly
established during trial.
Considering the absence of sufficient security in the printing of the checks coupled with the very
close similarities between the genuine signatures and the alleged forgeries, the twenty-three (23)
checks in question could have been presented to the petitioner's signatories without their knowing
that they were bogus checks. Indeed, the cashier of the petitioner whose signatures were allegedly
forged was unable to ten the difference between the allegedly forged signature and his own genuine
signature. On the other hand, the MWSS officials admitted that these checks could easily be passed
on as genuine.
The memorandum of Mr. A. T. Tolentino, no, Assistant Chief Accountant of the drawee Philippine
National Bank to Mr. E. Villatuya, Executive Vice-President of the petitioner dated June 9, 1969 cites
an instance where even the concerned NWSA officials could not ten the differences between the
genuine checks and the alleged forged checks.
At about 12:00 o'clock on June 6, 1969, VP Maramag requested me to see him in his
office at the Cashier's Dept. where Messrs. Jose M. Sanchez, treasurer of NAWASA
and Romeo Oliva of the same office were present. Upon my arrival I observed the
NAWASA officials questioning the issue of the NAWASA checks appearing in their
own list, xerox copy attached.
For verification purposes, therefore, the checks were taken from our file. To
everybody there present namely VIP Maramag, the two abovementioned NAWASA
officials, AVP, Buhain, Asst. Cashier Castelo, Asst. Cashier Tejada and Messrs. A.
Lopez and L. Lechuga, both C/A bookkeepers, no one was able to point out any
difference on the signatures of the NAWASA officials appearing on the checks
compared to their official signatures on file. In fact 3 checks, one of those under
question, were presented to the NAWASA treasurer for verification but he could not
point out which was his genuine signature. After intent comparison, he pointed on the
questioned check as bearing his correct signature.
xxx xxx xxx
Moreover, the petitioner is barred from setting up the defense of forgery under Section 23 of the
Negotiable Instruments Law which provides that:
SEC. 23. FORGED SIGNATURE; EFFECT OF.- When the signature is forged or
made without authority of the person whose signature it purports to be, it is wholly
inoperative, and no right to retain the instrument, or to give a discharge therefor, or to
enforce payment thereof against any party thereto can be acquired through or under
such signature unless the party against whom it is sought to enforce such right is
precluded from setting up the forgery or want of authority.
because it was guilty of negligence not only before the questioned checks were negotiated but even
after the same had already been negotiated. (See Republic v. Equitable Banking Corporation, 10
SCRA 8) The records show that at the time the twenty-three (23) checks were prepared, negotiated,
and encashed, the petitioner was using its own personalized checks, instead of the official PNB
Commercial blank checks. In the exercise of this special privilege, however, the petitioner failed to
provide the needed security measures. That there was gross negligence in the printing of its
personalized checks is shown by the following uncontroverted facts, to wit:
(1) The petitioner failed to give its printer, Mesina Enterprises, specific instructions relative to the
safekeeping and disposition of excess forms, check vouchers, and safety papers;
(2) The petitioner failed to retrieve from its printer all spoiled check forms;
(3) The petitioner failed to provide any control regarding the paper used in the printing of said
checks;
(4) The petitioner failed to furnish the respondent drawee bank with samples of typewriting, cheek
writing, and print used by its printer in the printing of its checks and of the inks and pens used in
signing the same; and
(5) The petitioner failed to send a representative to the printing office during the printing of said
checks.
This gross negligence of the petitioner is very evident from the sworn statement dated June 19, 1969
of Faustino Mesina, Jr., the owner of the printing press which printed the petitioner's personalized
checks:
xxx xxx xxx
7. Q: Do you have any business transaction with the National
Waterworks and Sewerage Authority (NAWASA)?
A: Yes, sir. I have a contract with the NAWASA in printing NAWASA
Forms such as NAWASA Check
xxx xxx xxx
15. Q: Were you given any ingtruction by the NAWASA in connection
with the printing of these check vouchers?
A: There is none, sir. No instruction whatsoever was given to me.
16. Q: Were you not advised as to what kind of paper would be used
in the check vouchers?
A: Only as per sample, sir.
xxx xxx xxx
20. Q: Where did you buy this Hammermill Safety check paper?
A: From Tan Chiong, a paper dealer with store located at Juan Luna,
Binondo, Manila. (In front of the Metropolitan Bank).
xxx xxx xxx
24. Q: Were all these check vouchers printed by you submitted to
NAWASA?
A: Not all, sir. Because we have to make reservations or allowances
for spoilage.
25. Q: Out of these vouchers printed by you, how many were spoiled
and how many were the excess printed check vouchers?
A: Approximately four hundred (400) sheets, sir. I cannot determine
the proportion of the excess and spoiled because the final act of
perforating these check vouchers has not yet been done and spoilage
can only be determined after this final act of printing.
26. Q: What did you do with these excess check vouchers?
A: I keep it under lock and key in my firing cabinet.
xxx xxx xxx
28. Q: Were you not instructed by the NAWASA authorities to bum
these excess check vouchers?
A: No, sir. I was not instructed.
29. Q: What do you intend to do with these excess printed check
vouchers?
A: I intend to use them for future orders from the
xxx xxx xxx
32. Q: In the process of printing the check vouchers ordered by the
NAWASA, how many sheets were actually spoiled?
A: I cannot approximate, sir. But there are spoilage in the process of
printing and perforating.
33. Q: What did you do with these spoilages?
A: Spoiled printed materials are usually thrown out, in the garbage
can.
34. Q: Was there any representative of the NAWASA to supervise the
printing or watch the printing of these check vouchers?
A: None, sir.
xxx xxx xxx
39. Q: During the period of printing after the days work, what
measures do you undertake to safeguard the mold and other
paraphernalia used in the printing of these particular orders of
NAWASA?
A: Inasmuch as I have an employee who sleeps in the printing shop
and at the same time do the guarding, we just leave the mold
attached to the machine and the other finished or unfinished work
check vouchers are left in the rack so that the work could be
continued the following day.
The National Bureau of Investigation Report dated November 2, 1970 is even more explicit. Thus
xxx xxx xxx
60. We observed also that there is some laxity and loose control in
the printing of NAWASA checks. We gathered from MESINA
ENTERPRISES, the printing firm that undertook the printing of the
check vouchers of NAWASA that NAWASA had no representative at
the printing press during the process of the printing and no particular
security measure instructions adopted to safeguard the interest of the
government in connection with printing of this accountable form.
Another factor which facilitated the fraudulent encashment of the twenty-three (23) checks in
question was the failure of the petitioner to reconcile the bank statements with its own records.
It is accepted banking procedure for the depository bank to furnish its depositors bank statements
and debt and credit memos through the mail. The records show that the petitioner requested the
respondent drawee bank to discontinue the practice of mailing the bank statements, but instead to
deliver the same to a certain Mr. Emiliano Zaporteza. For reasons known only to Mr. Zaporteza
however, he was unreasonably delayed in taking prompt deliveries of the said bank statements and
credit and debit memos. As a consequence, Mr. Zaporteza failed to reconcile the bank statements
with the petitioner's records. If Mr. Zaporteza had not been remiss in his duty of taking the bank
statements and reconciling them with the petitioner's records, the fraudulent encashments of the first
checks should have been discovered, and further frauds prevented. This negligence was, therefore,
the proximate cause of the failure to discover the fraud. Thus,
When a person opens a checking account with a bank, he is given blank checks
which he may fill out and use whenever he wishes. Each time he issues a check, he
should also fill out the check stub to which the check is usually attached. This stub, if
properly kept, will contain the number of the check, the date of its issue, the name of
the payee and the amount thereof. The drawer would therefore have a complete
record of the checks he issues. It is the custom of banks to send to its depositors a
monthly statement of the status of their accounts, together with all the cancelled
checks which have been cashed by their respective holders. If the depositor has
filled out his check stubs properly, a comparison between them and the cancelled
checks will reveal any forged check not taken from his checkbook. It is the duty of a
depositor to carefully examine the bank's statement, his cancelled checks, his check
stubs and other pertinent records within a reasonable time, and to report any errors
without unreasonable delay. If his negligence should cause the bank to honor a
forged check or prevent it from recovering the amount it may have already paid on
such check, he cannot later complain should the bank refuse to recredit his account
with the amount of such check. (First Nat. Bank of Richmond v. Richmond Electric
Co., 106 Va. 347, 56 SE 152, 7 LRA, NS 744 [1907]. See also Leather
Manufacturers' Bank v. Morgan, 117 US 96, 6 S. Ct. 657 [1886]; Deer Island Fish
and Oyster Co. v. First Nat. Bank of Biloxi, 166 Miss. 162, 146 So. 116 [1933]).
Campos and Campos, Notes and Selected Cases on Negotiable Instruments Law,
1971, pp. 267-268).
This failure of the petitioner to reconcile the bank statements with its cancelled checks was noted by
the National Bureau of Investigation in its report dated November 2, 1970:
58. One factor which facilitate this fraud was the delay in the reconciliation of bank
(PNB) statements with the NAWASA bank accounts. x x x. Had the NAWASA
representative come to the PNB early for the statements and had the bank been
advised promptly of the reported bogus check, the negotiation of practically all of the
remaining checks on May, 1969, totalling P2,224,736.00 could have been prevented.
The records likewise show that the petitioner failed to provide appropriate security measures over its
own records thereby laying confidential records open to unauthorized persons. The petitioner's own
Fact Finding Committee, in its report submitted to their General manager underscored this laxity of
records control. It observed that the "office of Mr. Ongtengco (Cashier No. VI of the Treasury
Department at the NAWASA) is quite open to any person known to him or his staff members and
that the check writer is merely on top of his table."
When confronted with this report at the Anti-Fraud Action Section of the National Bureau of
Investigation. Mr. Ongtengco could only state that:
A. Generally my order is not to allow anybody to enter my office. Only
authorized persons are allowed to enter my office. There are some
cases, however, where some persons enter my office because they
are following up their checks. Maybe, these persons may have been
authorized by Mr. Pantig. Most of the people entering my office are
changing checks as allowed by the Resolution of the Board of
Directors of the NAWASA and the Treasurer. The check writer was
never placed on my table. There is a place for the check write which
is also under lock and key.
Q. Is Mr. Pantig authorized to allow unauthorized persons to enter
your office?
A. No, sir.
Q. Why are you tolerating Mr. Pantig admitting unauthorized persons
in your office?
A. I do not want to embarrass Mr. Pantig. Most of the people following
up checks are employees of the NAWASA.
Q. Was the authority given by the Board of Directors and the approval
by the Treasurer for employees, and other persons to encash their
checks carry with it their authority to enter your office?
A. No, sir.
xxx xxx xxx
Q. From the answers that you have given to us we observed that
actually there is laxity and poor control on your part with regards to
the preparations of check payments inasmuch as you allow
unauthorized persons to follow up their vouchers inside your office
which may leakout confidential informations or your books of account.
After being apprised of all the shortcomings in your office, as head of
the Cashiers' Office of the Treasury Department what remedial
measures do you intend to undertake?
A. Time and again the Treasurer has been calling our attention not to
allow interested persons to hand carry their voucher checks and we
are trying our best and if I can do it to follow the instructions to the
letter, I will do it but unfortunately the persons who are allowed to
enter my office are my co-employees and persons who have
connections with our higher ups and I can not possibly antagonize
them. Rest assured that even though that everybody will get hurt, I
win do my best not to allow unauthorized persons to enter my office.
xxx xxx xxx
Q. Is it not possible inasmuch as your office is in charge of the
posting of check payments in your books that leakage of payments to
the banks came from your office?
A. I am not aware of it but it only takes us a couple of minutes to
process the checks. And there are cases wherein every information
about the checks may be obtained from the Accounting Department,
Auditing Department, or the Office of the General Manager.
Relying on the foregoing statement of Mr. Ongtengco, the National Bureau of Investigation
concluded in its Report dated November 2, 1970 that the fraudulent encashment of the twenty-three
(23)cheeks in question was an "inside job". Thus-
We have all the reasons to believe that this fraudulent act was an inside job or one
pulled with inside connivance at NAWASA. As pointed earlier in this report, the serial
numbers of these checks in question conform with the numbers in current use of
NAWASA, aside from the fact that these fraudulent checks were found to be of the
same kind and design as that of NAWASA's own checks. While knowledge as to
such facts may be obtained through the possession of a NAWASA check of current
issue, an outsider without information from the inside can not possibly pinpoint which
of NAWASA's various accounts has sufficient balance to cover all these fraudulent
checks. None of these checks, it should be noted, was dishonored for insufficiency of
funds. . .
Even if the twenty-three (23) checks in question are considered forgeries, considering the petitioner's
gross negligence, it is barred from setting up the defense of forgery under Section 23 of the
Negotiable Instruments Law.
Nonetheless, the petitioner claims that it was the negligence of the respondent Philippine National
Bank that was the proximate cause of the loss. The petitioner relies on our ruling in Philippine
National Bank v. Court of Appeals (25 SCRA 693) that.
Thus, by not returning the cheek to the PCIB, by thereby indicating that the PNB had
found nothing wrong with the check and would honor the same, and by actually
paying its amount to the PCIB, the PNB induced the latter, not only to believe that the
check was genuine and good in every respect, but, also, to pay its amount to
Augusto Lim. In other words, the PNB was the primary or proximate cause of the
loss, and, hence, may not recover from the PCIB.
The argument has no merit. The records show that the respondent drawee bank, had taken the
necessary measures in the detection of forged checks and the prevention of their fraudulent
encashment. In fact, long before the encashment of the twenty-three (23) checks in question, the
respondent Bank had issued constant reminders to all Current Account Bookkeepers informing them
of the activities of forgery syndicates. The Memorandum of the Assistant Vice-President and Chief
Accountant of the Philippine National Bank dated February 17, 1966 reads in part:
SUBJECT: ACTIVITIES OF FORGERY SYNDICATE
From reliable information we have gathered that personalized checks of current
account depositors are now the target of the forgery syndicate. To protect the interest
of the bank, you are hereby enjoined to be more careful in examining said checks
especially those coming from the clearing, mails and window transactions. As a
reminder please be guided with the following:
1. Signatures of drawers should be properly scrutinized and compared with those we
have on file.
2. The serial numbers of the checks should be compared with the serial numbers
registered with the Cashier's Dept.
3. The texture of the paper used and the printing of the checks should be compared
with the sample we have on file with the Cashier's Dept.
4. Checks bearing several indorsements should be given a special attention.
5. Alteration in amount both in figures and words should be carefully examined even
if signed by the drawer.
6. Checks issued in substantial amounts particularly by depositors who do not
usually issue checks in big amounts should be brought to the attention of the drawer
by telephone or any fastest means of communication for purposes of confirmation.
and your attention is also invited to keep abreast of previous circulars and memo
instructions issued to bookkeepers.
We cannot fault the respondent drawee Bank for not having detected the fraudulent encashment of
the checks because the printing of the petitioner's personalized checks was not done under the
supervision and control of the Bank. There is no evidence on record indicating that because of this
private printing the petitioner furnished the respondent Bank with samples of checks, pens, and inks
or took other precautionary measures with the PNB to safeguard its interests.
Under the circumstances, therefore, the petitioner was in a better position to detect and prevent the
fraudulent encashment of its checks.
WHEREFORE, the petition for review on certiorari is hereby DISMISSED for lack of merit. The
decision of the respondent Court of Appeals dated October 29, 1982 is AFFIRMED. No
pronouncement as to costs.
SO ORDERED.
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?
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 (BDO)
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.
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, (BDO) 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 checks
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.
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 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.
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 suppliers. These checks were all presented by the indorsees as holders
thereof to, and honored by, the respondent drawee Bank. Respondent drawee Bank correspondingly
debited the amounts thereof against petitioner's checking account numbered 30-00038-1. Most of
the aforementioned checks were for amounts in excess of her actual obligations to the various
payees as shown in their corresponding invoices. To mention a few:
. . . 1) in Check No. 621127, dated June 27, 1984 in the amount of P11,895.23 in
favor of Kawsek Inc. (Exh. A-60), appellant's actual obligation to said payee was only
P895.33 (Exh. A-83); (2) in Check No. 652282 issued on September 18, 1984 in
favor of Senson Enterprises in the amount of P11,041.20 (Exh. A-67) appellant's
actual obligation to said payee was only P1,041.20 (Exh. 7); (3) in Check No. 589092
dated April 7, 1984 for the amount of P11,672.47 in favor of Marchem (Exh. A-61)
appellant's obligation was only P1,672.47 (Exh. B); (4) in Check No. 620450 dated
May 10, 1984 in favor of Knotberry for P11,677.10 (Exh. A-31) her actual obligation
was only P677.10 (Exhs. C and C-1); (5) in Check No. 651862 dated August 9, 1984
in favor of Malinta Exchange Mart for P11,107.16 (Exh. A-62), her obligation was
only P1,107.16 (Exh. D-2); (6) in Check No. 651863 dated August 11, 1984 in favor
of Grocer's International Food Corp. in the amount of P11,335.60 (Exh. A-66), her
obligation was only P1,335.60 (Exh. E and E-1); (7) in Check No. 589019 dated
March 17, 1984 in favor of Sophy Products in the amount of P11,648.00 (Exh. A-78),
her obligation was only P648.00 (Exh. G); (8) in Check No. 589028 dated March 10,
1984 for the amount of P11,520.00 in favor of the Yakult Philippines (Exh. A-73), the
latter's invoice was only P520.00 (Exh. H-2); (9) in Check No. 62033 dated May 23,
1984 in the amount of P11,504.00 in favor of Monde Denmark Biscuit (Exh. A-34),
her obligation was only P504.00 (Exhs. I-1 and I-2).
2

Practically, all the checks issued and honored by the respondent drawee bank were crossed
checks.
3
Aside from the daily notice given to the petitioner by the respondent drawee Bank, the latter
also furnished her with a monthly statement of her transactions, attaching thereto all the cancelled checks
she had issued and which were debited against her current account. It was only after the lapse of more
two (2) years that petitioner found out about the fraudulent manipulations of her bookkeeper.
All the eighty-two (82) checks with forged signatures of the payees were brought to Ernest L. Boon,
Chief Accountant of respondent drawee Bank at the Buendia branch, who, without authority therefor,
accepted them all for deposit at the Buendia branch to the credit and/or in the accounts of Alfredo Y.
Romero and Benito Lam. Ernest L. Boon was a very close friend of Alfredo Y. Romero. Sixty-three
(63) out of the eighty-two (82) checks were deposited in Savings Account No. 00844-5 of Alfredo Y.
Romero at the respondent drawee Bank's Buendia branch, and four (4) checks in his Savings
Account No. 32-81-9 at its Ongpin branch. The rest of the checks were deposited in Account No.
0443-4, under the name of Benito Lam at the Elcao branch of the respondent drawee Bank.
About thirty (30) of the payees whose names were specifically written on the checks testified that
they did not receive nor even see the subject checks and that the indorsements appearing at the
back of the checks were not theirs.
The team of auditors from the main office of the respondent drawee Bank which conducted periodic
inspection of the branches' operations failed to discover, check or stop the unauthorized acts of
Ernest L. Boon. Under the rules of the respondent drawee Bank, only a Branch Manager and no
other official of the respondent drawee bank, may accept a second indorsement on a check for
deposit. In the case at bar, all the deposit slips of the eighty-two (82) checks in question were
initialed and/or approved for deposit by Ernest L. Boon. The Branch Managers of the Ongpin and
Elcao branches accepted the deposits made in the Buendia branch and credited the accounts of
Alfredo Y. Romero and Benito Lam in their respective branches.
On November 7, 1984, petitioner made a written demand on respondent drawee Bank to credit her
account with the money value of the eighty-two (82) checks totalling P1,208.606.89 for having been
wrongfully charged against her account. Respondent drawee Bank refused to grant petitioner's
demand. On January 23, 1985, petitioner filed the complaint with the Regional Trial Court.
This is not a suit by the party whose signature was forged on a check drawn against the drawee
bank. The payees are not parties to the case. Rather, it is the drawer, whose signature is genuine,
who instituted this action to recover from the drawee bank the money value of eighty-two (82)
checks paid out by the drawee bank to holders of those checks where the indorsements of the
payees were forged. How and by whom the forgeries were committed are not established on the
record, but the respective payees admitted that they did not receive those checks and therefore
never indorsed the same. The applicable law is the Negotiable Instruments Law
4
(heretofore referred
to as the NIL). Section 23 of the NIL provides:
When a signature is forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce payment thereof against any
party thereto, can be acquired through or under such signature, unless the party
against whom it is sought to enforce such right is precluded from setting up the
forgery or want of authority.
Under the aforecited provision, forgery is a real or absolute defense by the party whose
signature is forged. A party whose signature to an instrument was forged was never a party
and never gave his consent to the contract which gave rise to the instrument. Since his
signature does not appear in the instrument, he cannot be held liable thereon by anyone, not
even by a holder in due course. Thus, if a person's signature is forged as a maker of a
promissory note, he cannot be made to pay because he never made the promise to pay. Or
where a person's signature as a drawer of a check is forged, the drawee bank cannot charge
the amount thereof against the drawer's account because he never gave the bank the order
to pay. And said section does not refer only to the forged signature of the maker of a
promissory note and of the drawer of a check. It covers also a forged indorsement, i.e., the
forged signature of the payee or indorsee of a note or check. Since under said provision a
forged signature is "wholly inoperative", no one can gain title to the instrument through such
forged indorsement. Such an indorsement prevents any subsequent party from acquiring any
right as against any party whose name appears prior to the forgery. Although rights may
exist between and among parties subsequent to the forged indorsement, not one of them
can acquire rights against parties prior to the forgery. Such forged indorsement cuts off the
rights of all subsequent parties as against parties prior to the forgery. However, the law
makes an exception to these rules where a party is precluded from setting up forgery as a
defense.
As a matter of practical significance, problems arising from forged indorsements of checks may
generally be broken into two types of cases: (1) where forgery was accomplished by a person not
associated with the drawer for example a mail robbery; and (2) where the indorsement was
forged by an agent of the drawer. This difference in situations would determine the effect of the
drawer's negligence with respect to forged indorsements. While there is no duty resting on the
depositor to look for forged indorsements on his cancelled checks in contrast to a duty imposed
upon him to look for forgeries of his own name, a depositor is under a duty to set up an accounting
system and a business procedure as are reasonably calculated to prevent or render difficult the
forgery of indorsements, particularly by the depositor's own employees. And if the drawer (depositor)
learns that a check drawn by him has been paid under a forged indorsement, the drawer is under
duty promptly to report such fact to the drawee bank.
5
For his negligence or failure either to discover or
to report promptly the fact of such forgery to the drawee, the drawer loses his right against the drawee
who has debited his account under a forged indorsement.
6
In other words, he is precluded from using
forgery as a basis for his claim for re-crediting of his account.
In the case at bar, petitioner admitted that the checks were filled up and completed by her trusted
employee, Alicia Galang, and were given to her for her signature. Her signing the checks made the
negotiable instrument complete. Prior to signing the checks, there was no valid contract yet.
Every contract on a negotiable instrument is incomplete and revocable until delivery of the
instrument to the payee for the purpose of giving effect thereto.
7
The first delivery of the instrument,
complete in form, to the payee who takes it as a holder, is called issuance of the instrument.
8
Without the
initial delivery of the instrument from the drawer of the check to the payee, there can be no valid and
binding contract and no liability on the instrument.
Petitioner completed the checks by signing them as drawer and thereafter authorized her employee
Alicia Galang to deliver the eighty-two (82) checks to their respective payees. Instead of issuing the
checks to the payees as named in the checks, Alicia Galang delivered them to the Chief Accountant
of the Buendia branch of the respondent drawee Bank, a certain Ernest L. Boon. It was established
that the signatures of the payees as first indorsers were forged. The record fails to show the identity
of the party who made the forged signatures. The checks were then indorsed for the second time
with the names of Alfredo Y. Romero and Benito Lam, and were deposited in the latter's accounts as
earlier noted. The second indorsements were all genuine signatures of the alleged holders. All the
eighty-two (82) checks bearing the forged indorsements of the payees and the genuine second
indorsements of Alfredo Y. Romero and Benito Lam were accepted for deposit at the Buendia
branch of respondent drawee Bank to the credit of their respective savings accounts in the Buendia,
Ongpin and Elcao branches of the same bank. The total amount of P1,208,606.89, represented by
eighty-two (82) checks, were credited and paid out by respondent drawee Bank to Alfredo Y.
Romero and Benito Lam, and debited against petitioner's checking account No. 13-00038-1,
Caloocan branch.
As a rule, a drawee bank who has paid a check on which an indorsement has been forged cannot
charge the drawer's account for the amount of said check. An exception to this rule is where the
drawer is guilty of such negligence which causes the bank to honor such a check or checks. If a
check is stolen from the payee, it is quite obvious that the drawer cannot possibly discover the
forged indorsement by mere examination of his cancelled check. This accounts for the rule that
although a depositor owes a duty to his drawee bank to examine his cancelled checks for forgery of
his own signature, he has no similar duty as to forged indorsements. A different situation arises
where the indorsement was forged by an employee or agent of the drawer, or done with the active
participation of the latter. Most of the cases involving forgery by an agent or employee deal with the
payee's indorsement. The drawer and the payee often time shave business relations of long
standing. The continued occurrence of business transactions of the same nature provides the
opportunity for the agent/employee to commit the fraud after having developed familiarity with the
signatures of the parties. However, sooner or later, some leak will show on the drawer's books. It will
then be just a question of time until the fraud is discovered. This is specially true when the agent
perpetrates a series of forgeries as in the case at bar.
The negligence of a depositor which will prevent recovery of an unauthorized payment is based on
failure of the depositor to act as a prudent businessman would under the circumstances. In the case
at bar, the petitioner relied implicitly upon the honesty and loyalty of her bookkeeper, and did not
even verify the accuracy of amounts of the checks she signed against the invoices attached thereto.
Furthermore, although she regularly received her bank statements, she apparently did not carefully
examine the same nor the check stubs and the returned checks, and did not compare them with the
same invoices. Otherwise, she could have easily discovered the discrepancies between the checks
and the documents serving as bases for the checks. With such discovery, the subsequent forgeries
would not have been accomplished. It was not until two years after the bookkeeper commenced her
fraudulent scheme that petitioner discovered that eighty-two (82) checks were wrongfully charged to
her account, at which she notified the respondent drawee bank.
It is highly improbable that in a period of two years, not one of Petitioner's suppliers complained of
non-payment. Assuming that even one single complaint had been made, petitioner would have been
duty-bound, as far as the respondent drawee Bank was concerned, to make an adequate
investigation on the matter. Had this been done, the discrepancies would have been discovered,
sooner or later. Petitioner's failure to make such adequate inquiry constituted negligence which
resulted in the bank's honoring of the subsequent checks with forged indorsements. On the other
hand, since the record mentions nothing about such a complaint, the possibility exists that the
checks in question covered inexistent sales. But even in such a case, considering the length of a
period of two (2) years, it is hard to believe that petitioner did not know or realize that she was
paying more than she should for the supplies she was actually getting. A depositor may not sit idly
by, after knowledge has come to her that her funds seem to be disappearing or that there may be a
leak in her business, and refrain from taking the steps that a careful and prudent businessman would
take in such circumstances and if taken, would result in stopping the continuance of the fraudulent
scheme. If she fails to take steps, the facts may establish her negligence, and in that event, she
would be estopped from recovering from the bank.
9

One thing is clear from the records that the petitioner failed to examine her records with
reasonable diligence whether before she signed the checks or after receiving her bank statements.
Had the petitioner examined her records more carefully, particularly the invoice receipts, cancelled
checks, check book stubs, and had she compared the sums written as amounts payable in the
eighty-two (82) checks with the pertinent sales invoices, she would have easily discovered that in
some checks, the amounts did not tally with those appearing in the sales invoices. Had she noticed
these discrepancies, she should not have signed those checks, and should have conducted an
inquiry as to the reason for the irregular entries. Likewise had petitioner been more vigilant in going
over her current account by taking careful note of the daily reports made by respondent drawee
Bank in her issued checks, or at least made random scrutiny of cancelled checks returned by
respondent drawee Bank at the close of each month, she could have easily discovered the fraud
being perpetrated by Alicia Galang, and could have reported the matter to the respondent drawee
Bank. The respondent drawee Bank then could have taken immediate steps to prevent further
commission of such fraud. Thus, petitioner's negligence was the proximate cause of her loss. And
since it was her negligence which caused the respondent drawee Bank to honor the forged checks
or prevented it from recovering the amount it had already paid on the checks, petitioner cannot now
complain should the bank refuse to recredit her account with the amount of such checks.
10
Under
Section 23 of the NIL, she is now precluded from using the forgery to prevent the bank's debiting of her
account.
The doctrine in the case of Great Eastern Life Insurance Co. vs. Hongkong & Shanghai Bank
11
is not
applicable to the case at bar because in said case, the check was fraudulently taken and the signature of
the payee was forged not by an agent or employee of the drawer. The drawer was not found to be
negligent in the handling of its business affairs and the theft of the check by a total stranger was not
attributable to negligence of the drawer; neither was the forging of the payee's indorsement due to the
drawer's negligence. Since the drawer was not negligent, the drawee was duty-bound to restore to the
drawer's account the amount theretofore paid under the check with a forged payee's indorsement
because the drawee did not pay as ordered by the drawer.
Petitioner argues that respondent drawee Bank should not have honored the checks because they
were crossed checks. Issuing a crossed check imposes no legal obligation on the drawee not to
honor such a check. It is more of a warning to the holder that the check cannot be presented to the
drawee bank for payment in cash. Instead, the check can only be deposited with the payee's bank
which in turn must present it for payment against the drawee bank in the course of normal banking
transactions between banks. The crossed check cannot be presented for payment but it can only be
deposited and the drawee bank may only pay to another bank in the payee's or indorser's account.
Petitioner likewise contends that banking rules prohibit the drawee bank from having checks with
more than one indorsement. The banking rule banning acceptance of checks for deposit or cash
payment with more than one indorsement unless cleared by some bank officials does not invalidate
the instrument; neither does it invalidate the negotiation or transfer of the said check. In effect, this
rule destroys the negotiability of bills/checks by limiting their negotiation by indorsement of only the
payee. Under the NIL, the only kind of indorsement which stops the further negotiation of an
instrument is a restrictive indorsement which prohibits the further negotiation thereof.
Sec. 36. When indorsement restrictive. An indorsement is restrictive which either
(a) Prohibits further negotiation of the instrument; or
xxx xxx xxx
In this kind of restrictive indorsement, the prohibition to transfer or negotiate must be written in
express words at the back of the instrument, so that any subsequent party may be forewarned that
ceases to be negotiable. However, the restrictive indorsee acquires the right to receive payment and
bring any action thereon as any indorser, but he can no longer transfer his rights as such indorsee
where the form of the indorsement does not authorize him to do so.
12

Although the holder of a check cannot compel a drawee bank to honor it because there is no privity
between them, as far as the drawer-depositor is concerned, such bank may not legally refuse to
honor a negotiable bill of exchange or a check drawn against it with more than one indorsement if
there is nothing irregular with the bill or check and the drawer has sufficient funds. The drawee
cannot be compelled to accept or pay the check by the drawer or any holder because as a drawee,
he incurs no liability on the check unless he accepts it. But the drawee will make itself liable to a suit
for damages at the instance of the drawer for wrongful dishonor of the bill or check.
Thus, it is clear that under the NIL, petitioner is precluded from raising the defense of forgery by
reason of her gross negligence. But under Section 196 of the NIL, any case not provided for in the
Act shall be governed by the provisions of existing legislation. Under the laws of quasi-delict, she
cannot point to the negligence of the respondent drawee Bank in the selection and supervision of its
employees as being the cause of the loss because negligence is the proximate cause thereof and
under Article 2179 of the Civil Code, she may not be awarded damages. However, under Article
1170 of the same Code the respondent drawee Bank may be held liable for damages. The article
provides
Those who in the performance of their obligations are guilty of fraud, negligence or
delay, and those who in any manner contravene the tenor thereof, are liable for
damages.
There is no question that there is a contractual relation between petitioner as depositor (obligee) and
the respondent drawee bank as the obligor. In the performance of its obligation, the drawee bank is
bound by its internal banking rules and regulations which form part of any contract it enters into with
any of its depositors. When it violated its internal rules that second endorsements are not to be
accepted without the approval of its branch managers and it did accept the same upon the mere
approval of Boon, a chief accountant, it contravened the tenor of its obligation at the very least, if it
were not actually guilty of fraud or negligence.
Furthermore, the fact that the respondent drawee Bank did not discover the irregularity with respect
to the acceptance of checks with second indorsement for deposit even without the approval of the
branch manager despite periodic inspection conducted by a team of auditors from the main office
constitutes negligence on the part of the bank in carrying out its obligations to its depositors. Article
1173 provides
The fault or negligence of the obligor consists in the omission of that diligence which
is required by the nature of the obligation and corresponds with the circumstance of
the persons, of the time and of the place. . . .
We hold that banking business is so impressed with public interest where the trust and confidence of
the public in general is of paramount importance such that the appropriate standard of diligence
must be a high degree of diligence, if not the utmost diligence. Surely, respondent drawee Bank
cannot claim it exercised such a degree of diligence that is required of it. There is no way We can
allow it now to escape liability for such negligence. Its liability as obligor is not merely vicarious but
primary wherein the defense of exercise of due diligence in the selection and supervision of its
employees is of no moment.
Premises considered, respondent drawee Bank is adjudged liable to share the loss with the
petitioner on a fifty-fifty ratio in accordance with Article 172 which provides:
Responsibility arising from negligence in the performance of every kind of obligation
is also demandable, but such liability may be regulated by the courts according to the
circumstances.
With the foregoing provisions of the Civil Code being relied upon, it is being made clear that the
decision to hold the drawee bank liable is based on law and substantial justice and not on mere
equity. And although the case was brought before the court not on breach of contractual obligations,
the courts are not precluded from applying to the circumstances of the case the laws pertinent
thereto. Thus, the fact that petitioner's negligence was found to be the proximate cause of her loss
does not preclude her from recovering damages. The reason why the decision dealt on a discussion
on proximate cause is due to the error pointed out by petitioner as allegedly committed by the
respondent court. And in breaches of contract under Article 1173, due diligence on the part of the
defendant is not a defense.
PREMISES CONSIDERED, the case is hereby ordered REMANDED to the trial court for the
reception of evidence to determine the exact amount of loss suffered by the petitioner, considering
that she partly benefited from the issuance of the questioned checks since the obligation for which
she issued them were apparently extinguished, such that only the excess amount over and above
the total of these actual obligations must be considered as loss of which one half must be paid by
respondent drawee bank to herein petitioner.
SO ORDERED.
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.
x x x x x x x x x x x x x x x x x x x x x
G.R. No. 107612 January 31, 1996
PHILIPPINE NATIONAL BANK, petitioner,
vs.
HONORABLE COURT OF APPEALS, PROVINCE OF TARLAC, and ASSOCIATED
BANK, respondents.
D E C I S I O N
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;
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.
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.
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 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.
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
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.
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.
[G.R. No. 42725. April 22, 1991.]

REPUBLIC BANK, Petitioner, v. COURT OF APPEALS and FIRST NATIONAL CITY
BANK,Respondents.
On January 25, 1966, San Miguel Corporation (SMC for short), drew a dividend Check No. 108854 for P240,
Philippine currency, on its account in the respondent First National City Bank ("FNCB" for brevity) in favor of
J. Roberto C. Delgado, a stockholder. After the check had been delivered to Delgado, the amount on its face
was fraudulently and without authority of the drawer, SMC, altered by increasing it from P240 to P9,240.
The check was indorsed and deposited on March 14, 1966 by Delgado in his account with the petitioner
Republic Bank (hereafter "Republic").

Republic accepted the check for deposit without ascertaining its genuineness and regularity. Later, Republic
endorsed the check to FNCB by stamping on the back of the check "all prior and/or lack of indorsement
guaranteed" and presented it to FNCB for payment through the Central Bank Clearing House. Believing the
check was genuine, and relying on the guaranty and endorsement of Republic appearing on the back of the
check, FNCB paid P9,240 to Republic through the Central Bank Clearing House on March 15, 1966.

On April 19, 1966, SMC notified FNCB of the material alteration in the amount of the check in question.
FNCB lost no time in recrediting P9,240 to SMC. On May 19, 1966, FNCB informed Republic in writing of the
alteration and the forgery of the endorsement of J. Roberto C. Delgado. By then, Delgado had already
withdrawn his account from Republic.

On August 15, 1966, FNCB demanded that Republic refund the P9,240 on the basis of the latters
endorsement and guaranty. Republic refused, claiming there was delay in giving it notice of the alteration;
that it was not guilty of negligence; that it was the drawers (SMCs) fault in drawing the check in such a
way as to permit the insertion of numerals increasing the amount; that FNCB, as drawee, was absolved of
any liability to the drawer (SMC), thus, FNCB had no right of recourse against Republic.

On April 8, 1968, the trial court rendered judgment ordering Republic to pay P9,240 to FNCB with 6%
interest per annum from February 27, 1967 until fully paid, plus P2,000 for attorneys fees and costs of the
suit. The Court of Appeals affirmed that decision, but modified the award of attorneys fees by reducing it to
P1,000 without pronouncement as to costs (CA-G.R. No. 41691-R, December 22, 1975).chanrobles vi rtual lawli brary

In this petition for review, the lone issue is whether Republic, as the collecting bank, is protected, by the 24-
hour clearing house rule, found in CB Circular No. 9, as amended, from liability to refund the amount paid by
FNCB, as drawee of the SMC dividend check.

The petition for review is meritorious and must be granted.

The 24-hour clearing house rule embodied in Section 4(c) of Central Bank Circular No. 9, as amended,
provides:jgc:chanrobles.com.ph

"Items which should be returned for any reason whatsoever shall be returned directly to the bank,
institution or entity from which the item was received. For this purpose, the Receipt for Returned Checks
(Cash Form No. 9) should be used. The original and duplicate copies of said Receipt shall be given to the
Bank, institution or entity which returned the items and the triplicate copy should be retained by the bank,
institution or entity whose demand is being returned. At the following clearing, the original of the Receipt for
Returned Checks shall be presented through the Clearing Office as a demand against the bank, institution or
entity whose item has been returned. Nothing in this section shall prevent the returned items from being
settled by direct reimbursement to the bank, institution or entity returning the items. All items cleared at
11:00 oclock A.M. shall be returned not later than 2:00 oclock P.M. on the same day and all items cleared
at 3:00 oclock 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."cralaw virtua1aw library

The 24-hour clearing house rule is a valid rule applicable to commercial banks (Republic v. Equitable
Banking Corporation, 10 SCRA 8 [1964]; Metropolitan Bank & Trust Co. v. First National City Bank, 118
SCRA 537).

It is true that when an endorsement is forged, the collecting bank or last endorser, as a general rule, bears
the loss (Banco de Oro Savings & Mortgage Bank v. Equitable Banking Corp., 167 SCRA 188). But the
unqualified endorsement of the collecting bank on the check should be read together with the 24-hour
regulation on clearing house operation (Metropolitan Bank & Trust Co. v. First National City Bank, supra).
Thus, when the drawee bank fails to return a forged or altered check to the collecting bank within the 24-
hour clearing period, the collecting bank is absolved from liability. The following decisions of this Court are
also relevant and persuasive:chanrob1es virtual 1aw l ibrary

In Hongkong & Shanghai Banking Corp. v. Peoples Bank & Trust Co. (35 SCRA 140), a check for P14,608.05
was drawn by the Philippine Long Distance Telephone Company on the Hongkong & Shanghai Banking
Corporation payable to the same bank. It was mailed to the payee but fell into the hands of a certain
Florentino Changco who erased the name of the payee, typed his own name, and thereafter deposited the
altered check in his account in the Peoples Bank & Trust Co. which presented it to the drawee bank with the
following indorsement:chanrobles law l ibrary

"For clearance, clearing office. All prior endorsements and or lack of endorsements guaranteed. Peoples
Bank and Trust Company."cralaw virtua1aw library

The check was cleared by the drawee bank (Hongkong & Shanghai Bank), whereupon the Peoples Bank
credited Changco with the amount of the check. Changco thereafter withdrew the contents of his bank
account. A month later, when the check was returned to PLDT, the alteration was discovered. The Hongkong
& Shanghai Bank sued to recover from the Peoples Bank the sum of P14,608.05. The complaint was
dismissed. Affirming the decision of the trial court, this Court held:jgc:chanrobles.com.ph

"The entire case of plaintiff is based on the indorsement that has been heretofore copied namely, a
guarantee of all prior indorsement, made by Peoples Bank and since such an indorsement carries with it a
concomitant guarantee of genuineness, the Peoples Bank is liable to the Hongkong Shanghai Bank for
alteration made in the name of payee. On the other hand, the Peoples Bank relies on the 24-hour
regulation of the Central Bank that requires after a clearing, that all cleared items must be returned not
later than 3:00 P.M. of the following business day. And since the Hongkong Shanghai Bank only advised the
Peoples Bank as to the alteration on April 12, 1965 or 27 days after clearing, the Peoples Bank claims that
it is now too late to do so. This regulation of the Central Bank as to 24 hours is challenged by Plaintiff Bank
as being merely part of an ingenious device to facilitate banking transactions. Be that what it may as both
Plaintiff as well as Defendant Banks are part of our banking system and both are subject to regulations of
the Central Bank they are both bound by such regulations. . . . But Plaintiff Bank insists that Defendant
Bank is liable on its indorsement during clearing house operations. The indorsement, itself, is very clear
when it begins with the words `For clearance, clearing office . . . In other words, such an indorsement must
be read together with the 24-hour regulation on clearing House Operations of the Central Bank. Once that
24-hour period is over, the liability on such an indorsement has ceased. This being so, Plaintiff Bank has not
made out a case for relief."cralaw vi rtua1aw library

"x x x

"Moreover, in one of the very cases relied upon by plaintiff, as appellant, mention is made of a principle on
which defendant Bank could have acted without incurring the liability now sought to be imposed by plaintiff.
Thus: It is a settled rule that a person who presents for payment checks such as are here involved
guarantees the genuineness of the check, and the drawee bank need concern itself with nothing but the
genuineness of the signature, and the state of the account with it of the drawee. (Interstate Trust Co. v.
United States National Bank, 185 Pac. 260 [1919]). If at all, then, whatever remedy the plaintiff has would
lie not against defendant Bank but as against the party responsible for changing the name of the payee. Its
failure to call the attention of defendant Bank as to such alteration until after the lapse of 27 days would, in
the light of the above Central Bank circular, negate whatever right it might have had against defendant
Bank. . . ." (35 SCRA 140, 142-143; 145-146.)

In Metropolitan Bank & Trust Co. v. First National City Bank, Et. Al. (118 SCRA 537, 542) a check for P50,
drawn by Joaquin Cunanan and Company on its account at FNCB and payable to Manila Polo Club, was
altered by changing the amount to P50,000 and the payee was changed to "Cash." It was deposited by a
certain Salvador Sales in his current account in the Metropolitan Bank which sent it to the clearing house.
The check was cleared the same day by FNCB which paid the amount of P50,000 to Metro Bank. Sales
immediately withdrew the whole amount and closed his account. Nine (9) days later, the alteration was
discovered and FNCB sought to recover from Metro Bank what it had paid. The trial court and the Court of
Appeals rendered judgment for FNCB but this Court reversed it. We ruled:jgc:chanrobles.com.ph

"The validity of the 24-hour clearing house regulation has been upheld by this Court in Republic v. 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.chanrobles.com.ph : virtual law l i brary

"In this case, the check was not returned to Metro Bank in accordance with the 24-hour clearing house
period, but was cleared by FNCB. Failure of FNCB, therefore, to call the attention of Metro Bank to the
alteration of the check in question until after the lapse of nine days, negates whatever right it might have
had against Metro Bank in the light of the said Central Bank Circular. Its remedy lies not against Metro
Bank, but against the party responsible for changing the name of the payee (Hongkong & Shanghai Banking
Corp. v. Peoples Bank & Trust Co., 35 SCRA 140) and the amount on the face of the check." (p. 542.)

Every bank that issues checks for the use of its customers should know whether or not the drawers
signature thereon is genuine, whether there are sufficient funds in the drawers account to cover checks
issued, and it should be able to detect alterations, erasures, superimpositions or intercalations thereon, for
these instruments are prepared, printed and issued by itself, it has control of the drawers account, and it is
supposed to be familiar with the drawers signature. It should possess appropriate detecting devices for
uncovering forgeries and/or alterations on these instruments. Unless an alteration is attributable to the fault
or negligence of the drawer himself, such as when he leaves spaces on the check which would allow the
fraudulent insertion of additional numerals in the amount appearing thereon, the remedy of the drawee bank
that negligently clears a forged and/or altered check for payment is against the party responsible for the
forgery or alteration (Hongkong & Shanghai Banking Corp. v. Peoples Bank & Trust Co., 35 SCRA 140),
otherwise, it bears the loss. It may not charge the amount so paid to the account of the drawer, if the latter
was free from blame, nor recover it from the collecting bank if the latter made payment after proper
clearance from the drawee. As this Court pointed out in Philippine National Bank v. Quimpo, Et Al., 158
SCRA 582, 584:jgc:chanrobles.com.ph

"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."cralaw virtua1aw li brary

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:jgc:chanrobles.com.ph

"Where a loss, which must be borne by one of two parties alike innocent of forgery, can be traced to the
neglect or fault of either, it is reasonable that it would be borne by him, even if innocent of any intentional
fraud, through whose means it has succeeded. (Phil. National Bank v. National City Bank of New York, 63
Phil. 711, 733.)"

WHEREFORE, the petition for review is granted. The decision of the Court of Appeals is hereby reversed and
set aside, and another is entered absolving the petitioner Republic Bank from liability to refund to the First
National City Bank the sum of P9,240, which the latter paid on the check in question. No costs.

SO ORDERED.
G.R. No. 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 THE COURT OF
APPEALS, respondents.
D E C I S I O N
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.
G.R. Nos. 121413 and 121479 are twin petitions for review of the March 27, 1995
Decision
[1]
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 Philippine 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 Decision
[3]
of
the Court of Appeals and its March 5, 1997 Resolution
[4]
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
plaintiffs Citibank 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 plaintiffs percentage or manufacturers sales taxes for the
third quarter of 1977.
The aforesaid check was deposited with the defendant 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 Payees
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 plaintiffs 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 Metrobank, Alabang Branch to receive the tax
payment of the plaintiff.
On December 19, 1977, plaintiffs 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 same 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 plaintiffs
account with the defendant Citibank and the check was returned to the plaintiff.
Upon verification, plaintiff discovered that its Citibank Check No. SN-04867 in the
amount of P4,746,114.41 was not paid to the Commissioner of Internal
Revenue. Hence, in separate letters dated October 26, 1979, addressed to the
defendants, the plaintiff notified the latter that in case it will be re-assessed by the BIR
for the payment of the taxes covered by the said checks, then plaintiff shall hold the
defendants liable for reimbursement of the face value of the same. Both defendants
denied liability and refused to pay.
In a letter dated February 28, 1980 by the Acting Commissioner of Internal Revenue
addressed to the plaintiff - supposed to be Exhibit D, the latter was officially
informed, among others, that its check in the amount of P4,746,114.41 was not paid to
the government or its authorized agent and instead encashed by unauthorized persons,
hence, plaintiff has to pay the said amount within fifteen days from receipt of the
letter. Upon advice of the plaintiffs lawyers, plaintiff on March 11, 1982, paid to the
Bureau of Internal Revenue, the amount of P4,746,114.41, representing payment of
plaintiffs percentage tax for the third quarter of 1977.
As a consequence of defendants 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 plaintiffs 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 plaintiffs injury is the gross negligence of defendant IBAA in indorsing the
plaintiffs Citibank check in question.
It is admitted that on December 19, 1977 when the proceeds of plaintiffs Citibank
Check No. SN-04867 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 Riveras
instruction, PCIBank replaced the check with two of its own Managers 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 court 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 plaintiffs 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 Citibanks 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 the 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 Court 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 renders 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 plaintiffs 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]

PCIBank moved to reconsider the above-quoted decision of the Court of Appeals, while
Ford filed a Motion for Partial Reconsideration. Both motions were denied for lack of merit.
Separately, PCIBank and Ford filed before this Court, petitions for review by certiorari
under Rule 45.
In G.R. No. 121413, PCIBank seeks the reversal of the decision and resolution of the
Twelfth Division of the Court of Appeals contending that it merely acted on the instruction of
Ford and such cause 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 respondents 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 Payees 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. PCIBank 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, PCIBanks 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 Fords cause of action had not prescribed.
[13]

II. G.R. No. 128604

The same syndicate apparently embezzled the proceeds of checks intended, this time, to
settle Fords 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 left corner
between which were written the words payable to the payees 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 concerned, 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 anew, 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 plaintiffs check marked Ex. A
[Citibank Check No. SN-10597] for payment to the BIR. Instead, however, of
delivering the same to 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
PCIBs main office enroute to the Central Bank for clearing, replaced this worthless
check with FORDs Exhibit A and accordingly tampered the accompanying
documents to cover the replacement. As a result, Exhibit A was cleared by
defendant CITIBANK, and the fictitious deposit account of Reynaldo Reyes was
credited at the PCIB Meralco Branch with the total amount of the FORD check
Exhibit A. The same method was again utilized by the syndicate in profiting from
Exh. B [Citibank Check No. SN-16508] which was subsequently pilfered by Alexis
Marindo, Riveras Assistant at FORD.
From this Reynaldo Reyes account, Castro drew various checks distributing the
shares 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, FORDs
Godofredo Rivera and PCIBs Remberto Castro; (3) JUAN CASTILLO who assisted
de Leon in the initial arrangements; (4) GODOFREDO RIVERA, FORDs accountant
who passed on the first check (Exhibit A) to Castro; (5) REMBERTO CASTRO,
PCIBs 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, PCIBs 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, Riveras 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 FORDs
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 absolving 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 attorneys fees and expenses of litigation, and to pay the
defendant, PCIB (on its counterclaim to crossclaim) the sum of P300,000.00 as
attorneys 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 institution.
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 arguendo that defendant 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 in 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 Fords 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 appropriate
quarterly percentage taxes of Ford, the checks were diverted and encashed for the eventual
distribution among the members 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 force and fear, or other unlawful means, or for an illegal
consideration, or when he negotiates it in breach of faith or under such circumstances
as amount to a fraud.
Pursuant to this provision, it is vital to show that the negotiation is made by the perpetrator
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, through their own negligence, allowed 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 the question of liability based on the degree of negligence among
the parties concerned.
Foremost, we must resolve whether the injured party, Ford, is guilty of the imputed
contributory negligence that would defeat its claim for reimbursement, bearing in 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 syndicates 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 funds of Citibank Check Nos. SN-10597 and 16508, PCIBank
claims that the proximate cause of the damage to Ford lies in its own officers and employees
who carried out the fraudulent 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 that 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 servants 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 concurring contributory
negligence of his own servant or agent, the latters negligence is imputed to his superior and will
defeat the superiors action against the third person, assuming, 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, Fords
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 which
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 Fords 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. Riveras instruction to replace the said check with
PCIBanks Managers Check was not in the ordinary 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 Fords employees, who were acting on their own personal capacity.
Given these circumstances, the mere fact that the forgery was committed by a drawer-
payors 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.
[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, PCIBanks 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 Managers 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:

x x x. Since the questioned crossed check was deposited with IBAA [now
PCIBank], which claimed to be a depository/collecting bank of the BIR, it has the
responsibility to make sure that the check in question is deposited in Payees account
only.
x x x x x x x x x
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 one Godofredo Rivera
and in his signature to the authenticity of such 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 agreement 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 Banks clearing stamp appearing at the back of the
questioned checks stating that ALL PRIOR INDORSEMENTS AND/OR LACK OF
INDORSEMENTS GUARANTEED 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 asserts that the proximate cause of Fords injury is the gross negligence of
PCIBank. Since the questioned crossed 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
question is deposited in Payees account only.
Indeed, the crossing of the check with the phrase Payees 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 payees account
only. Therefore, it is the collecting bank (PCIBank) which is bound to scrutinize 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 petitioners liability on said instruments, this court is in full accord with the
ruling of the PCHCs 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 defendants 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 defendants 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 precautions to learn whether or not it is genuine. And if the one cashing the check
through indifference or other 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 banks 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 personal, 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 participation 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 participated.
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 PCIBanks Meralco Branch, who helped Castro open a Checking account of a
fictitious person named Reynaldo Reyes. Castro deposited a worthless Bank of America Check
in exactly the same amount of Ford checks. The syndicate tampered with the checks and
succeeded in replacing the worthless checks and the eventual encashment of Citibank Check
Nos. SN 10597 and 16508. The PCIBank Pro-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 it 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 indebtedness lodged with his bank for
collection, the bank is liable for his misappropriation of such sum.
[30]

Moreover, as correctly pointed out by Ford, Section 5
[31]
of Central Bank Circular No. 580,
Series of 1977 provides that any theft affecting items in transit for clearing, shall be for the
account of sending bank, which in this case is PCIBank.
But in this case, responsibility for negligence does not lie on PCIBanks 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 Fords checks 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 infirmity 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 62
[32]
of the Negotiable Instruments Law, Ford argues that by accepting the
instrument, the acceptor 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 courts 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, constitutes negligence in carrying out the banks 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 importance such that the
appropriate standard of diligence must be very high, if not the highest, degree of diligence.
[34]
A
banks 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 years 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, 1983, barely six years had lapsed. Thus, we conclude that Fords cause of action to
recover the amount of Citibank Check No. SN 04867 was seasonably filed within the period
provided by law.
Finally, we also find that 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,
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. 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, are AFFIRMED. PCIBank, known formerly as Insular Bank of Asia and
America, is 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 ORDERED to 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.
Costs against Philippine Commercial International Bank and Citibank, N.A.
SO ORDERED.

G.R. No. 139130. November 27, 2002]
RAMON K. ILUSORIO, petitioner, vs. HON. COURT OF APPEALS, and
THE MANILA BANKING CORPORATION, respondents.
D E C I S I O N
QUISUMBING, J .:
This petition for review seeks to reverse the decision
[1]
promulgated on
January 28, 1999 by the Court of Appeals in CA-G.R. CV No. 47942, affirming
the decision of the then Court of First Instance of Rizal, Branch XV (now the
Regional Trial Court of Makati, Branch 138) dismissing Civil Case No. 43907,
for damages.
The facts as summarized by the Court of Appeals are as follows:
Petitioner is a prominent businessman who, at the time material to this
case, was the Managing Director of Multinational Investment Bancorporation
and the Chairman and/or President of several other corporations. He was a
depositor in good standing of respondent bank, the Manila Banking
Corporation, under current Checking Account No. 06-09037-0. As he was
then running about 20 corporations, and was going out of the country a
number of times, petitioner entrusted to his secretary, Katherine
[2]
E. Eugenio,
his credit cards and his checkbook with blank checks. It was also Eugenio
who verified and reconciled the statements of said checking account.
[3]

Between the dates September 5, 1980 and January 23, 1981, Eugenio
was able to encash and deposit to her personal account about seventeen (17)
checks drawn against the account of the petitioner at the respondent bank,
with an aggregate amount of P119,634.34. Petitioner did not bother to check
his statement of account until a business partner apprised him that he saw
Eugenio use his credit cards. Petitioner fired Eugenio immediately, and
instituted a criminal action against her for estafa thru falsification before the
Office of the Provincial Fiscal of Rizal. Private respondent, through an
affidavit executed by its employee, Mr. Dante Razon, also lodged a complaint
for estafa thru falsification of commercial documents against Eugenio on the
basis of petitioners statement that his signatures in the checks were
forged.
[4]
Mr. Razons affidavit states:
That I have examined and scrutinized the following checks in accordance with
prescribed verification procedures with utmost care and diligence by
comparing the signatures affixed thereat against the specimen signatures of
Mr. Ramon K. Ilusorio which we have on file at our said office on such dates,
x x x
That the aforementioned checks were among those issued by Manilabank in
favor of its client MR. RAMON K. ILUSORIO,
That the same were personally encashed by KATHERINE E. ESTEBAN, an
executive secretary of MR. RAMON K. ILUSORIO in said Investment
Corporation;
That I have met and known her as KATHERINE E. ESTEBAN the attending
verifier when she personally encashed the above-mentioned checks at our
said office;
That MR. RAMON K. ILUSORIO executed an affidavit expressly disowning his
signature appearing on the checks further alleged to have not authorized the
issuance and encashment of the same.
[5]

Petitioner then requested the respondent bank to credit back and restore
to its account the value of the checks which were wrongfully encashed but
respondent bank refused.

Hence, petitioner filed the instant case.
[6]

At the trial, petitioner testified on his own behalf, attesting to the truth of
the circumstances as narrated above, and how he discovered the alleged
forgeries. Several employees of Manila Bank were also called to the witness
stand as hostile witnesses. They testified that it is the banks standard
operating procedure that whenever a check is presented for encashment or
clearing, the signature on the check is first verified against the specimen
signature cards on file with the bank.
Manila Bank also sought the expertise of the National Bureau of
Investigation (NBI) in determining the genuineness of the signatures
appearing on the checks. However, in a letter dated March 25, 1987, the NBI
informed the trial court that they could not conduct the desired examination for
the reason that the standard specimens submitted were not sufficient for
purposes of rendering a definitive opinion. The NBI then suggested that
petitioner be asked to submit seven (7) or more additional standard signatures
executed before or about, and immediately after the dates of the questioned
checks. Petitioner, however, failed to comply with this request.
After evaluating the evidence on both sides, the court a quo rendered
judgment on May 12, 1994 with the following dispositive portion:
WHEREFORE, finding no sufficient basis for plaintiff's cause herein against
defendant bank, in the light of the foregoing considerations and established
facts, this case would have to be, as it is hereby DISMISSED.
Defendants counterclaim is likewise DISMISSED for lack of sufficient basis.
SO ORDERED.
[7]

Aggrieved, petitioner elevated the case to the Court of Appeals by way of
a petition for review but without success. The appellate court held that
petitioners own negligence was the proximate cause of his loss. The
appellate court disposed as follows:
WHEREFORE, the judgment appealed from is AFFIRMED. Costs against the
appellant.
SO ORDERED.
[8]

Before us, petitioner ascribes the following errors to the Court of Appeals:
A. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE RESPONDENT
BANK IS ESTOPPED FROM RAISING THE DEFENSE THAT THERE WAS NO
FORGERY OF THE SIGNATURES OF THE PETITIONER IN THE CHECK
BECAUSE THE RESPONDENT FILED A CRIMINAL COMPLAINT FOR ESTAFA
THRU FALSIFICATION OF COMMERCIAL DOCUMENTS AGAINST KATHERINE
EUGENIO USING THE AFFIDAVIT OF PETITIONER STATING THAT HIS
SIGNATURES WERE FORGED AS PART OF THE AFFIDAVIT-COMPLAINT.
[9]

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

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

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

Essentially the issues in this case are: (1) whether or not petitioner has a
cause of action against private respondent; and (2) whether or not private
respondent, in filing an estafa case against petitioners secretary, is barred
from raising the defense that the fact of forgery was not established.
Petitioner contends that Manila Bank is liable for damages for its
negligence in failing to detect the discrepant checks. He adds that as a
general rule a bank which has obtained possession of a check upon an
unauthorized or forged endorsement of the payees signature and which
collects the amount of the check from the drawee is liable for the proceeds
thereof to the payee. Petitioner invokes the doctrine of estoppel, saying that
having itself instituted a forgery case against Eugenio, Manila Bank is now
estopped from asserting that the fact of forgery was never proven.
For its part, Manila Bank contends that respondent appellate court did not
depart from the accepted and usual course of judicial proceedings, hence
there is no reason for the reversal of its ruling. Manila Bank additionally points
out that Section 23
[13]
of the Negotiable Instruments Law is inapplicable,
considering that the fact of forgery was never proven. Lastly, the bank
negates petitioners claim of estoppel.
[14]

On the first issue, we find that petitioner has no cause of action against
Manila Bank. To be entitled to damages, petitioner has the burden of proving
negligence on the part of the bank for failure to detect the discrepancy in the
signatures on the checks. It is incumbent upon petitioner to establish the fact
of forgery, i.e., by submitting his specimen signatures and comparing them
with those on the questioned checks. Curiously though, petitioner failed to
submit additional specimen signatures as requested by the National Bureau of
Investigation from which to draw a conclusive finding regarding forgery. The
Court of Appeals found that petitioner, by his own inaction, was precluded
from setting up forgery. Said the appellate court:
We cannot fault the court a quo for such declaration, considering that the
plaintiffs evidence on the alleged forgery is not convincing enough. The
burden to prove forgery was upon the plaintiff, which burden he failed to
discharge. Aside from his own testimony, the appellant presented no other
evidence to prove the fact of forgery. He did not even submit his own
specimen signatures, taken on or about the date of the questioned checks, for
examination and comparison with those of the subject checks. On the other
hand, the appellee presented specimen signature cards of the appellant,
taken at various years, namely, in 1976, 1979 and 1981 (Exhibits 1, 2, 3
and 7), showing variances in the appellants unquestioned signatures. The
evidence further shows that the appellee, as soon as it was informed by the
appellant about his questioned signatures, sought to borrow the questioned
checks from the appellant for purposes of analysis and examination (Exhibit
9), but the same was denied by the appellant. It was also the former which
sought the assistance of the NBI for an expert analysis of the signatures on
the questioned checks, but the same was unsuccessful for lack of sufficient
specimen signatures.
[15]

Moreover, petitioners contention that Manila Bank was remiss in the
exercise of its duty as drawee lacks factual basis. Consistently, the CA and
the RTC found that Manila Bank employees exercised due diligence in
cashing the checks. The banks employees in the present case did not have a
hint as to Eugenios modus operandi because she was a regular customer of
the bank, having been designated by petitioner himself to transact in his
behalf. According to the appellate court, the employees of the bank exercised
due diligence in the performance of their duties. Thus, it found that:
The evidence on both sides indicates that TMBCs employees exercised due
diligence before encashing the checks. Its verifiers first verified the drawers
signatures thereon as against his specimen signature cards, and when in
doubt, the verifier went further, such as by referring to a more experienced
verifier for further verification. In some instances the verifier made a
confirmation by calling the depositor by phone. It is only after taking such
precautionary measures that the subject checks were given to the teller for
payment.
Of course it is possible that the verifiers of TMBC might have made a mistake
in failing to detect any forgery -- if indeed there was. However, a mistake is
not equivalent to negligence if they were honest mistakes. In the instant case,
we believe and so hold that if there were mistakes, the same were not
deliberate, since the bank took all the precautions.
[16]

As borne by the records, it was petitioner, not the bank, who was
negligent. Negligence is the omission to do something which a reasonable
man, guided by those considerations which ordinarily regulate the conduct of
human affairs, would do, or the doing of something which a prudent and
reasonable man would do.
[17]
In the present case, it appears that petitioner
accorded his secretary unusual degree of trust and unrestricted access to his
credit cards, passbooks, check books, bank statements, including custody
and possession of cancelled checks and reconciliation of accounts. Said the
Court of Appeals on this matter:
Moreover, the appellant had introduced his secretary to the bank for purposes
of reconciliation of his account, through a letter dated July 14, 1980 (Exhibit
8). Thus, the said secretary became a familiar figure in the bank. What is
worse, whenever the bank verifiers call the office of the appellant, it is the
same secretary who answers and confirms the checks.
The trouble is, the appellant had put so much trust and confidence in the said
secretary, by entrusting not only his credit cards with her but also his
checkbook with blank checks. He also entrusted to her the verification and
reconciliation of his account. Further adding to his injury was the fact that
while the bank was sending him the monthly Statements of Accounts, he was
not personally checking the same. His testimony did not indicate that he was
out of the country during the period covered by the checks. Thus, he had all
the opportunities to verify his account as well as the cancelled checks issued
thereunder -- month after month. But he did not, until his partner asked him
whether he had entrusted his credit card to his secretary because the said
partner had seen her use the same. It was only then that he was minded to
verify the records of his account.
[18]

The abovecited findings are binding upon the reviewing court. We stress
the rule that the factual findings of a trial court, especially when affirmed by
the appellate court, are binding upon us
[19]
and entitled to utmost respect
[20]
and
even finality. We find no palpable error that would warrant a reversal of the
appellate courts assessment of facts anchored upon the evidence on record.
Petitioners failure to examine his bank statements appears as the
proximate cause of his own damage. Proximate cause is that cause, which, in
natural and continuous sequence, unbroken by any efficient intervening
cause, produces the injury, and without which the result would not have
occurred.
[21]
In the instant case, the bank was not shown to be remiss in its
duty of sending monthly bank statements to petitioner so that any error or
discrepancy in the entries therein could be brought to the banks attention at
the earliest opportunity. But, petitioner failed to examine these bank
statements not because he was prevented by some cause in not doing so, but
because he did not pay sufficient attention to the matter. Had he done so, he
could have been alerted to any anomaly committed against him. In other
words, petitioner had sufficient opportunity to prevent or detect any
misappropriation by his secretary had he only reviewed the status of his
accounts based on the bank statements sent to him regularly. In view of
Article 2179 of the New Civil Code,
[22]
when the plaintiffs own negligence was
the immediate and proximate cause of his injury, no recovery could be had for
damages.
Petitioner further contends that under Section 23 of the Negotiable
Instruments Law a forged check is inoperative, and that Manila Bank had no
authority to pay the forged checks. True, it is a rule that when a signature is
forged or made without the authority of the person whose signature it purports
to be, the check is wholly inoperative. No right to retain the instrument, or to
give a discharge therefor, or to enforce payment thereof against any party,
can be acquired through or under such signature. However, the rule does
provide for an exception, namely: unless the party against whom it is
sought to enforce such right is precluded from setting up the forgery or
want of authority. In the instant case, it is the exception that applies. In our
view, petitioner is precluded from setting up the forgery, assuming there is
forgery, due to his own negligence in entrusting to his secretary his credit
cards and checkbook including the verification of his statements of account.
Petitioners reliance on Associated Bank vs. Court of
Appeals
[23]
and Philippine Bank of Commerce vs. CA
[24]
to buttress his
contention that respondent Manila Bank as the collecting or last endorser
generally suffers the loss because it has the duty to ascertain the
genuineness of all prior endorsements is misplaced. In the cited cases, the
fact of forgery was not in issue. In the present case, the fact of forgery was
not established with certainty. In those cited cases, the collecting banks were
held to be negligent for failing to observe precautionary measures to detect
the forgery. In the case before us, both courts below uniformly found that
Manila Banks personnel diligently performed their duties, having compared
the signature in the checks from the specimen signatures on record and
satisfied themselves that it was petitioners.
On the second issue, the fact that Manila Bank had filed a case
for estafa against Eugenio would not estop it from asserting the fact that
forgery has not been clearly established. Petitioner cannot hold private
respondent in estoppel for the latter is not the actual party to the criminal
action. In a criminal action, the State is the plaintiff, for the commission of a
felony is an offense against the State.
[25]
Thus, under Section 2, Rule 110 of
the Rules of Court the complaint or information filed in court is required to be
brought in the name of the People of the Philippines.
[26]

Further, as petitioner himself stated in his petition, respondent bank filed
the estafa case against Eugenio on the basis of petitioners own affidavit,
[27]
but
without admitting that he had any personal knowledge of the alleged
forgery. It is, therefore, easy to understand that the filing of the estafa case by
respondent bank was a last ditch effort to salvage its ties with the petitioner as
a valuable client, by bolstering the estafa case which he filed against his
secretary.
All told, we find no reversible error that can be ascribed to the Court of
Appeals.
WHEREFORE, the instant petition is DENIED for lack of merit. The
assailed decision of the Court of Appeals dated January 28, 1999 in CA-G.R.
CV No. 47942, is AFFIRMED.
Costs against petitioner.
SO ORDERED.

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.


D E C I S I O N


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 Bian, Laguna, maintained a current account with defendant Far East Bank and Trust
Company
1
("FEBTC") at the latters Bel-Air, Makati branch.
2
The sole signatory to Samsung
Constructions account was Jong Kyu Lee ("Jong"), its Project Manager,
3
while the checks
remained in the custody of the companys accountant, Kyu Yong Lee ("Kyu").
4

On 19 March 1992, a certain Roberto Gonzaga presented for payment FEBTC Check No.
432100 to the banks branch in Bel-Air, Makati. The check, payable to cash and drawn against
Samsung Constructions 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 Constructions 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 Jongs 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 banks 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 Jongs 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 aComplaint 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 attorneys
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 Jongs 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 Jongs 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 Jongs signature on the check was
genuine.
15

Confronted with conflicting expert testimony, the RTC chose to believe the findings of the NBI
expert. In aDecision dated 25 April 1994, the RTC held that Jongs signature on the check was
forged and accordingly directed the bank to pay or credit back to Samsung Constructions
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 attorneys
fees in the amount of Fifteen Thousand Pesos (P15,000.00).
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 RTCs 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 drawers account. The traditional
justification for the result is that the drawee is in a superior position to detect a forgery because
he has the makers 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 banks 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 depositors order. When the bank pays a check, on which the
depositors 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 depositors.
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 depositors
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 plaintiffs credit and which the bank had
paid out on checks bearing forgeries of the plaintiffs 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 customers account by specifying whose signature is necessary on checks that
are chargeable against the customers 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 customers
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 Jongs 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 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
opponents 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 courts 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 (90) 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 seventh
36
forms a severe forty-five degree
(45) 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 experts. 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 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 examiners 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 Jongs 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 Jongs 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. Jongs 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 succeeded
49
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 partys 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 Courts pronouncement in PCI Bank v. Court of
Appeals
53
applies in this case, to wit:
[T]he mere fact that the forgery was committed by a drawer-payors 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 Jongs
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 Constructions 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.
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 depositors 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 drawers 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 drawers 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 drawers 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 banks 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 Gonzagas 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.
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 clients 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.
VI MATERIAL ALTERATION
[G.R. No. 107508. April 25, 1996]
PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF APPEALS,
CAPITOL CITY DEVELOPMENT BANK, PHILIPPINE BANK OF
COMMUNICATIONS, and F. ABANTE MARKETING, respondents.
SYLLABUS
1. COMMERCIAL LAW; NEGOTIABLE INSTRUMENTS; MATERIAL
ALTERATION, DEFINED, - An alteration is said to be material if it alters
the effect of the instrument. It means an unauthorized change in an
instrument that purports to modify in any respect the obligation of a party
or an unauthorized addition of words or numbers or other change to an
incomplete instrument relating to the obligation of a party. In other words,
a material alteration is one which changes the items which are required to
be stated under Section 1 of the Negotiable Instruments Law.
2. ID.; ID.; IMMATERIAL ALTERATION; EFFECT ON THE INSTRUMENT. -
In his book entitled Pandect of Commercial Law and Jurisprudence,
Justice Jose C. Vitug opines that an innocent alteration (generally,
changes on items other than those required to be stated under Sec. 1, N.
I. L.) and spoliation (alterations done by a stranger) will not avoid the
instrument, but the holder may enforce it only according to its original
tenor.
3. ID.; ID.; ID.; PRESENT IN CASE AT BAR. The case at bench is
unique in the sense that what was altered is the serial number of the
check in question, an item which, it can readily be observed, is not an
essential requisite for negotiability under Section 1 of the Negotiable
Instrument Law. The aforementioned alteration did not change the
relations between the parties. The name of the drawer and the drawee
were not altered. The intended payee was the same. The sum of money
due to the payee remained the same. The checks serial number is not
the sole indication of its origin. As succinctly found by the Court of
Appeals, the name of the government agency which issued the subject
check was prominently printed therein. The checks issuer was therefore
sufficiently identified, rendering the referral to the serial number redundant
and inconsequential. Petitioner, thus cannot refuse to accept the check in
question on the ground that the serial number was altered, the same being
an immaterial or innocent one.
4. CIVIL LAW; DAMAGES; ATTORNEYS FEES; AWARD THEREOF
DEMANDS FACTUAL, LEGAL AND EQUITABLE JUSTIFICATION.
The award of attorneys fees lies within the discretion of the court and
depends upon the circumstances of each case. However, the discretion of
the court to award attorneys fees under Article 2208 of the Civil Code of
the Philippines demands factual, legal and equitable justification, without
which the award is a conclusion without a premise and improperly left to
speculation and conjecture. It becomes a violation of the proscription
against the imposition of a penalty on the right to litigate(Universal
Shipping Lines, Inc. v. Intermediate Appellate Court, 188 SCRA 170
[1990]). The reason for the award must be stated in the text of the courts
decision. If it is stated only in the dispositive portion of the decision, the
same shall be disallowed. As to the award of attorneys fees being an
exception rather than the rule, it is necessary for the court to make
findings of fact and law that would bring the case within the exception and
justify the grant of the award(Refractories Corporation of the Philippines v.
Intermediate Appellate Court, 176 SCRA 539).
APPEARANCES OF COUNSEL
Monsod Tamargo Valencia & Associates for private respondent Capitol
City Development Bank.
Siguion Reyna Montecillo & Ongsiako for private respondent Philippine
Bank of Communications.
D E C I S I O N
KAPUNAN, J .:
This is a petition for review on certiorari under Rule 45 of the Rules of
Court assailing the decision dated April 29, 1992 of respondent Court of
Appeals in CA-G.R. CV No. 24776 and its resolution dated September 16,
1992, denying petitioner Philippine National Banks motion for reconsideration
of said decision.
The facts of the case are as follows:
A check with serial number 7-3666-223-3, dated August 7, 1981 in the
amount of P97,650.00 was issued by the Ministry of Education and Culture
(now Department of Education, Culture and Sports [DECS]) payable to F.
Abante Marketing. This check was drawn against Philippine National Bank
(herein petitioner).
On August 11, 1981, F. Abante Marketing, a client of Capitol City
Development Bank (Capitol), deposited the questioned check in its savings
account with said bank. In turn, Capitol deposited the same in its account with
the Philippine Bank of Communications (PBCom) which, in turn, sent the
check to petitioner for clearing.
Petitioner cleared the check as good and, thereafter, PBCom credited
Capitols account for the amount stated in the check. However, on October 19,
1981, petitioner returned the check to PBCom and debited PBComs account
for the amount covered by the check, the reason being that there was a
material alteration of the check number.
PBCom, as collecting agent of Capitol, then proceeded to debit the latters
account for the same amount, and subsequently, sent the check back to
petitioner. Petitioner, however, returned the check to PBCom.
On the other hand, Capitol could not, in turn, debit F. Abante Marketings
account since the latter had already withdrawn the amount of the check as of
October 15, 1981. Capitol sought clarification from PBCom and demanded
the re-crediting of the amount. PBCom followed suit by requesting an
explanation and re-crediting from petitioner.
Since the demands of Capitol were not heeded, it filed a civil suit with the
Regional Trial Court of Manila against PBCom which, in turn, filed a third-party
complaint against petitioner for reimbursement/indemnity with respect to the
claims of Capitol. Petitioner, on its part, filed a fourth-party complaint against
F. Abante Marketing.
On October 3, 1989; the Regional Trial Court rendered its decision the
dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered as follows:
1.) On plaintiffs complaint, defendant Philippine Bank of Communications is ordered
to re-credit or reimburse plaintiff Capitol City Development Bank the amount of
P97,650.00, plus interest of 12 percent thereto from October 19, 1981 until the
amount is fully paid;
2.) On Philippine Bank of Communications third-party complaint, third-party
defendant PNB is ordered to reimburse and indemnify Philippine Bank of
Communications for whatever amount PBCom pays to plaintiff;
3.) On Philippine National Banks fourth-party complaint, F. Abante Marketing is
ordered to reimburse and indemnify PNB for whatever amount PNB pays to PBCom;
4.) On attorneys fees, Philippine Bank of Communications is ordered to pay Capitol
City Development Bank attorneys fees in the amount of Ten Thousand (P 10,000.00)
Pesos; but PBCom is entitled to reimbursement/indemnity from PNB; and Philippine
National Bank to be, in turn, reimbursed or indemnified by F. Abante Marketing for
the same amount;
5.) The Counterclaims of PBCom and PNB are hereby dismissed;
6.) No pronouncement as to costs.
SO ORDERED.
[1]

An appeal was interposed before the respondent Court of Appeals which
rendered its decision on April 29, 1992, the decretal portion of which reads:
WHEREFORE, the judgment appealed from is modified by exempting PBCom from
liability to plaintiff-appellee for attorneys fees and ordering PNB to honor the check
for P97,650.00, with interest as declared by the trial court, and pay plaintiff-appellee
attorneys fees of P10,000.00. After the check shall have been honored by PNB,
PBCom shall re-credit plaintiff-appellees account with it with the amount. No
pronouncement as to costs.
SO ORDERED.
[2]

A motion for reconsideration of the decision was denied by the respondent
Court in its resolution dated September 16, 1992 for lack of merit.
[3]

Hence, petitioner filed the instant petition which raises the following
issues:
I
WHETHER OR NOT AN ALTERATION OF THE SERIAL NUMBER OF A
CHECK IS A MATERIAL ALTERATION UNDER THE NEGOTIABLE
INSTRUMENTS LAW.
II
WHETHER OR NOT A CERTIFICATION HEREIN ISSUED BY THE MINISTRY
OF EDUCATION CAN BE GIVEN WEIGHT IN EVIDENCE.
III
WHETHER OR NOT A DRAWEE BANK WHO FAILED TO RETURN A CHECK
WITHIN THE TWENTY FOUR (24) HOUR CLEARING PERIOD MAY
RECOVER THE VALUE OF THE CHECK FROM THE COLLECTING BANK.
IV
WHETHER OR NOT IN THE ABSENCE OF MALICE OR ILL WILL
PETITIONER PNB MAY BE HELD LIABLE FOR ATTORNEYS FEES.
[4]

We find no merit in the petition.
We shall first deal with the effect of the alteration of the serial number on
the negotiability of the check in question.
Petitioner anchors its position on Section 125 of the Negotiable Instrument
Law (ACT No. 2031)
[5]
which provides:
Section 125. What constitutes a material alteration. - Any alteration which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment;
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be made;
(f) Or which adds a place of payment where no place of payment is specified, or
any other change or addition which alters the effect of the instrument in any respect, is
a material alteration.
Petitioner alleges that there is no hard and fast rule in the interpretation of
the aforequoted provision of the Negotiable Instruments Law. It maintains that
under Section 125(f), any change that alters the effect of the instrument is a
material alteration.
[6]

We do not agree.
An alteration is said to be material if it alters the effect of the instrument.
[7]
It
means an unauthorized change in an instrument that purports to modify in any
respect the obligation of a party or an unauthorized addition of words or
numbers or other change to an incomplete instrument relating to the obligation
of a party.
[8]
In other words, a material alteration is one which changes the
items which are required to be stated under Section 1 of the Negotiable
Instrument Law.
Section 1 of the Negotiable Instruments Law provides:
Section 1. - Form of negotiable instruments. An instrument to be negotiable must
conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.
In his book entitled Pandect of Commercial Law and Jurisprudence,
Justice Jose C. Vitug opines that an innocent alteration (generally, changes
on items other than those required to be stated under Sec. 1, N.I.L.) and
spoliation (alterations done by a stranger) will not avoid the instrument, but the
holder may enforce it only according to its original tenor.
[9]

Reproduced hereunder are some examples of material and immaterial
alterations:
A. Material Alterations:
(1) Substituting the words or bearer for order.
(2) Writing protest waived above blank indorsements.
(3) A change in the date from which interest is to run.
(4) A check was originally drawn as follows: Iron County Bank, Crystal Falls, Mich.
Aug. 5, 1901. Pay to G.L. or order $9 fifty cents CTR. The insertion of the figure 5
before the figure 9, the instrument being otherwise unchanged.
(5) Adding the words with interest with or without a fixed rate.
(6) An alteration in the maturity of a note, whether the time for payment is thereby
curtailed or extended.
(7) An instrument was payable First Natl Bank, the plaintiff added the word
Marion.
(8) Plaintiff, without consent of the defendant, struck out the name of the defendant
as payee and inserted the name of the maker of the original note.
(9) Striking out the name of the payee and substituting that of the person who
actually discounted the note.
(10) Substituting the address of the maker for the name of a co-maker.
[10]

B. Immaterial Alterations:
(1) Changing I promise to pay to We promise to pay, where there are two
makers.
(2) Adding the word annual after the interest clause.
(3) Adding the date of maturity as a marginal notation.
(4) Filling in the date of the actual delivery where the makers of a note gave it with
the date in blank, July . . .
(5) An alteration of the marginal figures of a note where the sum stated in words in
the body remained unchanged.
(6) The insertion of the legal rate of interest where the note had a provision for
interest at . . . per cent.
(7) A printed form of promissory note had on the margin the printed words,
Extended to . . . The holder on or after maturity wrote in the blank space the words
May 1, 1913, as a reference memorandum of a promise made by him to the
principal maker at the time the words were written to extend the time of payment.
(8) Where there was a blank for the place of payment, filling in the blank with the
place desired.
(9) Adding to an indorsees name the abbreviation Cash when it had been agreed
that the draft should be discounted by the trust company of which the indorsee was
cashier.
(10) The indorsement of a note by a stranger after its delivery to the payee at the time
the note was negotiated to the plaintiff.
(11) An extension of time given by the holder of a note to the principal maker,
without the consent of the a surety co-maker.
[11]

The case at the bench is unique in the sense that what was altered is the
serial number of the check in question, an item which, it can readily be
observed, is not an essential requisite for negotiability under Section 1 of the
Negotiable Instruments Law. The aforementioned alteration did not change
the relations between the parties. The name of the drawer and the drawee
were not altered. The intended payee was the same. The sum of money due
to the payee remained the same. Despite these findings, however, petitioner
insists, that:
xxx xxx xxx.
It is an accepted concept, besides being a negotiable instrument itself, that a TCAA
check by its very nature is the medium of exchange of governments (sic)
instrumentalities or agencies. And as (a) safety measure, every government office o(r)
agency (is) assigned TCAA checks bearing different number series.
A concrete example is that of the disbursements of the Ministry of Education and
Culture. It is issued by the Bureau of Treasury sizeable bundles of checks in booklet
form with serial numbers different from other government office or agency. Now, for
fictitious payee to succeed in its malicious intentions to defraud the government, all it
need do is to get hold of a TCAA Check and have the serial numbers of portion (sic)
thereof changed or altered to make it appear that the same was issued by the MEC.
Otherwise, stated, it is through the serial numbers that (a) TCAA Check is determined
to have been issued by a particular office or agency of the government.
[12]

xxx xxx xxx
Petitioners arguments fail to convince. The checks serial number is not
the sole indication of its origin. As succinctly found by the Court of Appeals,
the name of the government agency which issued the subject check was
prominently printed therein. The checks issuer was therefore sufficiently
identified, rendering the referral to the serial number redundant and
inconsequential. Thus, we quote with favor the findings of the respondent
court:
xxx xxx xxx
If the purpose of the serial number is merely to identify the issuing government office
or agency, its alteration in this case had no material effect whatsoever on the integrity
of the check. The identity of the issuing government office or agency was not
changed thereby and the amount of the check was not charged against the account of
another government office or agency which had no liability under the check. The
owner and issuer of the check is boldly and clearly printed on its face, second line
from the top: MiNiSTRY OF EDUCATiON AND CULTURE, and below the name
of the payee are the rubber-stamped words: Ministry of Educ. & Culture. These
words are not alleged to have been falsely or fraudulently intercalated into the check.
The ownership of the check is established without the necessity of recourse to the
serial number. Neither is there any proof that the amount of the check was
erroneously charged against the account of a government office or agency other than
the Ministry of Education and Culture. Hence, the alteration in the number of the
check did not affect or change the liability of the Ministry of Education and Culture
under the check and, therefore, is immaterial. The genuineness of the amount and the
signatures therein of then Deputy Minister of Education Hermenegildo C. Dumlao and
of the resident Auditor, Penomio C. Alvarez are not challenged. Neither is the
authenticity of the different codes appearing therein questioned x x x.
[13]
(Italics ours.)
Petitioner, thus cannot refuse to accept the check in question on the
ground that the serial number was altered, the same being an immaterial or
innocent one.
We now go to the second issue. It is petitioners submission that the
certification issued by Minrado C. Batonghinog, Cashier III of the MEC clearly
shows that the check was altered. Said certification reads:
July 22, 1985
TO WHOM IT MAY CONCERN:
This is to certify that according to the records of this Office, TCAA PNB Check No.
SN7-3666223-3 dated August 7, 1981 drawn in favor of F. Abante Marketing in the
amount of NINETY (S)EVEN THOUSAND SIX HUNDRED FIFTY PESOS ONLY
(P97,650.00) was not issued by this Office nor released to the payee concerned. The
series number of said check was not included among those requisition by this Office
from the Bureau of Treasury.
Very truly yours,
(SGD.) MINRADO C. BATONGHINOG
Cashier III.
[14]

Petitioner claims that even if the author of the certification issued by the
Ministry of Education and Culture (MEC) was not presented, still the best
evidence of the material alteration would be the disputed check itself and the
serial number thereon. Petitioner thus assails the refusal of respondent court
to give weight to the certification because the author thereof was not
presented to identify it and to be cross-examined thereon.
[15]

We agree with the respondent court.
The one who signed the certification was not presented before the trial
court to prove that the said document was really the document he prepared
and that the signature below the said document is his own signature. Neither
did petitioner present an eyewitness to the execution of the questioned
document who could possibly identify it.
[16]
Absent this proof, we cannot rule on
the authenticity of the contents of the certification. Moreover, as we previously
emphasized, there was no material alteration on the check, the change of its
serial number not being substantial to its negotiability.
Anent the third issue - whether or not the drawee bank may still recover
the value of the check from the collecting bank even if it failed to return the
check within the twenty-four (24) hour clearing period because the check was
tampered - suffice it to state that since there is no material alteration in the
check, petitioner has no right to dishonor it and return it to PBCom, the same
being in all respects negotiable.
However, the amount of P10,000.00 as attorneys fees is hereby deleted.
In their respective decisions, the trial court and the Court of Appeals failed to
explicitly state the rationale for the said award. The trial court merely ruled as
follows:
With respect to Capitols claim for damages consisting of alleged loss of
opportunity, this Court finds that Capitol failed to adequately substantiate its
claim. What Capitol had presented was a self-serving, unsubstantiated and
speculative computation of what it allegedly could have earned or realized
were it not for the debit made by PBCom which was triggered by the return
and debit made by PNB. However, this Court finds that it would be fair and
reasonable to impose interest at 12% per annum on the principal amount of
the check computed from October 19, 1981 (the date PBCom debited
Capitols account) until the amount is fully paid and reasonable attorneys
fees.
[17]
(Italics ours.)
And contrary to the Court of Appeals resolution, petitioner unambiguously
questioned before it the award of attorneys fees, assigning the latter as one
of the errors committed by the trial court.
[18]

The foregoing is in conformity with the guiding principles laid down in a
long line of cases and reiterated recently in Consolidated Bank & Trust
Corporation (Solidbank) v. Court of Appeals:
[19]

The award of attorneys fees lies within the discretion of the court and depends upon
the circumstances of each case. However, the discretion of the court to award
attorneys fees under Article 2208 of the Civil Code of the Philippines demands
factual, legal and equitable justification, without which the award is a conclusion
without a premise and improperly left to speculation and conjecture. It becomes a
violation of the proscription against the imposition of a penalty on the right to litigate
(Universal Shipping Lines Inc. v. Intermediate Appellate Court, 188 SCRA 170
[1990]). The reason for the award must be stated in the text of the courts decision. If
it is stated only in the dispositive portion of the decision, the same shall be disallowed.
As to the award of attorneys fees being an exception rather than the rule, it is
necessary for the court to make findings of fact and law that would bring the case
within the exception and justify the grant of the award (Refractories Corporation of
the Philippines v. Intermediate Appellate Court, 176 SCRA 539).
WHEREFORE, premises considered, except for the deletion of the award
of attorneys fees, the decision of the Court of Appeals is hereby AFFIRMED.
SO ORDERED.

G.R. No. L-2861 February 26, 1951
ENRIQUE P. MONTINOLA, plaintiff-appellant,
vs.
THE PHILIPPINE NATIONAL BANK, ET AL., defendants-appellees.
Quijano, Rosete and Lucena for appellant.
Second Assistant Corporate Counsel Hilarion U. Jarencio for appellee Philippine National Bank.
Office of the Solicitor General Felix Bautista Angelo and Solicitor Augusto M. Luciano for
appellee Provincial Treasurer of Misamis Oriental.
MONTEMAYOR, J .:
In August, 1947, Enrique P. Montinola filed a complaint in the Court of First Instance of Manila
against the Philippine National Bank and the Provincial Treasurer of Misamis Oriental to collect
the sum of P100,000, the amount of Check No. 1382 issued on May 2, 1942 by the Provincial
Treasurer of Misamis Oriental to Mariano V. Ramos and supposedly indorsed to Montinola.
After hearing, the court rendered a decision dismissing the complaint with costs against plaintiff-
appellant. Montinola has appealed from that decision directly to this Court inasmuch as the
amount in controversy exceeds P50,000.
There is no dispute as to the following facts. In April and May, 1942, Ubaldo D. Laya was the
Provincial Treasurer of Misamis Oriental. As such Provincial Treasurer he was ex officio agent
of the Philippine National Bank branch in the province. Mariano V. Ramos worked under him as
assistant agent in the bank branch aforementioned. In April of that year 1942, the currency
being used in Mindanao, particularly Misamis Oriental and Lanao which had not yet been
occupied by the Japanese invading forces, was the emergency currency which had been issued
since January, 1942 by the Mindanao Emergency Currency Board by authority of the late
President Quezon.
About April 26, 1942, thru the recommendation of Provincial Treasurer Laya, his assistant agent
M. V. Ramos was inducted into the United States Armed Forces in the Far East (USAFFE) as
disbursing officer of an army division. As such disbursing officer, M. V. Ramos on April 30,
1942, went to the neighboring Province Lanao to procure a cash advance in the amount of
P800,000 for the use of the USAFFE in Cagayan de Misamis. Pedro Encarnacion, Provincial
Treasurer of Lanao did not have that amount in cash. So, he gave Ramos P300,000 in
emergency notes and a check for P500,000. On May 2, 1942 Ramos went to the office of
Provincial Treasurer Laya at Misamis Oriental to encash the check for P500,000 which he had
received from the Provincial Treasurer of Lanao. Laya did not have enough cash to cover the
check so he gave Ramos P400,000 in emergency notes and a check No. 1382 for P100,000
drawn on the Philippine National Bank. According to Laya he had previously deposited
P500,000 emergency notes in the Philippine National Bank branch in Cebu and he expected to
have the check issued by him cashed in Cebu against said deposit.
Ramos had no opportunity to cash the check because in the evening of the same day the check
was issued to him, the Japanese forces entered the capital of Misamis Oriental, and on June
10, 1942, the USAFFE forces to which he was attached surrendered. Ramos was made a
prisoner of war until February 12, 1943, after which, he was released and he resumed his status
as a civilian.
About the last days of December, 1944 or the first days of January, 1945, M. V. Ramos
allegedly indorsed this check No. 1382 to Enrique P. Montinola. The circumstances and
conditions under which the negotiation or transfer was made are in controversy.
According to Montinola's version, sometime in June, 1944, Ramos, needing money with which
to buy foodstuffs and medicine, offered to sell him the check; to be sure that it was genuine and
negotiable, Montinola, accompanied by his agents and by Ramos himself, went to see President
Carmona of the Philippine National Bank in Manila about said check; that after examining it
President Carmona told him that it was negotiable but that he should not let the Japanese catch
him with it because possession of the same would indicate that he was still waiting for the return
of the Americans to the Philippines; that he and Ramos finally agreed to the sale of the check
for P850,000 Japanese military notes, payable in installments; that of this amount, P450,000
was paid to Ramos in Japanese military notes in five installments, and the balance of P400,000
was paid in kind, namely, four bottles of sulphatia sole, each bottle containing 1,000 tablets, and
each tablet valued at P100; that upon payment of the full price, M. V. Ramos duly indorsed the
check to him. This indorsement which now appears on the back of the document is described in
detail by trial court as follows:
The endorsement now appearing at the back of the check (see Exhibit A-1) may be
described as follows: The woods, "pay to the order of" in rubber stamp and in violet color
are placed about one inch from the top. This is followed by the words "Enrique P. Montinola"
in typewriting which is approximately 5/8 an inch below the stamped words "pay to the order of". Below "Enrique P.
Montinola", in typewriting are words and figures also in typewriting, "517 Isabel Street" and about /8 of an inch therefrom, the
edges of the check appear to have been burned, but there are words stamped apparently in rubber stamp which, according to
Montinola, are a facsimile of the signature of Ramos. There is a signature which apparently reads "M. V. Ramos" also in green ink
but made in handwriting."
To the above description we may add that the name of M. V. Ramos is hand printed in green ink,
under the signature. According to Montinola, he asked Ramos to hand print it because Ramos'
signature was not clear.
Ramos in his turn told the court that the agreement between himself and Montinola regarding the
transfer of the check was that he was selling only P30,000 of the check and for this reason, at the
back of the document he wrote in longhand the following:
Pay to the order of Enrique P. Montinola P30,000 only. The balance to be deposited in the
Philippine National Bank to the credit of M. V. Ramos.
Ramos further said that in exchange for this assignment of P30,000 Montinola would pay him
P90,000 in Japanese military notes but that Montinola gave him only two checks of P20,000 and
P25,000, leaving a balance unpaid of P45,000. In this he was corroborated by Atty. Simeon Ramos
Jr. who told the court that the agreement between Ramos and Montinola was that the latter, for the
sale to him of P30,000 of the check, was to pay Ramos P90,000 in Japanese military notes; that
when the first check for P20,000 was issued by Montinola, he (Simeon) prepared a document
evidencing said payment of P20,000; that when the second check for P25,000 was issued by
Montinola, he (Simeon) prepared another document with two copies, one for Montinola and the other
for Ramos, both signed by Montinola and M. V. Ramos, evidencing said payment, with the
understanding that the balance of P45,000 would be paid in a few days.
The indorsement or writing described by M. V. Ramos which had been written by him at the back of
the check, Exhibit A, does not now appear at the back of said check. What appears thereon is the
indosement testified to by Montinola and described by the trial court as reproduced above. Before
going into a discussion of the merits of the version given by Ramos and Montinola as to the
indorsement or writing at the back of the check, it is well to give a further description of it as we shall
later.
When Montinola filed his complaint in 1947 he stated therein that the check had been lost, and so in
lieu thereof he filed a supposed photostic copy. However, at the trial, he presented the check itself
and had its face marked Exhibit A and the back thereof Exhibit A-1. But the check is badly mutilated,
bottled, torn and partly burned, and its condition can best be appreciated by seeing it. Roughly, it
may be stated that looking at the face of the check (Exhibit A) we see that the left third portion of the
paper has been cut off perpendicularly and severed from the remaining 2/3 portion; a triangular
portion of the upper right hand corner of said remaining 2/3portion has been
similarly cut off and severed, and to keep and attach this triangular portion
and the rectangular /3 portion to the rest of the document, the entire check is
pasted on both sides with cellophane; the edges of the severed portions as
well as of the remaining major portion, where cut bear traces of burning and
searing; there is a big blot with indelible ink about the right middle portion,
which seems to have penetrated to the back of the check (Exhibit A-1), which
back bears a larger smear right under the blot, but not black and sharp as the
blot itself; finally, all this tearing, burning, blotting and smearing and pasting of
the check renders it difficult if not impossible to read some of the words and
figures on the check.
In explanation of the mutilation of the check Montinola told the court that several months after
indorsing and delivering the check to him, Ramos demanded the return of the check to him,
threatening Montinola with bodily harm, even death by himself or his guerrilla forces if he did not
return said check, and that in order to justify the non-delivery of the document and to discourage
Ramos from getting it back, he (Montinola) had to resort to the mutilation of the document.
As to what was really written at the back of the check which Montinola claims to be a full
indorsement of the check, we agree with trial court that the original writing of Ramos on the back of
the check was to the effect that he was assigning only P30,000 of the value of the document and
that he was instructing the bank to deposit to his credit the balance. This writing was in some
mysterious way obliterated, and in its place was placed the present indorsement appearing thereon.
Said present indorsement occupies a good portion of the back of the check. It has already been
described in detail. As to how said present indorsement came to be written, the circumstances
surrounding its preparation, the supposed participation of M. V. Ramos in it and the writing originally
appearing on the reverse side of the check, Exhibit A-1, we quote with approval what the trial court
presided over by Judge Conrado V. Sanchez, in its well-prepared decision, says on these points:
The allegedly indorsement: "Pay to the order of Enrique P. Montinola the amount of P30,000
only. The balance to be deposited to the credit of M. V. Ramos", signed by M. V. Ramos-
according to the latter-does not now appear at the back of the check. A different
indorsement, as aforesaid, now appears.
Had Montinola really paid in full the sum of P850,000 in Japanese Military Notes as
consideration for the check? The following observations are in point:
(a) According to plaintiff's witness Gregorio A. Cortado, the oval line in violet, enclosing "P."
of the words "Enrique P. Montinola" and the line in the form of cane handle crossing the word
"street" in the words and figures "517 Isabel Street" in the endorsement Exhibit A-1 "unusual"
to him, and that as far as he could remember this writing did not appear on the instrument
and he had no knowledge as to how it happened to be there. Obviously Cortado had no
recollection as to how such marks ever were stamped at the back of the check.
(b) Again Cortado, speaking of the endorsement as it now appears at the back of the check
(Exh. A-1) stated that Ramos typewrote these words outside of the premises of Montinola,
that is, a nearby house. Montinola, on the other hand, testified that Ramos typewrote the
words "Enrique P. Montinola 517 Isabel Street", in his own house. Speaking of the rubber
stamp used at the back of the check and which produced the words "pay to the order of",
Cortado stated that when he (Cortado), Atadero, Montinola and Ramos returned in group to
the house of Montinola, the rubber stamp was already in the house of Montinola, and it was
on the table of the upper floor of the house, together with the stamp pad used to stamp the
same. Montinola, on the other hand, testified that Ramos carried in his pocket the said
rubber stamp as well as the ink pad, and stamped it in his house.
The unusually big space occupied by the indorsement on the back of the check and the
discrepancies in the versions of Montinola and his witness Cortado just noted, create doubts
as to whether or not really Ramos made the indorsement as it now appears at the back of
Exhibit A. One thing difficult to understand is why Ramos should go into the laborious task of
placing the rubber stamp "Pay to the order of" and afterwards move to the typewriter and
write the words "Enrique P. Montinola" "and "517 Isabel Street", and finally sign his name too
far below the main indorsement.
(c) Another circumstances which bears heavily upon the claim of plaintiff Montinola that he
acquired the full value of the check and paid the full consideration therefor is the present
condition of said check. It is now so unclean and discolored; it is pasted in cellophane,
bottled with ink on both sides torn three parts, and with portions thereof burned-all done by
plaintiff, the alleged owner thereof.
The acts done by the very plaintiff on a document so important and valuable to him, and
which according to him involves his life savings, approximate intentional cancellation. The
only reason advanced by plaintiff as to why tore check, burned the torn edges and bottled
out the registration at the back, is found in the following: That Ramos came to his house,
armed with a revolver, threatened his life and demanded from him the return of the check;
that when he informed Ramos that he did not have it in the house, but in some deposit
outside thereof and that Ramos promised to return the next day; that the same night he tore
the check into three parts, burned the sides with a parrafin candle to show traces of burning;
and that upon the return of Ramos the next day he showed the two parts of the check, the
triangle on the right upper part and the torn piece on the left part, and upon seeing the
condition thereof Ramos did not bother to get the check back. He also said that he placed
the blots in indelible ink to prevent Ramos if he would be forced to surrender the middle
part of the check from seeing that it was registered in the General Auditing Office.
Conceding at the moment these facts to be true, the question is: Why should Montinola be
afraid of Ramos? Montinola claims that Ramos went there about April, 1945, that is, during
liberation. If he believed he was standing by his rights, he could have very well sought police
protection or transferred to some place where Ramos could not bother him. And then, really
Ramos did not have anything more to do with this check for the reason that Montinola had
obtained in full the amount thereof, there could not be any reason why Ramos should have
threatened Montinola as stated by the latter. Under the circumstances, the most logical
conclusion is that Ramos wanted the check at all costs because Montinola did not acquire
the check to such an extent that it borders on intentional cancellation thereof (see Sections
119-123 Negotiable Instruments Law) there is room to believe that Montinola did not have so
much investments in that check as to adopted an "what do I care?" attitude.
And there is the circumstance of the alleged loss of the check. At the time of the filing of the
complaint the check was allegedly lost, so much so that a photostatic copy thereof was
merely attached to the complaint (see paragraph 7 of the complaint). Yet, during the trial the
original check Exhibit A was produced in court.
But a comparison between the photostatic copy and the original check reveals discrepancies
between the two. The condition of the check as it was produced is such that it was partially
burned, partially blotted, badly mutilated, discolored and pasted with cellophane. What is
worse is that Montinola's excuse as to how it was lost, that it was mixed up with household
effects is not plausible, considering the fact that it involves his life savings, and that before
the alleged loss, he took extreme pains and precautions to save the check from the possible
ravages of the war, had it photographed, registered said check with the General Auditing
Office and he knew that Ramos, since liberation, was hot after the possession of that check.
(d) It seems that Montinola was not so sure as to what he had testified to in reference to the
consideration he paid for the check. In court he testified that he paid P450,000 in cash from
June to December 1944, and P400,000 worth of sulphatiazole in January 1945 to complete
the alleged consideration of P850,000. When Montinola testified this way in court, obviously
he overlooked a letter he wrote to the provincial treasurer of Cagayan, Oriental Misamis,
dated May 1, 1947, Exhibit 3 the record. In that letter Exhibit 3, Montinola told Provincial
Treasurer Elizalde of Misamis Oriental that "Ramos endorsed it (referring to check) to me for
goods in kind, medicine, etc., received by him for the use of the guerrillas." In said letter
Exhibit 3, Montinola did not mention the cash that he paid for the check.
From the foregoing the court concludes that plaintiff Montinola came into the possession of
the check in question about the end of December 1944 by reason of the fact that M. V.
Ramos sold to him P30,000 of the face value thereof in consideration of the sum of P90,000
Japanese money, of which only one-half or P45,000 (in Japanese money) was actually paid
by said plaintiff to Ramos. (R. on A., pp. 31-33; Brief of Appellee, pp. 14-20.)
At the beginning of this decision, we stated that as Provincial Treasurer of Misamis Oriental, Ubaldo
D. Laya wasex officio agent of the Philippine National Bank branch in that province. On the face of
the check (Exh. A) we now find the words in parenthesis "Agent, Phil. National Bank" under the
signature of Laya, purportedly showing that he issued the check as agent of the Philippine National
Bank. It this is true, then the bank is not only drawee but also a drawer of the check, and Montinola
evidently is trying to hold the Philippine National Bank liable in that capacity of drawer, because as
drawee alone, inasmuch as the bank has not yet accepted or certified the check, it may yet avoid
payment.
Laya, testifying in court, stated that he issued the check only as Provincial Treasurer, and that the
words in parenthesis "Agent, Phil. National Bank" now appearing under his signature did not appear
on the check when he issued the same. In this he was corroborated by the payee M. V. Ramos who
equally assured the court that when he received the check and then delivered it to Montinola, those
words did not appear under the signature of Ubaldo D. Laya. We again quote with approval the
pertinent portion of the trial court's decision:
The question is reduced to whether or not the words, "Agent, Phil. National Bank" were
added after Laya had issued the check. In a straightforward manner and without vacillation
Laya positively testified that the check Exhibit A was issued by him in his capacity as
Provincial Treasurer of Misamis Oriental and that the words "Agent, Phil. National Bank"
which now appear on the check Exhibit A were not typewritten below his signature when he
signed the said check and delivered the same to Ramos. Laya assured the court that there
could not be any mistake as to this. For, according to Laya, when he issued check in his
capacity as agent of the Misamis Oriental agency of the Philippine National Bank the said
check must be countersigned by the cashier of the said agency not by the provincial
auditor. He also testified that the said check was issued by him in his capacity as provincial
treasurer of Misamis Oriental and that is why the same was countersigned by Provincial
Auditor Flores. The Provincial Auditor at that time had no connection in any capacity with the
Misamis Oriental agency of the Philippine National Bank. Plaintiff Montinola on the other
hand testified that when he received the check Exhibit A it already bore the words "Agent,
Phil. National Bank" below the signature of Laya and the printed words "Provincial
Treasurer".
After considering the testimony of the one and the other, the court finds that the
preponderance of the evidence supports Laya's testimony. In the first place, his testimony
was corroborated by the payee M. V. Ramos. But what renders more probable the testimony
of Laya and Ramos is the fact that the money for which the check was issued was expressly
for the use of the USAFFE of which Ramos was then disbursing officer, so much so that
upon the delivery of the P400,000 in emergency notes and the P100,000 check to Ramos,
Laya credited his depository accounts as provincial treasurer with the corresponding credit
entry. In the normal course of events the check could not have been issued by the bank, and
this is borne by the fact that the signature of Laya was countersigned by the provincial
auditor, not the bank cashier. And then, too there is the circumstance that this check was
issued by the provincial treasurer of Lanao to Ramos who requisitioned the said funds in his
capacity as disbursing officer of the USAFFE. The check, Exhibit A is not what we may term
in business parlance, "certified check" or "cashier's check."
Besides, at the time the check was issued, Laya already knew that Cebu and Manila were
already occupied. He could not have therefore issued the check-as a bank employee-
payable at the central office of the Philippine National Bank.
Upon the foregoing circumstances the court concludes that the words "Agent, Phil. National
Bank' below the signature of Ubaldo D. Laya and the printed words "Provincial Treasurer"
were added in the check after the same was issued by the Provincial Treasurer of Misamis
Oriental.
From all the foregoing, we may safely conclude as we do that the words "Agent, Phil. National Bank"
now appearing on the face of the check (Exh. A) were added or placed in the instrument after it was
issued by Provincial Treasurer Laya to M. V. Ramos. There is no reason known to us why Provincial
Treasurer Laya should issue the check (Exh. A) as agent of the Philippine National Bank. Said check
for P100,000 was issued to complete the payment of the other check for P500,000 issued by the
Provincial Treasurer of Lanao to Ramos, as part of the advance funds for the USAFFE in Cagayan
de Misamis. The balance of P400,000 in cash was paid to Ramos by Laya from the funds, not of the
bank but of the Provincial Treasury. Said USAFFE were being financed not by the Bank but by the
Government and, presumably, one of the reasons for the issuance of the emergency notes in
Mindanao was for this purpose. As already stated, according to Provincial Treasurer Laya, upon
receiving a relatively considerable amount of these emergency notes for his office, he deposited
P500,000 of said currency in the Philippine National Bank branch in Cebu, and that in issuing the
check (Exh. A), he expected to have it cashed at said Cebu bank branch against his deposit of
P500,000.
The logical conclusion, therefore, is that the check was issued by Laya only as Provincial Treasurer
and as an official of the Government which was under obligation to provide the USAFFE with
advance funds, and not by the Philippine National Bank which has no such obligation. The very
Annex C, made part of plaintiff's complaint, and later introduced in evidence for him as Exhibit E
states that Laya issued the check "in his capacity as Provincial Treasurer of Misamis Oriental",
obviously, not as agent of the Bank.
Now, did M. V. Ramos add or place those words below the signature of Laya before transferring the
check to Montinola? Let us bear in mind that Ramos before his induction into the USAFFE had been
working as assistant of Treasurer Laya as ex-officio agent of the Misamis Oriental branch of the
Philippine National Bank. Naturally, Ramos must have known the procedure followed there as to the
issuance of checks, namely, that when a check is issued by the Provincial Treasurer as such, it is
countersigned by the Provincial Auditor as was done on the check (Exhibit A), but that if the
Provincial Treasurer issues a check as agent of the Philippine National Bank, the check is
countersigned not by the Provincial Auditor who has nothing to do with the bank, but by the bank
cashier, which was not done in this case. It is not likely, therefore, that Ramos had made the
insertion of the words "Agent, Phil. National Bank" after he received the check, because he should
have realized that following the practice already described, the check having been issued by Laya as
Provincial Treasurer, and not as agent of the bank, and since the check bears the countersignature
not of the Bank cashier of the Provincial Auditor, the addition of the words "Agent, Phil. National
Bank" could not change the status and responsibility of the bank. It is therefore more logical to
believe and to find that the addition of those words was made after the check had been transferred
by Ramos to Montinola. Moreover, there are other facts and circumstances involved in the case
which support this view. Referring to the mimeographed record on appeal filed by the plaintiff-
appellant, we find that in transcribing and copying the check, particularly the face of it (Exhibit A) in
the complaint, the words "Agent, Phil. National Bank" now appearing on the face of the check under
the signature of the Provincial Treasurer, is missing. Unless the plaintiff in making this copy or
transcription in the complaint committed a serious omission which is decisive as far as the bank is
concerned, the inference is, that at the time the complaint was filed, said phrase did not appear on
the face of the check. That probably was the reason why the bank in its motion to dismiss dated
September 2, 1947, contended that if the check in question had been issued by the provincial
treasurer in his capacity as agent of the Philippine National Bank, said treasurer would have placed
below his signature the words "Agent of the Philippine National Bank". The plaintiff because of the
alleged loss of the check, allegedly attached to the complaint a photostatic copy of said check and
marked it as Annex A. But in transcribing and copying said Annex A in his complaint, the phrase
"Agent, Phil. National Bank" does not appear under the signature of the provincial treasurer. We tried
to verify this discrepancy by going over the original records of the Court of First Instance so as to
compare the copy of Annex A in the complaint, with the original Annex A, the photostatic copy, but
said original Annex A appears to be missing from the record. How it disappeared is not explained. Of
course, now we have in the list of exhibit a photostatic copy marked Annex A and Exhibit B, but
according to the manifestation of counsel for the plaintiff dated October 15, 1948, said photostatic
copy now marked Annex A and Exhibit B was submitted on October 15, 1948, in compliance with the
verbal order of the trial court. It is therefore evident that the Annex A now available is not the same
original Annex A attached to the complaint in 1947.
There is one other circumstance, important and worth nothing. If Annex A also marked Exhibit B is
the photostatic copy of the original check No. 1382 particularly the face thereof (Exhibit A), then said
photostatic copy should be a faithful and accurate reproduction of the check, particularly of the
phrase "Agent, Phil. National Bank" now appearing under the signature of the Provincial Treasurer
on the face of the original check (Exhibit A). But a minute examination of and comparison between
Annex A, the photostatic copy also marked Exhibit B and the face of the check, Exhibit A, especially
with the aid of a handlens, show notable differences and discrepancies. For instance, on Exhibit A,
the letter A of the word "Agent" is toward the right of the tail of the beginning letter of the signature of
Ubaldo D. Laya; this same letter "A" however in Exhibit B is directly under said tail.
The letter "N" of the word "National" on Exhibit A is underneath the space between "Provincial" and
"Treasurer"; but the same letter "N" is directly under the letter "I" of the word "Provincial" in Exhibit B.
The first letter "a" of the word "National" is under "T" of the word "Treasurer" in Exhibit A; but the
same letter "a" in Exhibit "B" is just below the space between the words "Provincial" and "Treasurer".
The letter "k" of the word "Bank" in Exhibit A is after the green perpendicular border line near the
lower right hand corner of the edge of the check (Exh. A); this same letter "k" however, on Exhibit B
is on the very border line itself or even before said border line.
The closing parenthesis ")" on Exhibit A is a little far from the perpendicular green border line and
appears to be double instead of one single line; this same ")" on Exhibit B appears in a single line
and is relatively nearer to the border line.
There are other notable discrepancies between the check Annex A and the photostatic copy, Exhibit
B, as regards the relative position of the phrase "Agent, Phil. National Bank", with the title Provincial
Treasurer, giving ground to the doubt that Exhibit B is a photostatic copy of the check (Exhibit A).
We then have the following facts. Exhibit A was issued by Laya in his capacity as Provincial
Treasurer of Misamis Oriental as drawer on the Philippine National Bank as drawee. Ramos sold
P30,000 of the check to Enrique P. Montinola for P90,000 Japanese military notes, of which only
P45,000 was paid by Montinola. The writing made by Ramos at the back of the check was an
instruction to the bank to pay P30,000 to Montinola and to deposit the balance to his (Ramos) credit.
This writing was obliterated and in its place we now have the supposed indorsement appearing on
the back of the check (Exh. A-1).
At the time of the transfer of this check (Exh. A) to Montinola about the last days of December, 1944,
or the first days of January, 1945, the check which, being a negotiable instrument, was payable on
demand, was long overdue by about 2 years. It may therefore be considered, even then, a stable
check. Of course, Montinola claims that about June, 1944 when Ramos supposedly approached him
for the purpose of negotiating the check, he (Montinola) consulted President Carmona of the
Philippine National Bank who assured him that the check was good and negotiable. However,
President Carmona on the witness stand flatly denied Montinola's claim and assured the court that
the first time that he saw Montinola was after the Philippine National Bank, of which he was
President, reopened, after liberation, around August or September, 1945, and that when shown the
check he told Montinola that it was stale. M. V. Ramos also told the court that it is not true that he
ever went with Montinola to see President Carmona about the check in 1944.
On the basis of the facts above related there are several reasons why the complaint of Montinola
cannot prosper. The insertion of the words "Agent, Phil. National Bank" which converts the bank
from a mere drawee to a drawer and therefore changes its liability, constitutes a material alteration
of the instrument without the consent of the parties liable thereon, and so discharges the instrument.
(Section 124 of the Negotiable Instruments Law). The check was not legally negotiated within the
meaning of the Negotiable Instruments Law. Section 32 of the same law provides that "the
indorsement must be an indorsement of the entire instrument. An indorsement which purports to
transfer to the indorsee a part only of the amount payable, . . . (as in this case) does not operate as
a negotiation of the instrument." Montinola may therefore not be regarded as an indorsee. At most
he may be regarded as a mere assignee of the P30,000 sold to him by Ramos, in which case, as
such assignee, he is subject to all defenses available to the drawer Provincial Treasurer of Misamis
Oriental and against Ramos. Neither can Montinola be considered as a holder in due course
because section 52 of said law defines a holder in due course as a holder who has taken the
instrument under certain conditions, one of which is that he became the holder before it was
overdue. When Montinola received the check, it was long overdue. And, Montinola is not even a
holder because section 191 of the same law defines holder as the payee or indorsee of a bill or note
and Montinola is not a payee. Neither is he an indorsee for as already stated, at most he can be
considered only as assignee. Neither could it be said that he took it in good faith. As already stated,
he has not paid the full amount of P90,000 for which Ramos sold him P30,000 of the value of the
check. In the second place, as was stated by the trial court in its decision, Montinola speculated on
the check and took a chance on its being paid after the war. Montinola must have known that at the
time the check was issued in May, 1942, the money circulating in Mindanao and the Visayas was
only the emergency notes and that the check was intended to be payable in that currency. Also, he
should have known that a check for such a large amount of P100,000 could not have been issued to
Ramos in his private capacity but rather in his capacity as disbursing officer of the USAFFE, and that
at the time that Ramos sold a part of the check to him, Ramos was no longer connected with the
USAFFE but already a civilian who needed the money only for himself and his family.
As already stated, as a mere assignee Montinola is subject to all the defenses available against
assignor Ramos. And, Ramos had he retained the check may not now collect its value because it
had been issued to him as disbursing officer. As observed by the trial court, the check was issued to
M. V. Ramos not as a person but M. V. Ramos as the disbursing officer of the USAFFE. Therefore,
he had no right to indorse it personally to plaintiff. It was negotiated in breach of trust, hence he
transferred nothing to the plaintiff.
In view of all the foregoing, finding no reversible error in the decision appealed from, the same is
hereby affirmed with costs.
In the prayer for relief contained at the end of the brief for the Philippine National Bank dated
September 27, 1949, we find this prayer:
It is also respectfully prayed that this Honorable Court refer the check, Exhibit A, to the City
Fiscal's Office for appropriate criminal action against the plaintiff-appellant if the facts so
warrant.
Subsequently, in a petition signed by plaintiff-appellant Enrique P. Montinola dated February 27,
1950, he asked this Court to allow him to withdraw the original check (Exh. A) for him to keep,
expressing his willingness to submit it to the court whenever needed for examination and verification.
The bank on March 2, 1950 opposed the said petition on the ground that inasmuch as the
appellant's cause of action in this case is based on the said check, it is absolutely necessary for the
court to examine the original in order to see the actual alterations supposedly made thereon, and
that should this Court grant the prayer contained in the bank's brief that the check be later referred to
the city fiscal for appropriate action, said check may no longer be available if the appellant is allowed
to withdraw said document. In view of said opposition this Court resolution of March 6, 1950, denied
said petition for withdrawal.
Acting upon the petition contained in the bank's brief already mentioned, once the decision becomes
final, let the Clerk of Court transmit to the city fiscal the check (Exh. A) together with all pertinent
papers and documents in this case, for any action he may deem proper in the premises.
G.R. No. L-17845 April 27, 1967
INTESTATE ESTATE OF VICTOR SEVILLA. SIMEON SADAYA, petitioner,
vs.
FRANCISCO SEVILLA, respondent.
Belen Law Offices for petitioner.
Poblador, Cruz & Nazareno for respondent.
SANCHEZ, J .:
On March 28, 1949, Victor Sevilla, Oscar Varona and Simeon Sadaya executed, jointly and
severally, in favor of the Bank of the Philippine Islands, or its order, a promissory note for
P15,000.00 with interest at 8% per annum, payable on demand. The entire, amount of
P15,000.00, proceeds of the promissory note, was received from the bank by Oscar Varona
alone. Victor Sevilla and Simeon Sadaya signed the promissory note as co-makers only as a
favor to Oscar Varona. Payments were made on account. As of June 15, 1950, the outstanding
balance stood P4,850.00. No payment thereafter made.
On October 6, 1952, the bank collected from Sadaya the foregoing balance which, together with
interest, totalled P5,416.12. Varona failed to reimburse Sadaya despite repeated demands.
Victor Sevilla died. Intestate estate proceedings were started in the Court of First Instance of
Rizal, Special Proceeding No. 1518. Francisco Sevilla was named administrator.
In Special Proceeding No. 1518, Sadaya filed a creditor's claim for the above sum of P5,746.12,
plus attorneys fees in the sum of P1,500.00. The administrator resisted the claim upon the
averment that the deceased Victor Sevilla "did not receive any amount as consideration for the
promissory note," but signed it only "as surety for Oscar Varona".
On June 5, 1957, the trial court issued an order admitting the claim of Simeon Sadaya in the
amount of P5,746.12, and directing the administrator to pay the same from any available funds
belonging to the estate of the deceased Victor Sevilla.
The motion to reconsider having been overruled, the administrator appealed.
1
The Court of
Appeals, in a decision promulgated on July, 15, 1960, voted to set aside the order appealed
from and to disapprove and disallow "appellee's claim of P5,746.12 against the intestate estate."
The case is now before this Court on certiorari to review the judgment of the Court of Appeals.
Sadaya's brief here seeks reversal of the appellate court's decision and prays that his claim "in
the amount of 50% of P5,746.12, or P2,873.06, against the intestate estate of the deceased
Victor Sevilla," be approved.
1. That Victor Sevilla and Simeon Sadaya were joint and several accommodation makers of the
15,000.00-peso promissory note in favor of the Bank of the Philippine Islands, need not be
essayed. As such accommodation the makers, the individual obligation of each of them to the
bank is no different from, and no greater and no less than, that contract by Oscar Varona. For,
while these two did not receive value on the promissory note, they executed the same with, and
for the purpose of lending their names to, Oscar Varona. Their liability to the bank upon the
explicit terms of the promissory note is joint and several.
2
Better yet, the bank could have
pursued its right to collect the unpaid balance against either Sevilla or Sadaya. And the fact is
that one of the last two, Simeon Sadaya, paid that balance.
2. It is beyond debate that Simeon Sadaya could have sought reimbursement of the total
amount paid from Oscar Varona. This is but right and just. Varona received full value of the
promissory note.
3
Sadaya received nothing therefrom. He paid the bank because he was a joint
and several obligor. The least that can be said is that, as between Varona and Sadaya, there is
an implied contract of indemnity. And Varona is bound by the obligation to reimburse Sadaya.
4

3. The common creditor, the Bank of the Philippine Islands, now out of the way, we first look into
the relations inter se amongst the three consigners of the promissory note. Their relations vis-a-
vis the Bank, we repeat, is that of joint and several obligors. But can the same thing be said
about the relations of the three consigners, in respect to each other?
Surely enough, as amongst the three, the obligation of Varona and Sevilla to Sadaya who paid
can not be joint and several. For, indeed, had payment been made by Oscar Varona, instead of
Simeon Sadaya, Varona could not have had reason to seek reimbursement from either Sevilla
or Sadaya, or both. After all, the proceeds of the loan went to Varona and the other two received
nothing therefrom.
4. On principle, a solidary accommodation maker who made payment has the right to
contribution, from his co-accommodation maker, in the absence of agreement to the contrary
between them, and subject to conditions imposed by law. This right springs from an implied
promise between the accommodation makers to share equallythe burdens that may ensue from
their having consented to stamp their signatures on the promissory note.
5
For having lent their
signatures to the principal debtor, they clearly placed themselves in so far as payment made
by one may create liability on the other in the category of mere joint grantors of the
former.
6
This is as it should be. Not one of them benefited by the promissory note. They stand
on the same footing. In misfortune, their burdens should be equally spread.
Manresa, commenting on Article 1844 of the Civil Code of Spain,
7
which is substantially
reproduced in Article 2073
8
of our Civil Code, on this point stated:
Otros, como Pothier, entienden que, si bien el principio es evidente enestricto concepto
juridico, se han extremado sus consecuencias hasta el punto de que estas son contrarias,
no solo a la logica, sino tambien a la equidad, que debe ser el alma del Derecho, como ha
dicho Laurent.
Esa accion sostienen no nace de la fianza, pues, en efecto, el hecho de afianzar una
misma deuda no crea ningun vinculo juridico, ni ninguna razon de obligar entre los fiadores,
sino que trae, por el contrario, su origen de una acto posterior, cual es el pago de toda la
deuda realizado por uno de ellos, y la equdad, no permite que los denias fiadores, que
igualmente estaban estaban obligos a dicho pago, se aprovenchen de ese acto en perjuico
del que lo realozo.
Lo cierto es que esa accion concedida al fiador nace, si, del hecho del pago, pero es
consecuencia del beneficio o del derecho de division, como tenemos ya dicho. En efecto,
por virtud de esta todos los cofiadores vienen obligados a contribuir al pago de parte que a
cada uno corresponde. De ese obligacion, contraida por todos ellos, se libran los que no han
pagado por consecuencia del acto realizado por el que pago, y si bien este no hizo mas
que cumplir el deber que el contracto de fianza le imponia de responder de todo el debito
cuando no limito su obligacion a parte alguna del mismo, dicho acto redunda en beneficio de
los otros cofiadores los cuales se aprovechan de el para quedar desligados de todo
compromiso con el acreedor.
9

5. And now, to the requisites before one accommodation maker can seek reimbursement from a
co-accommodation maker.
By Article 18 of the Civil Code in matters not covered by the special laws, "their deficiency shall
be supplied by the provisions of this Code". Nothing extant in the Negotiable Instruments Law
would define the right of one accommodation maker to seek reimbursement from another.
Perforce, we must go to the Civil Code.1wph1.t
Because Sevilla and Sadaya, in themselves, are but co-guarantors of Varona, their case comes
within the ambit of Article 2073 of the Civil Code which reads:
ART. 2073. When there are two or more guarantors of the same debtor and for the same
debt, the one among them who has paid may demand of each of the others the share which
is proportionally owing from him.
If any of the guarantors should be insolvent, his share shall be borne by the others, including
the payer, in the same proportion.
The provisions of this article shall not be applicable, unless the payment has been made in
virtue of a judicial demand or unless the principal debtor is insolvent.
10

As Mr. Justice Street puts it: "[T]hat article deals with the situation which arises when one surety
has paid the debt to the creditor and is seeking contribution from his cosureties."
11

Not that the requirements in paragraph 3, Article 2073, just quoted, are devoid of cogent reason.
Says Manresa:
12

c) Requisitos para el ejercicio del derecho de reintegro o de reembolso derivado de la
corresponsabilidad de los cofiadores.
La tercera de las prescripciones que comprende el articulo se refiere a los requisitos que
deben concurrir para que pueda tener lugar lo dispuesto en el mismo. Ese derecho que
concede al fiador para reintegrarse directamente de los fiadores de lo que pago por ellos en
vez de dirigir su reclamacion contra el deudor, es un beneficio otorgado por la ley solo ell
dos casos determinados, cuya justificacion resulta evidenciada desde luego; y esa limitacion
este debidamente aconsejada por una razon de prudencia que no puede desconocerse, cual
es la de evitar que por la mera voluntad de uno de los cofiadores pueda hacerse surgir la
accion de reintegro contra los demas en prejuicio de los mismos.
El perjuicio que con tal motivo puede inferirse a los cofiadores es bien notorio, pues teniendo
en primer termino el fiador que paga por el deudor el derecho de indemnizacion contra este,
sancionado por el art. 1,838, es de todo punto indudable que ejercitando esta accion pueden
quedar libres de toda responsabilidad los demas cofiadores si, a consecuencia de ella,
indemniza el fiado a aquel en los terminos establecidos en el expresado articulo. Por el
contrario de prescindir de dicho derecho el fiador, reclamando de los confiadores en primer
lugar el oportuno reintegro, estos en tendrian mas remedio que satisfacer sus ductares
respectivas, repitiendo despues por ellas contra el deudor con la imposicion de las molestias
y gastos consiguientes.
No es aventurado asegurar que si el fiador que paga pudiera libremente utilizar uno u otro
de dichos derechos, el de indemnizacion por el deudor y el del reintegro por los cofiadores,
indudablemente optaria siempre y en todo caso por el segundo, puesto que mucha mas
garantias de solvencia y mucha mas seguridad del cobro ha de encontrar en los fiadores
que en el deudor; y en la practica quedaria reducido el primero a la indemnizacion por el
deudor a los confiadores que hubieran hecho el reintegro, obligando a estos, sin excepcion
alguna, a soportar siempre los gastos y las molestias que anteriormente homos indicado.
Y para evitar estos perjuicios, la ley no ha podido menos de reducir el ejercicio de ese
derecho a los casos en que absolutamente sea indispensable.
13

6. All of the foregoing postulate the following rules: (1) A joint and several accommodation
maker of a negotiable promissory note may demand from the principal debtor reimbursement for
the amount that he paid to the payee; and (2) a joint and several accommodation maker who
pays on the said promissory note may directly demand reimbursement from his co-
accommodation maker without first directing his action against the principal debtor provided that
(a) he made the payment by virtue of a judicial demand, or (b) a principal debtor is insolvent.
The Court of Appeals found that Sadaya's payment to the bank "was made voluntarily and
without any judicial demand," and that "there is an absolute absence of evidence showing that
Varona is insolvent". This combination of fact and lack of fact epitomizes the fatal distance
between payment by Sadaya and Sadaya's right to demand of Sevilla "the share which is
proportionately owing from him."
For the reasons given, the judgment of the Court of Appeals under review is hereby affirmed.
No costs. So ordered.
G.R. No. 80599 September 15, 1989
ERNESTINA CRISOLOGO-JOSE, petitioner,
vs.
COURT OF APPEALS and RICARDO S. SANTOS, JR. in his own behalf and as Vice-President
for Sales of Mover Enterprises, Inc., respondents.
Melquiades P. de Leon for petitioner.
Rogelio A. Ajes for private respondent.

REGALADO, J .:
Petitioner seeks the annulment of the decision
1
of respondent Court of Appeals, promulgated on
September 8, 1987, which reversed the decision of the trial Court
2
dismissing the complaint for
consignation filed by therein plaintiff Ricardo S. Santos, Jr.
The parties are substantially agreed on the following facts as found by both lower courts:
In 1980, plaintiff Ricardo S. Santos, Jr. was the vice-president of Mover Enterprises,
Inc. in-charge of marketing and sales; and the president of the said corporation was
Atty. Oscar Z. Benares. On April 30, 1980, Atty. Benares, in accommodation of his
clients, the spouses Jaime and Clarita Ong, issued Check No. 093553 drawn against
Traders Royal Bank, dated June 14, 1980, in the amount of P45,000.00 (Exh- 'I')
payable to defendant Ernestina Crisologo-Jose. Since the check was under the
account of Mover Enterprises, Inc., the same was to be signed by its president, Atty.
Oscar Z. Benares, and the treasurer of the said corporation. However, since at that
time, the treasurer of Mover Enterprises was not available, Atty. Benares prevailed
upon the plaintiff, Ricardo S. Santos, Jr., to sign the aforesaid chEck as an alternate
story. Plaintiff Ricardo S. Santos, Jr. did sign the check.
It appears that the check (Exh. '1') was issued to defendant Ernestina Crisologo-Jose
in consideration of the waiver or quitclaim by said defendant over a certain property
which the Government Service Insurance System (GSIS) agreed to sell to the clients
of Atty. Oscar Benares, the spouses Jaime and Clarita Ong, with the understanding
that upon approval by the GSIS of the compromise agreement with the spouses Ong,
the check will be encashed accordingly. However, since the compromise agreement
was not approved within the expected period of time, the aforesaid check for
P45,000.00 (Exh. '1') was replaced by Atty. Benares with another Traders Royal
Bank cheek bearing No. 379299 dated August 10, 1980, in the same amount of
P45,000.00 (Exhs. 'A' and '2'), also payable to the defendant Jose. This replacement
check was also signed by Atty. Oscar Z. Benares and by the plaintiff Ricardo S.
Santos, Jr. When defendant deposited this replacement check (Exhs. 'A' and '2') with
her account at Family Savings Bank, Mayon Branch, it was dishonored for
insufficiency of funds. A subsequent redepositing of the said check was likewise
dishonored by the bank for the same reason. Hence, defendant through counsel was
constrained to file a criminal complaint for violation of Batas Pambansa Blg. 22 with
the Quezon City Fiscal's Office against Atty. Oscar Z. Benares and plaintiff Ricardo
S. Santos, Jr. The investigating Assistant City Fiscal, Alfonso Llamas, accordingly
filed an amended information with the court charging both Oscar Benares and
Ricardo S. Santos, Jr., for violation of Batas Pambansa Blg. 22 docketed as Criminal
Case No. Q-14867 of then Court of First Instance of Rizal, Quezon City.
Meanwhile, during the preliminary investigation of the criminal charge against
Benares and the plaintiff herein, before Assistant City Fiscal Alfonso T. Llamas,
plaintiff Ricardo S. Santos, Jr. tendered cashier's check No. CC 160152 for
P45,000.00 dated April 10, 1981 to the defendant Ernestina Crisologo-Jose, the
complainant in that criminal case. The defendant refused to receive the cashier's
check in payment of the dishonored check in the amount of P45,000.00. Hence,
plaintiff encashed the aforesaid cashier's check and subsequently deposited said
amount of P45,000.00 with the Clerk of Court on August 14, 1981 (Exhs. 'D' and 'E').
Incidentally, the cashier's check adverted to above was purchased by Atty. Oscar Z.
Benares and given to the plaintiff herein to be applied in payment of the dishonored
check.
3

After trial, the court a quo, holding that it was "not persuaded to believe that consignation referred to
in Article 1256 of the Civil Code is applicable to this case," rendered judgment dismissing plaintiff s
complaint and defendant's counterclaim.
4

As earlier stated, respondent court reversed and set aside said judgment of dismissal and revived
the complaint for consignation, directing the trial court to give due course thereto.
Hence, the instant petition, the assignment of errors wherein are prefatorily stated and
discussed seriatim.
1. Petitioner contends that respondent Court of Appeals erred in holding that private
respondent, one of the signatories of the check issued under the account of Mover
Enterprises, Inc., is an accommodation party under the Negotiable Instruments Law
and a debtor of petitioner to the extent of the amount of said check.
Petitioner avers that the accommodation party in this case is Mover Enterprises, Inc. and not private
respondent who merely signed the check in question in a representative capacity, that is, as vice-
president of said corporation, hence he is not liable thereon under the Negotiable Instruments Law.
The pertinent provision of said law referred to provides:
Sec. 29. Liability of accommodation party an accommodation party is one who has
signed the instrument as maker, drawer, acceptor, or indorser, without receiving
value therefor, and for the purpose of lending his name to some other person. Such a
person is liable on the instrument to a holder for value, notwithstanding such holder,
at the time of taking the instrument, knew him to be only an accommodation party.
Consequently, to be considered an accommodation party, a person must (1) be a party to the
instrument, signing as maker, drawer, acceptor, or indorser, (2) not receive value therefor, and (3)
sign for the purpose of lending his name for the credit of some other person.
Based on the foregoing requisites, it is not a valid defense that the accommodation party did not
receive any valuable consideration when he executed the instrument. From the standpoint of
contract law, he differs from the ordinary concept of a debtor therein in the sense that he has not
received any valuable consideration for the instrument he signs. Nevertheless, he is liable to a
holder for value as if the contract was not for accommodation
5
in whatever capacity such
accommodation party signed the instrument, whether primarily or secondarily. Thus, it has been held that
in lending his name to the accommodated party, the accommodation party is in effect a surety for the
latter.
6

Assuming arguendo that Mover Enterprises, Inc. is the accommodation party in this case, as
petitioner suggests, the inevitable question is whether or not it may be held liable on the
accommodation instrument, that is, the check issued in favor of herein petitioner.
We hold in the negative.
The aforequoted provision of the Negotiable Instruments Law which holds an accommodation party
liable on the instrument to a holder for value, although such holder at the time of taking the
instrument knew him to be only an accommodation party, does not include nor apply to corporations
which are accommodation parties.
7
This is because the issue or indorsement of negotiable paper by a
corporation without consideration and for the accommodation of another is ultra vires.
8
Hence, one who
has taken the instrument with knowledge of the accommodation nature thereof cannot recover against a
corporation where it is only an accommodation party. If the form of the instrument, or the nature of the
transaction, is such as to charge the indorsee with knowledge that the issue or indorsement of the
instrument by the corporation is for the accommodation of another, he cannot recover against the
corporation thereon.
9

By way of exception, an officer or agent of a corporation shall have the power to execute or indorse
a negotiable paper in the name of the corporation for the accommodation of a third person only if
specifically authorized to do so.
10
Corollarily, corporate officers, such as the president and vice-
president, have no power to execute for mere accommodation a negotiable instrument of the corporation
for their individual debts or transactions arising from or in relation to matters in which the corporation has
no legitimate concern. Since such accommodation paper cannot thus be enforced against the
corporation, especially since it is not involved in any aspect of the corporate business or operations, the
inescapable conclusion in law and in logic is that the signatories thereof shall be personally liable
therefor, as well as the consequences arising from their acts in connection therewith.
The instant case falls squarely within the purview of the aforesaid decisional rules. If we indulge
petitioner in her aforesaid postulation, then she is effectively barred from recovering from Mover
Enterprises, Inc. the value of the check. Be that as it may, petitioner is not without recourse.
The fact that for lack of capacity the corporation is not bound by an accommodation paper does not
thereby absolve, but should render personally liable, the signatories of said instrument where the
facts show that the accommodation involved was for their personal account, undertaking or purpose
and the creditor was aware thereof.
Petitioner, as hereinbefore explained, was evidently charged with the knowledge that the cheek was
issued at the instance and for the personal account of Atty. Benares who merely prevailed upon
respondent Santos to act as co-signatory in accordance with the arrangement of the corporation with
its depository bank. That it was a personal undertaking of said corporate officers was apparent to
petitioner by reason of her personal involvement in the financial arrangement and the fact that, while
it was the corporation's check which was issued to her for the amount involved, she actually had no
transaction directly with said corporation.
There should be no legal obstacle, therefore, to petitioner's claims being directed personally against
Atty. Oscar Z. Benares and respondent Ricardo S. Santos, Jr., president and vice-president,
respectively, of Mover Enterprises, Inc.
2. On her second assignment of error, petitioner argues that the Court of Appeals
erred in holding that the consignation of the sum of P45,000.00, made by private
respondent after his tender of payment was refused by petitioner, was proper under
Article 1256 of the Civil Code.
Petitioner's submission is that no creditor-debtor relationship exists between the parties, hence
consignation is not proper. Concomitantly, this argument was premised on the assumption that
private respondent Santos is not an accommodation party.
As previously discussed, however, respondent Santos is an accommodation party and is, therefore,
liable for the value of the check. The fact that he was only a co-signatory does not detract from his
personal liability. A co-maker or co-drawer under the circumstances in this case is as much an
accommodation party as the other co-signatory or, for that matter, as a lone signatory in an
accommodation instrument. Under the doctrine inPhilippine Bank of Commerce vs. Aruego, supra,
he is in effect a co-surety for the accommodated party with whom he and his co-signatory, as the
other co-surety, assume solidary liability ex lege for the debt involved. With the dishonor of the
check, there was created a debtor-creditor relationship, as between Atty. Benares and respondent
Santos, on the one hand, and petitioner, on the other. This circumstance enables respondent Santos
to resort to an action of consignation where his tender of payment had been refused by petitioner.
We interpose the caveat, however, that by holding that the remedy of consignation is proper under
the given circumstances, we do not thereby rule that all the operative facts for consignation which
would produce the effect of payment are present in this case. Those are factual issues that are not
clear in the records before us and which are for the Regional Trial Court of Quezon City to ascertain
in Civil Case No. Q-33160, for which reason it has advisedly been directed by respondent court to
give due course to the complaint for consignation, and which would be subject to such issues or
claims as may be raised by defendant and the counterclaim filed therein which is hereby ordered
similarly revived.
3. That respondent court virtually prejudged Criminal Case No. Q-14687 of the
Regional Trial Court of Quezon City filed against private respondent for violation of
Batas Pambansa Blg. 22, by holding that no criminal liability had yet attached to
private respondent when he deposited with the court the amount of P45,000.00 is the
final plaint of petitioner.
We sustain petitioner on this score.
Indeed, respondent court went beyond the ratiocination called for in the appeal to it in CA-G.R. CV.
No. 05464. In its own decision therein, it declared that "(t)he lone issue dwells in the question of
whether an accommodation party can validly consign the amount of the debt due with the court after
his tender of payment was refused by the creditor." Yet, from the commercial and civil law aspects
determinative of said issue, it digressed into the merits of the aforesaid Criminal Case No. Q-14867,
thus:
Section 2 of B.P. 22 establishes the prima facie evidence of knowledge of such
insufficiency of funds or credit. Thus, the making, drawing and issuance of a check,
payment of which is refused by the drawee because of insufficient funds in or credit
with such bank is prima facie evidence of knowledge of insufficiency of funds or
credit, when the check is presented within 90 days from the date of the check.
It will be noted that the last part of Section 2 of B.P. 22 provides that the element of
knowledge of insufficiency of funds or credit is not present and, therefore, the crime
does not exist, when the drawer pays the holder the amount due or makes
arrangements for payment in full by the drawee of such check within five (5) banking
days after receiving notice that such check has not been paid by the drawee.
Based on the foregoing consideration, this Court finds that the plaintiff-appellant
acted within Ms legal rights when he consigned the amount of P45,000.00 on August
14, 1981, between August 7, 1981, the date when plaintiff-appellant receive (sic) the
notice of non-payment, and August 14, 1981, the date when the debt due was
deposited with the Clerk of Court (a Saturday and a Sunday which are not banking
days) intervened. The fifth banking day fell on August 14, 1981. Hence, no criminal
liability has yet attached to plaintiff-appellant when he deposited the amount of
P45,000.00 with the Court a quo on August 14, 1981.
11

That said observations made in the civil case at bar and the intrusion into the merits of the criminal
case pending in another court are improper do not have to be belabored. In the latter case, the
criminal trial court has to grapple with such factual issues as, for instance, whether or not the period
of five banking days had expired, in the process determining whether notice of dishonor should be
reckoned from any prior notice if any has been given or from receipt by private respondents of the
subpoena therein with supporting affidavits, if any, or from the first day of actual preliminary
investigation; and whether there was a justification for not making the requisite arrangements for
payment in full of such check by the drawee bank within the said period. These are matters alien to
the present controversy on tender and consignation of payment, where no such period and its legal
effects are involved.
These are aside from the considerations that the disputed period involved in the criminal case is only
a presumptive rule, juris tantum at that, to determine whether or not there was knowledge of
insufficiency of funds in or credit with the drawee bank; that payment of civil liability is not a mode for
extinguishment of criminal liability; and that the requisite quantum of evidence in the two types of
cases are not the same.
To repeat, the foregoing matters are properly addressed to the trial court in Criminal Case No. Q-
14867, the resolution of which should not be interfered with by respondent Court of Appeals at the
present posture of said case, much less preempted by the inappropriate and unnecessary holdings
in the aforequoted portion of the decision of said respondent court. Consequently, we modify the
decision of respondent court in CA-G.R. CV No. 05464 by setting aside and declaring without force
and effect its pronouncements and findings insofar as the merits of Criminal Case No. Q-14867 and
the liability of the accused therein are concerned.
WHEREFORE, subject to the aforesaid modifications, the judgment of respondent Court of Appeals
is AFFIRMED.
SO ORDERED.
G.R. No. 96160 June 17, 1992
STELCO MARKETING CORPORATION, petitioner,
vs.
HON. COURT OF APPEALS and STEELWELD CORPORATION OF THE PHILIPPINES,
INC., respondent.

NARVASA, c.J .:
Stelco Marketing Corporation is engaged in the distribution and sale to the public of structural steel
bars.
1
On seven (7) different occasions in September and October, 1980, it sold to RYL Construction,
Inc. quantities of steels bars of various sizes and rolls of G.I. wire. These bars and wire were delivered at
different places at the indication of RYL Construction, Inc. The aggregate price for the purchases was
P126,859.61.
Although the corresponding invoices issued by STELCO stipulated that RYL pay "COD" (cash on
delivery), the latter made no payments for the construction materials thus ordered and delivered
despite insistent demands for payment by the former.
On April 4, 1981, RYL gave to Armstrong, Industries described by STELCO as its "sister
corporation" and "manufacturing arm"
2
a check drawn against Metrobank in the amount of
P126,129.86, numbered 765380 and dated April 4, 1981. That check was a company check of another
corporation, Steelweld Corporation of the Philippines, signed by its President, Peter Rafael Limson, and
its Vice-President, Artemio Torres.
The check was issued by Limson at the behest of his friend, Romeo Y. Lim, President of RYL.
Romeo Lim had asked Limson, for financial assistance, and the latter had agreed to give Lim a
check only by way of accommodation, "only as guaranty but not to pay for anything."
3
Why the check
was made out in the amount of P126,129.86 is not explained. Anyway, the check was actually issued in
said amount of P126, 129.86, and as already stated, was given by R.Y. Lim to Armstrong Industries,
4
in
payment of an obligation. When the latter deposited the check at its bank, it was dishonored because
"drawn against insufficient funds."
5
When so deposited, the check bore two(2) endorsements, that of
"RYL Construction," followed by that of "Armstrong Industries."
6

On account of the dishonor of Metrobank Check No. 765380, and on complaint of Armstrong
Industries (through a Mr. Young), Rafael Limson and Artemio Torres were charged in the Regional
Trial Court of Manila with a violation of Batas Pambansa Bilang 22.
7
They were acquitted in a decision
rendered on June 28, 1984 "on the ground that the check in question was not issued by the drawer "to
apply on account for value," it being merely for accommodation purposes. 8The judgment however conditioned the
acquittal with the following pronouncement:
This is not however to release Steelweld Corporation from its liability under Sec. 29
of the Negotiable Instruments Law for having issued it for the accommodation of
Romeo Lim.
Eleven months or so later and some four (4) years after issuance of the check in question in
May, 1985, STELCO filed with the Regional Trial Court at Caloocan City a civil complaint
9
against
both RYL and STEELWELD for the recovery of the valued of the steel bars and wire sold to and delivered
to RYL (as already narrated) in the amount of P126,129.86, "plus 18% interest from August 20, 1980 . . .
(and) 25% of the total amount sought to be recovered as and by way of attorney's fees . . . ."
10
Among
the allegations of its complaint was that Metrobank Check No. 765380 above mentioned had been given
to it in payment of RYL's indebtedness, duly indorsed by R.Y. Lim.
11
A preliminary attachment was issued
by the trial court on the basis of the averments of the complaint but was shortly dissolved upon the filing
of a counter-bond by STEELWELD.
RYL could no longer be located and could not be served with
summons.
12
It never appeared. Only STEELWELD filed an answer, under date of July 16, 1985.
13
In
said pleading, it specifically denied the facts alleged in the complaint, the truth, according to Steelweld,
being basically that
1) STELCO "is a complete stranger to it;" it had "not entered into any transaction or business dealing
of any kind" with STELCO, the transactions described in the complaint having been solely and
exclusively between the plaintiff and RYL Construction;
2) the check in question was "only given to a certain R. Lim to be used as collateral for another
obligation . . . (but) in breach of his agreement (Lim) utilized and negotiated the check for another
purpose. . . .;
3) nevertheless, the check "is wholly inoperative since . . . Steelweld
. . . did not issue it for any valuable consideration either to R. Lim or to the plaintiff not to mention
also the fact that the said plaintiff failed to comply with the requirements of the law to hold the said
defendant (STEELWELD) liable
. . ."
Trial ensued upon these issues, after which judgment was rendered on June 26, 1986.
14
The
judgment sentenced "the defendant Steelweld Corporation to pay to . . . (Stelco Marketing Corporation)
the amount of P126,129.86 with legal rate of interest from May 9, 1985, when this case was instituted
until fully paid, plus another sum equivalent to 25% of the total amount due as and for attorney's fees . .
.
15
That disposition was justified in the judgment as follows:
16

There is no question, then, that as far as any commercial transaction is concerned
between plaintiff and defendant Steelweld no such transaction ever occurred.
Ordinarily, under civil law rules, there having been no transaction between them
involving the purchase of certain merchandise there would be no privity of contract
between them, and plaintiff will have no right to sue the defendant for payment of
said merchandise for the simple reason that the defendant did not order them, such
less receive them.
But we have here a case where the defendant Steelweld thru its President Peter
Rafael Limson admitted to have issued a check payable to cash in favor of his friend
Romeo Lim who was the President of RYL Construction by way of accommodation.
Under the Negotiable Instruments Law an accommodation party is liable.
Sec. 29. Liability of an accommodation party. An accommodation
party is one who has signed the instrument as maker, drawer,
acceptor, or indorser, without receiving value therefor, and for the
purpose of lending his name to some other person. Such a person is
liable on the instrument to a holder for value notwithstanding such
holder at the time of taking the instrument knew him to be only an
accommodation party.
From this adverse judgment STEELWELD appealed to the Court of Appeals
17
and there succeeded
in reversing the judgment. By Decision promulgated on May 29, 1990,
18
the Court of Appeals
19
ordered
"the complaint against appellant (STEELWELD) DISMISSED; (and the appellee, STELCO) to pay
appellant the sum of P15,000.00 as attorney's fees and cost of litigation, the suit . . . (being) a baseless
one that dragged appellant in court and caused it to incur attorney's fees and expense of litigation.
STELCO's motion for reconsideration was denied by the Appellate Tribunal's resolution dated
November 13, 1990.
20
The Court stressed that
. . . as far as Steelweld is concerned, there was no commercial transaction between
said appellant and appellee. Moreover, there is no evidence that appellee Stelco
Marketing became a holder for value. Nowhere in the check itself does the name of
Stelco Marketing appear as payee, indorsee or depositor thereof. Finally, appellee's
complaint is for the collection of the unpaid accounts for delivery of steels bars and
construction materials. It having been established that appellee had no commercial
transaction with appellant Stelco, appellee had no cause of action against said
appellant.
STELCO appealed to this Court in accordance with Rule 45 of the Rules of Court. In this Court it
seeks to make the following points in connection with its plea for the overthrow of the Appellate
Tribunal's aforesaid decision,viz.:
1) said decision is "not in accord with law and jurisprudence;"
2) "STELCO is a "holder" within the meaning of the Negotiable Instruments Law;"
3) "STELCO is a holder in due course of Metrobank Check No. 765380 . . . (and hence) holds the
same free from personal or equitable defense;" and
4) "Negotiation in breach of faith is a personal defense . . . (and hence) not effective as against a
holder in due course."
The points are not well taken.
The crucial question is whether or not STELCO ever became a holder in due course of Check No.
765380, a bearer instrument, within the contemplation of the Negotiable Instruments Law. It never
did.
STELCO evidently places much reliance on the pronouncement of the Regional Trial Court in
Criminal Case No. 66571,
21
that the acquittal of the two (2) accused (Limson and Torres) did not
operate "to release Steelweld Corporation from its liability under Sec. 29 of the Negotiable Instruments
Law for having issued . . . (the check) for the accommodation of Romeo Lim." The cited provision reads
as follows:
Sec. 29. Liability of accommodation party. An accommodation party is one who
has singed the instrument as maker, drawer, acceptor, or indorser, without receiving
valued therefor, and for the purpose of lending his name to some other person. Such
a person is liable on the instrument to a holder for value, notwithstanding such
holder, at the time of taking the instrument, knew him to be only an accommodation
party.
It is noteworthy that the Trial Court's pronouncement containing reference to said Section 29 did not
specify to whom STEELWELD, as accommodation party, is supposed to be liable; and certain it is
that neither said pronouncement nor any other part of the judgment of acquittal declared it liable to
STELCO.
"A holder in due course," says the law,
22
"is a holder who has taken the instrument
under the following conditions:
(a) That is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice that it
had been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no notice of any infirmity in the
instrument or defect in the title of the persons negotiating it.
To be sure, as regards an accommodation party (such as STEELWELD), the fourth condition, i.e.,
lack of notice of any infirmity in the instruments or defect in title of the persons negotiating it, has no
application. This is because Section 29 of the law above quoted preserves the right of recourse of a
"holder for value" against the accommodation party notwithstanding that "such holder, at the time of
taking the instrument, knew him to be only an accommodation
party."
23

Now, STELCO theorizes that it should be deemed a "holder for value" of STEELWELD's Check No.
765380 because the record shows it to have been in "actual possession" thereof; otherwise, it "could
not have presented, marked and introduced (said check) in evidence . . . before the court a quo."
"Besides," it adds, the check in question was presented by STELCO to the drawee bank for payment
through Armstrong Industries, the manufacturing arm of STELCO and its sister company."
24

The trouble is, there is no evidence whatever that STELCO's possession of Check No. 765380 ever
dated back to any time before the instrument's presentment and dishonor. There is no evidence
whatsoever that the check was ever given to it, or indorsed to it in any manner or form in payment of
an obligation or as security for an obligation, or for any other purpose before it was presented for
payment. On the contrary, the factual finding of the Court of Appeals, which by traditional precept is
normally conclusive on this Court, is that STELCO never became a holder for value and that
"(n)owhere in the check itself does the name of Stelco Marketing appear as payee, indorsee or
depositor thereof."
25

What the record shows is that: (1) the STEELWELD company check in question was given by its
president to R.Y. Lim; (2) it was given only by way of accommodation, to be "used as collateral for
another obligation;" (3) in breach of the agreement, however, R.Y. Lim indorsed the check to
Armstrong in payment of obligation; (4) Armstrong deposited the check to its account, after indorsing
it; (5) the check was dishonored. The record does not show any intervention or participation by
STELCO in any manner of form whatsoever in these transactions, or any communication of any sort
between STEELWELD and STELCO, or between either of them and Armstrong Industries, at any
time before the dishonor of the check.
The record does show that after the check had been deposited and dishonored, STELCO came into
possession of it in some way, and was able, several years after the dishonor of the check, to give it
in evidence at the trial of the civil case it had instituted against the drawers of the check (Limson and
Torres) and RYL. But, as already pointed out, possession of a negotiable instrument after
presentment and dishonor, or payment, is utterly inconsequential; it does not make the possessor a
holder for value within the meaning of the law; it gives rise to no liability on the part of the maker or
drawer and indorsers.
It is clear from the relevant circumstances that STELCO cannot be deemed a holder of the check for
value. It does not meet two of the essential requisites prescribed by the statute. It did not become
"the holder of it before it was overdue, and without notice that it had been previously dishonored,"
and it did not take the check "in good faith and for value."
26

Neither is there any evidence whatever that Armstrong Industries, to whom R.Y. Lim negotiated the
check accepted the instrument and attempted to encash it in behalf, and as agent of STELCO. On
the contrary, the indications are that Armstrong was really the intended payee of the check and was
the party actually injured by its dishonor; it was after all its representative (a Mr. Young) who
instituted the criminal prosecution of the drawers, Limson and Torres, albeit unsuccessfully.
The petitioner has failed to show any sufficient cause for modification or reversal of the challenged
judgment of the Court of Appeals which, on the contrary, appears to be entirely in accord with the
facts and the applicable law.
WHEREFORE, the petition is DENIED and the Decision of the Court of Appeals in CA-G.R. CV No.
13418 is AFFIRMED in toto. Costs against petitioner.
SO ORDERED
G.R. No. L-56169 June 26, 1992
TRAVEL-ON, INC., petitioner,
vs.
COURT OF APPEALS and ARTURO S. MIRANDA, respondents.
R E S O L U T I O N

FELICIANO, J .:
Petitioner Travel-On. Inc. ("Travel-On") is a travel agency selling airline tickets on commission basis
for and in behalf of different airline companies. Private respondent Arturo S. Miranda had a revolving
credit line with petitioner. He procured tickets from petitioner on behalf of airline passengers and
derived commissions therefrom.
On 14 June 1972, Travel-On filed suit before the Court of First Instance ("CFI") of Manila to collect
on six (6) checks issued by private respondent with a total face amount of P115,000.00. The
complaint, with a prayer for the issuance of a writ of preliminary attachment and attorney's fees,
averred that from 5 August 1969 to 16 January 1970, petitioner sold and delivered various airline
tickets to respondent at a total price of P278,201.57; that to settle said account, private respondent
paid various amounts in cash and in kind, and thereafter issued six (6) postdated checks amounting
to P115,000.00 which were all dishonored by the drawee banks. Travel-On further alleged that in
March 1972, private respondent made another payment of P10,000.00 reducing his indebtedness to
P105,000.00. The writ of attachment was granted by the court a quo.
In his answer, private respondent admitted having had transactions with Travel-On during the period
stipulated in the complaint. Private respondent, however, claimed that he had already fully paid and
even overpaid his obligations and that refunds were in fact due to him. He argued that he had issued
the postdated checks for purposes of accommodation, as he had in the past accorded similar favors
to petitioner. During the proceedings, private respondent contested several tickets alleged to have
been erroneously debited to his account. He claimed reimbursement of his alleged over payments,
plus litigation expenses, and exemplary and moral damages by reason of the allegedly improper
attachment of his properties.
In support of his theory that the checks were issued for accommodation, private respondent testified
that he had issued the checks in the name of Travel-On in order that its General Manager, Elita
Montilla, could show to Travel-On's Board of Directors that the accounts receivable of the company
were still good. He further stated that Elita Montilla tried to encash the same, but that these were
dishonored and were subsequently returned to him after the accommodation purpose had been
attained.
Travel-On's witness, Elita Montilla, on the other hand explained that the "accommodation" extended
to Travel-On by private respondent related to situations where one or more of its passengers needed
money in Hongkong, and upon request of Travel-On respondent would contact his friends in
Hongkong to advance Hongkong money to the passenger. The passenger then paid Travel-On upon
his return to Manila and which payment would be credited by Travel-On to respondent's running
account with it.
In its decision dated 31 January 1975, the court a quo ordered Travel-On to pay private respondent
the amount of P8,894.91 representing net overpayments by private respondent, moral damages of
P10,000.00 for the wrongful issuance of the writ of attachment and for the filing of this case,
P5,000.00 for attorney's fees and the costs of the suit.
The trial court ruled that private respondent's indebtedness to petitioner was not satisfactorily
established and that the postdated checks were issued not for the purpose of encashment to pay his
indebtedness but to accommodate the General Manager of Travel-On to enable her to show to the
Board of Directors that Travel-On was financially stable.
Petitioner filed a motion for reconsideration that was, however, denied by the trial court, which in fact
then increased the award of moral damages to P50,000.00.
On appeal, the Court of Appeals affirmed the decision of the trial court, but reduced the award of
moral damages to P20,000.00, with interest at the legal rate from the date of the filing of the Answer
on 28 August 1972.
Petitioner moved for reconsideration of the Court of Appeal's' decision, without success.
In the instant Petition for Review, it is urged that the postdated checks are per se evidence of liability
on the part of private respondent. Petitioner further argues that even assuming that the checks were
for accommodation, private respondent is still liable thereunder considering that petitioner is a holder
for value.
Both the trial and appellate courts had rejected the checks as evidence of indebtedness on the
ground that the various statements of account prepared by petitioner did not show that Private
respondent had an outstanding balance of P115,000.00 which is the total amount of the checks he
issued. It was pointed out that while the various exhibits of petitioner showed various accountabilities
of private respondent, they did not satisfactorily establish the amount of the outstanding
indebtedness of private respondent. The appellate court made much of the fact that the figures
representing private respondent's unpaid accounts found in the "Schedule of Outstanding Account"
dated 31 January 1970 did not tally with the figures found in the statement which showed private
respondent's transactions with petitioner for the years 1969 and 1970; that there was no satisfactory
explanation as to why the total outstanding amount of P278,432.74 was still used as basis in the
accounting of 7 April 1972 considering that according to the table of transactions for the year 1969
and 1970, the total unpaid account of private respondent amounted to P239,794.57.
We have, however, examined the record and it shows that the 7 April 1972 Statement of Account
had simply not been updated; that if we use as basis the figure as of 31 January 1970 which is
P278,432.74 and from it deduct P38,638.17 which represents some of the payments subsequently
made by private respondent, the figure P239,794.57 will be obtained.
Also, the fact alone that the various statements of account had variances in figures, simply did not
mean that private respondent had no more financial obligations to petitioner. It must be stressed that
private respondent's account with petitioner was a running or open one, which explains the varying
figures in each of the statements rendered as of a given date.
The appellate court erred in considering only the statements of account in determining whether
private respondent was indebted to petitioner under the checks. By doing so, it failed to give due
importance to the most telling piece of evidence of private respondent's indebtedness the checks
themselves which he had issued.
Contrary to the view held by the Court of Appeals, this Court finds that the checks are the all
important evidence of petitioner's case; that these checks clearly established private respondent's
indebtedness to petitioner; that private respondent was liable thereunder.
It is important to stress that a check which is regular on its face is deemed prima facie to have been
issued for a valuable consideration and every person whose signature appears thereon is deemed to
have become a party thereto for value.
1
Thus, the mere introduction of the instrument sued on in
evidence prima facie entitles the plaintiff to recovery. Further, the rule is quite settled that a negotiable
instrument is presumed to have been given or indorsed for a sufficient consideration unless otherwise
contradicted and overcome by other competent evidence.
2

In the case at bar, the Court of Appeals, contrary to these established rules, placed the burden of
proving the existence of valuable consideration upon petitioner. This cannot be countenanced; it was
up to private respondent to show that he had indeed issued the checks without sufficient
consideration. The Court considers that Private respondent was unable to rebut satisfactorily this
legal presumption. It must also be noted that those checks were issued immediately after a letter
demanding payment had been sent to private respondent by petitioner Travel-On.
The fact that all the checks issued by private respondent to petitioner were presented for payment by
the latter would lead to no other conclusion than that these checks were intended for encashment.
There is nothing in the checks themselves (or in any other document for that matter) that states
otherwise.
We are unable to accept the Court of Appeals' conclusion that the checks here involved were issued
for "accommodation" and that accordingly private respondent maker of those checks was not liable
thereon to petitioner payee of those checks.
In the first place, while the Negotiable Instruments Law does refer to accommodation transactions,
no such transaction was here shown. Section 29 of the Negotiable Instruments Law provides as
follows:
Sec. 29. Liability of accommodation party. An accommodation party is one who
has signed the instrument as maker, drawer, acceptor, or indorser, without receiving
value therefor, and for the purpose of lending his name to some other person. Such a
person is liable on the instrument to a holder for value, notwithstanding such holder,
at the time of taking the instrument, knew him to be only an accommodation party.
In accommodation transactions recognized by the Negotiable Instruments Law, an
accommodating party lends his credit to the accommodated party, by issuing or indorsing a
check which is held by a payee or indorsee as a holder in due course, who gave full value
therefor to the accommodated party. The latter, in other words, receives or realizes full value
which the accommodated party then must repay to the accommodating party, unless of
course the accommodating party intended to make a donation to the accommodated
party. But the accommodating party is bound on the check to the holder in due course who is
necessarily a third party and is not the accommodated party. Having issued or indorsed the
check, the accommodating party has warranted to the holder in due course that he will pay
the same according to its tenor.
3

In the case at bar, Travel-On was payee of all six (6) checks, it presented these checks for payment
at the drawee bank but the checks bounced. Travel-On obviously was not an accommodated party;
it realized no value on the checks which bounced.
Travel-On was entitled to the benefit of the statutory presumption that it was a holder in due
course,
4
that the checks were supported by valuable consideration.
5
Private respondent maker of the
checks did not successfully rebut these presumptions. The only evidence aliunde that private respondent
offered was his own self-serving uncorroborated testimony. He claimed that he had issued the checks to
Travel-On as payee to "accommodate" its General Manager who allegedly wished to show those checks
to the Board of Directors of Travel-On to "prove" that Travel-On's account receivables were somehow
"still good." It will be seen that this claim was in fact a claim that the checks were merely simulated, that
private respondent did not intend to bind himself thereon. Only evidence of the clearest and most
convincing kind will suffice for that purpose;
6
no such evidence was submitted by private respondent. The
latter's explanation was denied by Travel-On's General Manager; that explanation, in any case, appears
merely contrived and quite hollow to us. Upon the other hand, the "accommodation" or assistance
extended to Travel-On's passengers abroad as testified by petitioner's General Manager involved, not the
accommodation transactions recognized by the NIL, but rather the circumvention of then existing foreign
exchange regulations by passengers booked by Travel-On, which incidentally involved receipt of full
consideration by private respondent.
Thus, we believe and so hold that private respondent must be held liable on the six (6) checks here
involved. Those checks in themselves constituted evidence of indebtedness of private respondent,
evidence not successfully overturned or rebutted by private respondent.
Since the checks constitute the best evidence of private respondent's liability to petitioner Travel-On,
the amount of such liability is the face amount of the checks, reduced only by the P10,000.00 which
Travel-On admitted in its complaint to have been paid by private respondent sometime in March
1992.
The award of moral damages to Private respondent must be set aside, for the reason that
Petitioner's application for the writ of attachment rested on sufficient basis and no bad faith was
shown on the part of Travel-On. If anyone was in bad faith, it was private respondent who issued
bad checks and then pretended to have "accommodated" petitioner's General Manager by assisting
her in a supposed scheme to deceive petitioner's Board of Directors and to misrepresent Travel-On's
financial condition.
ACCORDINGLY, the Court Resolved to GRANT due course to the Petition for Review
on Certiorari and to REVERSE and SET ASIDE the Decision dated 22 October 1980 and the
Resolution of 23 January 1981 of the Court of Appeals, as well as the Decision dated 31 January
1975 of the trial court, and to enter a new decision requiring private respondent Arturo S. Miranda to
pay to petitioner Travel-On the amount of P105,000.00 with legal interest thereon from 14 June
1972, plus ten percent (10%) of the total amount due as attorney's fees. Costs against Private
respondent.
Gutierrez, Jr., Bidin, Davide, Jr. and Romero, JJ., concur.
[G.R. No. 112392. February 29, 2000]
BANK OF THE PHILIPPINE ISLANDS, petitioner, vs. COURT OF
APPEALS and BENJAMIN C. NAPIZA, respondents.
D E C I S I O N
YNARES-SANTIAGO, J .:
This is a petition for review on certiorari of the Decision
[1]
of the Court of
Appeals in CA-G.R. CV No. 37392 affirming in toto that of the Regional Trial
Court of Makati, Branch 139,
[2]
which dismissed the complaint filed by
petitioner Bank of the Philippine Islands against private respondent Benjamin
C. Napiza for sum of money. Sdaad
On September 3, 1987, private respondent deposited in Foreign Currency
Deposit Unit (FCDU) Savings Account No. 028-187
[3]
which he maintained in
petitioner banks Buendia Avenue Extension Branch, Continental Bank
Managers Check No. 00014757
[4]
dated August 17, 1984, payable to "cash" in
the amount of Two Thousand Five Hundred Dollars ($2,500.00) and duly
endorsed by private respondent on its dorsal side.
[5]
It appears that the check
belonged to a certain Henry Chan who went to the office of private respondent
and requested him to deposit the check in his dollar account by way of
accommodation and for the purpose of clearing the same. Private respondent
acceded, and agreed to deliver to Chan a signed blank withdrawal slip, with
the understanding that as soon as the check is cleared, both of them would go
to the bank to withdraw the amount of the check upon private respondents
presentation to the bank of his passbook.
Using the blank withdrawal slip given by private respondent to Chan, on
October 23, 1984, one Ruben Gayon, Jr. was able to withdraw the amount of
$2,541.67 from FCDU Savings Account No. 028-187. Notably, the withdrawal
slip shows that the amount was payable to Ramon A. de Guzman and Agnes
C. de Guzman and was duly initialed by the branch assistant manager,
Teresita Lindo.
[6]

On November 20, 1984, petitioner received communication from the Wells
Fargo Bank International of New York that the said check deposited by private
respondent was a counterfeit check
[7]
because it was "not of the type or style of
checks issued by Continental Bank International."
[8]
Consequently, Mr. Ariel
Reyes, the manager of petitioners Buendia Avenue Extension Branch,
instructed one of its employees, Benjamin D. Napiza IV, who is private
respondents son, to inform his father that the check bounced.
[9]
Reyes himself
sent a telegram to private respondent regarding the dishonor of the check. In
turn, private respondents son wrote to Reyes stating that the check had been
assigned "for encashment" to Ramon A. de Guzman and/or Agnes C. de
Guzman after it shall have been cleared upon instruction of Chan. He also
said that upon learning of the dishonor of the check, his father immediately
tried to contact Chan but the latter was out of town.
[10]

Private respondents son undertook to return the amount of $2,500.00 to
petitioner bank. On December 18, 1984, Reyes reminded private respondent
of his sons promise and warned that should he fail to return that amount
within seven (7) days, the matter would be referred to the banks lawyers for
appropriate action to protect the banks interest.
[11]
This was followed by a letter
of the banks lawyer dated April 8, 1985 demanding the return of the
$2,500.00.
[12]

In reply, private respondent wrote petitioners counsel on April 20,
1985
[13]
stating that he deposited the check "for clearing purposes" only to
accommodate Chan. He added:
"Further, please take notice that said check was deposited on
September 3, 1984 and withdrawn on October 23, 1984, or a total
period of fifty (50) days had elapsed at the time of withdrawal.
Also, it may not be amiss to mention here that I merely signed an
authority to withdraw said deposit subject to its clearing, the
reason why the transaction is not reflected in the passbook of the
account. Besides, I did not receive its proceeds as may be
gleaned from the withdrawal slip under the captioned signature of
recipient.
If at all, my obligation on the transaction is moral in nature, which
(sic) I have been and is (sic) still exerting utmost and maximum
efforts to collect from Mr. Henry Chan who is directly liable under
the circumstances. Scsdaad
xxx......xxx......xxx."
On August 12, 1986, petitioner filed a complaint against private respondent,
praying for the return of the amount of $2,500.00 or the prevailing peso
equivalent plus legal interest from date of demand to date of full payment, a
sum equivalent to 20% of the total amount due as attorney's fees, and
litigation and/or costs of suit.
Private respondent filed his answer, admitting that he indeed signed a "blank"
withdrawal slip with the understanding that the amount deposited would be
withdrawn only after the check in question has been cleared. He likewise
alleged that he instructed the party to whom he issued the signed blank
withdrawal slip to return it to him after the bank drafts clearance so that he
could lend that party his passbook for the purpose of withdrawing the amount
of $2,500.00. However, without his knowledge, said party was able to
withdraw the amount of $2,541.67 from his dollar savings account through
collusion with one of petitioners employees. Private respondent added that he
had "given the Plaintiff fifty one (51) days with which to clear the bank draft in
question." Petitioner should have disallowed the withdrawal because his
passbook was not presented. He claimed that petitioner had no one to blame
except itself "for being grossly negligent;" in fact, it had allegedly admitted
having paid the amount in the check "by mistake" x x x "if not altogether due
to collusion and/or bad faith on the part of (its) employees." Charging
petitioner with "apparent ignorance of routine bank procedures," by way of
counterclaim, private respondent prayed for moral damages of P100,000.00,
exemplary damages of P50,000.00 and attorneys fees of 30% of whatever
amount that would be awarded to him plus an honorarium of P500.00 per
appearance in court.
Private respondent also filed a motion for admission of a third party complaint
against Chan. He alleged that "thru strategem and/or manipulation," Chan
was able to withdraw the amount of $2,500.00 even without private
respondents passbook. Thus, private respondent prayed that third party
defendant Chan be made to refund to him the amount withdrawn and to pay
attorneys fees of P5,000.00 plus P300.00 honorarium per appearance.
Petitioner filed a comment on the motion for leave of court to admit the third
party complaint, wherein it asserted that per paragraph 2 of the Rules and
Regulations governing BPI savings accounts, private respondent alone was
liable "for the value of the credit given on account of the draft or check
deposited." It contended that private respondent was estopped from
disclaiming liability because he himself authorized the withdrawal of the
amount by signing the withdrawal slip. Petitioner prayed for the denial of the
said motion so as not to unduly delay the disposition of the main case
asserting that private respondents claim could be ventilated in another case.
Private respondent replied that for the parties to obtain complete relief and to
avoid multiplicity of suits, the motion to admit third party complaint should be
granted. Meanwhile, the trial court issued orders on August 25, 1987 and
October 28, 1987 directing private respondent to actively participate in
locating Chan. After private respondent failed to comply, the trial court, on
May 18, 1988, dismissed the third party complaint without prejudice.
On November 4, 1991, a decision was rendered dismissing the complaint.
The lower court held that petitioner could not hold private respondent liable
based on the checks face value alone. To so hold him liable "would
render inutile the requirement of clearance from the drawee bank before the
value of a particular foreign check or draft can be credited to the account of a
depositor making such deposit." The lower court further held that "it was
incumbent upon the petitioner to credit the value of the check in question to
the account of the private respondent only upon receipt of the notice of final
payment and should not have authorized the withdrawal from the latters
account of the value or proceeds of the check." Having admitted that it
committed a "mistake" in not waiting for the clearance of the check before
authorizing the withdrawal of its value or proceeds, petitioner should suffer the
resultant loss. Supremax
On appeal, the Court of Appeals affirmed the lower courts decision. The
appellate court held that petitioner committed "clear gross negligence" in
allowing Ruben Gayon, Jr. to withdraw the money without presenting private
respondents passbook and, before the check was cleared and in crediting the
amount indicated therein in private respondents account. It stressed that the
mere deposit of a check in private respondents account did not mean that the
check was already private respondents property. The check still had to be
cleared and its proceeds can only be withdrawn upon presentation of a
passbook in accordance with the banks rules and regulations. Furthermore,
petitioners contention that private respondent warranted the checks
genuineness by endorsing it is untenable for it would render useless the
clearance requirement. Likewise, the requirement of presentation of a
passbook to ascertain the propriety of the accounting reflected would be a
meaningless exercise. After all, these requirements are designed to protect
the bank from deception or fraud.
The Court of Appeals cited the case of Roman Catholic Bishop of Malolos,
Inc. v. IAC,
[14]
where this Court stated that a personal check is not legal tender
or money, and held that the check deposited in this case must be cleared
before its value could be properly transferred to private respondent's account.
Without filing a motion for the reconsideration of the Court of Appeals
Decision, petitioner filed this petition for review on certiorari, raising the
following issues:
1.......WHETHER OR NOT RESPONDENT NAPIZA IS LIABLE
UNDER HIS WARRANTIES AS A GENERAL INDORSER.
2.......WHETHER OR NOT A CONTRACT OF AGENCY WAS
CREATED BETWEEN RESPONDENT NAPIZA AND RUBEN
GAYON.
3.......WHETHER OR NOT PETITIONER WAS GROSSLY
NEGLIGENT IN ALLOWING THE WITHDRAWAL.
Petitioner claims that private respondent, having affixed his signature at the
dorsal side of the check, should be liable for the amount stated therein in
accordance with the following provision of the Negotiable Instruments Law
(Act No. 2031):
"SEC. 66. Liability of general indorser. 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 section; and
(b)......That the instrument is at the time of his indorsement, valid
and subsisting.
And, in addition, he engages that on due presentment, it shall be
accepted or paid, or both, as the case may be, according to its
tenor, and that if it be dishonored, and the necessary proceedings
on dishonor be duly taken, he will pay the amount thereof to the
holder, or to any subsequent indorser who may be compelled to
pay it."
Section 65, on the other hand, provides for the following warranties of a
person negotiating an instrument by delivery or by qualified indorsement: (a)
that the instrument is genuine and in all respects what it purports to be; (b)
that he has a good title to it, and (c) that all prior parties had capacity to
contract.
[15]
In People v. Maniego,
[16]
this Court described the liabilities of an
indorser as follows: Juris
"Appellants contention that as mere indorser, she may not be
liable on account of the dishonor of the checks indorsed by her, is
likewise untenable. Under the law, the holder or last indorsee of a
negotiable instrument has the right to enforce payment of the
instrument for the full amount thereof against all parties liable
thereon. Among the parties liable thereon is an indorser of the
instrument, i.e., a person placing his signature upon an
instrument otherwise than as a maker, drawer or acceptor * *
unless he clearly indicated by appropriate words his intention to
be bound in some other capacity. Such an indorser who indorses
without qualification, inter alia engages that on due presentment,
* * (the instrument) shall be accepted or paid, or both, as the case
may be, according to its tenor, and that if it be dishonored, and
the necessary proceedings on dishonor be duly taken, he will pay
the amount thereof to the holder, or any subsequent indorser who
may be compelled to pay it. Maniego may also be deemed an
accommodation party in the light of the facts, i.e., a person 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. As such, she is under the
law liable on the instrument to a holder for value, notwithstanding
such holder at the time of taking the instrument knew * * (her) to
be only an accommodation party, although she has the right, after
paying the holder, to obtain reimbursement from the party
accommodated, since the relation between them is in effect that
of principal and surety, the accommodation party being the
surety."
It is thus clear that ordinarily private respondent may be held liable as an
indorser of the check or even as an accommodation party.
[17]
However, to hold
private respondent liable for the amount of the check he deposited by the
strict application of the law and without considering the attending
circumstances in the case would result in an injustice and in the erosion of the
public trust in the banking system. The interest of justice thus demands
looking into the events that led to the encashment of the check.
Petitioner asserts that by signing the withdrawal slip, private respondent
"presented the opportunity for the withdrawal of the amount in question."
Petitioner relied "on the genuine signature on the withdrawal slip, the
personality of private respondents son and the lapse of more than fifty (50)
days from date of deposit of the Continental Bank draft, without the same
being returned yet."
[18]
We hold, however, that the propriety of the withdrawal
should be gauged by compliance with the rules thereon that both petitioner
bank and its depositors are duty-bound to observe.
In the passbook that petitioner issued to private respondent, the following
rules on withdrawal of deposits appear:
"4.......Withdrawals must be made by the depositor personally but
in some exceptional circumstances, the Bank may allow
withdrawal by another upon the depositors written authority duly
authenticated; and neither a deposit nor a withdrawal will be
permitted except upon the presentation of the depositors savings
passbook, in which the amount deposited withdrawn shall be
entered only by the Bank.
5.......Withdrawals may be made by draft, mail or telegraphic
transfer in currency of the account at the request of the depositor
in writing on the withdrawal slip or by authenticated cable. Such
request must indicate the name of the payee/s, amount and the
place where the funds are to be paid. Any stamp, transmission
and other charges related to such withdrawals shall be for the
account of the depositor and shall be paid by him/her upon
demand. Withdrawals may also be made in the form of travellers
checks and in pesos. Withdrawals in the form of notes/bills are
allowed subject however, to their (availability).
6.......Deposits shall not be subject to withdrawal by check, and
may be withdrawn only in the manner above provided, upon
presentation of the depositors savings passbook and with the
withdrawal form supplied by the Bank at the counter."
[19]
Scjuris
Under these rules, to be able to withdraw from the savings account deposit
under the Philippine foreign currency deposit system, two requisites must be
presented to petitioner bank by the person withdrawing an amount: (a) a duly
filled-up withdrawal slip, and (b) the depositors passbook. Private respondent
admits that he signed a blank withdrawal slip ostensibly in violation of Rule
No. 6 requiring that the request for withdrawal must name the payee, the
amount to be withdrawn and the place where such withdrawal should be
made. That the withdrawal slip was in fact a blank one with only private
respondents two signatures affixed on the proper spaces is buttressed by
petitioners allegation in the instant petition that had private respondent
indicated therein the person authorized to receive the money, then Ruben
Gayon, Jr. could not have withdrawn any amount. Petitioner contends that
"(i)n failing to do so (i.e., naming his authorized agent), he practically
authorized any possessor thereof to write any amount and to collect the
same."
[20]

Such contention would have been valid if not for the fact that the withdrawal
slip itself indicates a special instruction that the amount is payable to "Ramon
A. de Guzman &/or Agnes C. de Guzman." Such being the case, petitioners
personnel should have been duly warned that Gayon, who was also employed
in petitioners Buendia Ave. Extension branch,
[21]
was not the proper payee of
the proceeds of the check. Otherwise, either Ramon or Agnes de Guzman
should have issued another authority to Gayon for such withdrawal. Of
course, at the dorsal side of the withdrawal slip is an "authority to withdraw"
naming Gayon the person who can withdraw the amount indicated in the
check. Private respondent does not deny having signed such authority.
However, considering petitioners clear admission that the withdrawal slip was
a blank one except for private respondents signature, the unavoidable
conclusion is that the typewritten name of "Ruben C. Gayon, Jr." was
intercalated and thereafter it was signed by Gayon or whoever was allowed by
petitioner to withdraw the amount. Under these facts, there could not have
been a principal-agent relationship between private respondent and Gayon so
as to render the former liable for the amount withdrawn.
Moreover, the withdrawal slip contains a boxed warning that states: "This
receipt must be signed and presented with the corresponding foreign currency
savings passbook by the depositor in person. For withdrawals thru a
representative, depositor should accomplish the authority at the back." The
requirement of presentation of the passbook when withdrawing an amount
cannot be given mere lip service even though the person making the
withdrawal is authorized by the depositor to do so. This is clear from Rule No.
6 set out by petitioner so that, for the protection of the banks interest and as a
reminder to the depositor, the withdrawal shall be entered in the depositors
passbook. The fact that private respondents passbook was not presented
during the withdrawal is evidenced by the entries therein showing that the last
transaction that he made with the bank was on September 3, 1984, the date
he deposited the controversial check in the amount of $2,500.00.
[22]

In allowing the withdrawal, petitioner likewise overlooked another rule that is
printed in the passbook. Thus:
"2.......All deposits will be received as current funds and will be
repaid in the same manner; provided, however, that deposits
of drafts, checks, money orders, etc. will be accepted as subject
to collection only and credited to the account only upon receipt of
the notice of final payment. Collection charges by the Banks
foreign correspondent in effecting such collection shall be for the
account of the depositor. If the account has sufficient balance, the
collection shall be debited by the Bank against the account. If, for
any reason, the proceeds of the deposited checks, drafts, money
orders, etc., cannot be collected or if the Bank is required to return
such proceeds, the provisional entry therefor made by the Bank in
the savings passbook and its records shall be deemed
automatically cancelled regardless of the time that has elapsed,
and whether or not the defective items can be returned to the
depositor; and the Bank is hereby authorized to execute
immediately the necessary corrections, amendments or changes
in its record, as well as on the savings passbook at the first
opportunity to reflect such cancellation." (Italics and underlining
supplied.) Jurissc
As correctly held by the Court of Appeals, in depositing the check in his name,
private respondent did not become the outright owner of the amount stated
therein. Under the above rule, by depositing the check with petitioner, private
respondent was, in a way, merely designating petitioner as the collecting
bank. This is in consonance with the rule that a negotiable instrument, such as
a check, whether a managers check or ordinary check, is not legal
tender.
[23]
As such, after receiving the deposit, under its own rules, petitioner
shall credit the amount in private respondents account or infuse value thereon
only after the drawee bank shall have paid the amount of the check or the
check has been cleared for deposit. Again, this is in accordance with ordinary
banking practices and with this Courts pronouncement 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."
[24]
The rule finds more meaning in this case where the
check involved is drawn on a foreign bank and therefore collection is more
difficult than when the drawee bank is a local one even though the check in
question is a managers check.
[25]
Misjuris
In Banco Atlantico v. Auditor General,
[26]
Banco Atlantico, a commercial bank in
Madrid, Spain, paid the amounts represented in three (3) checks to Virginia
Boncan, the finance officer of the Philippine Embassy in Madrid. The bank did
so without previously clearing the checks with the drawee bank, the Philippine
National Bank in New York, on account of the "special treatment" that Boncan
received from the personnel of Banco Atlanticos foreign department. The
Court held that the encashment of the checks without prior clearance is
"contrary to normal or ordinary banking practice specially so where the
drawee bank is a foreign bank and the amounts involved were large."
Accordingly, the Court approved the Auditor Generals denial of Banco
Atlanticos claim for payment of the value of the checks that was withdrawn by
Boncan.
Said ruling brings to light the fact that the banking business is affected with
public interest. By the nature of its functions, a bank is under obligation to
treat the accounts of its depositors "with meticulous care, always having in
mind the fiduciary nature of their relationship."
[27]
As such, in dealing with its
depositors, a bank should exercise its functions not only with the diligence of a
good father of a family but it should do so with the highest degree of care.
[28]

In the case at bar, petitioner, in allowing the withdrawal of private
respondents deposit, failed to exercise the diligence of a good father of a
family. In total disregard of its own rules, petitioners personnel negligently
handled private respondents account to petitioners detriment. As this Court
once said on this matter:
"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. The seventy-eight
(78)-year-old, yet still relevant, case ofPicart v. Smith, provides
the test by which to determine the existence of negligence in a
particular case which 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. The law
here in effect adopts the standard supposed to be supplied by the
imaginary conduct of the discreet pater-familiasof the Roman law.
The existence of negligence in a given case is not determined by
reference to the personal judgment of the actor in the situation
before him. The law considers what would be reckless,
blameworthy, or negligent in the man of ordinary intelligence and
prudence and determines liability by that."
[29]

Petitioner violated its own rules by allowing the withdrawal of an amount that
is definitely over and above the aggregate amount of private respondents
dollar deposits that had yet to be cleared. The banks ledger on private
respondents account shows that before he deposited $2,500.00, private
respondent had a balance of only $750.00.
[30]
Upon private respondents
deposit of $2,500.00 on September 3, 1984, that amount was credited in his
ledger as a deposit resulting in the corresponding total balance of
$3,250.00.
[31]
On September 10, 1984, the amount of $600.00 and the
additional charges of $10.00 were indicated therein as withdrawn thereby
leaving a balance of $2,640.00. On September 30, 1984, an interest of $11.59
was reflected in the ledger and on October 23, 1984, the amount of $2,541.67
was entered as withdrawn with a balance of $109.92.
[32]
On November 19,
1984 the word "hold" was written beside the balance of $109.92.
[33]
That must
have been the time when Reyes, petitioners branch manager, was informed
unofficially of the fact that the check deposited was a counterfeit, but
petitioners Buendia Ave. Extension Branch received a copy of the
communication thereon from Wells Fargo Bank International in New York the
following day, November 20, 1984.
[34]
According to Reyes, Wells Fargo Bank
International handled the clearing of checks drawn against U.S. banks that
were deposited with petitioner.
[35]
Jjlex
From these facts on record, it is at once apparent that petitioners personnel
allowed the withdrawal of an amount bigger than the original deposit of
$750.00 and the value of the check deposited in the amount of $2,500.00
although they had not yet received notice from the clearing bank in the United
States on whether or not the check was funded. Reyes contention that after
the lapse of the 35-day period the amount of a deposited check could be
withdrawn even in the absence of a clearance thereon, otherwise it could take
a long time before a depositor could make a withdrawal,
[36]
is untenable. Said
practice amounts to a disregard of the clearance requirement of the banking
system.
While it is true that private respondents having signed a blank withdrawal slip
set in motion the events that resulted in the withdrawal and encashment of the
counterfeit check, the negligence of petitioners personnel was the proximate
cause of the loss that petitioner sustained. Proximate cause, which is
determined by a mixed consideration of logic, common sense, policy and
precedent, 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."
[37]
The proximate cause of the
withdrawal and eventual loss of the amount of $2,500.00 on petitioners part
was its personnels negligence in allowing such withdrawal in disregard of its
own rules and the clearing requirement in the banking system. In so doing,
petitioner assumed the risk of incurring a loss on account of a forged or
counterfeit foreign check and hence, it should suffer the resulting damage.
WHEREFORE, the petition for review on certiorari is DENIED. The Decision
of the Court of Appeals in CA-G.R. CV No. 37392 is AFFIRMED.
SO ORDERED. Newmiso
[G.R. No. 117660. December 18, 2000]
AGRO CONGLOMERATES, INC. and MARIO SORIANO, petitioners,
vs. THE HON. COURT OF APPEALS and REGENT SAVINGS and
LOAN BANK, INC., respondents.
D E C I S I O N
QUISUMBING, J .:
This is a petition for review challenging the decision
[1]
dated October 17, 1994 of the
Court of Appeals in CA-G.R. No. 32933, which affirmed in toto the judgment of the
Manila Regional Trial Court, Branch 27, in consolidated Cases Nos. 86-37374, 86-
37388, 86-37543.
This petition springs from three complaints for sums of money filed by respondent
bank against herein petitioners. In the decision of the Court of Appeals, petitioners
were ordered to pay respondent bank, as follows:
Wherefore, judgment is hereby rendered in favor of plaintiff and against
defendants, as follows:
1) In Civil Case No. 86-37374, defendants [petitioners, herein] are ordered jointly and
severally, to pay to plaintiff the amount of P78,212.29, together with interest and
service charge thereon, at the rates of 14% and 3% per annum, respectively,
computed from November 10, 1982, until fully paid, plus stipulated penalty on
unpaid principal at the rate of 6% per annum, computed from November 10, 1982,
plus 15% as liquidated damage plus 10% of the total amount due, as attorneys
fees, plus costs;
2) In Civil Case No. 86-37388, defendant is ordered to pay plaintiff the amount of
P632,911.39, together with interest and service charge thereon at the rate of 14%
and 3% per annum, respectively, computed from January 15, 1983, until fully paid,
plus stipulated penalty on unpaid principal at the rate of 6% per annum, computed
from January 15, 1983, plus liquidated damages equivalent to 15% of the total
amount due, plus attorneys fees equivalent to 10% of the total amount due, plus
costs; and
3) In Civil Case No. 86-37543, defendant is ordered to pay plaintiff, on the first cause
of action, the amount of P510,000.00, together with interest and service charge
thereon, at the rates of 14% and 2% per annum, respectively, computed from March
13, 1983, until fully paid, plus a penalty of 6% per annum, based on the outstanding
principal of the loan, computed from March 13, 1983, until fully paid; and on the
second cause of action, the amount of P494,936.71, together with interest and
service charge thereon at the rates of 14% and 2%, per annum, respectively,
computed from March 30, 1983, until fully paid, plus a penalty charge of 6% per
annum, based on the unpaid principal, computed from March 30, 1983, until fully
paid, plus (on both causes of action) an amount equal to 15% of the total amounts
due, as liquidated damages, plus attorneys fees equal to 10% of the total amounts
due, plus costs.
[2]

Based on the records, the following are the factual antecedents.
On July 17, 1982, petitioner Agro Conglomerates, Inc. as vendor, sold two parcels
of land to Wonderland Food Industries, Inc. In their Memorandum of Agreement,
[3]
the
parties covenanted that the purchase price of Five Million (P5,000,000.00) Pesos would
be settled by the vendee, under the following terms and conditions: (1) One Million
(P1,000,000.00) Pesos shall be paid in cash upon the signing of the agreement;
(2) Two Million (P2,000,000.00) Pesos worth of common shares of stock of the
Wonderland Food Industries, Inc.; and (3) The balance of P2,000,000.00 shall be paid
in four equal installments, the first installment falling due, 180 days after the signing of
the agreement and every six months thereafter, with an interest rate of 18% per
annum, to be advanced by the vendee upon the signing of the agreement.
On July 19, 1982, the vendor, the vendee, and the respondent bank Regent
Savings & Loan Bank (formerly Summa Savings & Loan Association), executed an
Addendum
[4]
to the previous Memorandum of Agreement. The new arrangement
pertained to the revision of settlement of the initial payments of P1,000,000.00 and
prepaid interest of P360,000.00 (18% of P2,000,000.00) as follows:
Whereas, the parties have agreed to qualify the stipulated terms for the
payment of the said ONE MILLION THREE HUNDRED SIXTY THOUSAND
(P1,360,000.00) PESOS.
WHEREFORE, in consideration of the mutual covenant and agreement of the
parties, they do further covenant and agree as follows:
1. That the VENDEE instead of paying the amount of ONE MILLION THREE
HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS in cash, hereby authorizes
the VENDOR to obtain a loan from Summa Savings and Loan Association with
office address at Valenzuela, Metro Manila, being represented herein by its
President, Mr. Jaime Cario and referred to hereafter as Financier; in the amount of
ONE MILLION THREE HUNDRED SIXTY THOUSAND (P1,360,000.00)PESOS,
plus interest thereon at such rate as the VENDEE and the Financier may agree,
which amount shall cover the ONE MILLION (P1,000,000.00) PESOS cash which
was agreed to be paid upon signing of the Memorandum of Agreement, plus 18%
interest on the balance of two million pesos stipulated upon in Item No. 1(c) of the
said agreement; provided however, that said loan shall be made for and in the name
of the VENDOR.
2. The VENDEE also agrees that the full amount of ONE MILLION THREE HUNDRED
SIXTY THOUSAND (P1,360,000.00) PESOS be paid directly to the VENDOR;
however, the VENDEE hereby undertakes to pay the full amount of the said loan to
the Financier on such terms and conditions agreed upon by the Financier and the
VENDOR, it being understood that while the loan will be secured from and in the
name of the VENDOR, the VENDEE will be the one liable to pay the entire proceeds
thereof including interest and other charges.
[5]

This addendum was not notarized.
Consequently, petitioner Mario Soriano signed as maker several promissory
notes,
[6]
payable to the respondent bank. Thereafter, the bank released the proceeds of
the loan to petitioners. However, petitioners failed to meet their obligations as they fell
due. During that time, the bank was experiencing financial turmoil and was under the
supervision of the Central Bank. Central Bank examiner and liquidator Cordula de
Jesus, endorsed the subject promissory notes to the banks counsel for collection. The
bank gave petitioners opportunity to settle their account by extending payment due
dates. Mario Soriano manifested his intention to re-structure the loan, yet did not show
up nor submit his formal written request.
Respondent bank filed three separate complaints before the Regional Trial Court of
Manila for Collection of Sums of money. The corresponding case histories are
illustrated in the table below:
Date of
Loan
Amount Payment
Due
Date
Payment
Extension
Dates
Civil Case
86-37374
August
12, 1982

P 78,212.29

Nov. 10,
1982

Feb. 8,
1983
May 9,
1983
Aug. 7,
1983

Civil Case
86-37388
July 19,
1982

P 632,911.39

Jan. 15,
1983

May 16,
1983
Aug. 14,
1983

Civil Case
86-37543
September
14, 1982


October
1, 1982

P 510,000.00


P 494,936.71

March
13, 1983


March
30, 1983

June 11,
1983
Sept. 9,
1983

June 28,
1983
Sept. 26,
1983
In their answer, petitioners interposed the defense of novation and insisted there was a
valid substitution of debtor. They alleged that the addendum specifically states that
although the promissory notes were in their names, Wonderland shall be responsible for
the payment thereof.
The trial court held that petitioners are liable, to wit:
The evidences, however, disclose that Wonderland did not comply with its
obligation under said Addendum (Exh. S) as the agreement to turn over the
farmland to it, did not materialize (57 tsn, May 29, 1990), and there was,
actually no sale of the land (58 tsn, ibid). Hence, Wonderland is not
answerable. And since the loans obtained under the four promissory notes
(Exhs. A, C, G, and E) have not been paid, despite opportunities given by
plaintiff to defendants to make payments, it stands to reason that defendants
are liable to pay their obligations thereunder to plaintiff. In fact, defendants
failed to file a third-party complaint against Wonderland, which shows the
weakness of its stand that Wonderland is answerable to make said
payments.
[7]

Petitioners appealed to the Court of Appeals. The trial courts decision was affirmed
by the appellate court.
Hence, this recourse, wherein petitioners raise the sole issue of:
WHETHER THE COURT OF APPEALS ERRED IN NOT FINDING THAT
THE ADDENDUM, SIGNED BY THE PETITIONERS, RESPONDENT BANK
AND WONDERLAND INC., CONSTITUTES A NOVATION OF THE
CONTRACT BY SUBSTITUTION OF DEBTOR, WHICH EXEMPTS THE
PETITIONERS FROM ANY LIABILITY OVER THE PROMISSORY NOTES.
Revealed by the facts on record, the conflict among the parties started from a
contract of sale of a farmland between petitioners and Wonderland Food Industries,
Inc. As found by the trial court, no such sale materialized.
A contract of sale is a reciprocal transaction. The obligation or promise of each
party is the cause or consideration for the obligation or promise by the other. The
vendee is obliged to pay the price, while the vendor must deliver actual possession of
the land. In the instant case the original plan was that the initial payments would be
paid in cash. Subsequently, the parties (with the participation of respondent bank)
executed an addendum providing instead, that the petitioners would secure a loan in the
name of Agro Conglomerates Inc. for the total amount of the initial payments, while the
settlement of said loan would be assumed by Wonderland. Thereafter, petitioner
Soriano signed several promissory notes and received the proceeds in behalf of
petitioner-company.
By this time, we note a subsidiary contract of suretyship had taken effect since
petitioners signed the promissory notes as maker and accommodation party for the
benefit of Wonderland. Petitioners became liable as accommodation party. An
accommodation party is a person who has signed the instrument as maker, acceptor, or
indorser, without receiving value therefor, and for the purpose of lending his name to
some other person and is liable on the instrument to a holder for value, notwithstanding
such holder at the time of taking the instrument knew (the signatory) to be an
accommodation party.
[8]
He has the right, after paying the holder, to obtain
reimbursement from the party accommodated, since the relation between them has in
effect become one of principal and surety, the accommodation party being the
surety.
[9]
Suretyship is defined as the relation which exists where one person has
undertaken an obligation and another person is also under the obligation or other duty
to the obligee, who is entitled to but one performance, and as between the two who are
bound, one rather than the other should perform.
[10]
The suretys liability to the creditor or
promisee of the principal is said to be direct, primary and absolute; in other words, he is
directly and equally bound with the principal.
[11]
And the creditor may proceed against
any one of the solidary debtors.
[12]

We do not give credence to petitioners assertion that, as provided by the
addendum, their obligation to pay the promissory notes was novated by substitution of
a new debtor, Wonderland. Contrary to petitioners contention, the attendant facts
herein do not make a case of novation.
Novation is the extinguishment of an obligation by the substitution or change of the
obligation by a subsequent one which extinguishes or modifies the first, either by
changing the object or principal conditions, or by substituting another in place of the
debtor, or by subrogating a third person in the rights of the creditor.
[13]
In order that a
novation can take place, the concurrence of the following requisites
[14]
are indispensable:
1) There must be a previous valid obligation;
2) There must be an agreement of the parties concerned to a new contract;
3) There must be the extinguishment of the old contract; and
4) There must be the validity of the new contract.
In the instant case, the first requisite for a valid novation is lacking. There was no
novation by substitution of debtor because there was no prior obligation which was
substituted by a new contract. It will be noted that the promissory notes, which bound
the petitioners to pay, were executed after the addendum. The addendum modified the
contract of sale, not the stipulations in the promissory notes which pertain to the surety
contract. At this instance, Wonderland apparently assured the payment of future debts
to be incurred by the petitioners. Consequently, only a contract of surety arose. It was
wrong for petitioners to presume a novation had taken place. The well-settled rule is
that novation is never presumed,
[15]
it must be clearly and unequivocally shown.
[16]

As it turned out, the contract of surety between Wonderland and the petitioners was
extinguished by the rescission of the contract of sale of the farmland. With the
rescission, there was confusion or merger in the persons of the principal obligor and the
surety, namely the petitioners herein. The addendum which was dependent thereon
likewise lost its efficacy.
It is true that the basic and fundamental rule in the interpretation of contract is that,
if the terms thereof are clear and leave no doubt as to the intention of the contracting
parties, the literal meaning shall control. However, in order to judge the intention of the
parties, their contemporaneous and subsequent acts should be considered.
[17]

The contract of sale between Wonderland and petitioners did not materialize. But it
was admitted that petitioners received the proceeds of the promissory notes obtained
from respondent bank.
Sec. 22 of the Civil Code provides:
Every person who through an act of performance by another, or any other
means, acquires or comes into possession of something at the expense of the
latter without just or legal ground, shall return the same to him.
Petitioners had no legal or just ground to retain the proceeds of the loan at the
expense of private respondent. Neither could petitioners excuse themselves and hold
Wonderland still liable to pay the loan upon the rescission of their sales contract. If
petitioners sustained damages as a result of the rescission, they should have impleaded
Wonderland and asked damages. The non-inclusion of a necessary party does not
prevent the court from proceeding in the action, and the judgment rendered therein shall
be without prejudice to the rights of such necessary party.
[18]
But respondent appellate
court did not err in holding that petitioners are duty-bound under the law to pay the
claims of respondent bank from whom they had obtained the loan proceeds.
WHEREFORE, the petition is DENIED for lack of merit. The assailed decision of
the Court of Appeals dated October 17, 1994 is AFFIRMED. Costs against petitioners.
SO ORDERED.

VII. HIDC
G.R. No. L-15126 November 30, 1961

VICENTE R. DE OCAMPO & CO., plaintiff-appellee,
vs.
ANITA GATCHALIAN, ET AL., defendants-appellants.

Vicente Formoso, Jr. for plaintiff-appellee.
Reyes and Pangalagan for defendants-appellants.

LABRADOR, J.:

Appeal from a judgment of the Court of First Instance of Manila, Hon. Conrado M. Velasquez,
presiding, sentencing the defendants to pay the plaintiff the sum of P600, with legal interest from
September 10, 1953 until paid, and to pay the costs.

The action is for the recovery of the value of a check for P600 payable to the plaintiff and drawn by
defendant Anita C. Gatchalian. The complaint sets forth the check and alleges that plaintiff received
it in payment of the indebtedness of one Matilde Gonzales; that upon receipt of said check, plaintiff
gave Matilde Gonzales P158.25, the difference between the face value of the check and Matilde
Gonzales' indebtedness. The defendants admit the execution of the check but they allege in their
answer, as affirmative defense, that it was issued subject to a condition, which was not fulfilled, and
that plaintiff was guilty of gross negligence in not taking steps to protect itself.

At the time of the trial, the parties submitted a stipulation of facts, which reads as follows:

Plaintiff and defendants through their respective undersigned attorney's respectfully submit the
following Agreed Stipulation of Facts;

First. That on or about 8 September 1953, in the evening, defendant Anita C. Gatchalian who was
then interested in looking for a car for the use of her husband and the family, was shown and offered
a car by Manuel Gonzales who was accompanied by Emil Fajardo, the latter being personally known
to defendant Anita C. Gatchalian;

Second. That Manuel Gonzales represented to defend Anita C. Gatchalian that he was duly
authorized by the owner of the car, Ocampo Clinic, to look for a buyer of said car and to negotiate for
and accomplish said sale, but which facts were not known to plaintiff;

Third. That defendant Anita C. Gatchalian, finding the price of the car quoted by Manuel Gonzales
to her satisfaction, requested Manuel Gonzales to bring the car the day following together with the
certificate of registration of the car, so that her husband would be able to see same; that on this
request of defendant Anita C. Gatchalian, Manuel Gonzales advised her that the owner of the car
will not be willing to give the certificate of registration unless there is a showing that the party
interested in the purchase of said car is ready and willing to make such purchase and that for this
purpose Manuel Gonzales requested defendant Anita C. Gatchalian to give him (Manuel Gonzales)
a check which will be shown to the owner as evidence of buyer's good faith in the intention to
purchase the said car, the said check to be for safekeeping only of Manuel Gonzales and to be
returned to defendant Anita C. Gatchalian the following day when Manuel Gonzales brings the car
and the certificate of registration, but which facts were not known to plaintiff;

Fourth. That relying on these representations of Manuel Gonzales and with his assurance that
said check will be only for safekeeping and which will be returned to said defendant the following day
when the car and its certificate of registration will be brought by Manuel Gonzales to defendants, but
which facts were not known to plaintiff, defendant Anita C. Gatchalian drew and issued a check, Exh.
"B"; that Manuel Gonzales executed and issued a receipt for said check, Exh. "1";

Fifth. That on the failure of Manuel Gonzales to appear the day following and on his failure to
bring the car and its certificate of registration and to return the check, Exh. "B", on the following day
as previously agreed upon, defendant Anita C. Gatchalian issued a "Stop Payment Order" on the
check, Exh. "3", with the drawee bank. Said "Stop Payment Order" was issued without previous
notice on plaintiff not being know to defendant, Anita C. Gatchalian and who furthermore had no
reason to know check was given to plaintiff;

Sixth. That defendants, both or either of them, did not know personally Manuel Gonzales or any
member of his family at any time prior to September 1953, but that defendant Hipolito Gatchalian is
personally acquainted with V. R. de Ocampo;

Seventh. That defendants, both or either of them, had no arrangements or agreement with the
Ocampo Clinic at any time prior to, on or after 9 September 1953 for the hospitalization of the wife of
Manuel Gonzales and neither or both of said defendants had assumed, expressly or impliedly, with
the Ocampo Clinic, the obligation of Manuel Gonzales or his wife for the hospitalization of the latter;

Eight. That defendants, both or either of them, had no obligation or liability, directly or indirectly
with the Ocampo Clinic before, or on 9 September 1953;

Ninth. That Manuel Gonzales having received the check Exh. "B" from defendant Anita C.
Gatchalian under the representations and conditions herein above specified, delivered the same to
the Ocampo Clinic, in payment of the fees and expenses arising from the hospitalization of his wife;

Tenth. That plaintiff for and in consideration of fees and expenses of hospitalization and the
release of the wife of Manuel Gonzales from its hospital, accepted said check, applying P441.75
(Exhibit "A") thereof to payment of said fees and expenses and delivering to Manuel Gonzales the
amount of P158.25 (as per receipt, Exhibit "D") representing the balance on the amount of the said
check, Exh. "B";

Eleventh. That the acts of acceptance of the check and application of its proceeds in the manner
specified above were made without previous inquiry by plaintiff from defendants:

Twelfth. That plaintiff filed or caused to be filed with the Office of the City Fiscal of Manila, a
complaint for estafa against Manuel Gonzales based on and arising from the acts of said Manuel
Gonzales in paying his obligations with plaintiff and receiving the cash balance of the check, Exh. "B"
and that said complaint was subsequently dropped;

Thirteenth. That the exhibits mentioned in this stipulation and the other exhibits submitted
previously, be considered as parts of this stipulation, without necessity of formally offering them in
evidence;

WHEREFORE, it is most respectfully prayed that this agreed stipulation of facts be admitted and that
the parties hereto be given fifteen days from today within which to submit simultaneously their
memorandum to discuss the issues of law arising from the facts, reserving to either party the right to
submit reply memorandum, if necessary, within ten days from receipt of their main memoranda. (pp.
21-25, Defendant's Record on Appeal).

No other evidence was submitted and upon said stipulation the court rendered the judgment already
alluded above.

In their appeal defendants-appellants contend that the check is not a negotiable instrument, under
the facts and circumstances stated in the stipulation of facts, and that plaintiff is not a holder in due
course. In support of the first contention, it is argued that defendant Gatchalian had no intention to
transfer her property in the instrument as it was for safekeeping merely and, therefore, there was no
delivery required by law (Section 16, Negotiable Instruments Law); that assuming for the sake of
argument that delivery was not for safekeeping merely, delivery was conditional and the condition
was not fulfilled.

In support of the contention that plaintiff-appellee is not a holder in due course, the appellant argues
that plaintiff-appellee cannot be a holder in due course because there was no negotiation prior to
plaintiff-appellee's acquiring the possession of the check; that a holder in due course presupposes a
prior party from whose hands negotiation proceeded, and in the case at bar, plaintiff-appellee is the
payee, the maker and the payee being original parties. It is also claimed that the plaintiff-appellee is
not a holder in due course because it acquired the check with notice of defect in the title of the
holder, Manuel Gonzales, and because under the circumstances stated in the stipulation of facts
there were circumstances that brought suspicion about Gonzales' possession and negotiation, which
circumstances should have placed the plaintiff-appellee under the duty, to inquire into the title of the
holder. The circumstances are as follows:

The check is not a personal check of Manuel Gonzales. (Paragraph Ninth, Stipulation of Facts).
Plaintiff could have inquired why a person would use the check of another to pay his own debt.
Furthermore, plaintiff had the "means of knowledge" inasmuch as defendant Hipolito Gatchalian is
personally acquainted with V. R. de Ocampo (Paragraph Sixth, Stipulation of Facts.).

The maker Anita C. Gatchalian is a complete stranger to Manuel Gonzales and Dr. V. R. de Ocampo
(Paragraph Sixth, Stipulation of Facts).

The maker is not in any manner obligated to Ocampo Clinic nor to Manuel Gonzales. (Par. 7,
Stipulation of Facts.)

The check could not have been intended to pay the hospital fees which amounted only to P441.75.
The check is in the amount of P600.00, which is in excess of the amount due plaintiff. (Par. 10,
Stipulation of Facts).

It was necessary for plaintiff to give Manuel Gonzales change in the sum P158.25 (Par. 10,
Stipulation of Facts). Since Manuel Gonzales is the party obliged to pay, plaintiff should have been
more cautious and wary in accepting a piece of paper and disbursing cold cash.

The check is payable to bearer. Hence, any person who holds it should have been subjected to
inquiries. EVEN IN A BANK, CHECKS ARE NOT CASHED WITHOUT INQUIRY FROM THE
BEARER. The same inquiries should have been made by plaintiff. (Defendants-appellants' brief, pp.
52-53)

Answering the first contention of appellant, counsel for plaintiff-appellee argues that in accordance
with the best authority on the Negotiable Instruments Law, plaintiff-appellee may be considered as a
holder in due course, citing Brannan's Negotiable Instruments Law, 6th edition, page 252. On this
issue Brannan holds that a payee may be a holder in due course and says that to this effect is the
greater weight of authority, thus:

Whether the payee may be a holder in due course under the N. I. L., as he was at common law, is a
question upon which the courts are in serious conflict. There can be no doubt that a proper
interpretation of the act read as a whole leads to the conclusion that a payee may be a holder in due
course under any circumstance in which he meets the requirements of Sec. 52.

The argument of Professor Brannan in an earlier edition of this work has never been successfully
answered and is here repeated.

Section 191 defines "holder" as the payee or indorsee of a bill or note, who is in possession of it, or
the bearer thereof. Sec. 52 defendants defines a holder in due course as "a holder who has taken
the instrument under the following conditions: 1. That it is complete and regular on its face. 2. That
he became the holder of it before it was overdue, and without notice that it had been previously
dishonored, if such was the fact. 3. That he took it in good faith and for value. 4. That at the time it
was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the
person negotiating it."

Since "holder", as defined in sec. 191, includes a payee who is in possession the word holder in the
first clause of sec. 52 and in the second subsection may be replaced by the definition in sec. 191 so
as to read "a holder in due course is a payee or indorsee who is in possession," etc. (Brannan's on
Negotiable Instruments Law, 6th ed., p. 543).

The first argument of the defendants-appellants, therefore, depends upon whether or not the
plaintiff-appellee is a holder in due course. If it is such a holder in due course, it is immaterial that it
was the payee and an immediate party to the instrument.

The other contention of the plaintiff is that there has been no negotiation of the instrument, because
the drawer did not deliver the instrument to Manuel Gonzales with the intention of negotiating the
same, or for the purpose of giving effect thereto, for as the stipulation of facts declares the check
was to remain in the possession Manuel Gonzales, and was not to be negotiated, but was to serve
merely as evidence of good faith of defendants in their desire to purchase the car being sold to
them. Admitting that such was the intention of the drawer of the check when she delivered it to
Manuel Gonzales, it was no fault of the plaintiff-appellee drawee if Manuel Gonzales delivered the
check or negotiated it. As the check was payable to the plaintiff-appellee, and was entrusted to
Manuel Gonzales by Gatchalian, the delivery to Manuel Gonzales was a delivery by the drawer to
his own agent; in other words, Manuel Gonzales was the agent of the drawer Anita Gatchalian
insofar as the possession of the check is concerned. So, when the agent of drawer Manuel
Gonzales negotiated the check with the intention of getting its value from plaintiff-appellee,
negotiation took place through no fault of the plaintiff-appellee, unless it can be shown that the
plaintiff-appellee should be considered as having notice of the defect in the possession of the holder
Manuel Gonzales. Our resolution of this issue leads us to a consideration of the last question
presented by the appellants, i.e., whether the plaintiff-appellee may be considered as a holder in due
course.

Section 52, Negotiable Instruments Law, defines holder in due course, thus:

A holder in due course is a holder who has taken the instrument under the following conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it had been
previously dishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or
defect in the title of the person negotiating it.

The stipulation of facts expressly states that plaintiff-appellee was not aware of the circumstances
under which the check was delivered to Manuel Gonzales, but we agree with the defendants-
appellants that the circumstances indicated by them in their briefs, such as the fact that appellants
had no obligation or liability to the Ocampo Clinic; that the amount of the check did not correspond
exactly with the obligation of Matilde Gonzales to Dr. V. R. de Ocampo; and that the check had two
parallel lines in the upper left hand corner, which practice means that the check could only be
deposited but may not be converted into cash all these circumstances should have put the
plaintiff-appellee to inquiry as to the why and wherefore of the possession of the check by Manuel
Gonzales, and why he used it to pay Matilde's account. It was payee's duty to ascertain from the
holder Manuel Gonzales what the nature of the latter's title to the check was or the nature of his
possession. Having failed in this respect, we must declare that plaintiff-appellee was guilty of gross
neglect in not finding out the nature of the title and possession of Manuel Gonzales, amounting to
legal absence of good faith, and it may not be considered as a holder of the check in good faith. To
such effect is the consensus of authority.

In order to show that the defendant had "knowledge of such facts that his action in taking the
instrument amounted to bad faith," it is not necessary to prove that the defendant knew the exact
fraud that was practiced upon the plaintiff by the defendant's assignor, it being sufficient to show that
the defendant had notice that there was something wrong about his assignor's acquisition of title,
although he did not have notice of the particular wrong that was committed. Paika v. Perry, 225
Mass. 563, 114 N.E. 830.

It is sufficient that the buyer of a note had notice or knowledge that the note was in some way tainted
with fraud. It is not necessary that he should know the particulars or even the nature of the fraud,
since all that is required is knowledge of such facts that his action in taking the note amounted bad
faith. Ozark Motor Co. v. Horton (Mo. App.), 196 S.W. 395. Accord. Davis v. First Nat. Bank, 26 Ariz.
621, 229 Pac. 391.

Liberty bonds stolen from the plaintiff were brought by the thief, a boy fifteen years old, less than five
feet tall, immature in appearance and bearing on his face the stamp a degenerate, to the defendants'
clerk for sale. The boy stated that they belonged to his mother. The defendants paid the boy for the
bonds without any further inquiry. Held, the plaintiff could recover the value of the bonds. The term
'bad faith' does not necessarily involve furtive motives, but means bad faith in a commercial sense.
The manner in which the defendants conducted their Liberty Loan department provided an easy way
for thieves to dispose of their plunder. It was a case of "no questions asked." Although gross
negligence does not of itself constitute bad faith, it is evidence from which bad faith may be inferred.
The circumstances thrust the duty upon the defendants to make further inquiries and they had no
right to shut their eyes deliberately to obvious facts. Morris v. Muir, 111 Misc. Rep. 739, 181 N.Y.
Supp. 913, affd. in memo., 191 App. Div. 947, 181 N.Y. Supp. 945." (pp. 640-642, Brannan's
Negotiable Instruments Law, 6th ed.).

The above considerations would seem sufficient to justify our ruling that plaintiff-appellee should not
be allowed to recover the value of the check. Let us now examine the express provisions of the
Negotiable Instruments Law pertinent to the matter to find if our ruling conforms thereto. Section 52
(c) provides that a holder in due course is one who takes the instrument "in good faith and for value;"
Section 59, "that every holder is deemed prima facie to be a holder in due course;" and Section 52
(d), that in order that one may be a holder in due course it is necessary that "at the time the
instrument was negotiated to him "he had no notice of any . . . defect in the title of the person
negotiating it;" and lastly Section 59, that every holder is deemed prima facieto be a holder in due
course.

In the case at bar the rule that a possessor of the instrument is prima faciea holder in due course
does not apply because there was a defect in the title of the holder (Manuel Gonzales), because the
instrument is not payable to him or to bearer. On the other hand, the stipulation of facts indicated by
the appellants in their brief, like the fact that the drawer had no account with the payee; that the
holder did not show or tell the payee why he had the check in his possession and why he was using
it for the payment of his own personal account show that holder's title was defective or suspicious,
to say the least. As holder's title was defective or suspicious, it cannot be stated that the payee
acquired the check without knowledge of said defect in holder's title, and for this reason the
presumption that it is a holder in due course or that it acquired the instrument in good faith does not
exist. And having presented no evidence that it acquired the check in good faith, it (payee) cannot be
considered as a holder in due course. In other words, under the circumstances of the case, instead
of the presumption that payee was a holder in good faith, the fact is that it acquired possession of
the instrument under circumstances that should have put it to inquiry as to the title of the holder who
negotiated the check to it. The burden was, therefore, placed upon it to show that notwithstanding
the suspicious circumstances, it acquired the check in actual good faith.

The rule applicable to the case at bar is that described in the case of Howard National Bank v.
Wilson, et al., 96 Vt. 438, 120 At. 889, 894, where the Supreme Court of Vermont made the following
disquisition:

Prior to the Negotiable Instruments Act, two distinct lines of cases had developed in this country.
The first had its origin in Gill v. Cubitt, 3 B. & C. 466, 10 E. L. 215, where the rule was distinctly laid
down by the court of King's Bench that the purchaser of negotiable paper must exercise reasonable
prudence and caution, and that, if the circumstances were such as ought to have excited the
suspicion of a prudent and careful man, and he made no inquiry, he did not stand in the legal
position of a bona fide holder. The rule was adopted by the courts of this country generally and seem
to have become a fixed rule in the law of negotiable paper. Later in Goodman v. Harvey, 4 A. & E.
870, 31 E. C. L. 381, the English court abandoned its former position and adopted the rule that
nothing short of actual bad faith or fraud in the purchaser would deprive him of the character of a
bona fide purchaser and let in defenses existing between prior parties, that no circumstances of
suspicion merely, or want of proper caution in the purchaser, would have this effect, and that even
gross negligence would have no effect, except as evidence tending to establish bad faith or fraud.
Some of the American courts adhered to the earlier rule, while others followed the change
inaugurated in Goodman v. Harvey. The question was before this court in Roth v. Colvin, 32 Vt. 125,
and, on full consideration of the question, a rule was adopted in harmony with that announced in Gill
v. Cubitt, which has been adhered to in subsequent cases, including those cited above. Stated
briefly, one line of cases including our own had adopted the test of the reasonably prudent man and
the other that of actual good faith. It would seem that it was the intent of the Negotiable Instruments
Act to harmonize this disagreement by adopting the latter test. That such is the view generally
accepted by the courts appears from a recent review of the cases concerning what constitutes notice
of defect. Brannan on Neg. Ins. Law, 187-201. To effectuate the general purpose of the act to make
uniform the Negotiable Instruments Law of those states which should enact it, we are constrained to
hold (contrary to the rule adopted in our former decisions) that negligence on the part of the plaintiff,
or suspicious circumstances sufficient to put a prudent man on inquiry, will not of themselves prevent
a recovery, but are to be considered merely as evidence bearing on the question of bad faith. See G.
L. 3113, 3172, where such a course is required in construing other uniform acts.

It comes to this then: When the case has taken such shape that the plaintiff is called upon to prove
himself a holder in due course to be entitled to recover, he is required to establish the conditions
entitling him to standing as such, including good faith in taking the instrument. It devolves upon him
to disclose the facts and circumstances attending the transfer, from which good or bad faith in the
transaction may be inferred.

In the case at bar as the payee acquired the check under circumstances which should have put it to
inquiry, why the holder had the check and used it to pay his own personal account, the duty
devolved upon it, plaintiff-appellee, to prove that it actually acquired said check in good faith. The
stipulation of facts contains no statement of such good faith, hence we are forced to the conclusion
that plaintiff payee has not proved that it acquired the check in good faith and may not be deemed a
holder in due course thereof.

For the foregoing considerations, the decision appealed from should be, as it is hereby, reversed,
and the defendants are absolved from the complaint. With costs against plaintiff-appellee.

Padilla, Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon and De Leon, JJ.,
concur.
Bengzon, C.J., concurs in the result.
G.R. No. 70145 November 13, 1986
MARCELO A. MESINA, petitioner,
vs.
THE HONORABLE INTERMEDIATE APPELLATE COURT, HON. ARSENIO M. GONONG, in his
capacity as Judge of Regional Trial Court Manila (Branch VIII), JOSE GO, and ALBERT
UY, respondents.

PARAS, J .:
This is an appeal by certiorari from the decision of the then Intermediate Appellate Court (IAC for
short), now the Court of Appeals (CA) in AC-G.R. S.P. 04710, dated Jan. 22, 1985, which dismissed
the petition for certiorari and prohibition filed by Marcelo A. Mesina against the trial court in Civil
Case No. 84-22515. Said case (an Interpleader) was filed by Associated Bank against Jose Go and
Marcelo A. Mesina regarding their conflicting claims over Associated Bank Cashier's Check No.
011302 for P800,000.00, dated December 29, 1983.
Briefly, the facts and statement of the case are as follows:
Respondent Jose Go, on December 29, 1983, purchased from Associated Bank Cashier's Check
No. 011302 for P800,000.00. Unfortunately, Jose Go left said check on the top of the desk of the
bank manager when he left the bank. The bank manager entrusted the check for safekeeping to a
bank official, a certain Albert Uy, who had then a visitor in the person of Alexander Lim. Uy had to
answer a phone call on a nearby telephone after which he proceeded to the men's room. When he
returned to his desk, his visitor Lim was already gone. When Jose Go inquired for his cashier's
check from Albert Uy, the check was not in his folder and nowhere to be found. The latter advised
Jose Go to go to the bank to accomplish a "STOP PAYMENT" order, which suggestion Jose Go
immediately followed. He also executed an affidavit of loss. Albert Uy went to the police to report the
loss of the check, pointing to the person of Alexander Lim as the one who could shed light on it.
The records of the police show that Associated Bank received the lost check for clearing on
December 31, 1983, coming from Prudential Bank, Escolta Branch. The check was immediately
dishonored by Associated Bank by sending it back to Prudential Bank, with the words "Payment
Stopped" stamped on it. However, the same was again returned to Associated Bank on January 4,
1984 and for the second time it was dishonored. Several days later, respondent Associated Bank
received a letter, dated January 9, 1984, from a certain Atty. Lorenzo Navarro demanding payment
on the cashier's check in question, which was being held by his client. He however refused to reveal
the name of his client and threatened to sue, if payment is not made. Respondent bank, in its letter,
dated January 20, 1984, replied saying the check belonged to Jose Go who lost it in the bank and is
laying claim to it.
On February 1, 1984, police sent a letter to the Manager of the Prudential Bank, Escolta Branch,
requesting assistance in Identifying the person who tried to encash the check but said bank refused
saying that it had to protect its client's interest and the Identity could only be revealed with the
client's conformity. Unsure of what to do on the matter, respondent Associated Bank on February 2,
1984 filed an action for Interpleader naming as respondent, Jose Go and one John Doe, Atty.
Navarro's then unnamed client. On even date, respondent bank received summons and copy of the
complaint for damages of a certain Marcelo A. Mesina from the Regional Trial Court (RTC) of
Caloocan City filed on January 23, 1984 bearing the number C-11139. Respondent bank moved to
amend its complaint, having been notified for the first time of the name of Atty. Navarro's client and
substituted Marcelo A. Mesina for John Doe. Simultaneously, respondent bank, thru representative
Albert Uy, informed Cpl. Gimao of the Western Police District that the lost check of Jose Go is in the
possession of Marcelo Mesina, herein petitioner. When Cpl. Gimao went to Marcelo Mesina to ask
how he came to possess the check, he said it was paid to him by Alexander Lim in a "certain
transaction" but refused to elucidate further. An information for theft (Annex J) was instituted against
Alexander Lim and the corresponding warrant for his arrest was issued (Annex 6-A) which up to the
date of the filing of this instant petition remains unserved because of Alexander Lim's successful
evation thereof.
Meanwhile, Jose Go filed his answer on February 24, 1984 in the Interpleader Case and moved to
participate as intervenor in the complain for damages. Albert Uy filed a motion of intervention and
answer in the complaint for Interpleader. On the Scheduled date of pretrial conference inthe
interpleader case, it was disclosed that the "John Doe" impleaded as one of the defendants is
actually petitioner Marcelo A. Mesina. Petitioner instead of filing his answer to the complaint in the
interpleader filed on May 17, 1984 an Omnibus Motion to Dismiss Ex Abudante Cautela alleging lack
of jurisdiction in view of the absence of an order to litigate, failure to state a cause of action and lack
of personality to sue. Respondent bank in the other civil case (CC-11139) for damages moved to
dismiss suit in view of the existence already of the Interpleader case.
The trial court in the interpleader case issued an order dated July 13, 1984, denying the motion to
dismiss of petitioner Mesina and ruling that respondent bank's complaint sufficiently pleaded a cause
of action for itnerpleader. Petitioner filed his motion for reconsideration which was denied by the trial
court on September 26, 1984. Upon motion for respondent Jose Go dated October 31, 1984,
respondent judge issued an order on November 6, 1984, declaring petitioner in default since his
period to answer has already expirecd and set the ex-parte presentation of respondent bank's
evidence on November 7, 1984.
Petitioner Mesina filed a petition for certioari with preliminary injunction with IAC to set aside 1) order
of respondent court denying his omnibus Motion to Dismiss 2) order of 3) the order of default against
him.
On January 22, 1985, IAC rendered its decision dimissing the petition for certiorari. Petitioner
Mesina filed his Motion for Reconsideration which was also denied by the same court in its
resolution dated February 18, 1985.
Meanwhile, on same date (February 18, 1985), the trial court in Civil Case #84-22515 (Interpleader)
rendered a decisio, the dispositive portion reading as follows:
WHEREFORE, in view of the foregoing, judgment is hereby rendered ordering
plaintiff Associate Bank to replace Cashier's Check No. 011302 in favor of Jose Go
or its cas equivalent with legal rate of itnerest from date of complaint, and with costs
of suit against the latter.
SO ORDERED.
On March 29, 1985, the trial court in Civil Case No. C-11139, for damages, issued an
order, the pertinent portion of which states:
The records of this case show that on August 20, 1984 proceedings in this case was
(were) ordered suspended because the main issue in Civil Case No. 84-22515 and in
this instant case are the same which is: who between Marcelo Mesina and Jose Go
is entitled to payment of Associated Bank's Cashier's Check No. CC-011302? Said
issue having been resolved already in Civil casde No. 84-22515, really this instant
case has become moot and academic.
WHEREFORE, in view of the foregoing, the motion sholud be as it is hereby granted
and this case is ordered dismissed.
In view of the foregoing ruling no more action should be taken on the "Motion For
Reconsideration (of the order admitting the Intervention)" dated June 21, 1984 as
well as the Motion For Reconsideration dated September 10, 1984.
SO ORDERED.
Petitioner now comes to Us, alleging that:
1. IAC erred in ruling that a cashier's check can be countermanded even in the hands of a holder in
due course.
2. IAC erred in countenancing the filing and maintenance of an interpleader suit by a party who had
earlier been sued on the same claim.
3. IAC erred in upholding the trial court's order declaring petitioner as in default when there was no
proper order for him to plead in the interpleader complaint.
4. IAC went beyond the scope of its certiorari jurisdiction by making findings of facts in advance of
trial.
Petitioner now interposes the following prayer:
1. Reverse the decision of the IAC, dated January 22, 1985 and set aside the February 18, 1985
resolution denying the Motion for Reconsideration.
2. Annul the orders of respondent Judge of RTC Manila giving due course to the interpleader suit
and declaring petitioner in default.
Petitioner's allegations hold no water. Theories and examples advanced by petitioner on causes and
effects of a cashier's check such as 1) it cannot be countermanded in the hands of a holder in due
course and 2) a cashier's check is a bill of exchange drawn by the bank against itself-are general
principles which cannot be aptly applied to the case at bar, without considering other things.
Petitioner failed to substantiate his claim that he is a holder in due course and for consideration or
value as shown by the established facts of the case. Admittedly, petitioner became the holder of the
cashier's check as endorsed by Alexander Lim who stole the check. He refused to say how and why
it was passed to him. He had therefore notice of the defect of his title over the check from the start.
The holder of a cashier's check who is not a holder in due course cannot enforce such check against
the issuing bank which dishonors the same. If a payee of a cashier's check obtained it from the
issuing bank by fraud, or if there is some other reason why the payee is not entitled to collect the
check, the respondent bank would, of course, have the right to refuse payment of the check when
presented by the payee, since respondent bank was aware of the facts surrounding the loss of the
check in question. Moreover, there is no similarity in the cases cited by petitioner since respondent
bank did not issue the cashier's check in payment of its obligation. Jose Go bought it from
respondent bank for purposes of transferring his funds from respondent bank to another bank near
his establishment realizing that carrying money in this form is safer than if it were in cash. The check
was Jose Go's property when it was misplaced or stolen, hence he stopped its payment. At the
outset, respondent bank knew it was Jose Go's check and no one else since Go had not paid or
indorsed it to anyone. The bank was therefore liable to nobody on the check but Jose Go. The bank
had no intention to issue it to petitioner but only to buyer Jose Go. When payment on it was
therefore stopped, respondent bank was not the one who did it but Jose Go, the owner of the check.
Respondent bank could not be drawer and drawee for clearly, Jose Go owns the money it
represents and he is therefore the drawer and the drawee in the same manner as if he has a current
account and he issued a check against it; and from the moment said cashier's check was lost and/or
stolen no one outside of Jose Go can be termed a holder in due course because Jose Go had not
indorsed it in due course. The check in question suffers from the infirmity of not having been properly
negotiated and for value by respondent Jose Go who as already been said is the real owner of said
instrument.
In his second assignment of error, petitioner stubbornly insists that there is no showing of conflicting
claims and interpleader is out of the question. There is enough evidence to establish the contrary.
Considering the aforementioned facts and circumstances, respondent bank merely took the
necessary precaution not to make a mistake as to whom to pay and therefore interpleader was its
proper remedy. It has been shown that the interpleader suit was filed by respondent bank because
petitioner and Jose Go were both laying their claims on the check, petitioner asking payment thereon
and Jose Go as the purchaser or owner. The allegation of petitioner that respondent bank had
effectively relieved itself of its primary liability under the check by simply filing a complaint for
interpleader is belied by the willingness of respondent bank to issue a certificate of time deposit in
the amount of P800,000 representing the cashier's check in question in the name of the Clerk of
Court of Manila to be awarded to whoever wig be found by the court as validly entitled to it. Said
validity will depend on the strength of the parties' respective rights and titles thereto. Bank filed the
interpleader suit not because petitioner sued it but because petitioner is laying claim to the same
check that Go is claiming. On the very day that the bank instituted the case in interpleader, it was not
aware of any suit for damages filed by petitioner against it as supported by the fact that the
interpleader case was first entitled Associated Bank vs. Jose Go and John Doe, but later on
changed to Marcelo A. Mesina for John Doe when his name became known to respondent bank.
In his third assignment of error, petitioner assails the then respondent IAC in upholding the trial
court's order declaring petitioner in default when there was no proper order for him to plead in the
interpleader case. Again, such contention is untenable. The trial court issued an order, compelling
petitioner and respondent Jose Go to file their Answers setting forth their respective claims.
Subsequently, a Pre-Trial Conference was set with notice to parties to submit position papers.
Petitioner argues in his memorandum that this order requiring petitioner to file his answer was issued
without jurisdiction alleging that since he is presumably a holder in due course and for value, how
can he be compelled to litigate against Jose Go who is not even a party to the check? Such
argument is trite and ridiculous if we have to consider that neither his name or Jose Go's name
appears on the check. Following such line of argument, petitioner is not a party to the check either
and therefore has no valid claim to the Check. Furthermore, the Order of the trial court requiring the
parties to file their answers is to all intents and purposes an order to interplead, substantially and
essentially and therefore in compliance with the provisions of Rule 63 of the Rules of Court. What
else is the purpose of a law suit but to litigate?
The records of the case show that respondent bank had to resort to details in support of its action for
Interpleader. Before it resorted to Interpleader, respondent bank took an precautionary and
necessary measures to bring out the truth. On the other hand, petitioner concealed the
circumstances known to him and now that private respondent bank brought these circumstances out
in court (which eventually rendered its decision in the light of these facts), petitioner charges it with
"gratuitous excursions into these non-issues." Respondent IAC cannot rule on whether respondent
RTC committed an abuse of discretion or not, without being apprised of the facts and reasons why
respondent Associated Bank instituted the Interpleader case. Both parties were given an opportunity
to present their sides. Petitioner chose to withhold substantial facts. Respondents were not forbidden
to present their side-this is the purpose of the Comment of respondent to the petition. IAC decided
the question by considering both the facts submitted by petitioner and those given by respondents.
IAC did not act therefore beyond the scope of the remedy sought in the petition.
WHEREFORE, finding that the instant petition is merely dilatory, the same is hereby denied and the
assailed orders of the respondent court are hereby AFFIRMED in toto.
SO ORDERED.