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Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 93695 February 4, 1992
RAMON C. LEE and ANTONIO DM. LACDAO, petitioners,
vs.
THE HON. COURT OF APPEALS, SACOBA MANUFACTURING CORP., PABLO GONZALES,
JR. and THOMAS GONZALES, respondents.
Cayanga, Zuniga & Angel Law Offices for petitioners.
Timbol & Associates for private respondents.

GUTIERREZ, JR., J.:
What is the nature of the voting trust agreement executed between two parties in this case? Who
owns the stocks of the corporation under the terms of the voting trust agreement? How long can a
voting trust agreement remain valid and effective? Did a director of the corporation cease to be such
upon the creation of the voting trust agreement? These are the questions the answers to which are
necessary in resolving the principal issue in this petition for certiorari — whether or not there was
proper service of summons on Alfa Integrated Textile Mills (ALFA, for short) through the petitioners
as president and vice-president, allegedly, of the subject corporation after the execution of a voting
trust agreement between ALFA and the Development Bank of the Philippines (DBP, for short).
From the records of the instant case, the following antecedent facts appear:
On November 15, 1985, a complaint for a sum of money was filed by the International Corporate
Bank, Inc. against the private respondents who, in turn, filed a third party complaint against ALFA
and the petitioners on March 17, 1986.
On September 17, 1987, the petitioners filed a motion to dismiss the third party complaint which the
Regional Trial Court of Makati, Branch 58 denied in an Order dated June 27, 1988.
On July 18, 1988, the petitioners filed their answer to the third party complaint.
Meanwhile, on July 12, 1988, the trial court issued an order requiring the issuance of
an alias summons upon ALFA through the DBP as a consequence of the petitioner's letter informing
the court that the summons for ALFA was erroneously served upon them considering that the
management of ALFA had been transferred to the DBP.
In a manifestation dated July 22, 1988, the DBP claimed that it was not authorized to receive
summons on behalf of ALFA since the DBP had not taken over the company which has a separate
and distinct corporate personality and existence.

On August 4, 1988, the trial court issued an order advising the private respondents to take the
appropriate steps to serve the summons to ALFA.
On August 16, 1988, the private respondents filed a Manifestation and Motion for the Declaration of
Proper Service of Summons which the trial court granted on August 17, 1988.
On September 12, 1988, the petitioners filed a motion for reconsideration submitting that Rule 14,
section 13 of the Revised Rules of Court is not applicable since they were no longer officers of ALFA
and that the private respondents should have availed of another mode of service under Rule 14,
Section 16 of the said Rules, i.e.,through publication to effect proper service upon ALFA.
In their Comment to the Motion for Reconsideration dated September 27, 1988, the private
respondents argued that the voting trust agreement dated March 11, 1981 did not divest the
petitioners of their positions as president and executive vice-president of ALFA so that service of
summons upon ALFA through the petitioners as corporate officers was proper.
On January 2, 1989, the trial court upheld the validity of the service of summons on ALFA through
the petitioners, thus, denying the latter's motion for reconsideration and requiring ALFA to filed its
answer through the petitioners as its corporate officers.
On January 19, 1989, a second motion for reconsideration was filed by the petitioners reiterating
their stand that by virtue of the voting trust agreement they ceased to be officers and directors of
ALFA, hence, they could no longer receive summons or any court processes for or on behalf of
ALFA. In support of their second motion for reconsideration, the petitioners attached thereto a copy
of the voting trust agreement between all the stockholders of ALFA (the petitioners included), on the
one hand, and the DBP, on the other hand, whereby the management and control of ALFA became
vested upon the DBP.
On April 25, 1989, the trial court reversed itself by setting aside its previous Order dated January 2,
1989 and declared that service upon the petitioners who were no longer corporate officers of ALFA
cannot be considered as proper service of summons on ALFA.
On May 15, 1989, the private respondents moved for a reconsideration of the above Order which
was affirmed by the court in its Order dated August 14, 1989 denying the private respondent's
motion for reconsideration.
On September 18, 1989, a petition for certiorari was belatedly submitted by the private respondent
before the public respondent which, nonetheless, resolved to give due course thereto on September
21, 1989.
On October 17, 1989, the trial court, not having been notified of the pending petition
for certiorari with public respondent issued an Order declaring as final the Order dated April 25,
1989. The private respondents in the said Order were required to take positive steps in prosecuting
the third party complaint in order that the court would not be constrained to dismiss the same for
failure to prosecute. Subsequently, on October 25, 1989 the private respondents filed a motion for
reconsideration on which the trial court took no further action.
On March 19, 1990, after the petitioners filed their answer to the private respondents' petition
for certiorari, the public respondent rendered its decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, the orders of respondent judge dated April
25, 1989 and August 14, 1989 are hereby SET ASIDE and respondent corporation is
ordered to file its answer within the reglementary period. (CA Decision, p. 8; Rollo, p.
24)
On April 11, 1990, the petitioners moved for a reconsideration of the decision of the public
respondent which resolved to deny the same on May 10, 1990. Hence, the petitioners filed
this certiorari petition imputing grave abuse of discretion amounting to lack of jurisdiction on the part
of the public respondent in reversing the questioned Orders dated April 25, 1989 and August 14,
1989 of the court a quo, thus, holding that there was proper service of summons on ALFA through
the petitioners.
In the meantime, the public respondent inadvertently made an entry of judgment on July 16, 1990
erroneously applying the rule that the period during which a motion for reconsideration has been
pending must be deducted from the 15-day period to appeal. However, in its Resolution dated
January 3, 1991, the public respondent set aside the aforestated entry of judgment after further
considering that the rule it relied on applies to appeals from decisions of the Regional Trial Courts to
the Court of Appeals, not to appeals from its decision to us pursuant to our ruling in the case
of Refractories Corporation of the Philippines v. Intermediate Appellate Court, 176 SCRA 539 [1989].
(CA Rollo, pp. 249-250)
In their memorandum, the petitioners present the following arguments, to wit:
(1) that the execution of the voting trust agreement by a stockholders whereby all his
shares to the corporation have been transferred to the trustee deprives the
stockholders of his position as director of the corporation; to rule otherwise, as the
respondent Court of Appeals did, would be violative of section 23 of the Corporation
Code ( Rollo, pp. 270-3273); and
(2) that the petitioners were no longer acting or holding any of the positions provided
under Rule 14, Section 13 of the Rules of Court authorized to receive service of
summons for and in behalf of the private domestic corporation so that the service of
summons on ALFA effected through the petitioners is not valid and ineffective; to
maintain the respondent Court of Appeals' position that ALFA was properly served its
summons through the petitioners would be contrary to the general principle that a
corporation can only be bound by such acts which are within the scope of its officers'
or agents' authority (Rollo, pp. 273-275)
In resolving the issue of the propriety of the service of summons in the instant case, we dwell first on
the nature of a voting trust agreement and the consequent effects upon its creation in the light of the
provisions of the Corporation Code.
A voting trust is defined in Ballentine's Law Dictionary as follows:
(a) trust created by an agreement between a group of the stockholders of a
corporation and the trustee or by a group of identical agreements between individual
stockholders and a common trustee, whereby it is provided that for a term of years,
or for a period contingent upon a certain event, or until the agreement is terminated,
control over the stock owned by such stockholders, either for certain purposes or for
all purposes, is to be lodged in the trustee, either with or without a reservation to the
owners, or persons designated by them, of the power to direct how such control shall
be used. (98 ALR 2d. 379 sec. 1 [d]; 19 Am J 2d Corp. sec. 685).

Under Section 59 of the new Corporation Code which expressly recognizes voting trust agreements,
a more definitive meaning may be gathered. The said provision partly reads:
Sec. 59. Voting Trusts — One or more stockholders of a stock corporation may
create a voting trust for the purpose of conferring upon a trustee or trustees the right
to vote and other rights pertaining to the share for a period rights pertaining to the
shares for a period not exceeding five (5) years at any one time: Provided, that in the
case of a voting trust specifically required as a condition in a loan agreement, said
voting trust may be for a period exceeding (5) years but shall automatically expire
upon full payment of the loan. A voting trust agreement must be in writing and
notarized, and shall specify the terms and conditions thereof. A certified copy of such
agreement shall be filed with the corporation and with the Securities and Exchange
Commission; otherwise, said agreement is ineffective and unenforceable. The
certificate or certificates of stock covered by the voting trust agreement shall be
cancelled and new ones shall be issued in the name of the trustee or trustees stating
that they are issued pursuant to said agreement. In the books of the corporation, it
shall be noted that the transfer in the name of the trustee or trustees is made
pursuant to said voting trust agreement.
By its very nature, a voting trust agreement results in the separation of the voting rights of a
stockholder from his other rights such as the right to receive dividends, the right to inspect the books
of the corporation, the right to sell certain interests in the assets of the corporation and other rights to
which a stockholder may be entitled until the liquidation of the corporation. However, in order to
distinguish a voting trust agreement from proxies and other voting pools and agreements, it must
pass three criteria or tests, namely: (1) that the voting rights of the stock are separated from the
other attributes of ownership; (2) that the voting rights granted are intended to be irrevocable for a
definite period of time; and (3) that the principal purpose of the grant of voting rights is to acquire
voting control of the corporation. (5 Fletcher, Cyclopedia of the Law on Private Corporations, section
2075 [1976] p. 331citing Tankersly v. Albright, 374 F. Supp. 538)
Under section 59 of the Corporation Code, supra, a voting trust agreement may confer upon a
trustee not only the stockholder's voting rights but also other rights pertaining to his shares as long
as the voting trust agreement is not entered "for the purpose of circumventing the law against
monopolies and illegal combinations in restraint of trade or used for purposes of fraud." (section 59,
5th paragraph of the Corporation Code) Thus, the traditional concept of a voting trust agreement
primarily intended to single out a stockholder's right to vote from his other rights as such and made
irrevocable for a limited duration may in practice become a legal device whereby a transfer of the
stockholder's shares is effected subject to the specific provision of the voting trust agreement.
The execution of a voting trust agreement, therefore, may create a dichotomy between the equitable
or beneficial ownership of the corporate shares of a stockholders, on the one hand, and the legal title
thereto on the other hand.
The law simply provides that a voting trust agreement is an agreement in writing whereby one or
more stockholders of a corporation consent to transfer his or their shares to a trustee in order to vest
in the latter voting or other rights pertaining to said shares for a period not exceeding five years upon
the fulfillment of statutory conditions and such other terms and conditions specified in the
agreement. The five year-period may be extended in cases where the voting trust is executed
pursuant to a loan agreement whereby the period is made contingent upon full payment of the loan.
In the instant case, the point of controversy arises from the effects of the creation of the voting trust
agreement. The petitioners maintain that with the execution of the voting trust agreement between

them and the other stockholders of ALFA, as one party, and the DBP, as the other party, the former
assigned and transferred all their shares in ALFA to DBP, as trustee. They argue that by virtue to of
the voting trust agreement the petitioners can no longer be considered directors of ALFA. In support
of their contention, the petitioners invoke section 23 of the Corporation Code which provides, in part,
that:
Every director must own at least one (1) share of the capital stock of the corporation
of which he is a director which share shall stand in his name on the books of the
corporation. Any director who ceases to be the owner of at least one (1) share of the
capital stock of the corporation of which he is a director shall thereby cease to be
director . . . (Rollo, p. 270)
The private respondents, on the contrary, insist that the voting trust agreement between ALFA and
the DBP had all the more safeguarded the petitioners' continuance as officers and directors of ALFA
inasmuch as the general object of voting trust is to insure permanency of the tenure of the directors
of a corporation. They cited the commentaries by Prof. Aguedo Agbayani on the right and status of
the transferring stockholders, to wit:
The "transferring stockholder", also called the "depositing stockholder", is equitable
owner for the stocks represented by the voting trust certificates and the stock
reversible on termination of the trust by surrender. It is said that the voting trust
agreement does not destroy the status of the transferring stockholders as such, and
thus render them ineligible as directors. But a more accurate statement seems to be
that for some purposes the depositing stockholder holding voting trust certificates in
lieu of his stock and being the beneficial owner thereof, remains and is treated as a
stockholder. It seems to be deducible from the case that he may sue as a
stockholder if the suit is in equity or is of an equitable nature, such as, a technical
stockholders' suit in right of the corporation. [Commercial Laws of the Philippines by
Agbayani, Vol. 3 pp. 492-493, citing 5 Fletcher 326, 327] (Rollo, p. 291)
We find the petitioners' position meritorious.
Both under the old and the new Corporation Codes there is no dispute as to the most immediate
effect of a voting trust agreement on the status of a stockholder who is a party to its execution —
from legal titleholder or owner of the shares subject of the voting trust agreement, he becomes the
equitable or beneficial owner. (Salonga,Philippine Law on Private Corporations, 1958 ed., p. 268;
Pineda and Carlos, The Law on Private Corporations and Corporate Practice, 1969 ed., p. 175;
Campos and Lopez-Campos, The Corporation Code; Comments, Notes & Selected Cases, 1981,
ed., p. 386; Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the
Philippines, Vol. 3, 1988 ed., p. 536). The penultimate question, therefore, is whether the change in
his status deprives the stockholder of the right to qualify as a director under section 23 of the present
Corporation Code which deletes the phrase "in his own right." Section 30 of the old Code states that:
Every director must own in his own right at least one share of the capital stock of the
stock corporation of which he is a director, which stock shall stand in his name on the
books of the corporation. A director who ceases to be the owner of at least one share
of the capital stock of a stock corporation of which is a director shall thereby cease to
be a director . . . (Emphasis supplied)
Under the old Corporation Code, the eligibility of a director, strictly speaking, cannot be adversely
affected by the simple act of such director being a party to a voting trust agreement inasmuch as he
remains owner (although beneficial or equitable only) of the shares subject of the voting trust

agreement pursuant to which a transfer of the stockholder's shares in favor of the trustee is required
(section 36 of the old Corporation Code). No disqualification arises by virtue of the phrase "in his
own right" provided under the old Corporation Code.
With the omission of the phrase "in his own right" the election of trustees and other persons who in
fact are not beneficial owners of the shares registered in their names on the books of the corporation
becomes formally legalized (see Campos and Lopez-Campos, supra, p. 296) Hence, this is a clear
indication that in order to be eligible as a director, what is material is the legal title to, not beneficial
ownership of, the stock as appearing on the books of the corporation (2 Fletcher, Cyclopedia of the
Law of Private Corporations, section 300, p. 92 [1969]citing People v. Lihme, 269 Ill. 351, 109 N.E.
1051).
The facts of this case show that the petitioners, by virtue of the voting trust agreement executed in
1981 disposed of all their shares through assignment and delivery in favor of the DBP, as trustee.
Consequently, the petitioners ceased to own at least one share standing in their names on the books
of ALFA as required under Section 23 of the new Corporation Code. They also ceased to have
anything to do with the management of the enterprise. The petitioners ceased to be directors.
Hence, the transfer of the petitioners' shares to the DBP created vacancies in their respective
positions as directors of ALFA. The transfer of shares from the stockholder of ALFA to the DBP is
the essence of the subject voting trust agreement as evident from the following stipulations:
1. The TRUSTORS hereby assign and deliver to the TRUSTEE the certificate of the
shares of the stocks owned by them respectively and shall do all things necessary for
the transfer of their respective shares to the TRUSTEE on the books of ALFA.
2. The TRUSTEE shall issue to each of the TRUSTORS a trust certificate for the
number of shares transferred, which shall be transferrable in the same manner and
with the same effect as certificates of stock subject to the provisions of this
agreement;
3. The TRUSTEE shall vote upon the shares of stock at all meetings of ALFA, annual
or special, upon any resolution, matter or business that may be submitted to any
such meeting, and shall possess in that respect the same powers as owners of the
equitable as well as the legal title to the stock;
4. The TRUSTEE may cause to be transferred to any person one share of stock for
the purpose of qualifying such person as director of ALFA, and cause a certificate of
stock evidencing the share so transferred to be issued in the name of such person;
xxx xxx xxx
9. Any stockholder not entering into this agreement may transfer his shares to the
same trustees without the need of revising this agreement, and this agreement shall
have the same force and effect upon that said stockholder. (CA Rollo, pp. 137-138;
Emphasis supplied)
Considering that the voting trust agreement between ALFA and the DBP transferred legal ownership
of the stock covered by the agreement to the DBP as trustee, the latter became the stockholder of
record with respect to the said shares of stocks. In the absence of a showing that the DBP had
caused to be transferred in their names one share of stock for the purpose of qualifying as directors
of ALFA, the petitioners can no longer be deemed to have retained their status as officers of ALFA

which was the case before the execution of the subject voting trust agreement. There appears to be
no dispute from the records that DBP has taken over full control and management of the firm.
Moreover, in the Certification dated January 24, 1989 issued by the DBP through one Elsa A.
Guevarra, Vice-President of its Special Accounts Department II, Remedial Management Group, the
petitioners were no longer included in the list of officers of ALFA "as of April 1982." (CA Rollo, pp.
140-142)
Inasmuch as the private respondents in this case failed to substantiate their claim that the subject
voting trust agreement did not deprive the petitioners of their position as directors of ALFA, the
public respondent committed a reversible error when it ruled that:
. . . while the individual respondents (petitioners Lee and Lacdao) may have ceased
to be president and vice-president, respectively, of the corporation at the time of
service of summons on them on August 21, 1987, they were at least up to that time,
still directors . . .
The aforequoted statement is quite inaccurate in the light of the express terms of Stipulation No. 4 of
the subject voting trust agreement. Both parties, ALFA and the DBP, were aware at the time of the
execution of the agreement that by virtue of the transfer of shares of ALFA to the DBP, all the
directors of ALFA were stripped of their positions as such.
There can be no reliance on the inference that the five-year period of the voting trust agreement in
question had lapsed in 1986 so that the legal title to the stocks covered by the said voting trust
agreement ipso facto reverted to the petitioners as beneficial owners pursuant to the 6th paragraph
of section 59 of the new Corporation Code which reads:
Unless expressly renewed, all rights granted in a voting trust agreement shall
automatically expire at the end of the agreed period, and the voting trust certificate
as well as the certificates of stock in the name of the trustee or trustees shall thereby
be deemed cancelled and new certificates of stock shall be reissued in the name of
the transferors.
On the contrary, it is manifestly clear from the terms of the voting trust agreement between ALFA
and the DBP that the duration of the agreement is contingent upon the fulfillment of certain
obligations of ALFA with the DBP. This is shown by the following portions of the agreement.
WHEREAS, the TRUSTEE is one of the creditors of ALFA, and its credit is secured
by a first mortgage on the manufacturing plant of said company;
WHEREAS, ALFA is also indebted to other creditors for various financial
accomodations and because of the burden of these obligations is encountering very
serious difficulties in continuing with its operations.
WHEREAS, in consideration of additional accommodations from the TRUSTEE,
ALFA had offered and the TRUSTEE has accepted participation in the management
and control of the company and to assure the aforesaid participation by the
TRUSTEE, the TRUSTORS have agreed to execute a voting trust covering their
shareholding in ALFA in favor of the TRUSTEE;
AND WHEREAS, DBP is willing to accept the trust for the purpose aforementioned.

NOW, THEREFORE, it is hereby agreed as follows:
xxx xxx xxx
6. This Agreement shall last for a period of Five (5) years, and is renewable for as
long as the obligations of ALFA with DBP, or any portion thereof, remains
outstanding; (CA Rollo, pp. 137-138)
Had the five-year period of the voting trust agreement expired in 1986, the DBP would not have
transferred all its rights, titles and interests in ALFA "effective June 30, 1986" to the national
government through the Asset Privatization Trust (APT) as attested to in a Certification dated
January 24, 1989 of the Vice President of the DBP's Special Accounts Department II. In the same
certification, it is stated that the DBP, from 1987 until 1989, had handled APT's account which
included ALFA's assets pursuant to a management agreement by and between the DBP and APT
(CA Rollo, p. 142) Hence, there is evidence on record that at the time of the service of summons on
ALFA through the petitioners on August 21, 1987, the voting trust agreement in question was not yet
terminated so that the legal title to the stocks of ALFA, then, still belonged to the DBP.
In view of the foregoing, the ultimate issue of whether or not there was proper service of summons
on ALFA through the petitioners is readily answered in the negative.
Under section 13, Rule 14 of the Revised Rules of Court, it is provided that:
Sec. 13. Service upon private domestic corporation or partnership. — If the
defendant is a corporation organized under the laws of the Philippines or a
partnership duly registered, service may be made on the president, manager,
secretary, cashier, agent or any of its directors.
It is a basic principle in Corporation Law that a corporation has a personality separate and distinct
from the officers or members who compose it. (See Sulo ng Bayan Inc. v. Araneta, Inc., 72 SCRA
347 [1976]; Osias Academy v. Department of Labor and Employment, et al., G.R. Nos. 83257-58,
December 21, 1990). Thus, the above rule on service of processes of a corporation enumerates the
representatives of a corporation who can validly receive court processes on its behalf. Not every
stockholder or officer can bind the corporation considering the existence of a corporate entity
separate from those who compose it.
The rationale of the aforecited rule is that service must be made on a representative so integrated
with the corporation sued as to make it a priori supposable that he will realize his responsibilities and
know what he should do with any legal papers served on him. (Far Corporation v. Francisco, 146
SCRA 197 [1986] citing Villa Rey Transit, Inc. v. Far East Motor Corp. 81 SCRA 303 [1978]).
The petitioners in this case do not fall under any of the enumerated officers. The service of
summons upon ALFA, through the petitioners, therefore, is not valid. To rule otherwise, as correctly
argued by the petitioners, will contravene the general principle that a corporation can only be bound
by such acts which are within the scope of the officer's or agent's authority. (see Vicente v. Geraldez,
52 SCRA 210 [1973]).
WHEREFORE, premises considered, the petition is hereby GRANTED. The appealed decision
dated March 19, 1990 and the Court of Appeals' resolution of May 10, 1990 are SET ASIDE and the
Orders dated April 25, 1989 and October 17, 1989 issued by the Regional Trial Court of Makati,
Branch 58 are REINSTATED.

SO ORDERED.
Feliciano, Bidin, Davide, Jr. and Romero, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 100290 June 4, 1993
NORBERTO TIBAJIA, JR. and CARMEN TIBAJIA, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and EDEN TAN, respondents.

PADILLA, J.:
Petitioners, spouses Norberto Tibajia, Jr. and Carmen Tibajia, are before this Court assailing the
decision * of respondent appellate court dated 24 April 1991 in CA-G.R. SP No. 24164 denying their
petition for certiorariprohibition, and injunction which sought to annul the order of Judge Eutropio
Migriño of the Regional Trial Court, Branch 151, Pasig, Metro Manila in Civil Case No. 54863 entitled
"Eden Tan vs. Sps. Norberto and Carmen Tibajia."
Stated briefly, the relevant facts are as follows:
Case No. 54863 was a suit for collection of a sum of money filed by Eden Tan against the Tibajia
spouses. A writ of attachment was issued by the trial court on 17 August 1987 and on 17 September
1987, the Deputy Sheriff filed a return stating that a deposit made by the Tibajia spouses in the
Regional Trial Court of Kalookan City in the amount of Four Hundred Forty Two Thousand Seven
Hundred and Fifty Pesos (P442,750.00) in another case, had been garnished by him. On 10 March
1988, the Regional Trial Court, Branch 151 of Pasig, Metro Manila rendered its decision in Civil
Case No. 54863 in favor of the plaintiff Eden Tan, ordering the Tibajia spouses to pay her an amount
in excess of Three Hundred Thousand Pesos (P300,000.00). On appeal, the Court of Appeals
modified the decision by reducing the award of moral and exemplary damages. The decision having
become final, Eden Tan filed the corresponding motion for execution and thereafter, the garnished
funds which by then were on deposit with the cashier of the Regional Trial Court of Pasig, Metro
Manila, were levied upon.
On 14 December 1990, the Tibajia spouses delivered to Deputy Sheriff Eduardo Bolima the total
money judgment in the following form:
Cashier's Check P262,750.00
Cash 135,733.70
————
Total P398,483.70

Private respondent, Eden Tan, refused to accept the payment made by the Tibajia spouses and
instead insisted that the garnished funds deposited with the cashier of the Regional Trial Court of
Pasig, Metro Manila be withdrawn to satisfy the judgment obligation. On 15 January 1991, defendant
spouses (petitioners) filed a motion to lift the writ of execution on the ground that the judgment debt
had already been paid. On 29 January 1991, the motion was denied by the trial court on the ground
that payment in cashier's check is not payment in legal tender and that payment was made by a third
party other than the defendant. A motion for reconsideration was denied on 8 February 1991.
Thereafter, the spouses Tibajia filed a petition for certiorari, prohibition and injunction in the Court of
Appeals. The appellate court dismissed the petition on 24 April 1991 holding that payment by
cashier's check is not payment in legal tender as required by Republic Act No. 529. The motion for
reconsideration was denied on 27 May 1991.
In this petition for review, the Tibajia spouses raise the following issues:
I WHETHER OR NOT THE BPI CASHIER'S CHECK NO. 014021 IN THE AMOUNT
OF P262,750.00 TENDERED BY PETITIONERS FOR PAYMENT OF THE
JUDGMENT DEBT, IS "LEGAL TENDER".
II WHETHER OR NOT THE PRIVATE RESPONDENT MAY VALIDLY REFUSE THE
TENDER OF PAYMENT PARTLY IN CHECK AND PARTLY IN CASH MADE BY
PETITIONERS, THRU AURORA VITO AND COUNSEL, FOR THE SATISFACTION
OF THE MONETARY OBLIGATION OF PETITIONERS-SPOUSES. 1
The only issue to be resolved in this case is whether or not payment by means of check (even by
cashier's check) is considered payment in legal tender as required by the Civil Code, Republic Act
No. 529, and the Central Bank Act.
It is contended by the petitioners that the check, which was a cashier's check of the Bank of the
Philippine Islands, undoubtedly a bank of good standing and reputation, and which was a crossed
check marked "For Payee's Account Only" and payable to private respondent Eden Tan, is
considered legal tender, payment with which operates to discharge their monetary
obligation. 2 Petitioners, to support their contention, cite the case of New Pacific Timber and Supply Co.,
Inc. v. Señeris 3 where this Court held through Mr. Justice Hermogenes Concepcion, Jr. that "It is a wellknown and accepted practice in the business sector that a cashier's check is deemed as cash".

The provisions of law applicable to the case at bar are the following:
a. Article 1249 of the Civil Code which provides:
Art. 1249. The payment of debts in money shall be made in the currency stipulated,
and if it is not possible to deliver such currency, then in the currency which is legal
tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other
mercantile documents shall produce the effect of payment only when they have been
cashed, or when through the fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in
abeyance.;
b. Section 1 of Republic Act No. 529, as amended, which provides:

Sec. 1. Every provision contained in, or made with respect to, any obligation which
purports to give the obligee the right to require payment in gold or in any particular
kind of coin or currency other than Philippine currency or in an amount of money of
the Philippines measured thereby, shall be as it is hereby declared against public
policy null and void, and of no effect, and no such provision shall be contained in, or
made with respect to, any obligation thereafter incurred. Every obligation heretofore
and hereafter incurred, whether or not any such provision as to payment is contained
therein or made with respect thereto, shall be discharged upon payment in any coin
or currency which at the time of payment is legal tender for public and private debts.
c. Section 63 of Republic Act No. 265, as amended (Central Bank Act) which provides:
Sec. 63. Legal character — Checks representing deposit money do not have legal
tender power and their acceptance in the payment of debts, both public and private,
is at the option of the creditor: Provided, however, that a check which has been
cleared and credited to the account of the creditor shall be equivalent to a delivery to
the creditor of cash in an amount equal to the amount credited to his account.
From the aforequoted provisions of law, it is clear that this petition must fail.
In the recent cases of Philippine Airlines, Inc. vs. Court of Appeals 4 and Roman Catholic Bishop of
Malolos, Inc. vs. Intermediate Appellate Court, 5 this Court held that —

A check, whether a manager's check or ordinary check, is not legal tender, and an
offer of a check in payment of a debt is not a valid tender of payment and may be
refused receipt by the obligee or creditor.
The ruling in these two (2) cases merely applies the statutory provisions which lay down the rule that
a check is not legal tender and that a creditor may validly refuse payment by check, whether it be a
manager's, cashier's or personal check.
Petitioners erroneously rely on one of the dissenting opinions in the Philippine Airlines case 6 to
support their cause. The dissenting opinion however does not in any way support the contention that a
check is legal tender but, on the contrary, states that "If the PAL checks in question had not been
encashed by Sheriff Reyes, there would be no payment by PAL and, consequently, no discharge or
satisfaction of its judgment obligation." 7 Moreover, the circumstances in the Philippine Airlines case are
quite different from those in the case at bar for in that case the checks issued by the judgment debtor
were made payable to the sheriff, Emilio Z. Reyes, who encashed the checks but failed to deliver the
proceeds of said encashment to the judgment creditor.

In the more recent case of Fortunado vs. Court of Appeals, 8 this Court stressed that, "We are not, by
this decision, sanctioning the use of a check for the payment of obligations over the objection of the
creditor."

WHEREFORE, the petition is DENIED. The appealed decision is hereby AFFIRMED, with costs
against the petitioners.
SO ORDERED.
Narvasa, C.J., Regalado and Nocon, JJ., concur.

# Footnotes
* Penned by Justice Consuelo Ynares Santiago with the concurrence of Justices
Nicolas P. Lapeña, Jr. and Cancio C. Garcia.
1 Rollo, p. 11.
2 Rollo, p. 54.
3 G.R. No. L-41764, 19 December 1980, 101 SCRA 686.
4 G.R. No. 49188, 30 January 1990, 181 SCRA 557.
5 G.R. No. 72110, 16 November 1990, 191 SCRA 411.
6 Supra, Dissenting Opinion of Padilla, J., pp. 580-582.
7 Supra, pp. 581-582.
8 G.R. No. 78556, 25 April 1991, 196 SCRA 269.

SECOND DIVISION

[G.R. No. 132362. June 28, 2001]

PIO BARRETTO REALTY DEVELOPMENT CORPORATION, petitioner,
vs. COURT OF APPEALS, JUDGE PERFECTO A. S. LAGUIO, JR.,
RTC-Branch 18, Manila, and HONOR P. MOSLARES, respondents.
DECISION
BELLOSILLO, J.:

This petition for review on certiorari assails the Decision dated 30 June 1997 of the Court of
Appeals in CA-G.R. SP No. 33982, "Pio Barretto Realty Development Corporation v. Hon.
Perfecto A. Laguio, et al.," which dismissed the special civil action for certiorari filed by
petitioner, as well as its Resolution dated 14 January 1998 denying reconsideration.
On 2 October 1984 respondent Honor P. Moslares instituted an action for annulment of sale
with damages before the Regional Trial Court of Manila against the Testate Estate of Nicolai
Drepin represented by its Judicial Administrator Atty. Tomas Trinidad and petitioner Pio
Barretto Realty Development Corporation. Moslares alleged that the Deed of Sale over four (4)
parcels of land of the Drepin Estate executed in favor of the Barretto Realty was null and void on
the ground that the same parcels of land had already been sold to him by the deceased Nicolai

Drepin. The case was docketed as Civil Case No. 84-27008 and raffled to respondent Judge
Perfecto A. S. Laguio, Jr., RTC-Br. 18, Manila.
On 2 May 1986 the parties, to settle the case, executed a Compromise Agreement pertinent
portions of which are quoted hereunder -

1. The Parties agree to sell the Estate, subject matter of the instant case, which is
composed of the following real estate properties, to wit:
a. Three (3) titled properties covered by TCT Nos. 50539, 50540 and 50541[1] of the
Registry of Deeds for the Province of Rizal, with a total area of 80 hectares, more or
less, and
b. Untitled Property, subject matter of (a) Land Registration Case No. 1602 of the
Regional Trial Court, Pasig, Metro Manila, with an area of 81 hectares, more or less,
subject to the following situations and conditions, to wit:

a. If plaintiff Honor P. Moslares x x x buys the property, he is under obligation, as
follows:
1. To reimburse and pay Defendant Pio Barretto Realty Development Corporation,
represented by Anthony Que, its capital investment of Three Million Pesos
(P3,000,000.00), Philippine Currency, and
2. To pay the Estate of Nicolai Drepin, represented by the Judicial Administrator,
Atty. Tomas Trinidad, the sum of One Million Three Hundred Fifty Thousand
(P1,350,000.00) Pesos, Philippine Currency
b. If defendant Pio Barretto Realty Development Corporation, represented by Mr.
Anthony Que x x x continue[s] to buy the property, it shall pay for the interests of
plaintiff Honor P. Moslares:
1. The sum of One Million (P1,000.000.00) Pesos, Philippine Currency to plaintiff
Honor P. Moslares personally and
2. Pay to the Estate of Nicolai Drepin, through the Judicial Administrator, Atty.
Tomas Trinidad, the balance of the agreed purchase price subject to negotiation and
verification of payments already made.
2. In the event that plaintiff Honor P. Moslares buys the Estate and pays in full the
amount of Three Million (P3,000,000.00) Philippine Currency to defendant Pio
Barretto Realty Development Corporation, and the full sum of One Million Three

Hundred Fifty Thousand (P1,350,000.00) Pesos, Philippine Currency, to the Estate of
Nicolai Drepin, through Atty. Tomas Trinidad, defendant Pio Barretto shall execute
the corresponding Deed of Conveyance in favor of plaintiff Honor P. Moslares and
deliver to him all the titles and pertinent papers to the Estate.
IN WITNESS WHEREOF, the parties hereto hereby sign this Compromise
Agreement at Manila, Philippines, this 2nd day of May 1986 x x x x
xxxx
xxx

x

On 24 July 1986 the trial court rendered a decision approving the Compromise
Agreement.[2] However, subsequent disagreements arose on the question of who bought the
properties first.
It must be noted that the Compromise Agreement merely gave Moslares and Barretto Realty
options to buy the disputed lots thus implicitly recognizing that the one who paid first had
priority in right. Moslares claimed that he bought the lots first on 15 January 1990 by delivering
to Atty. Tomas Trinidad two (2) PBCom checks, one (1) in favor of Barretto Realty for P3
million, and the other, in favor of the Drepin Estate for P1.35 million.
But petitioner Barretto Realty denied receiving the check. Instead, it claimed that it bought
the
properties
on 7 March 1990 by tendering a Traders Royal Bank Manager's Check for P1millio
n to Moslares, and a Far East Bank and Trust Company Cashier's Check for P1 million and a
Traders Royal Bank Manager's Check for P350,000.00 to Atty. Tomas Trinidad as Judicial
Administrator of the Estate. However, Moslares and Atty. Trinidad refused to accept the
checks.
Consequently, Barretto Realty filed a motion before the trial court alleging that it complied
with its monetary obligations under the Compromise Agreement but that its offers of payment
were refused, and prayed that a writ of execution be issued to compel Moslares and Atty.
Trinidad to comply with the Compromise Agreement and that the latter be directed to turn over
the owner's duplicate certificates of title over the lots.
On 10 May 1990[3] Judge Laguio, Jr. ordered that "a writ of execution be issued for the
enforcement of the decision of this Court for the parties to deposit with this Court, thru the City
Treasurer's Office of Manila, their respective monetary obligations under the compromise
agreement that had been executed by them x x x x"
Reacting to the order, Atty. Trinidad for the Estate filed an urgent motion to hold the
execution in abeyance on the ground that there was another case involving the issue of
ownership over subject lots pending before the Regional Trial Court of Antipolo
City. Moslares in turn filed a motion for reconsideration while Barretto Realty moved to amend
the order since the lower court did not exactly grant what it prayed for.
On 14 June 1990, ruling on the three (3) motions, Judge Laguio, Jr., issued his Order -

Considering Defendant Judicial Administrator's urgent motion to hold in abeyance x x
x the plaintiff's motion for reconsideration, and the Defendant Pio Barretto Realty

Development, Inc.'s opposition to both motions x x x this Court finds the two motions
without merit and are accordingly, denied.
As regards Pio Barretto Realty Development, Inc.'s ex-parte motion to amend order x
x x the same is hereby granted and the deputy sheriff of this Court is allowed to
deliver to the parties concerned thru their counsels the bank certified checks
mentioned in par. 2 of the motion (underscoring ours).[4]
On 20 June 1990 Deputy Sheriff Apolonio L. Golfo of the RTC-Br. 18, Manila,
implemented the order by personally delivering the checks issued by Barretto Realty in favor of
Moslares and the Estate to Atty. Pedro S. Ravelo, counsel for Moslares, and to Atty. Tomas
Trinidad, respectively, as recorded in a Sheriff's Return dated 25 June 1990.[5]
However, on 17 September 1993, or more than three (3) years later, Moslares filed a Motion
for Execution alleging that he bought the lots subject of the Compromise Agreement on 15
January 1990 and that he paid the amounts specified as payment therefor. He asked that
Barretto Realty be directed to execute a deed of conveyance over subject lots in his favor. In
a Supplement to his motion Moslares contended that the previous tender of the checks by
Barretto Realty did not produce the effect of payment because checks, according to
jurisprudence, were not legal tender.
Respondent Judge granted Moslares' Motion for Execution. Consequently, on 8 November
1993 Barretto Realty was ordered to execute a deed of conveyance over the subject lots in favor
of Moslares.
Aggrieved, Barretto Realty moved for reconsideration alleging that respondent Judge could
no longer grant Moslares' motion since the prior sale of subject lots in its favor had already been
recognized when the court sheriff was directed to deliver, and did in fact deliver, the checks it
issued in payment therefor to Moslares and Atty. Trinidad.
On 7 December 1993 respondent Judge granted the motion of Barretto Realty for
reconsideration and ruled -

Considering the motion for reconsideration and to quash writ of execution filed by
defendant Pio Barretto Realty Corporation, Inc., dated 16 November 1993, together
with the plaintiff's comment and/or opposition thereto, dated 18 November 1993, and
the movant's reply to the opposition etc., dated 20 November 1993, this Court finds
the motion well taken. The record shows that on 10 May 1990, a writ of execution
was issued by this Court for the parties to deposit with the Court, thru the City
Treasurer's Office of Manila, their respective monetary obligations under the
compromise agreement that they had executed, and that it was only defendant Pio
Barretto Realty Corporation Inc. that had complied therewith, per the return of this
Court's deputy sheriff, Apolonio L. Golfo, dated June 25, 1990. Such being the case,
Defendant Pio Barretto Realty Corporation Inc., is the absolute owner of the real
properties in question and the issue on such ownership is now a closed matter.

WHEREFORE, Defendant Pio Barretto Realty Corporation Inc.'s motion for
reconsideration etc., dated November 16, 1993, is hereby granted; this Court's order,
dated November 8, 1993, is reconsidered and set aside, and the writ of execution of
the same date against Defendant Pio Barretto Realty Corporation Inc. is ordered
quashed (underscoring ours).[6]
Within a reglementary period Moslares moved to reconsider insisting that Barretto Realty's
payment by check was not valid because (a) the check was not delivered personally to him but to
his counsel Atty. Pedro Ravelo, (b) the check was not encashed hence did not produce the effect
of payment; and, (c) the check was not legal tender per judicial pronouncements. Barretto Realty
opposed the motion, but to no avail. On 11 February 1994 respondent Judge granted the motion
for reconsideration and set aside his Order of 7 December 1993. Judge Laguio ruled that
Barretto Realty's payment through checks was not valid because "a check is not legal tender and
it cannot produce the effect of payment until it is encashed x x x x the check in question has
neither been negotiated nor encashed by the plaintiff."[7] At the same time, however, Moslares'
alleged payment of P3,000,000.00 on 15 January 1990 intended for Barretto Realty but delivered
to Atty. Tomas Trinidad was likewise decreed as not valid because the latter was not authorized
to accept payment for Barretto Realty.
Invoking interest of justice and equity, respondent Judge resolved to: (a) set aside its
ruling contained in its order of 7 December 1993 that "(d)efendant Pio Barretto Realty
Corporation, Inc., is the absolute owner of the property in question and the issue on such
ownership is now a closed matter;" (b) order the plaintiff (should he desire to exercise his option
to buy the real property in question) to pay defendant Pio Barretto Realty Corporation, Inc., the
sum ofP3,000,000.00 within five (5) days from notice thereof by way of reimbursement of the
latter's capital investment; and, (c) order defendant Pio Barretto Realty Development
Corporation, Inc., to pay the plaintiff (in the event the latter should fail to exercise his said option
and the former would want to buy the real property in question) the sum of P1,000,000.00.
But Moslares failed to exercise his option and pay the amount within the five (5)-day period
granted him. Instead, he filed a Supplemental Motion to Pay praying that he be given additional
seven (7) days within which to do so. Barretto Realty opposed and invoked par. 3 of the Order
of 11 February 1994 granting it the option to buy the lots in the event that Moslares should fail to
pay within the period given him. Barretto Realty prayed that the P1 million cashier's check still
in Moslares' possession be considered as sufficient compliance with the pertinent provision of
the court's order. Later, Barretto Realty offered to exchange the check with cash. When
Moslares did not appear however at the designated time for payment on 10 March 1994 before
the Branch Clerk of Court, Barretto Realty filed a motion for consignation praying that it be
allowed to deposit the P1,000,000.00 payment with the cashier of the Office of the Clerk of
Court.
Respondent Judge however failed to act on the motion as he went on vacation leave. For
reasons which do not clearly appear in the record, Judge Rosalio G. dela Rosa, Executive Judge
of the RTC, Manila, acted on the motion and granted the prayer of Barretto Realty. [8] Upon the
return of respondent Judge Laguio from his vacation, petitioner Barretto Realty immediately
filed a motion for his inhibition on the ground that he had already lost the cold neutrality of an
impartial judge as evident from his "seesaw" orders in the case. On 28 March 1994 respondent

Judge denied the motion for his inhibition. Moslares for his part moved for reconsideration of
Executive Judge dela Rosa's Order of 10 March 1994.
On 15 April 1994, in a Consolidated Order, respondent Judge Laguio set aside the
questioned order of Executive Judge dela Rosa on the ground that the motion for consignation
should have been referred to the pairing judge of Branch 18, Judge Zenaida Daguna of Branch
19. Respondent Judge further ruled that the questioned order was premature since there were
pending motions, namely, Moslares' Supplemental Motion to Pay dated 1 March 1994,
and Motion to Deposit dated 9 March 1994 which were both filed earlier than Barretto
Realty's Motion for Consignation which however remained unresolved.
Respondent Judge Laguio found Moslares' motions meritorious and granted them. Moslares
was thus given a non-extendible grace period of three (3) days within which to pay
the P3,000,000.00 to Barretto Realty. Moslares then deposited the amount with the Branch Clerk
of Court of Br. 18 within two (2) days from receipt of the order of respondent Judge, and on 25
April 1994 filed a motion for the Clerk of Court to be authorized to execute the necessary deed
of conveyance in his favor.
On 2 May 1994 Barretto Realty filed a petition for certiorari and prohibition with prayer for
a temporary restraining order and/or preliminary injunction with the Court of Appeals assailing
the Orders of respondent Judge dated 28 March 1994 and 15 April 1994 on the ground that they
were issued with grave abuse of discretion.
Meanwhile, on 12 October 1994 or during the pendency of the petition, respondent Judge
granted Moslares' motion and authorized the Clerk of Court to execute the deed of conveyance in
his favor. The implementation of the order however was enjoined by the Court of Appeals on 9
December 1994 when it issued a writ of preliminary injunction barring the issuance of the writ
until further orders from the court.
In its Petition and Memorandum petitioner specifically alleged that respondent Judge's
Orders of 8 November 1993,[9] 11 February 1994,[10] 15 April 1994,[11] and 12 October
1994[12] were all issued with grave abuse of discretion as the trial court had no more jurisdiction
to issue such orders since the Compromise Agreement of 2 May 1986 which was the basis of the
decision of 24 July 1986 had already been executed and implemented in its favor way back on 20
June 1990.
Petitioner likewise contended that the Order of 28 March 1994[13] denying petitioner's motion
for inhibition was void because it did not state the legal basis thereof; that respondent Judge
displayed obvious bias and prejudice when he issued "seesaw" orders in the case; and, that the
bias in favor of Moslares was apparent when respondent Judge granted the former another three
(3)-day period within which to pay the P3 million notwithstanding the fact that Moslares failed
to comply with the original five (5)-day period given him. With respect to Executive Judge dela
Rosa's Order of 10 March 1994, petitioner contended that there was no rule of procedure
prohibiting the Executive Judge from acting on an urgent motion even if the pairing judge of the
judge to whom the case was raffled was present.
The Court of Appeals dismissed the petition. It ruled that the denial by respondent Judge of
the motion for his inhibition was not tainted with grave abuse of discretion correctible by
certiorari. Aside from the fact that judges are given a wide latitude of discretion in determining
whether to voluntarily recuse themselves from a case, which is not lightly interfered with, the

appellate court however observed that the orders and resolutions issued by respondent Judge in
the five (5) years he had been presiding over Civil Case No. 84-27008 indicated that they were
not uniformly issued in favor of one or the other party. As petitioner itself aptly described,
respondent Judge's actuations in the case "seesawed" between the parties.
On the matter of the validity of Judge dela Rosa's Order of 10 March 1994
granting petitioner's motion for consignation, the Court of Appeals ruled that the order was
precipitate and unauthorized not only because the motion did not comply with the requisites for
litigated motions but also because Judge dela Rosa had no judicial authority to act on the
case. His duties as Executive Judge were purely administrative and did not include acting on a
case assigned to another judge.
With respect to the two (2) writs of execution, one dated 10 May 1990 in favor of petitioner,
and the other dated 11 February 1994 in favor of respondent, the Court of Appeals ruled -

Lastly, anent the existence of two writs of execution, first one for petitioner and the
second for Moslares which the former has repeatedly cited as capricious and
whimsical exercise of judicial discretion by respondent Judge, the records reveal that
on 10 May 1990 a writ of execution was issued in favor of the petitioner upon its
motion. For reasons of its own, petitioner did not pursue its effective and fruitful
implementation in accordance with the decision based on a compromise agreement,
spelling out the respective monetary obligations of petitioner and Moslares. Hence,
after the lapse of at least one year, Moslares filed a motion for execution of the same
decision x x x x [I]t cannot be said that respondent Judge issued two conflicting orders
sans any legal basis. What really happened was that the matter of the first order
granting execution in favor of petitioner was repeatedly put at issue until the order of
the court dated 11 February 1994 x x x x Observedly, the said order was never
elevated by petitioner to the appellate courts. Instead, he agreed with it by filing a
"Manifestation and Motion‖ on 01 March 1994 praying that the P1 Million Cashier's
Check still in the possession of Moslares be considered compliance with paragraph 3
of that order x x x x
On 14 January 1998 petitioner's motion for reconsideration was denied; hence, this petition.
Petitioner contends that the Court of Appeals erred (a) in concluding that petitioner did not
pursue the effective and fruitful implementation of the writ of execution dated 10 May 1990 in
its favor, (b) in not setting aside Judge Laguio's Orders dated 11 February 1994, 15 April 1994
and 12 October 1994 as patent nullities, and, (c) in disregarding jurisprudence declaring that
cashier's or manager's checks are deemed cash or as good as the money they represent.
We grant the petition. Final and executory decisions, more so with those already executed,
may no longer be amended except only to correct errors which are clerical in nature. They
become the law of the case and are immutable and unalterable regardless of any claim of error or
incorrectness.[14] Amendments or alterations which substantially affect such judgments as well as
the entire proceedings held for that purpose are null and void for lack of jurisdiction. [15] The
reason lies in the fact that public policy dictates that litigations must be terminated at some

definite time and that the prevailing party should not be denied the fruits of his victory by some
subterfuge devised by the losing party.[16]
It is not disputed, and in fact borne by the records, that petitioner bought the disputed lots of
the Drepin Estate subject matter of the Compromise Agreement ahead of Moslares and that the
checks issued in payment thereof were even personally delivered by the Deputy Sheriff of the
RTC-Br. 18, Manila, upon Order of respondent Judge dated 14 June 1990 after tender was
refused by Moslares and the Drepin Estate. Respondent Moslares never raised the invalidity of
the payment through checks either through a motion for reconsideration or a timely
appeal. Hence, with the complete execution and satisfaction of the Decision dated 24 July 1986
which approved the Compromise Agreement, Civil Case No. 84-27008 became closed and
terminated leaving nothing else to be done by the trial court with respect thereto.[17] As petitioner
correctly contended, the Court of Appeals erred when it concluded that petitioner did not pursue
the fruitful and effective implementation of the writ of execution in its favor. As already stated
petitioner paid for the lots through the court-sanctioned procedure outlined above. There was no
more need for the Drepin Estate, owner of the lots, to execute a deed of conveyance in
petitioner's favor because it had already done so on 10 October 1980. In fact the disputed lots
were already registered in petitioner's name under TCT Nos. 50539, 50540 and 50541 as a
consequence thereof. That was also why in the penultimate paragraph of the Compromise
Agreement it was provided that in the event respondent Moslares bought the lots ahead of
petitioner Barretto Realty the latter, not the Drepin Estate, was to execute the corresponding deed
of conveyance and deliver all the titles and pertinent papers to respondent Moslares. There was
therefore nothing more to be done by way of fruitful and effective implementation.
Clearly then respondent Judge Laguio no longer had any jurisdiction whatsoever to act on,
much less grant, the motion for execution and supplement thereto filed by Moslares on 17
September 1993 or more than three (3) years later, claiming that he had already bought the
lots. The fact that the check paid to him by Barretto Realty was never encashed should not be
invoked against the latter. As already stated, Moslares never questioned the tender done three
(3) years earlier. Besides, while delivery of a check produces the effect of payment only when it
is encashed, the rule is otherwise if the debtor was prejudiced by the creditor's unreasonable
delay in presentment. Acceptance of a check implies an undertaking of due diligence in
presenting it for payment. If no such presentment was made, the drawer cannot be held liable
irrespective of loss or injury sustained by the payee. Payment will be deemed effected and the
obligation for which the check was given as conditional payment will be discharged.[18]
Considering the foregoing, respondent Judge Laguio's Order dated 8 November 1993 which
granted private respondent's motion for execution thus nullifying the 1990 sale in favor of
petitioner after he had in effect approved such sale in his Order of 14 June 1990 and after such
order had already become final and executory, amounted to an oppressive exercise of judicial
authority, a grave abuse of discretion amounting to lack of jurisdiction, for which reason, all
further orders stemming therefrom are also null and void and without effect.[19]
The principle of laches does not attach when the judgment is null and void for want of
jurisdiction.[20] The fact that petitioner invoked par. 3 of the Order of 11 February 1994 praying
that its P1,000,000.00 check still in Moslares' possession be considered sufficient payment of the
disputed lots, could not be cited against it. For one thing, petitioner from the very start had
always consistently questioned and assailed the jurisdiction of the trial court to entertain

respondent's motion for execution filed three (3) years after the case had in fact been
executed. Secondly, estoppel being an equitable doctrine cannot be invoked to perpetuate an
injustice.[21]
WHEREFORE, the questioned Decision and Resolution of the Court of Appeals dated 30
June 1997 and 14 January 1998, respectively, are REVERSED and SET ASIDE. The Order of
respondent Judge Perfecto A. S. Laguio Jr. dated 11 February 1994 in Civil Case No. 84-27008,
setting aside his earlier ruling of 7 December 1993 which had declared petitioner Pio Barretto
Realty Development Corporation as the absolute owner of the real properties in question, and all
subsequent proceedings culminating in the Order of 12 October 1994 authorizing the Clerk of
Court, RTC-Manila, to execute a deed of conveyance over subject properties in favor of
respondent Honor P. Moslares, are declared NULL and VOID for want of jurisdiction.
Consequently, petitioner Pio Barretto Realty Development Corporation is declared the
absolute owner of the disputed properties subject matter of the Compromise Agreement dated 2
May 1986 as fully implemented by the Deputy Sheriff, RTC-Br. 18, Manila, pursuant to the final
and executory Order dated 14 June 1990 of its Presiding Judge Perfecto A. S. Laguio, Jr.
SO ORDERED.
Mendoza, Quisumbing, Buena, and De leon, Jr., JJ., concur.

SECOND DIVISION
G.R. No. L-35767 June 18, 1976
RAYMUNDO A. CRYSTAL, Petitioner, vs. COURT OF APPEALS
and PELAGIA OCANG, PACITA, TEODULO, FELICISIMO,
PABLO, LYDIA, DIOSCORA and RODRIGO, all surnamed DE
GRACIA, Respondents.
RESOLUTION
BARREDO, J.:
Motion for reconsideration of the decision of this Court in this case
promulgated on February 25, 1975 affirming the decision of the
Court of Appeals in favor of private respondents which held that
petitioner's redemption of the property acquired by said
respondents in an execution sale pursuant to a final judgment of the

trial court in Civil Case No. R-1666, Court of First Instance of Cebu,
was invalid inasmuch as the check which petitioner had used in
paying the redemption price had been either dishonored or had
become state, hence its value was never this upholding in the
process the jurisdiction of the trial court to rule on the question of
validity of the redemption in question notwithstanding that by order
of that same court, said matter had been made the subject of a
separate suit, Civil as No. 62-T also of the Court of First Instance of
Cebu, filed on August 9, 1960.
chanroblesvi rtua lawlib rary chan roble s virtual law lib rary

In his motion for reconsideration, petitioner insists that it was an act
in excess of jurisdiction on the part of the trial court in R-1666, to
issue on May 31, 1971 the writ of possession sought by private
respondents, thru Pelagia Ocang, in her motion of August 15, 1970,
considering that court had previously pointedly observed in its order
of March 24, 1960 that "the question as to whether or not the
redemption allegedly made by Mr. Crystal by paying the amount to
Mrs. Pelagia Ocang without using the said P11,200 deposited with
the sheriff is legal and effective" has to be decided in "another
proper case" and, furthermore, in its order of June 4, 1960 in the
same case, the same court had more definitely ruled that "the
question of ownership of Mr. Raymundo Crystal, the redemptioner,
is not a proper matter to be decided in this case but in another case
where the legality or validity of the alleged deed of redemption
executed in favor of Mr. Crystal will be amply raised and threshed
out" and, accordingly, in attention to such observations and ruling,
petitioner did file Civil Case No. 62-T, which is still pending trial.
cha nrob lesvi rtua lawlib rary chan robles v irt ual law l ibra ry

While, as already explained in Our decision, such pose of petitioner
has its merits, We deem it in advisable to this point to modify Our
ruling that there is really no issuance of jurisdiction involved here
and that it is preferable, under the peculiar circumstances obtaining
in this particular case, that the root of the controversy between the
parties be inquired into and (determined in the incident already
taken cognizance of by the trial court in Civil Case No. R-1666
regarding tile light of possession over tile alert in dispute. In this
connection, it is to be noted that even after he had filed Civil Case
No. 62-T, in of hat he must have considered as his right a
redemption i of the property sold in execution a judgment in Civil

Case No. R-1666, petitioner regained possession of the four (4)
parcels of land in question without the torture of the court, taking
the same from Pelagia Ocang who his taken it from him also
extrajudicially that she had legally acquired the same precisely in
the same execution and that petitioner redemption as null and void
because the cheek he used to pay the redemption price had been
dishonored for lack of sufficient funds. In other words both
petitioner and Ocang, predicating their respective claims to rightful
possession on the same sale on execution in the same case, Civil
Case No. R-l666, had alternately taken the law in their hands to
obtain possession of the lands in question in disregard of the toilet
for the complete satisfaction of that significant of the court in that
case. In the light of these peculiar circumstances, it does appear to
be more that since it is the Case in that Civil Case No. R-1666, that
rendered the judgment and subsequently ordered the execution
from which the redemption was made, it should to the people to
settle the whole controversy among all the interested statistics
including even the judgment leftors 'the heirs of Nicolas Rafols
themselves, who, according to the records, have claim of that own
relative to the same redemption, which might just as well be
inquired into in said case, rather than in Case No. 62-T in which
they are not parties. Otherwise, stated, in issuing the impugned writ
of possession, the court took the bull by the horns, so to speak,
thereby overturning its own previous stand on the matter
announced in its orders of March 24 and June 4, 1960
aforementioned. Consequently, We overrule the argument of
jurisdiction or even abuse of discretion raised by petitioner and
reiterate what We have said in regard thereto ni Our decision.
chanrob lesvi rtualaw lib raryc han robles v irt ual law li bra ry

This is not to say that the procedure followed by Ocang and
sactioned by the trial court of resorting to the issuance of a writ of
possession is not open to question, since a writ of possession is not
always available in all controversies concerning possession of real
estate. But We see no need to resolve that point here. More
importantly, what impresses Us in the motion for reconsideration is
the possible injustice that might result from our unqualified reliance
in our decision on the finding of the Court of Appeals that the check
for P11,200 paid by petitioner for the redemption in dispute had
been dishonored, in the face of the other finding in the same

decision of the Court of Appeals indicating that instead of having
been dishonored, the said check had become state, albeit it was
being replaced with new ones from time to time. Surely, for a check
to the dishonored upon presentment on the one hand, and to be
state for not being presented at all in time, on the other, are
incompatible developments that naturally have variant legal
consequences. Thus, if needed the check in question had been
dishonored, then there can be no doubt that petitioner's redemption
was null and void. On the oher hand, if it had only become stale,
then it becomes imperative that the circumstances that caused its
non-presentment be determined, for if this was not due to the fault
of the petitioner, then it would be unfair to deprive him of the rights
he had acquired as redemptioner, particularly, the value of the
check has otherwise been received or realized by the party
concerned. From the motion for reconsideration and its annexes, We
gather that petitioner has ready evidence showing that when
Pelagia Ocang secured the writ of possession in question, she had
already been paid the full amount of the check in dispute. What is
more, there are a number of circumstances pointed out in said
motion, apparaently supported by corresponding evidence, tending
to show that a compromise had already been agreed upon by the
parties, although not yet approved by the court, or, at least, that
Ocang has made admissions which indicate that the issue regarding
the supposed dishonorign or becomeing state of the repeatedly
mentioned check is no longer of any legal significance and, for that
matter, the observations we made in our decision in regard to the
duties of the sheriff in the premises have been rendered
academic.
chanrob lesvi rtua lawlib rary chan roble s virtual law l ibra ry

Needless to say, the Supreme Court should not allow any of its
decision to become final when it is properly made to appear in a
motion for reconsideration based on relevant facts and
circumstances not previously brought to its attention, although
demonstrable from the records, that even if the technical
consideration on which it is based is well taken, substantial jusitce
might be sacrificed, if further proceedings are not ordered to be
held to verify undeniable facts which might have escaped the eyes
of the Court of Appeals. In the instant case, We took it as proven,
per statements of fact in the decision of the Court of Appeals, that

the check with which petitioner redeemed the property in dispute
had been dishonored. On that premise and seeing that even if We
upheld the technical point of jurisdiction raised by petitioner, the
final outcome of the controversy between the parties would not be
different, We proceeded to decide the merits of the respective
substantive claims of the parties. We felt that in view of the findings
of fact of the Court of Appeals, equity demanded that the case be
earlier terminated by ignoring not only whatever flaw ther was in
the procedure adopted by the court below but also the seemingly
unusual departure by the Court of Appeals from the orthodox rule
requiring courts to confine its scrutiny in certiorari cases only to the
specific point of jurisdiction complained of.
chanroblesv irt ualawli bra rycha nrob les vi rtual law lib rary

Now, however, there is a strong showing in the motion for
reconsideration, presmised on no less than other portions of the
very decision of the intermediate court and other apparently
credible evidence, that not only was said check not dishonored,
although it became stale, but that repondent Pelagia Ocang had
actually been paid already the full value thereof. And in this
connection, it is notable that in the comment of respondents on
petitioner's motion for reconsideration, there is no clear and
categorical denial of these important and decisive facts.
chanroble svi rtualaw lib raryc han robles v irt ual law li bra ry

One more point. In our decision, We assumed that the findings of
fact of the Court of Appeals were the result of an exhaustive
consideration of evidence presented in due course by the parties. It
turns out now, that inasmuch as the trial court itself had previously
ruled that the validity of the redemption in controversy should be
the subject of a separate action and that, in fact, such separate
action had already been filed by petitioner, it was in this other case
that petitioner was present the corresponding evidencence. Hence,
whatever evidence was before the trial court in Case No. R-1666
when it issued the subject writ of possession could not have been
complete, much less incontrovertible.
cha nro blesvi rtua lawlib rary chan roble s virtual law l ib rary

With these substantial consideration in view, We find no just
alternative than to reconsider Our decision in so far as the matter of
validity or invalidity of petitioner's redemption is concerned. It being
shown that the pivotal finding of the Court of Appeals regarding the

check in question might actually be belied in a more appropriate
proceeding, the foundation of Our own decision has been shaken.
Indeed, We are now convinced that is but fair and just that the trial
court should be allowed to receive all relevant and competent
evidence the parties may wish to present relative to the issue of
whether or not respondent Pelagia Ocang has already received in
one form or another, directly or indirectly, the full amount of
P11,200 as redemption price of the four (4) parcels of land in
dispute, as well as to all other facts which might affect the validity
of the redemption here in controversy. Withal, should it be found by
the trial court that the redemption was invalid, because the
redemption price has not been fully paid, it should further
determine who made the improvements found on said lands, in
order that if it should turn out that they were introduced by
petitioner, possession may not be awarded to respondents unless
said improvements are first properly and fully reimbursed to
petitioner. It goes without saying that the proceedings herein
contemplated are to be held in Civil Case No. R-1666.
Correspondingly, Civil Case No. 62-T and the other case reviewing
the same should be deemed academic.
chanro blesvi rtua lawlib rary chan roble s virtual law lib rary

WHEREFORE, the decision of this Court of February 25, 1975 is
hereby reconsidered and modified in line with the foregoing opinion
and this case is remanded to the trial court for further proceedings
as therein indicated.
Antonio, Esguerra, Aquino and Martin, JJ., concur.
Fernando J., took no part.

chanroblesvi rtualaw lib raryc han robles v irt ual law li bra ry

Concepcion Jr., J, is on leave.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-222

April 26, 1950

chanroblesv irt ualawli bra rycha nrob les vi rtual la w libra ry

SALVACION F. VDA. DE EDUQUE, ETC., plaintiff-appellee,
vs.
JOSE M. OCAMPO, defendant-appellant.
Alfredo B. Cacnio and Padilla, Carlos and Fernando for appellant.
Jose Feria for appellee.
Delfin L. Gonzalez for plaintiff-intervenor.
MORAN, C.J.:
This is an action to compel acceptance of payment of a mortgage debt.
On February 16, 1935, Dr. Jose Eduque secured two loans from Mariano Ocampo de Leon, Doña
Escolastica de los Reyes and Don Jose M. Ocampo, the first in the amount of P40,000 and the
second in the sum of P15,000, both payable within the period of twenty years, with interest at the
rate of 5 per cent per annum. Payment of these two loans was guaranteed by mortgage on real
property. In the mortgage contract it is stipulated that any of the mortgage creditors may receive
payment and execute deeds of cancellation of the mortgage debts.
On December 6, 1943, plaintiff and appellee, as administratrix of the estate of the deceased Dr.
Jose Eduque, tendered payment, by means of cashier's check, of the total amount of the two loans,
P55,000, to defendant-appellant Jose M. Ocampo, one of the creditors, who refused to accept
payment. By reason of such refusal, an action was brought and a cashier's check for the total
amount of P55,000 deposited in court. After trial, judgment was rendered against defendant
compelling him to accept the P55,000 deposited in court, to issue deeds for cancellation of the
mortgage debts, and to pay the expenses of consignation and costs.
Defendant accepted the judgment with respect to the second loan of P15,000 upon the ground that,
according to him, in the deed of mortgage corresponding to that loan it clearly appeared that the loan
was payable "durante el termino de 20 años," and that the only question remaining between the
parties is the interpretation of the first deed of mortgage regarding the first loan of P40,000. and he
asked the court to order "que de la cantidad de P55,000 consignada en este Juzgado, se entregue
al demandado la suma de P15,000, despues de descontar proporcionalmente cualesquiera
cantidades por deposito y otros conceptos segun los terminos de la decision promulgada." The
order was issued accordingly and the sum of P15,000 out of the P55,000 deposited in court was
delivered to the defendant.
The present appeal concerns the decision of the lower court regarding the first loan of P40,000, and
the principal error assigned by the appellant is that tender of payment by means of a cashier's check
representing Japanese war notes is not valid.
We have already help that Japanese military notes were legal tender during the Japanese
occupation. But appellant argues, further, that the consignation of a cashier's check, which is not
legal tender, is not binding upon him. This question, however, has never been raised in the lower
court. Upon the contrary, defendant accepted impliedly the consignation of the cashier's check when
he himself asked the court that out of the money thus consigned he be paid the amount of the
second loan of P15,000. It is a rule that " a cashier's check may constitute a sufficient tender where
no objection is made on this ground." (62 C. J., p. 670; see also 40 Amer. Jur., p. 764.)
For all the foregoing, judgment is affirmed with cost against appellant.
Ozaeta, Pablo, Bengzon, Montemayor, and Reyes, JJ., concur.

Separate Opinions
TUASON, J., dissenting:
I am constrained to dissent from the majority decision on the ground on which I rested my dissent in
various cases involving the validity of payments in Japanese military notes.
I maintain that Japanese war notes were not legal tender and could not be made so by military
orders. Accordingly, payment in that currency of pre-war obligation over the protest of the creditor
did not operate to discharge the debt except to the extent he was or could have been benefited by
the payment.

SECOND DIVISION
G.R. No. L-41764 December 19, 1980
NEW PACIFIC TIMBER & SUPPLY COMPANY, INC., Petitioner,
vs. HON. ALBERTO V. SENERIS, RICARDO A. TONG and EXOFFICIO SHERIFF HAKIM S. ABDULWAHID,Respondents.
CONCEPCION JR., J.:
A petition for certiorari with preliminary injunction to annul and/or
modify the order of the Court of First Instance of Zamboanga City
(Branch ii) dated August 28, 1975 denying petitioner's ExParte Motion for Issuance of Certificate Of Satisfaction Of
Judgment.
chanroble svi rtualawl ib rary

chan rob les vi rtual law lib rary

Herein petitioner is the defendant in a complaint for collection of a
sum of money filed by the private respondent. 1 On July 19, 1974, a
compromise judgment was rendered by the respondent Judge in
accordance with an amicable settlement entered into by the parties
the terms and conditions of which, are as follows:
chanrob les vi rtua l law lib rary

(1) That defendant will pay to the plaintiff the amount of Fifty Four
Thousand Five Hundred Pesos (P54,500.00) at 6% interest per
annum to be reckoned from August 25, 1972;
chanrobles vi rtua l law lib ra ry

(2) That defendant will pay to the plaintiff the amount of Six
Thousand Pesos (P6,000.00) as attorney's fees for which P5,000.00

had been acknowledged received by the plaintiff under Consolidated
Bank and Trust Corporation Check No. 16-135022 amounting to
P5,000.00 leaving a balance of One Thousand Pesos (P1,000.00);

chanrobles vi rtua l law lib rary

(3) That the entire amount of P54,500.00 plus interest, plus the
balance of P1,000.00 for attorney's fees will be paid by defendant to
the plaintiff within five months from today, July 19, 1974; and
chanrobles vi rtua l law lib rary

(4) Failure one the part of the defendant to comply with any of the
above-conditions, a writ of execution may be issued by this Court
for the satisfaction of the obligation. 2
For failure of the petitioner to comply with his judgment obligation,
the respondent Judge, upon motion of the private respondent,
issued an order for the issuance of a writ of execution on December
21, 1974. Accordingly, writ of execution was issued for the amount
of P63,130.00 pursuant to which, the Ex-Officio Sheriff levied upon
the following personal properties of the petitioner, to wit:
chanroble s virtual law lib rary

(1) Unit American Lathe 24

chanrobles vi rtua l law li bra ry

(1) Unit American Lathe 18 Cracker Wheeler

chanroble s vi rtual law lib rary

(1) Unit Rockford Shaper 24
and set the auction sale thereof on January 15, 1975. However,
prior to January 15, 1975, petitioner deposited with the Clerk of
Court, Court of First Instance, Zamboanga City, in his capacity
as Ex-Officio Sheriff of Zamboanga City, the sum of P63,130.00 for
the payment of the judgment obligation, consisting of the
following:
chanrob les vi rtua l law lib rary

1. P50.000.00 in Cashier's Check No. S-314361 dated January 3,
1975 of the Equitable Banking Corporation; and
chanrobles vi rtua l law lib rary

2. P13,130.00 incash.

3

In a letter dated January 14, 1975, to the ExOfficio Sheriff, 4 private respondent through counsel, refused to
accept the check as well as the cash deposit. In the 'same letter,

private respondent requested the scheduled auction sale on January
15, 1975 to proceed if the petitioner cannot produce the cash.
However, the scheduled auction sale at 10:00 a.m. on January 15,
1975 was postponed to 3:00 o'clock p.m. of the same day due to
further attempts to settle the case. Again, the scheduled auction
sale that afternoon did not push through because of a last ditch
attempt to convince the private respondent to accept the check. The
auction sale was then postponed on the following day, January 16,
1975 at 10:00 o'clock a.m. 5 At about 9:15 a.m., on January 16,
1975, a certain Mr. Tañedo representing the petitioner appeared in
the office of the Ex-Officio Sheriff and the latter reminded Mr.
Tañedo that the auction sale would proceed at 10:00 o'clock. At
10:00 a.m., Mr. Tañedo and Mr. Librado, both representing the
petitioner requested the Ex-OfficioSheriff to give them fifteen
minutes within which to contract their lawyer which request was
granted. After Mr. Tañedo and Mr. Librado failed to return, counsel
for private respondent insisted that the sale must proceed and
the Ex-Officio Sheriff proceeded with the auction sale. 6 In the
course of the proceedings, Deputy Sheriff Castro sold the levied
properties item by item to the private respondent as the highest
bidder in the amount of P50,000.00. As a result thereof, the ExOfficio Sheriff declared a deficiency of P13,130.00.7Thereafter, on
January 16, 1975, the Ex-Officio Sheriff issued a "Sheriff's
Certificate of Sale" in favor of the private respondent, Ricardo Tong,
married to Pascuala Tong for the total amount of P50,000.00
only. 8Subsequently, on January 17, 1975, petitioner filed anexparte motion for issuance of certificate of satisfaction of judgment.
This motion was denied by the respondent Judge in his order dated
August 28, 1975. In view thereof, petitioner now questions said
order by way of the present petition alleging in the main that said
respondent Judge capriciously and whimsically abused his discretion
in not granting the motion for issuance of certificate of satisfaction
of judgment for the following reasons: (1) that there was already a
full satisfaction of the judgment before the auction sale was
conducted with the deposit made to the Ex-Officio Sheriff in the
amount of P63,000.00 consisting of P50,000.00 in Cashier's Check
and P13,130.00 in cash; and (2) that the auction sale was invalid
for lack of proper notice to the petitioner and its counsel when
theEx-Officio Sheriff postponed the sale from June 15, 1975 to

January 16, 1976 contrary to Section 24, Rule 39 of the Rules of
Court. On November 10, 1975, the Court issued a temporary
restraining order enjoining the respondent Ex-Officio Sheriff from
delivering the personal properties subject of the petition to Ricardo
A. Tong in view of the issuance of the "Sheriff Certificate of Sale."

chanrobles vi rt ual law li bra ry

We find the petition to be impressed with merit.

chanroble svirtualawl ibra ry

chan roble s virtual law lib rary

The main issue to be resolved in this instance is as to whether or
not the private respondent can validly refuse acceptance of the
payment of the judgment obligation made by the petitioner
consisting of P50,000.00 in Cashier's Check and P13,130.00 in cash
which it deposited with the Ex-Officio Sheriff before the date of the
scheduled auction sale. In upholding private respondent's claim that
he has the right to refuse payment by means of a check, the
respondent Judge cited the following:
chanrob les vi rtua l law lib rary

Section 63 of the Central Bank Act:

chanrob les vi rtual law lib rary

Sec. 63. Legal Character. - Checks representing deposit money do
not have legal tender power and their acceptance in payment of
debts, both public and private, is at the option of the creditor,
Provided, however, that a check which has been cleared and
credited to the account of the creditor shall be equivalent to a
delivery to the creditor in cash in an amount equal to the amount
credited to his account.
Article 1249 of the New Civil Code:

chanrob les vi rtual law lib rary

Art. 1249. - The payment of debts in money shall be made in the
currency stipulated, and if it is not possible to deliver such currency,
then in the currency which is legal tender in the Philippines.
chanro blesvi rtua lawlib rary

c hanro bles vi rt ual law li bra ry

The delivery of promissory notes payable to order, or bills of
exchange or other mercantile documents shall produce the effect of
payment only when they have been cashed, or when through the
fault of the creditor they have been impaired.
chanrob lesvi rtua lawlib rary

cha nrob les vi rtua l law lib rary

In the meantime, the action derived from the original obligation
shall be held in abeyance.

Likewise, the respondent Judge sustained the contention of the
private respondent that he has the right to refuse payment of the
amount of P13,130.00 in cash because the said amount is less than
the judgment obligation, citing the following Article of the New Civil
Code:
chanrobles vi rtual law lib rary

Art. 1248. Unless there is an express stipulation to that effect, the
creditor cannot be compelled partially to receive the presentations
in which the obligation consists. Neither may the debtor be required
to make partial payment.
chanroblesv irt ualawli bra ry

chan robles v irt ual law l ibra ry

However, when the debt is in part liquidated and in part
unliquidated, the creditor may demand and the debtor may effect
the payment of the former without waiting for the liquidation of the
latter.
It is to be emphasized in this connection that the check deposited
by the petitioner in the amount of P50,000.00 is not an ordinary
check but a Cashier's Check of the Equitable Banking Corporation, a
bank of good standing and reputation. As testified to by the ExOfficio Sheriff with whom it has been deposited, it is a certified
crossed check. 9 It is a well-known and accepted practice in the
business sector that a Cashier's Check is deemed as cash.
Moreover, since the said check had been certified by the drawee
bank, by the certification, the funds represented by the check are
transferred from the credit of the maker to that of the payee or
holder, and for all intents and purposes, the latter becomes the
depositor of the drawee bank, with rights and duties of one in such
situation. 10 Where a check is certified by the bank on which it is
drawn, the certification is equivalent to acceptance. 11 Said
certification "implies that the check is drawn upon sufficient funds in
the hands of the drawee, that they have been set apart for its
satisfaction, and that they shall be so applied whenever the check is
presented for payment. It is an understanding that the check is
good then, and shall continue good, and this agreement is as
binding on the bank as its notes in circulation, a certificate of
deposit payable to the order of the depositor, or any other
obligation it can assume. The object of certifying a check, as
regards both parties, is to enable the holder to use it as

money." 12 When the holder procures the check to be certified, "the
check operates as an assignment of a part of the funds to the
creditors." 13 Hence, the exception to the rule enunciated under
Section 63 of the Central Bank Act to the effect "that a check which
has been cleared and credited to the account of the creditor shall be
equivalent to a delivery to the creditor in cash in an amount equal
to the amount credited to his account" shall apply in this case.
Considering that the whole amount deposited by the petitioner
consisting of Cashier's Check of P50,000.00 and P13,130.00 in cash
covers the judgment obligation of P63,000.00 as mentioned in the
writ of execution, then, We see no valid reason for the private
respondent to have refused acceptance of the payment of the
obligation in his favor. The auction sale, therefore, was uncalled for.
Furthermore, it appears that on January 17, 1975, the Cashier's
Check was even withdrawn by the petitioner and replaced with cash
in the corresponding amount of P50,000.00 on January 27, 1975
pursuant to an agreement entered into by the parties at the
instance of the respondent Judge. However, the private respondent
still refused to receive the same. Obviously, the private respondent
is more interested in the levied properties than in the mere
satisfaction of the judgment obligation. Thus, petitioner's motion for
the issuance of a certificate of satisfaction of judgment is clearly
meritorious and the respondent Judge gravely abused his discretion
in not granting the same under the circumstances.
chanroble svirtualawl ibra ry

chanrob les vi rtual law lib rary

In view of the conclusion reached in this instance, We find no more
need to discuss the ground relied in the petition.
chanroblesvi rtua lawlib rary

c hanro bles vi rtua l law lib rary

It is also contended by the private respondent that Appeal and not a
special civil action for certiorari is the proper remedy in this case,
and that since the period to appeal from the decision of the
respondent Judge has already expired, then, the present petition
has been filed out of time. The contention is untenable. The decision
of the respondent Judge in Civil Case No. 250 (166) has long
become final and executory and so, the same is not being
questioned herein. The subject of the petition at bar as having been
issued in grave abuse of discretion is the order dated August 28,
1975 of the respondent Judge which was merely issued in execution
of the said decision. Thus, even granting that appeal is open to the

petitioner, the same is not an adequate and speedy remedy for the
respondent Judge had already issued a writ of execution. 14
chanro bles vi rtua l law lib ra ry

WHEREFORE, in view of all the foregoing, judgment is hereby
rendered:
chanrobles v irt ual law l ibra ry

1. Declaring as null and void the order of the respondent Judge
dated August 28, 1975;
chanrobles vi rtua l law lib rary

2. Declaring as null and void the auction sale conducted on January
16, 1975 and the certificate of sale issued pursuant thereto;
chanrobles vi rtual law lib rary

3. Ordering the private respondent to accept the sum of P63,130.00
under deposit as payment of the judgment obligation in his favor;

chanroble s virtual law

libra ry

4. Ordering the respondent Judge and respondent Ex-Officio Sheriff
to release the levied properties to the herein petitioner.
chanro blesvi rt ualawlib ra ry

chan robles v irt ual law li bra ry

The temporary restraining order issued is hereby made
permanent.
chanroblesvi rtua lawlib rary

c hanro bles vi rtua l law li bra ry

Costs against the private respondent.

chanroble svi rtualawl ib raryc hanrobles vi rt ual law li bra ry

SO ORDERED.
Barredo (Chairman), Aquino, Abad Santos and De Castro, JJ.,
concur.
Roman Catholic Bishop of Malolos, Inc. vs. Intermediate Appellate Court, G.R. No. 72110,
191 SCRA 411 , November 16, 1990

G.R. No. 72110. November 16, 1990.*
ROMAN CATHOLIC BISHOP OF MALOLOS, INC., petitioner, vs. INTERMEDIATE APPELLATE COURT, and ROBES-FRANCISCO
REALTY AND DEVELOPMENT CORPORATION, respondents.
PETITION for certiorari to review the decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Rodrigo Law Office for petitioner.
Antonio P. Barredo and Napoleon M. Malinas for private respondent.

SARMIENTO, J.:

This is a petition for review on certiorari which seeks the reversal and setting aside of the decision1 of the Court of Appeals,2
the dispositive portion of which reads:
WHEREFORE, the decision appealed from is hereby reversed
2 AC-G.R. CV No. 69626, Robes-Francisco Realty & Development Corporation vs. Roman Catholic Bishop of Malolos, Inc. and set
aside and another one entered for the plaintiff ordering the defendant-appellee Roman Catholic Bishop of Malolos, Inc. to
accept the balance of P124,000.00 being paid by plaintiff-appellant and thereafter to execute in favor of Robes-Francisco Realty
Corporation a registerable Deed of Absolute Sale over 20,655 square meters portion of that parcel of land situated in San Jose
del Monte, Bulacan described in OCT No. 575 (now Transfer Certificates of Title Nos. T-169493, 169494, 169495 and 169496) of
the Register of Deeds of Bulacan. In case of refusal of the defendant to execute the Deed of Final Sale, the clerk of court is
directed to execute the said document. Without pronouncement as to damages and attorney’s fees. Costs against the
defendant-appellee.3

The case at bar arose from a complaint filed by the private respondent, then plaintiff, against the petitioner, then defendant, in
the Court of First Instance (now Regional Trial Court) of Bulacan, at Sta. Maria, Bulacan,4 for specific performance with
damages, based on a contract5 executed on July 7, 1971.

The property subject matter of the contract consists of a 20,655 sq.m.-portion, out of the 30,655 sq.m. total area, of a parcel of
land covered by Original Certificate of Title No. 575 of the Province of Bulacan, issued and registered in the name of the
petitioner which it sold to the private respondent for and in consideration of P123,930.00.
The crux of the instant controversy lies in the compliance or non-compliance by the private respondent with the provision for
payment to the petitioner of the principal balance of P100,000.00 and the accrued interest of P24,000.00 within the grace
period.
A chronological narration of the antecedent facts is as follows:
On July 7, 1971, the subject contract over the land in question was executed between the petitioner as vendor and the private
respondent through its then president, Mr. Carlos F. Robes, as vendee, stipulating for a downpayment of P23,930.00 and the
balance of P100,000.00 plus 12% interest per annum to be paid within four (4) years from execution of the contract, that is, on
or before July 7, 1975. The contract likewise provides for cancellation, forfeiture of previous payments, and reconveyance of
the land in question in case the private respondent would fail to complete payment within the said period.

On March 12, 1973, the private respondent, through its new president, Atty. Adalia Francisco, addressed a letter6 to Father
Vasquez, parish priest of San Jose Del Monte, Bulacan, requesting to be furnished with a copy of the subject contract and the
supporting documents.

On July 17, 1975, admittedly after the expiration of the stipulated period for payment, the same Atty. Francisco wrote the
petitioner a formal request7 that her company be allowed to pay the principal amount of P100,000.00 in three (3) equal
installments of six (6) months each with the first installment and the accrued interest of P24,000.00 to be paid immediately
upon approval of the said request.
On July 29, 1975, the petitioner, through its counsel, Atty. Carmelo Fernandez, formally denied the said request of the private
respondent, but granted the latter a grace period of five (5) days from the receipt of the denial8 to pay the total balance of
P124,000.00, otherwise, the provisions of the contract regarding cancellation, forfeiture, and reconveyance would be
implemented.
On August 4, 1975, the private respondent, through its president, Atty. Francisco, wrote9 the counsel of the petitioner
requesting an extension of 30 days from said date to fully settle its account. The counsel for the petitioner, Atty. Fernandez,

received the said letter on the same day. Upon consultation with the petitioner in Malolos, Bulacan, Atty. Fernandez, as
instructed, wrote the private respondent a letter10 dated August.
Consequently, Atty. Francisco, the private respondent’s president, wrote a letter11 dated August 22, 1975, directly addressed
to the petitioner, protesting the alleged refusal of the latter to accept tender of payment purportedly made by the former on
August 5, 1975, the last day of the grace period. In the same letter of August 22, 1975, received on the following day by the
petitioner, the private respondent demanded the execution of a deed of absolute sale over the land in question and after which
it would pay its account in full, otherwise, judicial action would be resorted to.

On August 27, 1975, the petitioner’s counsel, Atty. Fernandez, wrote a reply12 to the private respondent stating the refusal of
his client to execute the deed of absolute sale due to its (private respondent’s) failure to pay its full obligation. Moreover, the
petitioner denied that the private respondent had made any tender of payment whatsoever within the grace period. In view of
this alleged breach of contract, the petitioner cancelled the contract and considered all previous payments forfeited and the
land as ipso facto reconveyed.

From a perusal of the foregoing facts, we find that both the contending parties have conflicting versions on the main question
of tender of payment.

The trial court, in its ratiocination, preferred not to give credence to the evidence presented by the private respondent.
According to the trial court:

x x x What made Atty. Francisco suddenly decide to pay plaintiff’s obligation on August 5, 1975, go to defendant’s office at
Malolos, and there tender her payment, when her request of August 4, 1975 had not yet been acted upon until August 7, 1975?
If Atty. Francisco had decided to pay the obligation and had available funds for the purpose on August 5, 1975, then there
would have been no need for her to write defendant on August 4, 1975 to request an extension of time. Indeed, Atty.
Francisco’s claim that she made a tender of payment on August 5, 1975—such alleged act, considered in relation to the
circumstances both antecedent and subsequent thereto, being not in accord with the normal pattern of human conduct—is not
worthy of credence.13

The trial court likewise noted the inconsistency in the testimony of Atty. Francisco, president of the private respondent, who
earlier testified that a certain Mila Policarpio accompanied her on August 5, 1975 to the office of the petitioner. Another
person, however, named Aurora Oracion, was presented to testify as the secretary-companion of Atty. Francisco on that same
occasion.

Furthermore, the trial court considered as fatal the failure of Atty. Francisco to present in court the certified personal check
allegedly tendered as payment or, at least, its xerox copy, or even bank records thereof. Finally, the trial court found that the
private respondent had insufficient funds available to fulfill the entire obligation considering that the latter, through its
president, Atty. Francisco, only had a savings account deposit of P64,840.00, and although the latter had a money-market
placement of P300,000.00. the same was to mature only after the expiration of the 5-day grace period.

Based on the above considerations, the trial court rendered a decision in favor of the petitioner, the dispositive portion of
which reads:

WHEREFORE, finding plaintiff to have failed to make out its case, the court hereby declares the subject contract cancelled and
plaintiff’s down payment of P23,930.00 forfeited in favor of defendant, and hereby dismisses the complaint; and on the
counterclaim, the Court orders plaintiff to pay defendant.

(1) Attorney’s fees of P10,000.00;
(2) Litigation expenses of P2,000.00; and
(3) Judicial costs.

SO ORDERED.14

Not satisfied with the said decision, the private respondent appealed to the respondent Intermediate Appellate Court (now
Court of Appeals) assigning as reversible errors, among others, the findings of the trial court that the available funds of the
private respondent were insufficient and that the latter did not effect a valid tender of payment and consignation.
The respondent court, in reversing the decision of the trial court, essentially relies on the following findings:

x x x We are convinced from the testimony of Atty. Adalia Francisco and her witnesses that in behalf of the plaintiff-appellant
they have a total available sum of P364,840.00 at her and at the plaintiff’s disposal on or before August 4, 1975 to answer for
the obligation of the plaintiff-appellant. It was not correct for the trial court to conclude that the plaintiff-appellant had only
about P64,840.00 in savings deposit on or before August 5, 1975, a sum not enough to pay the outstanding account of
P124,000.00. The plaintiff-appellant, through Atty. Francisco proved and the trial court even acknowledged that Atty. Adalia
Francisco had about P300,000.00 in money market placement. The error of the trial court lies in concluding that the money
market placement of P300,000.00 was out of reach of Atty. Francisco. But as testified to by Mr. Catalino Estrella, a
representative of the Insular Bank of Asia and America, Atty. Francisco could withdraw anytime her money market placement
and place it at her disposal, thus proving her financial capability of meeting more than the whole of P124,000.00 then due per
contract. This situation, We believe, proves the truth that Atty. Francisco apprehensive that her request for a 30-day grace
period would be denied, she tendered payment on August 4, 1975 which offer defendant through its representative and
counsel refused to receive. x x x15 (Italics supplied)
In other words, the respondent court, finding that the private respondent had sufficient available funds, ipso facto concluded
that the latter had tendered payment. Is such conclusion warranted by the facts proven? The petitioner submits that it is not.
Hence, this petition.16

The petitioner presents the following issues for resolution:
A. Is a finding that private respondent had sufficient available funds on or before the grace period for the payment of its
obligation proof that it (private respondent) did tender of (sic) payment for its said obligation within said period?
xxx

xxx

xxx

B. Is it the legal obligation of the petitioner (as vendor) to execute a deed of absolute sale in favor of the private respondent
(as vendee) before the latter has actually paid the complete consideration of the sale—where the contract between and
executed by the parties stipulates—
“That upon complete payment of the agreed consideration by the herein VENDEE, the VENDOR shall cause the execution of a
Deed of Absolute Sale in favor of the VENDEE.”

xxx

xxx

xxx

C. Is an offer of a check a valid tender of payment of an obligation under a contract which stipulates that the consideration of
the sale is in Philippine Currency?17

We find the petition impressed with merit.

With respect to the first issue, we agree with the petitioner that a finding that the private respondent had sufficient available
funds on or before the grace period for the payment of its obligation does not constitute proof of tender of payment by the
latter for its obligation within the said period. Tender of payment involves a positive and unconditional act by the obligor of
offering legal tender currency as payment to the obligee for the former’s obligation and demanding that the latter accept the
same. Thus, tender of payment cannot be presumed by a mere inference from surrounding circumstances. At most, sufficiency
of available funds is only affirmative of the capacity or ability of the obligor to fulfill his part of the bargain. But whether or not
the obligor avails himself of such funds to settle his outstanding account remains to be proven by independent and credible
evidence. Tender of payment presupposes not only that the obligor is able, ready, and willing, but more so, in the act of
performing his obligation. Ab posse ad actu non vale illatio. “A proof that an act could have been done is no proof that it was
actually done.”

The respondent court was therefore in error to have concluded from the sheer proof of sufficient available funds on the part of
the private respondent to meet more than the total obligation within the grace period, the alleged truth of tender of payment.
The same is a classic case of non-sequitur.

On the contrary, the respondent court finds itself remiss in overlooking or taking lightly the more important findings of fact
made by the trial court which we have earlier mentioned and which as a rule, are entitled to great weight on appeal and should
be accorded full consideration and respect and should not be disturbed unless for strong and cogent reasons.18
While the Court is not a trier of facts, yet, when the findings of fact of the Court of Appeals are at variance with those of the
trial court,19 or when the inference of the Court of Appeals from its findings of fact is manifestly mistaken,20 the Court has to
review the evidence in order to arrive at the correct findings based on the record.

Apropos the second issue raised, although admittedly the documents for the deed of absolute sale had not been prepared, the
subject contract clearly provides that the full payment by the private respondent is an a priori condition for the execution of the
said documents by the petitioner.
That upon complete payment of the agreed consideration by the herein VENDEE, the VENDOR shall cause the execution of a
Deed of Absolute Sale in favor of the VENDEE.21
The private respondent is therefore in estoppel to claim otherwise as the latter did in the testimony in cross-examination of its
president, Atty. Francisco, which reads:
Q Now, you mentioned, Atty. Francisco, that you wanted the defendant to execute the final deed of sale before you would
given (sic) the personal certified check in payment of your balance, is that correct?

A Yes, sir.22
xxx

xxx

xxx

Art. 1159 of the Civil Code of the Philippines provides that “obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith.” And unless the stipulations in said contract are contrary to law,
morals, good customs, public order, or public policy, the same are binding as between the parties.23

What the private respondent should have done if it was indeed desirous of complying with its obligations would have been to
pay the petitioner within the grace period and obtain a receipt of such payment duly issued by the latter. Thereafter, or,
allowing a reasonable time, the private respondent could have demanded from the petitioner the execution of the necessary
documents. In case the petitioner refused, the private respondent could have had always resorted to judicial action for the

legitimate enforcement of its right. For the failure of the private respondent to undertake this more judicious course of action,
it alone shall suffer the consequences.
With regard to the third issue, granting arguendo that we would rule affirmatively on the two preceding issues, the case of the
private respondent still can not succeed in view of the fact that the latter used a certified personal check which is not legal
tender nor the currency stipulated, and therefore, can not constitute valid tender of payment. The first paragraph of Art. 1249
of the Civil Code provides that “the payment of debts in money shall be made in the currency stipulated, and if it is not possible
to deliver such currency, then in the currency which is legal tender in the Philippines.
The Court en banc in the recent case of Philippine Airlines v. Court of Appeals,24 G.R. No. L-49188, stated thus:
Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does not, by
itself, operate as payment (citing Sec. 189, Act 2031 on Negs. Insts.; Art. 1249, Civil Code; Bryan London Co. v. American Bank, 7
Phil. 255; Tan Sunco v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check, whether a manager’s check or ordinary check, is not legal
tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee
or creditor.

Hence, where the tender of payment by the private respondent was not valid for failure to comply with the requisite payment
in legal tender or currency stipulated within the grace period and as such, was validly refused receipt by the petitioner, the
subsequent consignation did not operate to discharge the former from its obligation to the latter.

In view of the foregoing, the petitioner in the legitimate exercise of its rights pursuant to the subject contract, did validly order
therefore the cancellation of the said contract, the forfeiture of the previous payment, and the reconveyance ipso facto of the
land in question.

WHEREFORE, the petition for review on certiorari is GRANTED and the DECISION of the respondent court promulgated on April
25, 1985 is hereby SET ASIDE and ANNULLED and the DECISION of the trial court dated May 25, 1981 is hereby REINSTATED.
Costs against the private respondent.

SO ORDERED.
Melencio-Herrera (Chairman), Paras and Regalado, JJ., concur.
Padilla, J., No part, former counsel of petitioner.
Petition granted. Decision set aside and annulled.

Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 89252 May 24, 1993
RAUL SESBREÑO, 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 Sesbreño 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

TO Raul Sesbreño

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.
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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 nonnegotiable. 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 "nontransferable" 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:
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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.
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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, 19that 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 Sesbreño.
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 Sesbreño 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 Sesbreño. 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 Sesbreño 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.
Bidin, Davide, Jr., Romero and Melo, JJ., concur.
# Footnotes

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-1405

July 31, 1948

BENJAMIN ABUBAKAR, petitioner,
vs.
THE AUDITOR GENERAL, respondent.
Viray and Viola Viray for petitioner.
First Assistant Solicitor General Roberto A. Gianzon and Solicitor Manuel Tomacruz for respondent.
BENGZON, J.:
We are asked to overrule the decision of the Auditor General refusing to authorize the payment of
Treasury warrant No. A-2867376 for P1,000 which was issued in favor of Placido S. Urbanes on
December 10, 1941, but is now in the hands of herein petitioner Benjamin Abubakar.
For his refusal the respondent gave two reasons: first, because the money available for the
redemption of treasury warrants issued before January 2, 1942, is appropriated by Republic Act No.
80 (Item F-IV-8) and this warrant does not come within the purview of said appropriation; and
second, because on of the requirements of his office had not been complied with, namely, that it
must be shown that the holders of warrants covering payment or replenishment of cash advances for
official expenditures (as this warrant is) received them in payment of definite government obligations.
Finding the first reason to be sufficiently valid we shall not discuss, nor pass upon the second.
There is no doubt as to the authenticity and date of the treasury warrant. There is no question that it
was regularly indorsed by the payee and is now in the custody of the herein petitioner who is a
private individual. On the other hand, it is admitted that the warrant was originally made payable to
Placido S. Urbanes in his capacity as disbursing officer of the Food Administration for "additional
cash advance for Food Production Campaign in La Union" (Annex A). It is thus apparent that this is
a treasury warrant issued in favor of a public officer or employeeand held in possession by a private
individual. Such being the case, the Auditor General can hardly be blamed for not authorizing its
redemption out of an appropriation specifically for "treasury warrants issued ... in favor of and held in
possession by private individuals." (Republic Act No. 80, Item F-IV-8.) This warrant was not issued in
favor of a private individual. It was issued in favor of a government employee.
The distinction is not without a difference. Outstanding treasury warrants issued prior to January 2,
1942, amount to more than four million pesos. The appropriation herein mentioned is only for
P1,750,000. Obviously Congress wished to provide for redemption of one class of warrants — those
issued to private individuals — as distinguished from those issued in favor of government officials.
Basis for the discrimination is not lacking. Probably the Government is not so sure that those
warrants to officials have all been properly used by the latter during the Japanese occupation or
maybe it wants to conduct further inquiries as to the equities of the present holders thereof.
The petitioner argues that he is a holder in good faith and for value of a negotiable instrument an dis
entitled to the rights and privileges of a holder in due course, free from defenses. But this treasury

warrant is not within the scope of the negotiable instruments law. For one thing, the document
bearing on its face the words "payable from the appropriation for food administration," is actually an
order for payment out of "a particular fund," and is not unconditional, and does not fulfill one of the
essential requirements of a negotiable instrument. (Section 3 last sentenced and section 1[b] of the
Negotiable Instruments Law.) In the United States, government warrants for the payment of money
are not negotiable instruments nor commercial proper1
Anyway the question here is not whether the Government should eventually pay this warrant, or is
ultimately responsible for it, but whether the Auditor General erred in refusing to permit payment out
of the particular appropriation in Item F-IV-8 of Republic Act No. 80. We think that he did not. Petition
dismissed, with costs.
Paras, Actg. C.J., Feria, Pablo, Perfecto, Briones, and Padilla, JJ., concur.

Footnotes
1

Logan County Bank vs. Farmers' National Bank, 155 Pac., 561; Velvet Ridge School
District No. 91 vs. Bank of Searcy, 137 S.W., 907; Marshall vs. State, 102 So., 650.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC

G.R. No. L-22405 June 30, 1971
PHILIPPINE EDUCATION CO., INC., plaintiff-appellant,
vs.
MAURICIO A. SORIANO, ET AL., defendant-appellees.
Marcial Esposo for plaintiff-appellant.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Antonio G. Ibarra and
Attorney Concepcion Torrijos-Agapinan for defendants-appellees.

DIZON, J.:
An appeal from a decision of the Court of First Instance of Manila dismissing the complaint filed by
the Philippine Education Co., Inc. against Mauricio A. Soriano, Enrico Palomar and Rafael
Contreras.

On April 18, 1958 Enrique Montinola sought to purchase from the Manila Post Office ten (10) money
orders of P200.00 each payable to E.P. Montinola withaddress at Lucena, Quezon. After the postal
teller had made out money ordersnumbered 124685, 124687-124695, Montinola offered to pay for
them with a private checks were not generally accepted in payment of money orders, the teller
advised him to see the Chief of the Money Order Division, but instead of doing so, Montinola
managed to leave building with his own check and the ten(10) money orders without the knowledge
of the teller.
On the same date, April 18, 1958, upon discovery of the disappearance of the unpaid money orders,
an urgent message was sent to all postmasters, and the following day notice was likewise served
upon all banks, instructing them not to pay anyone of the money orders aforesaid if presented for
payment. The Bank of America received a copy of said notice three days later.
On April 23, 1958 one of the above-mentioned money orders numbered 124688 was received by
appellant as part of its sales receipts. The following day it deposited the same with the Bank of
America, and one day thereafter the latter cleared it with the Bureau of Posts and received from the
latter its face value of P200.00.
On September 27, 1961, appellee Mauricio A. Soriano, Chief of the Money Order Division of the
Manila Post Office, acting for and in behalf of his co-appellee, Postmaster Enrico Palomar, notified
the Bank of America that money order No. 124688 attached to his letter had been found to have
been irregularly issued and that, in view thereof, the amount it represented had been deducted from
the bank's clearing account. For its part, on August 2 of the same year, the Bank of America debited
appellant's account with the same amount and gave it advice thereof by means of a debit memo.
On October 12, 1961 appellant requested the Postmaster General to reconsider the action taken by
his office deducting the sum of P200.00 from the clearing account of the Bank of America, but his
request was denied. So was appellant's subsequent request that the matter be referred to the
Secretary of Justice for advice. Thereafter, appellant elevated the matter to the Secretary of Public
Works and Communications, but the latter sustained the actions taken by the postal officers.
In connection with the events set forth above, Montinola was charged with theft in the Court of First
Instance of Manila (Criminal Case No. 43866) but after trial he was acquitted on the ground of
reasonable doubt.
On January 8, 1962 appellant filed an action against appellees in the Municipal Court of Manila
praying for judgment as follows:
WHEREFORE, plaintiff prays that after hearing defendants be ordered:
(a) To countermand the notice given to the Bank of America on September 27, 1961,
deducting from the said Bank's clearing account the sum of P200.00 represented by
postal money order No. 124688, or in the alternative indemnify the plaintiff in the
same amount with interest at 8-½% per annum from September 27, 1961, which is
the rate of interest being paid by plaintiff on its overdraft account;
(b) To pay to the plaintiff out of their own personal funds, jointly and severally, actual
and moral damages in the amount of P1,000.00 or in such amount as will be proved
and/or determined by this Honorable Court: exemplary damages in the amount of
P1,000.00, attorney's fees of P1,000.00, and the costs of action.

Plaintiff also prays for such other and further relief as may be deemed just and
equitable.
On November 17, 1962, after the parties had submitted the stipulation of facts reproduced at pages
12 to 15 of the Record on Appeal, the above-named court rendered judgment as follows:
WHEREFORE, judgment is hereby rendered, ordering the defendants to
countermand the notice given to the Bank of America on September 27, 1961,
deducting from said Bank's clearing account the sum of P200.00 representing the
amount of postal money order No. 124688, or in the alternative, to indemnify the
plaintiff in the said sum of P200.00 with interest thereon at the rate of 8-½% per
annum from September 27, 1961 until fully paid; without any pronouncement as to
cost and attorney's fees.
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.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 93397 March 3, 1997
TRADERS ROYAL BANK, petitioner,
vs.
COURT OF APPEALS, FILRITERS GUARANTY ASSURANCE CORPORATION and CENTRAL
BANK of the PHILIPPINES, respondents.

TORRES, JR., J.:
Assailed in this Petition for Review on Certiorari is the Decision of the respondent Court of Appeals
dated January 29, 1990, 1 affirming the nullity of the transfer of Central Bank Certificate of Indebtedness
(CBCI) No. D891, 2 with a face value of P500,000.00, from the Philippine Underwriters Finance
Corporation (Philfinance) to the petitioner Trader's Royal Bank (TRB), under a Repurchase
Agreement 3 dated February 4, 1981, and a Detached Assignment 4 dated April 27, 1981.

Docketed as Civil Case No. 83-17966 in the Regional Trial Court of Manila, Branch 32, the action
was originally filed as a Petition for Mandamus 5 under Rule 65 of the Rules of Court, to compel the
Central Bank of the Philippines to register the transfer of the subject CBCI to petitioner Traders Royal
Bank (TRB).

In the said petition, TRB stated that:
3. On November 27, 1979, Filriters Guaranty Assurance Corporation (Filriters)
executed a "Detached Assignment" . . ., whereby Filriters, as registered owner, sold,
transferred, assigned and delivered unto Philippine Underwriters Finance
Corporation (Philfinance) all its rights and title to Central Bank Certificates of
Indebtedness of PESOS: FIVE HUNDRED THOUSAND (P500,000) and having an
aggregate value of PESOS: THREE MILLION FIVE HUNDRED THOUSAND
(P3,500,000.00);
4. The aforesaid Detached Assignment (Annex "A") contains an express
authorization executed by the transferor intended to complete the assignment
through the registration of the transfer in the name of PhilFinance, which
authorization is specifically phrased as follows: '(Filriters) hereby irrevocably
authorized the said issuer (Central Bank) to transfer the said bond/certificates on the
books of its fiscal agent;
5. On February 4, 1981, petitioner entered into a Repurchase Agreement with
PhilFinance . . ., whereby, for and in consideration of the sum of PESOS: FIVE
HUNDRED THOUSAND (P500,000.00), PhilFinance sold, transferred and delivered
to petitioner CBCI 4-year, 8th series, Serial No. D891 with a face value of
P500,000.00 . . ., which CBCI was among those previously acquired by PhilFinance
from Filriters as averred in paragraph 3 of the Petition;
6. Pursuant to the aforesaid Repurchase Agreement (Annex "B"), Philfinance agreed
to repurchase CBCI Serial No. D891 (Annex "C"), at the stipulated price of PESOS:
FIVE HUNDRED NINETEEN THOUSAND THREE HUNDRED SIXTY-ONE & 11/100
(P519,361.11) on April 27, 1981;
7. PhilFinance failed to repurchase the CBCI on the agreed date of maturity, April 27,
1981, when the checks it issued in favor of petitioner were dishonored for insufficient
funds;
8. Owing to the default of PhilFinance, it executed a Detached Assignment in favor of
the Petitioner to enable the latter to have its title completed and registered in the
books of the respondent. And by means of said Detachment, Philfinance transferred
and assigned all, its rights and title in the said CBCI (Annex "C") to petitioner and,
furthermore, it did thereby "irrevocably authorize the said issuer (respondent herein)
to transfer the said bond/certificate on the books of its fiscal agent." . . .
9. Petitioner presented the CBCI (Annex "C"), together with the two (2)
aforementioned Detached Assignments (Annexes "B" and "D"), to the Securities
Servicing Department of the respondent, and requested the latter to effect the
transfer of the CBCI on its books and to issue a new certificate in the name of
petitioner as absolute owner thereof;
10. Respondent failed and refused to register the transfer as requested, and
continues to do so notwithstanding petitioner's valid and just title over the same and
despite repeated demands in writing, the latest of which is hereto attached as Annex
"E" and made an integral part hereof;

11. The express provisions governing the transfer of the CBCI were substantially
complied with the petitioner's request for registration, to wit:
"No transfer thereof shall be valid unless made at said office (where
the Certificate has been registered) by the registered owner hereof, in
person or by his attorney duly authorized in writing, and similarly
noted hereon, and upon payment of a nominal transfer fee which may
be required, a new Certificate shall be issued to the transferee of the
registered holder thereof."
and, without a doubt, the Detached Assignments presented to respondent were
sufficient authorizations in writing executed by the registered owner, Filriters, and its
transferee, PhilFinance, as required by the above-quoted provision;
12. Upon such compliance with the aforesaid requirements, the ministerial duties of
registering a transfer of ownership over the CBCI and issuing a new certificate to the
transferee devolves upon the respondent;
Upon these assertions, TRB prayed for the registration by the Central Bank of the subject CBCI in its
name.
On December 4, 1984, the Regional Trial Court the case took cognizance of the defendant Central
Bank of the Philippines' Motion for Admission of Amended Answer with Counter Claim for
Interpleader 6 thereby calling to fore the respondent Filriters Guaranty Assurance Corporation (Filriters),
the registered owner of the subject CBCI as respondent.

For its part, Filriters interjected as Special Defenses the following:
11. Respondent is the registered owner of CBCI No. 891;
12. The CBCI constitutes part of the reserve investment against liabilities required of
respondent as an insurance company under the Insurance Code;
13. Without any consideration or benefit whatsoever to Filriters, in violation of law
and the trust fund doctrine and to the prejudice of policyholders and to all who have
present or future claim against policies issued by Filriters, Alfredo Banaria, then
Senior Vice-President-Treasury of Filriters, without any board resolution, knowledge
or consent of the board of directors of Filriters, and without any clearance or
authorization from the Insurance Commissioner, executed a detached assignment
purportedly assigning CBCI No. 891 to Philfinance;
xxx xxx xxx
14. Subsequently, Alberto Fabella, Senior Vice-President-Comptroller are Pilar
Jacobe, Vice-President-Treasury of Filriters (both of whom were holding the same
positions in Philfinance), without any consideration or benefit redounding to Filriters
and to the grave prejudice of Filriters, its policy holders and all who have present or
future claims against its policies, executed similar detached assignment forms
transferring the CBCI to plaintiff;
xxx xxx xxx

15. The detached assignment is patently void and inoperative because the
assignment is without the knowledge and consent of directors of Filriters, and not
duly authorized in writing by the Board, as requiring by Article V, Section 3 of CB
Circular No. 769;
16. The assignment of the CBCI to Philfinance is a personal act of Alfredo Banaria
and not the corporate act of Filriters and such null and void;
a) The assignment was executed without consideration and for that reason, the
assignment is void from the beginning (Article 1409, Civil Code);
b) The assignment was executed without any knowledge and consent of the board of
directors of Filriters;
c) The CBCI constitutes reserve investment of Filriters against liabilities, which is a
requirement under the Insurance Code for its existence as an insurance company
and the pursuit of its business operations. The assignment of the CBCI is illegal act
in the sense of malum in se or malum prohibitum, for anyone to make, either as
corporate or personal act;
d) The transfer of dimunition of reserve investments of Filriters is expressly prohibited
by law, is immoral and against public policy;
e) The assignment of the CBCI has resulted in the capital impairment and in the
solvency deficiency of Filriters (and has in fact helped in placing Filriters under
conservatorship), an inevitable result known to the officer who executed assignment.
17. Plaintiff had acted in bad faith and with knowledge of the illegality and invalidity of
the assignment.
a) The CBCI No. 891 is not a negotiable instrument and as a certificate of
indebtedness is not payable to bearer but is a registered in the name of Filriters;
b) The provision on transfer of the CBCIs provides that the Central Bank shall
treat the registered owner as the absolute owner and that the value of the registered
certificates shall be payable only to the registered owner; a sufficient notice to
plaintiff that the assignments do not give them the registered owner's right as
absolute owner of the CBCI's;
c) CB Circular 769, Series of 1980 (Rules and Regulations Governing CBCIs)
provides that the registered certificates are payable only to the registered owner
(Article II, Section 1).
18. Plaintiff knew full well that the assignment by Philfinance of CBCI No. 891 by
Filriters is not a regular transaction made in the usual of ordinary course of business;
a) The CBCI constitutes part of the reserve investments of Filriters against liabilities
requires by the Insurance Code and its assignment or transfer is expressly prohibited
by law. There was no attempt to get any clearance or authorization from the
Insurance Commissioner;

b) The assignment by Filriters of the CBCI is clearly not a transaction in the usual or
regular course of its business;
c) The CBCI involved substantial amount and its assignment clearly constitutes
disposition of "all or substantially all" of the assets of Filriters, which requires the
affirmative action of the stockholders (Section 40, Corporation [sic] Code. 7
In its Decision 8 dated April 29, 1988, the Regional Trial Court of Manila, Branch XXXIII found the
assignment of CBCI No. D891 in favor of Philfinance, and the subsequent assignment of the same CBCI
by Philfinance in favor of Traders Royal Bank null and void and of no force and effect. The dispositive
portion of the decision reads:

ACCORDINGLY, judgment is hereby rendered in favor of the respondent Filriters
Guaranty Assurance Corporation and against the plaintiff Traders Royal Bank:
(a) Declaring the assignment of CBCI No. 891 in favor of PhilFinance, and the
subsequent assignment of CBCI by PhilFinance in favor of the plaintiff Traders Royal
Bank as null and void and of no force and effect;
(b) Ordering the respondent Central Bank of the Philippines to disregard the said
assignment and to pay the value of the proceeds of the CBCI No. D891 to the
Filriters Guaranty Assurance Corporation;
(c) Ordering the plaintiff Traders Royal Bank to pay respondent Filriters Guaranty
Assurance Corp. The sum of P10,000 as attorney's fees; and
(d) to pay the costs.
SO ORDERED. 9
The petitioner assailed the decision of the trial court in the Court of Appeals 10, but their appeals
likewise failed. The findings of the fact of the said court are hereby reproduced:

The records reveal that defendant Filriters is the registered owner of CBCI No. D891.
Under a deed of assignment dated November 27, 1971, Filriters transferred CBCI
No. D891 to Philippine Underwriters Finance Corporation (Philfinance).
Subsequently, Philfinance transferred CBCI No. D891, which was still registered in
the name of Filriters, to appellant Traders Royal Bank (TRB). The transfer was made
under a repurchase agreement dated February 4, 1981, granting Philfinance the right
to repurchase the instrument on or before April 27, 1981. When Philfinance failed to
buy back the note on maturity date, it executed a deed of assignment, dated April 27,
1981, conveying to appellant TRB all its right and the title to CBCI No. D891.
Armed with the deed of assignment, TRB then sought the transfer and registration of
CBCI No. D891 in its name before the Security and Servicing Department of the
Central Bank (CB). Central Bank, however, refused to effect the transfer and
registration in view of an adverse claim filed by defendant Filriters.
Left with no other recourse, TRB filed a special civil action for mandamus against the
Central Bank in the Regional Trial Court of Manila. The suit, however, was
subsequently treated by the lower court as a case of interpleader when CB prayed in

its amended answer that Filriters be impleaded as a respondent and the court
adjudge which of them is entitled to the ownership of CBCI No. D891. Failing to get a
favorable judgment. TRB now comes to this Court on appeal. 11
In the appellate court, petitioner argued that the subject CBCI was a negotiable instrument, and
having acquired the said certificate from Philfinance as a holder in due course, its possession of the
same is thus free fro any defect of title of prior parties and from any defense available to prior parties
among themselves, and it may thus, enforce payment of the instrument for the full amount thereof
against all parties liable thereon. 12
In ignoring said argument, the appellate court that the CBCI is not a negotiable instrument, since the
instrument clearly stated that it was payable to Filriters, the registered owner, whose name was
inscribed thereon, and that the certificate lacked the words of negotiability which serve as an
expression of consent that the instrument may be transferred by negotiation.
Obviously, the assignment of the certificate from Filriters to Philfinance was fictitious, having made
without consideration, and did not conform to Central Bank Circular No. 769, series of 1980, better
known as the "Rules and Regulations Governing Central Bank Certificates of Indebtedness", which
provided that any "assignment of registered certificates shall not be valid unless made . . . by the
registered owner thereof in person or by his representative duly authorized in writing."
Petitioner's claimed interest has no basis, since it was derived from Philfinance whose interest was
inexistent, having acquired the certificate through simulation. What happened was Philfinance
merely borrowed CBCI No. D891 from Filriters, a sister corporation, to guarantee its financing
operations.
Said the Court:
In the case at bar, Alfredo O. Banaria, who signed the deed of assignment
purportedly for and on behalf of Filriters, did not have the necessary written
authorization from the Board of Directors of Filriters to act for the latter. For lack of
such authority, the assignment did not therefore bind Filriters and violated as the
same time Central Bank Circular No. 769 which has the force and effect of a law,
resulting in the nullity of the transfer (People v. Que Po Lay, 94 Phil. 640; 3M
Philippines, Inc. vs. Commissioner of Internal Revenue, 165 SCRA 778).
In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could
assign or transfer to Traders Royal Bank and which the latter can register with the
Central Bank.
WHEREFORE, the judgment appealed from is AFFIRMED, with costs against
plaintiff-appellant.
SO ORDERED. 13
Petitioner's present position rests solely on the argument that Philfinance owns 90% of Filriters
equity and the two corporations have identical corporate officers, thus demanding the application of
the doctrine or piercing the veil of corporate fiction, as to give validity to the transfer of the CBCI from
registered owner to petitioner TRB. 14 This renders the payment by TRB to Philfinance of CBCI, as
actual payment to Filriters. Thus, there is no merit to the lower court's ruling that the transfer of the CBCI
from Filriters to Philfinance was null and void for lack of consideration.

Admittedly, the subject CBCI is not a negotiable instrument in the absence of words of negotiability
within the meaning of the negotiable instruments law (Act 2031).
The pertinent portions of the subject CBCI read:
xxx xxx xxx
The Central Bank of the Philippines (the Bank) for value received, hereby promises
to pay bearer, of if this Certificate of indebtedness be registered, to FILRITERS
GUARANTY ASSURANCE CORPORATION, the registered owner hereof, the
principal sum of FIVE HUNDRED THOUSAND PESOS.
xxx xxx xxx
Properly understood, a certificate of indebtedness pertains to certificates for the creation and
maintenance of a permanent improvement revolving fund, is similar to a "bond," (82 Minn. 202).
Being equivalent to a bond, it is properly understood as acknowledgment of an obligation to pay a
fixed sum of money. It is usually used for the purpose of long term loans.
The appellate court ruled that the subject CBCI is not a negotiable instrument, stating that:
As worded, the instrument provides a promise "to pay Filriters Guaranty Assurance
Corporation, the registered owner hereof." Very clearly, the instrument is payable
only to Filriters, the registered owner, whose name is inscribed thereon. It lacks the
words of negotiability which should have served as an expression of consent that the
instrument may be transferred by negotiation. 15
A reading of the subject CBCI indicates that the same is payable to FILRITERS GUARANTY
ASSURANCE CORPORATION, and to no one else, thus, discounting the petitioner's submission
that the same is a negotiable instrument, and that it is a holder in due course of the certificate.
The language of negotiability which characterize a negotiable paper as a credit instrument is its
freedom to circulate as a substitute for money. Hence, freedom of negotiability is the touchtone
relating to the protection of holders in due course, and the freedom of negotiability is the foundation
for the protection which the law throws around a holder in due course (11 Am. Jur. 2d, 32). This
freedom in negotiability is totally absent in a certificate indebtedness as it merely to pay a sum of
money to a specified person or entity for a period of time.
As held in Caltex (Philippines), Inc. v. Court of Appeals, 16:
The accepted rule is that the negotiability or non-negotiability of an instrument is
determined from the writing, that is, from the face of the instrument itself. In the
construction of a bill or note, the intention of the parties is to control, if it can be
legally ascertained. While the writing may be read in the light of surrounding
circumstance 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.

Thus, the transfer of the instrument from Philfinance to TRB was merely an assignment, and is not
governed by the negotiable instruments law. The pertinent question then is, was the transfer of the
CBCI from Filriters to Philfinance and subsequently from Philfinance to TRB, in accord with existing
law, so as to entitle TRB to have the CBCI registered in its name with the Central Bank?
The following are the appellate court's pronouncements on the matter:
Clearly shown in the record is the fact that Philfinance's title over CBCI No. D891 is
defective since it acquired the instrument from Filriters fictitiously. Although the deed
of assignment stated that the transfer was for "value received", there was really no
consideration involved. What happened was Philfinance merely borrowed CBCI No.
D891 from Filriters, a sister corporation. Thus, for lack of any consideration, the
assignment made is a complete nullity.
What is more, We find that the transfer made by Filriters to Philfinance did not
conform to Central Bank Circular No. 769, series of 1980, otherwise known as the
"Rules and Regulations Governing Central Bank Certificates of Indebtedness", under
which the note was issued. Published in the Official Gazette on November 19, 1980,
Section 3 thereof provides that any assignment of registered certificates shall not be
valid unless made . . . by the registered owner thereof in person or by his
representative duly authorized in writing.
In the case at bar, Alfredo O. Banaria, who signed the deed of assignment
purportedly for and on behalf of Filriters, did not have the necessary written
authorization from the Board of Directors of Filriters to act for the latter. For lack of
such authority, the assignment did not therefore bind Filriters and violated at the
same time Central Bank Circular No. 769 which has the force and effect of a law,
resulting in the nullity of the transfer (People vs. Que Po Lay, 94 Phil. 640; 3M
Philippines, Inc. vs. Commissioner of Internal Revenue, 165 SCRA 778).
In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could
assign or transfer to Traders Royal Bank and which the latter can register with the
Central Bank
Petitioner now argues that the transfer of the subject CBCI to TRB must upheld, as the respondent
Filriters and Philfinance, though separate corporate entities on paper, have used their corporate
fiction to defraud TRB into purchasing the subject CBCI, which purchase now is refused registration
by the Central Bank.
Says the petitioner;
Since Philfinance own about 90% of Filriters and the two companies have the same
corporate officers, if the principle of piercing the veil of corporate entity were to be
applied in this case, then TRB's payment to Philfinance for the CBCI purchased by it
could just as well be considered a payment to Filriters, the registered owner of the
CBCI as to bar the latter from claiming, as it has, that it never received any payment
for that CBCI sold and that said CBCI was sold without its authority.
xxx xxx xxx
We respectfully submit that, considering that the Court of Appeals has held that the
CBCI was merely borrowed by Philfinance from Filriters, a sister corporation, to

guarantee its (Philfinance's) financing operations, if it were to be consistent therewith,
on the issued raised by TRB that there was a piercing a veil of corporate entity, the
Court of Appeals should have ruled that such veil of corporate entity was, in fact,
pierced, and the payment by TRB to Philfinance should be construed as payment to
Filriters. 17
We disagree with Petitioner.
Petitioner cannot put up the excuse of piercing the veil of corporate entity, as this merely an
equitable remedy, and may be awarded only in cases when the corporate fiction is used to defeat
public convenience, justify wrong, protect fraud or defend crime or where a corporation is a mere
alter ego or business conduit of a person. 18
Peiercing the veil of corporate entity requires the court to see through the protective shroud which
exempts its stockholders from liabilities that ordinarily, they could be subject to, or distinguished one
corporation from a seemingly separate one, were it not for the existing corporate fiction. But to do
this, the court must be sure that the corporate fiction was misused, to such an extent that injustice,
fraud, or crime was committed upon another, disregarding, thus, his, her, or its rights. It is the
protection of the interests of innocent third persons dealing with the corporate entity which the law
aims to protect by this doctrine.
The corporate separateness between Filriters and Philfinance remains, despite the petitioners
insistence on the contrary. For one, other than the allegation that Filriters is 90% owned by
Philfinance, and the identity of one shall be maintained as to the other, there is nothing else which
could lead the court under circumstance to disregard their corporate personalities.
Though it is true that when valid reasons exist, the legal fiction that a corporation is an entity with a
juridical personality separate from its stockholders and from other corporations may be
disregarded, 19 in the absence of such grounds, the general rule must upheld. The fact that Filfinance
owns majority shares in Filriters is not by itself a ground to disregard the independent corporate status of
Filriters. In Liddel & Co., Inc. vs. Collector of Internal Revenue, 20 the mere ownership by a single
stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself
a sufficient reason for disregarding the fiction of separate corporate personalities.

In the case at bar, there is sufficient showing that the petitioner was not defrauded at all when it
acquired the subject certificate of indebtedness from Philfinance.
On its face the subject certificates states that it is registered in the name of Filriters. This should
have put the petitioner on notice, and prompted it to inquire from Filriters as to Philfinance's title over
the same or its authority to assign the certificate. As it is, there is no showing to the effect that
petitioner had any dealings whatsoever with Filriters, nor did it make inquiries as to the ownership of
the certificate.
The terms of the CBCI No. D891 contain a provision on its TRANSFER. Thus:
TRANSFER. This Certificate shall pass by delivery unless it is registered in the
owner's name at any office of the Bank or any agency duly authorized by the Bank,
and such registration is noted hereon. After such registration no transfer thereof shall
be valid unless made at said office (where the Certificates has been registered) by
the registered owner hereof, in person, or by his attorney, duly authorized in writing
and similarly noted hereon and upon payment of a nominal transfer fee which may
be required, a new Certificate shall be issued to the transferee of the registered

owner thereof. The bank or any agency duly authorized by the Bank may deem and
treat the bearer of this Certificate, or if this Certificate is registered as herein
authorized, the person in whose name the same is registered as the absolute owner
of this Certificate, for the purpose of receiving payment hereof, or on account hereof,
and for all other purpose whether or not this Certificate shall be overdue.
This is notice to petitioner to secure from Filriters a written authorization for the transfer or to require
Philfinance to submit such an authorization from Filriters.
Petitioner knew that Philfinance is not registered owner of the CBCI No. D891. The fact that a nonowner was disposing of the registered CBCI owned by another entity was a good reason for
petitioner to verify of inquire as to the title Philfinance to dispose to the CBCI.
Moreover, CBCI No. D891 is governed by CB Circular No. 769, series of 1990 21, known as the Rules
and Regulations Governing Central Bank Certificates of Indebtedness, Section 3, Article V of which
provides that:

Sec. 3. Assignment of Registered Certificates. — Assignment of registered
certificates shall not be valid unless made at the office where the same have been
issued and registered or at the Securities Servicing Department, Central Bank of the
Philippines, and by the registered owner thereof, in person or by his representative,
duly authorized in writing. For this purpose, the transferee may be designated as the
representative of the registered owner.
Petitioner, being a commercial bank, cannot feign ignorance of Central Bank Circular 769, and its
requirements. An entity which deals with corporate agents within circumstances showing that the
agents are acting in excess of corporate authority, may not hold the corporation liable. 22 This is only
fair, as everyone must, in the exercise of his rights and in the performance of his duties, act with justice,
give everyone his due, and observe honesty and good faith. 23

The transfer made by Filriters to Philfinance did not conform to the said. Central Bank Circular,
which for all intents, is considered part of the law. As found by the courts a quo, Alfredo O. Banaria,
who had signed the deed of assignment from Filriters to Philfinance, purportedly for and in favor of
Filriters, did not have the necessary written authorization from the Board of Directors of Filriters to
act for the latter. As it is, the sale from Filriters to Philfinance was fictitious, and therefore void and
inexistent, as there was no consideration for the same. This is fatal to the petitioner's cause, for then,
Philfinance had no title over the subject certificate to convey the Traders Royal Bank. Nemo potest
nisi quod de jure potest — no man can do anything except what he can do lawfully.
Concededly, the subject CBCI was acquired by Filriters to form part of its legal and capital reserves,
which are required by law 24 to be maintained at a mandated level. This was pointed out by Elias Garcia,
Manager-in-Charge of respondent Filriters, in his testimony given before the court on May 30, 1986.

Q Do you know this Central Bank Certificate of Indebtedness, in
short, CBCI No. D891 in the face value of P5000,000.00 subject of
this case?
A Yes, sir.
Q Why do you know this?

A Well, this was CBCI of the company sought to be examined by the
Insurance Commission sometime in early 1981 and this CBCI No.
891 was among the CBCI's that were found to be missing.
Q Let me take you back further before 1981. Did you have the
knowledge of this CBCI No. 891 before 1981?
A Yes, sir. This CBCI is an investment of Filriters required by the
Insurance Commission as legal reserve of the company.
Q Legal reserve for the purpose of what?
A Well, you see, the Insurance companies are required to put up
legal reserves under Section 213 of the Insurance Code equivalent to
40 percent of the premiums receipt and further, the Insurance
Commission requires this reserve to be invested preferably in
government securities or government binds. This is how this CBCI
came to be purchased by the company.
It cannot, therefore, be taken out of the said funds, without violating the requirements of the law.
Thus, the anauthorized use or distribution of the same by a corporate officer of Filriters cannot bind
the said corporation, not without the approval of its Board of Directors, and the maintenance of the
required reserve fund.
Consequently, the title of Filriters over the subject certificate of indebtedness must be upheld over
the claimed interest of Traders Royal Bank.
ACCORDINGLY, the petition is DISMISSED and the decision appealed from dated January 29,
1990 is hereby AFFIRMED.
SO ORDERED.
Regalado, Romero and Mendoza, JJ., concur.
Puno, J., took no part.
Footnotes
Republic of the Philippines
SUPREME COURT
Manila
G.R. Nos. L-25836-37 January 31, 1981
THE PHILIPPINE BANK OF COMMERCE, plaintiff-appellee,
vs.
JOSE M. ARUEGO, defendant-appellant.

FERNANDEZ, J.:

The defendant, Jose M. Aruego, appealed to the Court of Appeals from the order of the Court of
First Instance of Manila, Branch XIII, in Civil Case No. 42066 denying his motion to set aside the
order declaring him in default, 1and 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 PhotoEngraving, 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.

SECOND DIVISION

[G.R. No. 96405. June 26, 1996]

BALDOMERO INCIONG, JR., petitioner, vs. COURT OF APPEALS and
PHILIPPINE BANK OF COMMUNICATIONS, respondents.
SYLLABUS
1. REMEDIAL LAW; EVIDENCE; PAROL EVIDENCE RULE; DOES NOT SPECIFY
THAT THE WRITTEN AGREEMENT BE A PUBLIC INSTRUMENT.- Clearly, the
rule does not specify that the written agreement be a public document. What is
required is that the agreement be in writing as the rule is in fact founded on "long
experience that written evidence is so much more certain and accurate than that
which rests in fleeting memory only, that it would be unsafe, when parties have
expressed the terms of their contract in writing, to admit weaker evidence to control
and vary the stronger and to show that the parties intended a different contract from
that expressed in the writing signed by them" [FRANCISCO, THE RULES OF
COURT OF THE PHILIPPINES, Vol. VII, Part I, 1990 ed., p. 179] Thus, for the
parol evidence rule to apply, a written contract need not be in any particular form, or
be signed by both parties. As a general rule, bills, notes and other instruments of a
similar nature are not subject to be varied or contradicted by parol or extrinsic
evidence.
2. CIVIL LAW; OBLIGATIONS; SOLIDARY OR JOINT AND SEVERAL OBLIGATION,
DEFINED.- A solidary or joint and several obligation is one in which each debtor is
liable for the entire obligation, and each creditor is entitled to demand the whole
obligation. [TOLENTINO, CIVIL CODE OF THE PHILIPPINES, Vol. IV, 1991 ed., p.
217] Section 4, Chapter 3, Title 1, Book IV of the Civil Code states the law on joint
and several obligations. Under Art. 1207 thereof, when there are two or more
debtors in one and the same obligation, the presumption is that the obligation is
joint so that each of the debtors is liable only for the proportionate part of the
debt. There is a solidary liability only when the obligation expressly so states, when
the law so provides or when the nature of the obligation so requires. [Sesbreño v.
Court of Appeals, G.R. No. 89252, May 24, 1993, 222 SCRA 466, 481.]
3. ID.; GUARANTY; GUARANTOR AS DISTINGUISHED FROM SOLIDARY
DEBTOR.- While a guarantor may bind himself solidarily with the principal debtor,
the liability of a guarantor is different from that of a solidary debtor. Thus, Tolentino
explains: "A guarantor who binds himself in solidum with the principal debtor under
the provisions of the second paragraph does not become a solidary co-debtor to all
intents and purposes. There is a difference between a solidary co-debtor, and a
fiador in solidum (surety). The latter, outside of the liability he assumes to pay the
debt before the property of the principal debtor has been exhausted, retains all the
other rights, actions and benefits which pertain to him by reason of the fiansa; while

a solidary co-debtor has no other rights than those bestowed upon him in Section 4,
Chapter 3, Title 1, Book IV of the Civil Code." [Tolentino, Civil Code of the
Philippines, Vol. V, 1992 ed., p. 502]
APPEARANCES OF COUNSEL
Emilio G. Abrogena for petitioner.
Teogenes X. Velez for private respondent.
DECISION
ROMERO, J.:

This is a petition for review on certiorari of the decision of the Court of Appeals
affirming that of the Regional Trial Court of Misamis Oriental, Branch 18, [1] which
disposed of Civil Case No. 10507 for collection of a sum of money and damages, as
follows:

"WHEREFORE, defendant BALDOMERO L. INCIONG, JR. is adjudged solidarily
liable and ordered to pay to the plaintiff Philippine Bank of Communications,
Cagayan de Oro City, the amount of FIFTY THOUSAND PESOS (P50,000.00),with
interest thereon from May 5, 1983 at 16% per annum until fully paid; and 6% per
annum on the total amount due, as liquidated damages or penalty from May 5, 1983
until fully paid; plus 10% of the total amount due for expenses of litigation and
attorney's fees; and to pay the costs.
The counterclaim, as well as the cross claim, are dismissed for lack of merit.
SO ORDERED."
Petitioner's liability resulted from the promissory note in the amount of P50,000.00
which he signed with Rene C. Naybe and Gregorio D. Pantanosas on February 3, 1983,
holding themselves jointly and severally liable to private respondent Philippine Bank of
Communications, Cagayan de Oro City branch. The promissory note was due on May
5, 1983.
Said due date expired without the promissors having paid their
obligation. Consequently, on November 14, 1983 and on June 8, 1984, private
respondent sent petitioner telegrams demanding payment thereof.[2] On December 11,
1984 private respondent also sent by registered mail a final letter of demand to Rene C.
Naybe. Since both obligors did not respond to the demands made, private respondent
filed on January 24, 1986 a complaint for collection of the sum of P50,000.00 against
the three obligors.
On November 25, 1986, the complaint was dismissed for failure of the plaintiff to
prosecute the case. However, on January 9, 1987, the lower court reconsidered the
dismissal order and required the sheriff to serve the summonses. On January 27, 1987,
the lower court dismissed the case against defendant Pantanosas as prayed for by the

private respondent herein. Meanwhile, only the summons addressed to petitioner was
served as the sheriff learned that defendant Naybe had gone to Saudi Arabia.
In his answer, petitioner alleged that sometime in January 1983, he was
approached by his friend, Rudy Campos, who told him that he was a partner of Pio Tio,
the branch manager of private respondent in Cagayan de Oro City, in the falcata logs
operation business. Campos also intimated to him that Rene C. Naybe was interested
in the business and would contribute a chainsaw to the venture. He added that,
although Naybe had no money to buy the equipment Pio Tio had assured Naybe of the
approval of a loan he would make with private respondent. Campos then persuaded
petitioner to act as a "co-maker" in the said loan. Petitioner allegedly acceded but with
the understanding that he would only be a co-maker for the loan of P5,000.00.
Petitioner alleged further that five (5) copies of a blank promissory note were
brought to him by Campos at his office. He affixed his signature thereto but in one
copy, he indicated that he bound himself only for the amount of P5,000.00. Thus, it was
by trickery, fraud and misrepresentation that he was made liable for the amount of
P50,000.00.
In the aforementioned decision of the lower court, it noted that the typewritten figure
"P50,000-" clearly appears directly below the admitted signature of the petitioner in the
promissory note.[3] Hence, the latter's uncorroborated testimony on his limited liability
cannot prevail over the presumed regularity and fairness of the transaction, under Sec.
5 (q) of Rule 131. The lower court added that it was "rather odd" for petitioner to have
indicated in a copy and not in the original, of the promissory note, his supposed
obligation in the amount of P5,000.00 only. Finally, the lower court held that even
granting that said limited amount had actually been agreed upon, the same would have
been merely collateral between him and Naybe and, therefore, not binding upon the
private respondent as creditor-bank.
The lower court also noted that petitioner was a holder of a Bachelor of Laws
degree and a labor consultant who was supposed to take due care of his concerns, and
that, on the witness stand, Pio Tio denied having participated in the alleged business
venture although he knew for a fact that the falcata logs operation was encouraged by
the bank for its export potential.
Petitioner appealed the said decision to the Court of Appeals which, in its decision
of August 31, 1990, affirmed that of the lower court. His motion for reconsideration of
the said decision having been denied, he filed the instant petition for review
on certiorari.
On February 6,1991, the Court denied the petition for failure of petitioner to comply
with the Rules of Court and paragraph 2 of Circular No. 1-88, and to sufficiently show
that respondent court had committed any reversible error in its questioned
decision.[4] His motion for the reconsideration of the denial of his petition was likewise
denied with finality in the Resolution of April 24, 1991.[5] Thereafter, petitioner filed a
motion for leave to file a second motion for reconsideration which, in the Resolution of
May 27, 1991, the Court denied. In the same Resolution, the Court ordered the entry of
judgment in this case.[6]

Unfazed, petitioner filed a motion for leave to file a motion for clarification. In the
latter motion, he asserted that he had attached Registry Receipt No. 3268 to page 14 of
the petition in compliance with Circular No. 1-88. Thus, on August 7,1991, the Court
granted his prayer that his petition be given due course and reinstated the same. [7]
Nonetheless, we find the petition unmeritorious.
Annexed to the petition is a copy of an affidavit executed on May 3, 1988, or after
the rendition of the decision of the lower court, by Gregorio Pantanosas, Jr., an MTCC
judge and petitioner's co-maker in the promissory note. It supports petitioner's
allegation that they were induced to sign the promissory note on the belief that it was
only for P5,000.00, adding that it was Campos who caused the amount of the loan to be
increased to P50,000.00.
The affidavit is clearly intended to buttress petitioner's contention in the instant
petition that the Court of Appeals should have declared the promissory note null and
void on the following grounds: (a) the promissory note was signed in the office of Judge
Pantanosas, outside the premises of the bank; (b) the loan was incurred for the purpose
of buying a second-hand chainsaw which cost only P5,000.00; (c) even a new chainsaw
would cost only P27,500.00; (d) the loan was not approved by the board or credit
committee which was the practice, at it exceeded P5,000.00; (e) the loan had no
collateral; (f) petitioner and Judge Pantanosas were not present at the time the loan was
released in contravention of the bank practice, and (g) notices of default are sent
simultaneously and separately but no notice was validly sent to him. [8] Finally, petitioner
contends that in signing the promissory note, his consent was vitiated by fraud as,
contrary to their agreement that the loan was only for the amount of P5,000. 00, the
promissory note stated the amount of P50,000.00.
The above-stated points are clearly factual. Petitioner is to be reminded of the
basic rule that this Court is not a trier of facts. Having lost the chance to fully ventilate
his factual claims below, petitioner may no longer be accorded the same opportunity in
the absence of grave abuse of discretion on the part of the court below. Had he
presented Judge Pantanosas' affidavit before the lower court, it would have
strengthened his claim that the promissory note did not reflect the correct amount of the
loan.
Nor is there merit in petitioner's assertion that since the promissory note "is not a
public deed with the formalities prescribed by law but x x x a mere commercial paper
which does not bear the signature of x x x attesting witnesses," parol evidence may
"overcome" the contents of the promissory note.[9] The first paragraph of the parol
evidence rule[10] states:

"When the terms of an agreement have been reduced to writing, it is considered as
containing all the terms agreed upon and there can be, between the parties and their
successors-in-interest, no evidence of such terms other than the contents of the written
agreement."
Clearly, the rule does not specify that the written agreement be a public document.

What is required is that agreement be in writing as the rule is in fact founded on
"long experience that written evidence is so much more certain and accurate than that
which rests in fleeting memory only, that it would be unsafe, when parties have
expressed the terms of their contract in writing, to admit weaker evidence to control and
vary the stronger and to show that the parties intended a different contract from that
expressed in the writing signed by them."[11] Thus, for the parol evidence rule to apply, a
written contract need not be in any particular form, or be signed by both parties. [12] As a
general rule, bills, notes and other instruments of a similar nature are not subject to be
varied or contradicted by parol or extrinsic evidence.[13]
By alleging fraud in his answer,[14] petitioner was actually in the right direction
towards proving that he and his co-makers agreed to a loan of P5,000.00 only
considering that, where a parol contemporaneous agreement was the inducing and
moving cause of the written contract, it may be shown by parol evidence. [15] However,
fraud must be established by clear and convincing evidence, mere preponderance of
evidence, not even being adequate.[16] Petitioner's attempt to prove fraud must,
therefore, fail as it was evidenced only by his own uncorroborated and, expectedly, selfserving testimony.
Petitioner also argues that the dismissal of the complaint against Naybe, the
principal debtor, and against Pantanosas, his co-maker, constituted a release of his
obligation, especially because the dismissal of the case against Pantanosas was upon
the motion of private respondent itself. He cites as basis for his argument, Article 2080
of the Civil Code which provides that:

"The guarantors, even though they be solidary, are released from their obligation
whenever by some act of the creditor, they cannot be subrogated to the rights,
mortgages, and preferences of the latter."
It is to be noted, however, that petitioner signed the promissory note as a solidary
co-maker and not as a guarantor. This is patent even from the first sentence of the
promissory note which states as follows:

"Ninety one (91) days after date, for value received, I/we, JOINTLY and
SEVERALLY promise to pay to the PHILIPPINE BANK OF COMMUNICATIONS
at its office in the City of Cagayan de Oro, Philippines the sum of FIFTY
THOUSAND ONLY (P50,000. 00) Pesos, Philippine Currency, together with interest
x x x at the rate of SIXTEEN (16) per cent per annum until fully paid."
A solidary or joint and several obligation is one in which each debtor is liable for the
entire obligation, and each creditor is entitled to demand the whole obligation. [17] On the
other hand, Article 2047 of the Civil Code states:

"By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section
4, Chapter 3, Title I of this Book shall be observed, In such a case the contract is
called a suretyship." (Italics supplied.)
While a guarantor may bind himself solidarily with the principal debtor, the liability of a
guarantor is different from that of a solidary debtor. Thus, Tolentino explains:
"A guarantor who binds himself in solidum with the principal debtor under the provisions of the
second paragraph does not become a solidary co-debtor to all intents and purposes. There is a
difference between a solidary co-debtor, and a fiador in solidum (surety). The later, outside of
the liability he assumes to pay the debt before the property of the principal debtor has been
exhausted, retains all the other rights, actions and benefits which pertain to him by reason of
the fiansa; while a solidary co-debtor has no other rights than those bestowed upon him in
Section 4, Chapter 3, title I, Book IV of the Civil Code."[18]
Section 4, Chapter 3, Title I, Book IV of the Civil Code states the law on joint and
several obligations. Under Art. 1207 thereof, when there are two or more debtors in one
and the same obligation, the presumption is that the obligation is joint so that each of
the debtors is liable only for a proportionate part of the debt. There is a solidarity liability
only when the obligation expressly so states, when the law so provides or when the
nature of the obligation so requires.[19]
Because the promissory note involved in this case expressly states that the three
signatories therein are jointly and severally liable, any one, some or all of them may be
proceeded against for the entire obligation.[20]The choice is left to the solidary creditor to
determine against whom he will enforce collection.[21] Consequently, the dismissal of the
case against Judge Pontanosas may not be deemed as having discharged petitioner
from liability as well. As regards Naybe, suffice it to say that the court never acquired
jurisdiction over him. Petitioner, therefore, may only have recourse against his comakers, as provided by law.
WHEREFORE, the instant petition for review on certiorari is hereby DENIED and
the questioned decision of the Court of Appeals is AFFIRMED. Costs against petitioner.
SO ORDERED.
Regalado (Chairman), Puno, Mendoza, and Torres, Jr., JJ., concur.

JIMENEZ V. BUCOY
103 PHIL 40
FACTS:

In the intestate of the estate of spouses Young, Jimenez presents a
promissory note signed by Pacita Young for different amounts totaling
P21,000. The administrator is willing to pay the promissory note on the premise that the amount
be adjusted. Claimant assails the adjustment and
hence, she instituted a case for collection of sum of money.
*Note: “6 months after the war”

HELD:
The administrator calls attention to the fact that the notes contained no
express promise to pay for a certain amount. This is without merit. An
acknowledge may become a promise to pay by the addition of words by
which a promise of payment is naturally implied, such as “payable”,
“payable” on a given date, “payable on demand”, “paid…when called for”.
To constitute a good promissory note, no precise words of contract are necessary, provided they
amount, in legal effect, a promise to pay.

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-22985

January 24, 1968

BATANGAS TRANSPORTATION COMPANY, petitioner,
vs.
GREGORIO CAGUIMBAL, PANCRACIO CAGUIMBAL, MARIA MARANAN DE CAGUIMBAL,
BIÑAN TRANSPORTATION COMPANY and MARCIANO ILAGAN, respondents.
Ozaeta, Gibbs and Ozaeta and Domingo E. de Lara for petitioner.
Victoriano H. Endaya for respondents.
CONCEPCION, C.J.:
Appeal by certiorari from a decision of the Court of Appeals.
The main facts are set forth in said decision from which we quote:
There is no dispute at all that the deceased Pedro Caguimbal, Barrio Lieutenant of Barrio
Calansayan, San Jose, Batangas, was a paying passenger of BTCO bus, with plate TPU507, going south on its regular route from Calamba, Laguna, to Batangas, Batangas, driven
by Tomas Perez, its regular driver, at about 5:30 o'clock on the early morning of April 25,
1954. The deceased's destination was his residence at Calansayan, San Jose, Batangas.
The bus of the Biñan Transportation Company, bearing plate TPU-820, driven by Marciano
Ilagan, was coming from the opposite direction (north-bound). Along the national highway at
Barrio Daraza, Tanauan, Batangas, on the date and hour above indicated, a horse-driven rig
(calesa) managed by Benito Makahiya, which was then ahead of the Biñan bus, was also

coming from the opposite direction, meaning proceeding towards the north. As to what
transpired thereafter, the lower court chose to give more credence to defendant Batangas
Transportation Company's version which, in the words of the Court a quo, is as follows: "As
the BTCO bus was nearing a house, a passenger requested the conductor to stop as he was
going to alight, and when he heard the signal of the conductor, the driver Tomas Perez
slowed down his bus swerving it farther to the right in order to stop; at this juncture, a calesa,
then driven by Benito Makahiya was at a distance of several meters facing the BTCO bus
coming from the opposite direction; that at the same time the Biñan bus was about 100
meters away likewise going northward and following the direction of the calesa; that upon
seeing the Biñan bus the driver of the BTCO bus dimmed his light as established by Magno
Ilaw, the very conductor of the Biñan bus at the time of the accident; that as the calesa and
the BTCO bus were passing each other from the opposite directions, the Biñan bus following
the calesa swerved to its left in an attempt to pass between the BTCO bus and thecalesa;
that without diminishing its speed of about seventy (70) kilometers an hour, the Biñan bus
passed through the space between the BTCO bus and the calesa hitting first the left side of
the BTCO bus with the left front corner of its body and then bumped and struck
the calesa which was completely wrecked; that the driver was seriously injured and the horse
was killed; that the second and all other posts supporting the top of the left side of the BTCO
bus were completely smashed and half of the back wall to the left was ripped open. (Exhibits
1 and 2). The BTCO bus suffered damages for the repair of its damaged portion.
As a consequence of this occurrence, two (2) passengers of BTCO died, namely, Pedro Caguimbal
and Guillermo Tolentino, apart from others who were injured. The widow and children of Caguimbal
instituted the present action, which was tried jointly with a similar action of the Tolentinos, to recover
damages from the Batangas Transportation Company, hereinafter referred to as BTCO. The latter,
in turn, filed a third-party complaint against the Biñan Transportation Company — hereinafter
referred to as Biñan — and its driver, Marciano Ilagan. Subsequently, the Caguimbals amended their
complaint, to include therein, as defendants, said Biñan and Ilagan.
After appropriate proceedings, the Court of First Instance of Batangas rendered a decision
dismissing the complaint insofar as the BTCO is concerned, without prejudice to plaintiff's right to
sue Biñan — which had stopped participating in the proceedings herein, owing apparently, to a case
in the Court of First Instance of Laguna for the insolvency of said enterprise — and Ilagan, and
without pronouncement as to costs.
On appeal taken by the Caguimbals, the Court of Appeals reversed said decision and rendered
judgment for them, sentencing the BTCO, Biñan and Ilagan to, jointly and severally, pay to the
plaintiffs the aggregate sum of P10,500.00 1 and the costs in both instances. Hence, this appeal by
BTCO, upon the ground that the Court of Appeals erred: 1) in finding said appellant liable for
damages; and 2) in awarding attorney's fees.
In connection with the first assignment of error, we note that the recklessness of defendant was,
manifestly, a major factor in the occurrence of the accident which resulted, inter alia, in the death of
Pedro Caguimbal. Indeed, as driver of the Biñan bus, he overtook Benito Makahiya's horse-driven
rig or calesa and passed between the same and the BTCO bus despite the fact that the space
available was not big enough therefor, in view of which the Biñan bus hit the left side of the BTCO
bus and then the calesa. This notwithstanding, the Court of Appeals rendered judgment against the
BTCO upon the ground that its driver, Tomas Perez, had failed to exercise the "extraordinary
diligence," required in Article 1733 of the new Civil Code, "in the vigilance for the safety" of his
passengers. 2

The record shows that, in order to permit one of them to disembark, Perez drove his BTCO bus
partly to the right shoulder of the road and partly on the asphalted portion thereof. Yet, he could have
and should have seen to it — had he exercised "extraordinary diligence" — that his bus was
completely outside the asphalted portion of the road, and fully within the shoulder thereof, the width
of which being more than sufficient to accommodate the bus. He could have and should have done
this, because, when the aforementioned passenger expressed his wish to alight from the bus, Ilagan
had seen the aforementioned "calesa", driven by Makahiya, a few meters away, coming from the
opposite direction, with the Biñan bus about 100 meters behind the rig cruising at a good
speed.3 When Perez slowed down his BTCO bus to permit said passenger to disembark, he must
have known, therefore, that the Biñan bus would overtake the calesa at about the time when the
latter and BTCO bus would probably be on the same line, on opposite sides of the asphalted
portions of the road, and that the space between the BTCO bus and the "calesa" would not be
enough to allow the Biñan bus to go through. It is true that the driver of the Biñan bus should have
slowed down or stopped, and, hence, was reckless in not doing so; but, he had no especial
obligations toward the passengers of the BTCO unlike Perez whose duty was to exercise "utmost" or
"extraordinary" diligence for their safety. Perez was thus under obligation to avoid a situation which
would be hazardous for his passengers, and, make their safety dependent upon the diligence of the
Biñan driver. Such obligation becomes more patent when we considered the fact — of which the
Court may take judicial cognizance — that our motor vehicle drivers, particularly those of public
service utilities, have not distinguished themselves for their concern over the safety, the comfort or
the convenience of others. Besides, as correctly stated in the syllabus to Brito Sy vs. Malate Taxicab
& Garage, Inc., 4
In an action based on a contract of carriage, the court need not make an express finding of
fault or negligence on the part of the carrier in order to hold it responsible to pay the
damages sought for by the passenger. By the contract of carriage, the carrier assumes the
express obligation to transport the passenger to his destination safely and to observe
extraordinary diligence with a due regard for all the circumstances, and any injury that might
be suffered by the passenger is right away attributable to the fault or negligence of the carrier
(Article 1756, new Civil Code). This is an exception to the general rule that negligence must
be proved, and it is therefore incumbent upon the carrier to prove that it has exercised
extraordinary diligence as prescribed in Articles 1733 and 1755 of the new Civil Code.
In the case at bar, BTCO has not proven the exercise of extraordinary diligence on its part. For this
reason, the case of Isaac vs. A. L. Ammen Trans. Co., Inc. 5 relied upon by BTCO, is not in point, for,
in said case, the public utility driver had done everything he could to avoid the accident, and could
not have possibly avoided it, for he "swerved the bus to the very extreme right of the road," which the
driver, in the present case, had failed to do.
As regards the second assignment of error, appellant argues that the award of attorney's fees is not
authorized by law, because, of the eleven (11) cases specified in Article 1208 of the new Civil Code,
only the fifth and the last are relevant to the one under consideration; but the fifth case requires bad
faith, which does not exist in the case at bar. As regards the last case, which permits the award,
"where the court deems it just and equitable that attorney's fees . . . should be recovered," it is urged
that the evidence on record does not show the existence of such just and equitable grounds.
We, however, believe otherwise, for: (1) the accident in question took place on April 25, 1954, and
the Caguimbals have been constrained to litigate for over thirteen (13) years to vindicate their rights;
and (2) it is high time to impress effectively upon public utility operators the nature and extent of their
responsibility in respect of the safety of their passengers and their duty to exercise greater care in
the selection of drivers and conductor and in supervising the performance of their duties, in
accordance, not only with Article 1733 of the Civil Code of the Philippines, but, also, with Articles

1755 and 1756 thereof 6 and the spirit of these provisions, as disclosed by the letter thereof, and
elucidated by the Commission that drafted the same. 7
WHEREFORE, the decision appealed from, should be, as it is hereby, affirmed, with the costs of this
instance against appellant Batangas Transportation Company.
Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ., concur.
Bengzon, J.P., J., took no part.

Footnotes
1

For funeral expenses

P1,000

For the death of Pedro Caguimbal

6,000

For moral damages

2,000

For attorney's fees

1,500
P10,000

2

"Art. 1733. Common carriers, from the nature of their business and for reasons of public
policy, are bound to observe extraordinary diligence in the vigilance over the goods and for
the safety of the passengers transported by them, according to all the circumstances of each
case."
3

70 km. p.h.

4

102 Phil. 482.

5

101 Phil. 1046.

6

"Art. 1755. A common carrier is bound to carry the passengers safely as far as human care
and foresight can provide, using the utmost diligence of very cautious persons, with a due
regard for all the circumstances."
"Art. 1756. In case of death of or injuries to passengers, common carriers are presumed to
have been at fault or to have acted negligently, unless they prove that they observed
extraordinary diligence as prescribed in articles 1733 and 1755."
7

"A common carrier is bound to carry the passengers safely as far as human care and
foresight can provide, using the utmost diligence of very cautious persons, with due regard
for all the circumstances. This extraordinary diligence required of common carriers is
calculated to protect the passengers from the tragic mishaps that frequently occur in
connection with rapid modern transportation. This high standard of care is imperatively
demanded by the preciousness of human life and by the consideration that every person

must in every way be safeguarded against all injury." (Report of the Code Commission, pp.
35-36.)
unday, April 15, 2012

Ponce vs. Court of Appeals, 90 SCRA 533, No. L-49494,
May 31, 1979
Posted by Alchemy Business Center and Marketing Consultancy at 10:13 PM Labels: 1979, 90 SCRA 533, Civil Law Review, May
31, No. L-49494,Ponce vs. Court of Appeals

Ponce vs. Court of Appeals, 90 SCRA 533, No. L-49494, May 31, 1979
G.R. No. L-49494 May 31, 1979
NELIA G. PONCE and VICENTE C. PONCE, petitioners,
vs.
THE HONORABLE COURT OF APPEALS, and JESUSA B. AFABLE, respondents.
Romeo L. Mendoza & Gallardo S. Tongohan for petitioners.
Ramon M. Velayo for private respondent.
MELENCIO-HERRERA, J.:
This is a Petition for Certiorari seeking to set aside the Resolution of the Court of Appeals, dated June 8, 1978, reconsidering its
Decision dated December 17, 1977 and reversing the judgment of the Court of First Instance of Manila in favor of petitioners as
well as the Resolutions, dated July 6, 1978 and November 27, 1978, denying petitioners' Motion for Reconsideration.
The factual background of the case is as follows:
On June 3, 1969, private respondent Jesusa B. Afable, together with Felisa L. Mendoza and Ma. Aurora C. Diño executed a
promissory note in favor of petitioner Nelia G. Ponce in the sum of P814,868.42, Philippine Currency, payable, without interest,
on or before July 31, 1969. It was further provided therein that should the indebtedness be not paid at maturity, it shall draw
interest at 12% per annum, without demand; that should it be necessary to bring suit to enforce pay ment of the note, the
debtors shall pay a sum equivalent to 10% of the total amount due for attorney's fees; and, in the event of failure to pay the
indebtedness plus interest in accordance with its terms, the debtors shall execute a first mortgage in favor of the creditor over
their properties or of the Carmen Planas Memorial, Inc.
Upon the failure of the debtors to comply with the terms of the promissory note, petitioners (Nelia G. Ponce and her husband)
filed, on July 27, 1970, a Complaint against them with the Court of First Instance of Manila for the recovery of the principal sum
of P814,868.42, plus interest and damages.
Defendant Ma. Aurora C. Diño's Answer consisted more of a general denial and the contention that she did not borrow any
amount from plaintiffs and that her signature on the promissory note was obtained by plaintiffs on their assurance that the
same was for " formality only."
Defendant Jesusa B. Afable, for her part, asserted in her Answer that the promissory note failed to express the true intent and
agreement of the parties, the true agreement being that the obligation therein mentioned would be assumed and paid entirely
by defendant Felisa L. Mendoza; that she had signed said document only as President of the Carmen Planas Memorial, Inc., and
that she was not to incur any personal obligation as to the payment thereof because the same would be repaid by defendant
Mendoza and/or Carmen Planas Memorial, Inc.
In her Amended Answer, defendant Felisa L. Mendoza admitted the authenticity and due execution of the promissory note, but
averred that it was a recapitulation of a series of transactions between her and the plaintiffs, "with defendant Ma. Aurora C.
Diño and Jesusa B. Afable coming only as accomodation parties." As affirmative defense, defendant Mendoza contended that
the promissory note was the result of usurious transactions, and, as counterclaim, she prayed that plaintiffs be ordered to
account for all the interests paid.
Plaintiffs filed their Answer to defendant Mendoza's counterclaim denying under oath the allegations of usury.
After petitioners had rested, the case was deemed submitted for decision since respondent Afable and her co-debtors had
repeatedly failed to appear before the trial Court for the presentation of their evidence.
On March 9, 1972, the trial Court rendered judgment ordering respondent Afable and her co-debtors, Felisa L. Mendoza and
Ma. Aurora C. Diño , to pay petitioners, jointly and severally, the sum of P814,868.42, plus 12% interest per annum from July 31,
1969 until full payment, and a sum equivalent to 10% of the total amount due as attorney's fees and costs.
From said Decision, by respondent Afable appealed to the Court of Appeals. She argued that the contract under consideration
involved the payment of US dollars and was, therefore, illegal; and that under the in pari delicto rule, since both parties are
guilty of violating the law, neither one can recover. It is to be noted that said defense was not raised in her Answer.

On December 13, 1977, the Court of Appeals* rendered judgment affirming the decision of the trial Court. In a Resolution
dated February 27, 1978, the Court of Appeals,** denied respondent's Motion for Reconsideration. However, in a Resolution
dated June 8, 1978, the Court of Appeals acting on the Second Motion for Reconsideration filed by private respondent, set
aside the Decision of December 13, 1977, reversed the judgment of the trial Court and dismissed the Complaint. The Court of
Appeals opined that the intent of the parties was that the promissory note was payable in US dollars, and, therefore, the
transaction was illegal with neither party entitled to recover under the in pari delicto rule.
Their Motions for Reconsideration having been denied in the Resolutions dated July 6, 1978 and November 27, 1978,
petitioners filed the instant Petition raising the following Assignments of Error.
I
THE RESPONDENT COURT OF APPEALS ERRED IN CONCLUDING THAT THE PROMISSORY NOTE EVIDENCING THE TRANSACTION
OF THE PARTIES IS PAYABLE IN U.S. DOLLARS THEREBY DETERMINING THE INTENT OF THE PARTIES OUTSIDE OF THEIR
PROMISSORY NOTE DESPITE LACK OF SHOWING THAT IT FAILED TO EXPRESS THE TRUE INTENT OR AGREEMENT OF THE
PARTIES AND ITS PAYABILITY IN PHILIPPINE PESOS WHICH IS EXPRESSED, AMONG OTHERS, BY ITS CLEAR AND PRECISE TERMS.
II
THE RESPONDENT COURT, OF APPEALS ERRED IN HOLDING THAT REPUBLIC ACT 529, OTHERWISE KNOWN ASIAN ACT TO
ASSURE UNIFORM VALUE TO PHILIPPINE COINS AND CURRENCY,' COVERS THE TRANSACTION OF THE PARTIES HEREIN.
III
THE RESPONDENT COURT OF APPEALS ERRED IN NOT FINDING THAT PRIVATE RESPONDENT JESUSA B. AFABLE COULD NOT
FAVORABLY AVAIL HERSELF OF THE DEFENSE OF ALLEGED APPLICABILITY OF REPUBLIC ACT 529 AND THE DOCTRINE OF IN PARI
DELICTO AS THESE WERE NOT PLEADED NOR ADOPTED BY HER IN THE TRIAL.
IV
THE RESPONDENT COURT OF APPEALS ERRED IN NOT FINDING ASSUMING ARGUENDO THAT REPUBLIC ACT 529 COVERS THE
PARTIES TRANSACTION, THAT THE Doctrine OF IN PARI DELICTO DOES NOT APPLY AND THE PARTIES AGREEMENT WAS NOT
NULL AND VOID PURSUANT TO THE RULING IN OCTAVIO A. KALALO VS. ALFREDO J. LUZ, NO.-27782, JULY 31, 1970.
In the Resolution dated June 8, 1978, the Court of Appeals made the following observations:
We are convinced from the evidence that the amount awarded by the lower Court was indeed owed by the defendants to the
plaintiffs. However, the sole issue raised in this second motion for reconconsideration is not the existence of the obligation
itself but the legality of the subject matter of the contract. If the subject matter is illegal and against public policy, the doctrine
of pari delicto applies.
xxx xxx xxx
We are constrained to reverse our December 13, 1977 decision. While it is true that the promissory note does not mention any
obligation to pay in dollars, plaintiff-appellee Ponce himself admitted that there was an agreement that he would be paid in
dollars by the defendants. The promissory note is payable in U.S. donors. The in. tent of the parties prevails over the bare
words of the written contracts.
xxx xxx xxx
The agreement is null and void and of no effect under Republic Act No. 529. Under the doctrine of pari delicto, no recovery can
1
be made in favor of the plaintiffs for being themselves guilty of violating the law.
We are constrained to disagree.
Reproduced hereunder is Section 1 of Republic Act No. 529, which was enacted on June 16, 1950:
Section 1. Every provision contained in, or made with respect to, any domestic obligation to wit, any obligation contracted in
the Philippines which provision purports to give the obligee the right to require payment in gold or in a particular kind of coin or
currency other than Philippine currency or in an amount of money of the Philippines measured thereby, be as it is hereby
declared against public policy, and null voice and of no effect and no such provision shall be contained in, or made with respect
to, any obligation hereafter incurred. The above prohibition shall not apply to (a) transactions were the funds involved are the
proceeds of loans or investments made directly or indirectly, through bona fide intermediaries or agents, by foreign
governments, their agencies and instrumentalities, and international financial and banking institutions so long as the funds are
Identifiable, as having emanated from the sources enumerated above; (b) transactions affecting high priority economic projects
for agricultural industrial and power development as may be determined by the National Economic Council which are financed
by or through foreign funds; (c) forward exchange transactions entered into between banks or between banks and individuals
or juridical persons; (d) import-export and other international banking financial investment and industrial transactions. With
the exception of the cases enumerated in items (a) (b), (c) and (d) in the foregoing provision, in, which cases the terms of the
parties' agreement shag apply, every other domestic obligation heretofore or hereafter incurred whether or not any such
provision as to payment is contained therein or made with- respect thereto, shall be discharged upon payment in any coin or
currency which at the time of payment is legal tender for public and private debts: Provided, That if the obligation was incurred
prior to the enactment of this Act and required payment in a particular kind of coin or currency other than Philippine currency,
it shall be discharge in Philippine currency measured at the prevailing rates of exchange at the time the obligation was incurred,
except in case of a loan made in foreign currency stipulated to be payable in the currency in which case the rate of exchange
prevailing at the time of the stipulated date of payment shall prevail All coin and currency, including Central Bank notes,

heretofore and hereafter issued and d by the Government of the Philippines shall be legal tender for all debts, public and
private. (As amended by RA 4100, Section 1, approved June 19, 1964) (Empahsis supplied).
It is to be noted that while an agreement to pay in dollars is declared as null and void and of no effect, what the law specifically
prohibits is payment in currency other than legal tender. It does not defeat a creditor's claim for payment, as it specifically
provides that "every other domestic obligation ... whether or not any such provision as to payment is contained therein or
made with respect thereto, shall be discharged upon payment in any coin or currency which at the time of payment is legal
tender for public and private debts." A contrary rule would allow a person to profit or enrich himself inequitably at another's
expense.
As the Court of Appeals itself found, the promissory note in question provided on its face for payment of the obligation in
Philippine currency, i.e., P814,868.42. So that, while the agreement between the parties originally involved a dollar transaction
and that petitioners expected to be paid in the amount of US$194,016.29, petitioners are not now insisting on their agreement
with respondent Afable for the payment of the obligation in dollars. On the contrary, they are suing on the basis of the
promissory note whereby the parties have already agreed to convert the dollar loan into Philippine currency at the rate of
2
P4.20 to $1.00. It may likewise be pointed out that the Promissory Note contains no provision "giving the obligee the right to
require payment in a particular kind of currency other than Philippine currency, " which is what is specifically prohibited by RA
No. 529.
At any rate, even if we were to disregard the promissory note providing for the payment of the obligation in Philippine currency
and consider that the intention of the parties was really to provide for payment of the obligation would be made in dollars,
petitioners can still recover the amount of US$194,016.29, which respondent Afable and her co-debtors do not deny having
received, in its peso equivalent. As held in Eastboard Navigation, Ltd. vs. Juan Ysmael & Co. Inc., 102 Phil. 1 (1957), and Arrieta
3
vs. National Rice & Corn Corp., if there is any agreement to pay an obligation in a currency other than Philippine legal tender,
the same is nun and void as contrary to public policy, pursuant to Republic Act No. 529, and the most that could be demanded
is to pay said obligation in Philippine currency. In other words, what is prohibited by RA No. 529 is the payment of an obligation
in dollars, meaning that a creditor cannot oblige the debtor to pay him in dollars, even if the loan were given in said currency. In
such a case, the indemnity to be allowed should be expressed in Philippine currency on the basis of the current rate of
4
exchange at the time of payment.
The foregoing premises considered, we deem it unnecessary to discuss the other errors assigned by petitioners.
WHEREFORE, the Resolutions of the Court of Appeals dated June 8, 1978, July 6, 1978 and November 27, 1978 are hereby set
aside, and judgment is hereby rendered reinstating the Decision of the Court of First Instance of Manila.
No pronouncement as to costs.
SO ORDERED.
Teehankee (Chairman), Fernandez, Guerrero and De Castro, JJ., concur.
Makasiar, J., took no part.
#Footnotes
* Special Fifth Division, composed of JJ. L, B. Reyes, M. V. Agcaoili and H.E. Gutierrez, ponente.
** Special Fourth Division composed of JJ. L. B. Reyes, H.E. Gutierrez,ponente, and R.C. Climaco.
1 Pp.24,25 & 28, Petition, Annex "A".
2 T.s.n., September 3, 1971, p. 40.
3 10 SCRA 79 (1964).
4 Kalalo vs. Luz, 34 SCRA 337 (1970).

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-27782 July 31, 1970
OCTAVIO A. KALALO, plaintiff-appellee,
vs.
ALFREDO J. LUZ, defendant-appellant.
Amelia K. del Rosario for plaintiff-appellee.

Pelaez, Jalandoni & Jamir for defendant-appellant.

ZALDIVAR, J.:
Appeal from the decision, dated, February 10, 1967, of the Court of First Instance of Rizal (Branch
V, Quezon City) in its Civil Case No. Q-6561.
On November 17, 1959, plaintiff-appellee Octavio A. Kalalo hereinafter referred to as appellee), a
licensed civil engineer doing business under the firm name of O. A. Kalalo and Associates, entered
into an agreement (Exhibit A ) 1 with defendant-appellant Alfredo J . Luz (hereinafter referred to
as appellant), a licensed architect, doing business under firm name of A. J. Luz and Associates, whereby
the former was to render engineering design services to the latter for fees, as stipulated in the agreement.
The services included design computation and sketches, contract drawing and technical specifications of
all engineering phases of the project designed by O. A. Kalalo and Associates bill of quantities and cost
estimate, and consultation and advice during construction relative to the work. The fees agreed upon
were percentages of the architect's fee, to wit: structural engineering, 12-½%; electrical engineering, 2-½%. The
agreement was subsequently supplemented by a "clarification to letter-proposal" which provided, among other things, that "the schedule of
engineering fees in this agreement does not cover the following: ... D. Foundation soil exploration, testing and evaluation; E. Projects that are
principally engineering works such as industrial plants, ..." and "O. A. Kalalo and Associates reserve the right to increase fees on projects
2
,which cost less than P100,000 ...." Pursuant to said agreement, appellee rendered engineering services to

appellant in the following projects:

(a) Fil-American Life Insurance Building at Legaspi City;
(b) Fil-American Life Insurance Building at Iloilo City;
(c) General Milling Corporation Flour Mill at Opon Cebu;
(d) Menzi Building at Ayala Blvd., Makati, Rizal;
(e) International Rice Research Institute, Research center Los Baños, Laguna;
(f) Aurelia's Building at Mabini, Ermita, Manila;
(g) Far East Bank's Office at Fil-American Life Insurance Building at Isaac Peral
Ermita, Manila;
(h) Arthur Young's residence at Forbes Park, Makati, Rizal;
(i) L & S Building at Dewey Blvd., Manila; and
(j) Stanvac Refinery Service Building at Limay, Bataan.
On December 1 1, '1961, appellee sent to appellant a statement of account (Exhibit "1"), 3 to which
was attached an itemized statement of defendant-appellant's account (Exh. "1-A"), according to which the
total engineering fee asked by appellee for services rendered amounted to P116,565.00 from which sum
was to be deducted the previous payments made in the amount of P57,000.00, thus leaving a balance
due in the amount of P59,565.00.

On May 18, 1962 appellant sent appellee a resume of fees due to the latter. Said fees, according to
appellant. amounted to P10,861.08 instead of the amount claimed by the appellee. On June 14,
1962 appellant sent appellee a check for said amount, which appellee refused to accept as full
payment of the balance of the fees due him.
On August 10, 1962, appellee filed a complaint against appellant, containing four causes of action.
In the first cause of action, appellee alleged that for services rendered in connection with the
different projects therein mentioned there was due him fees in sum s consisting of $28,000 (U.S.)
and P100,204.46, excluding interests, of which sums only P69,323.21 had been paid, thus leaving
unpaid the $28,000.00 and the balance of P30,881.25. In the second cause of action, appellee
claimed P17,000.00 as consequential and moral damages; in the third cause of action claimed
P55,000.00 as moral damages, attorney's fees and expenses of litigation; and in the fourth cause of
action he claimed P25,000.00 as actual damages, and also for attorney's fees and expenses of
litigation.
In his answer, appellant admitted that appellee rendered engineering services, as alleged in the first
cause of action, but averred that some of appellee's services were not in accordance with the
agreement and appellee's claims were not justified by the services actually rendered, and that the
aggregate amount actually due to appellee was only P80,336.29, of which P69,475.21 had already
been paid, thus leaving a balance of only P10,861.08. Appellant denied liability for any damage
claimed by appellee to have suffered, as alleged in the second, third and fourth causes of action.
Appellant also set up affirmative and special defenses, alleging that appellee had no cause of action,
that appellee was in estoppel because of certain acts, representations, admissions and/or silence,
which led appellant to believe certain facts to exist and to act upon said facts, that appellee's claim
regarding the Menzi project was premature because appellant had not yet been paid for said project,
and that appellee's services were not complete or were performed in violation of the agreement
and/or otherwise unsatisfactory. Appellant also set up a counterclaim for actual and moral damages
for such amount as the court may deem fair to assess, and for attorney's fees of P10,000.00.
Inasmuch as the pleadings showed that the appellee's right to certain fees for services rendered was
not denied, the only question being the assessment of the proper fees and the balance due to
appellee after deducting the admitted payments made by appellant, the trial court, upon agreement
of the parties, authorized the case to be heard before a Commissioner. The Commissioner rendered
a report which, in resume, states that the amount due to appellee was $28,000.00 (U.S.) as his fee
in the International Research Institute Project which was twenty percent (20%) of the $140,000.00
that was paid to appellant, and P51,539.91 for the other projects, less the sum of P69,475.46 which
was already paid by the appellant. The Commissioner also recommended the payment to appellee
of the sum of P5,000.00 as attorney's fees.
At the hearing on the Report of the Commissioner, the respective counsel of the parties manifested
to the court that they had no objection to the findings of fact of the Commissioner contained in the
Report, and they agreed that the said Report posed only two legal issues, namely: (1) whether under
the facts stated in the Report, the doctrine of estoppel would apply; and (2) whether the
recommendation in the Report that the payment of the amount. due to the plaintiff in dollars was
legally permissible, and if not, at what rate of exchange it should be paid in pesos. After the parties
had submitted their respective memorandum on said issues, the trial court rendered its decision
dated February 10, 1967, the dispositive portion of which reads as follows:
WHEREFORE, judgment is rendered in favor of plaintiff and against the defendant,
by ordering the defendant to pay plaintiff the sum of P51,539.91 and $28,000.00, the
latter to be converted into the Philippine currency on the basis of the current rate of
exchange at the time of the payment of this judgment, as certified to by the Central

Bank of the Philippines, from which shall be deducted the sum of P69,475.46, which
the defendant had paid the plaintiff, and the legal rate of interest thereon from the
filing of the complaint in the case until fully paid for; by ordering the defendant to pay
to plaintiff the further sum of P8,000.00 by way of attorney's fees which the Court
finds to be reasonable in the premises, with costs against the defendant. The
counterclaim of the defendant is ordered dismissed.
From the decision, this appeal was brought, directly to this Court, raising only questions of law.
During the pendency of this appeal, appellee filed a petition for the issuance of a writ of attachment
under Section 1 (f) of Rule 57 of the Rules of Court upon the ground that appellant is presently
residing in Canada as a permanent resident thereof. On June 3, 1969, this Court resolved, upon
appellee's posting a bond of P10,000.00, to issue the writ of attachment, and ordered the Provincial
Sheriff of Rizal to attach the estate, real and personal, of appellant Alfredo J. Luz within the province,
to the value of not less than P140,000.00.
The appellant made the following assignments of errors:
I. The lower court erred in not declaring and holding that plaintiff-appellee's letter
dated December 11, 1961 (Exhibit "1") and the statement of account (Exhibit "1-A")
therein enclosed, had the effect, cumulatively or alternatively, of placing plaintiffappellee in estoppel from thereafter modifying the representations made in said
exhibits, or of making plaintiff-appellee otherwise bound by said representations, or
of being of decisive weight in determining the true intent of the parties as to the
nature and extent of the engineering services rendered and/or the amount of fees
due.
II. The lower court erred in declaring and holding that the balance owing from
defendant-appellant to plaintiff-appellee on the IRRI Project should be paid on the
basis of the rate of exchange of the U.S. dollar to the Philippine peso at the time of
payment of judgment. .
III. The lower court erred in not declaring and holding that the aggregate amount of
the balance due from defendant-appellant to plaintiff-appellee is only P15,792.05.
IV. The lower court erred in awarding attorney's fees in the sum of P8,000.00,
despite the commissioner's finding, which plaintiff-appellee has accepted and has not
questioned, that said fee be only P5,000.00; and
V. The lower court erred in not granting defendant-appellant relief on his counterclaim.
1. In support of his first assignment of error appellant argues that in Exhibit 1-A, which is a statement
of accounts dated December 11, 1961, sent by appellee to appellant, appellee specified the various
projects for which he claimed engineering fees, the precise amount due on each particular
engineering service rendered on each of the various projects, and the total of his claims; that such a
statement barred appellee from asserting any claim contrary to what was stated therein, or from
taking any position different from what he asserted therein with respect to the nature of the
engineering services rendered; and consequently the trial court could not award fees in excess of
what was stated in said statement of accounts. Appellant argues that for estoppel to apply it is not
necessary, contrary to the ruling of the trial court, that the appellant should have actually relied on
the representation, but that it is sufficient that the representations were intended to make the

defendant act there on; that assuming arguendo that Exhibit 1-A did not put appellee in estoppel, the
said Exhibit 1-A nevertheless constituted a formal admission that would be binding on appellee
under the law on evidence, and would not only belie any inconsistent claim but also would discredit
any evidence adduced by appellee in support of any claim inconsistent with what appears therein;
that, moreover, Exhibit 1-A, being a statement of account, establishesprima facie the accuracy and
correctness of the items stated therein and its correctness can no longer be impeached except for
fraud or mistake; that Exhibit 1-A furthermore, constitutes appellee's own interpretation of the
contract between him and appellant, and hence, is conclusive against him.
On the other hand, appellee admits that Exhibit 1-A itemized the services rendered by him in the
various construction projects of appellant and that the total engineering fees charged therein was
P116,565.00, but maintains that he was not in estoppel: first, because when he prepared Exhibit 1-A
he was laboring under an innocent mistake, as found by the trial court; second, because appellant
was not ignorant of the services actually rendered by appellee and the fees due to the latter under
the original agreement, Exhibit "A."
We find merit in the stand of appellee.
The statement of accounts (Exh. 1-A) could not estop appellee, because appellant did not rely
thereon as found by the Commissioner, from whose Report we read:
While it is true that plaintiff vacillated in his claim, yet, defendant did not in anyway
rely or believe in the different claims asserted by the plaintiff and instead insisted on
a claim that plaintiff was only entitled to P10,861.08 as per a separate resume of fees
he sent to the plaintiff on May 18, 1962 (See Exhibit 6). 4
The foregoing finding of the Commissioner, not disputed by appellant, was adopted by the trial court
in its decision. Under article 1431 of the Civil Code, in order that estoppel may apply the person, to
whom representations have been made and who claims the estoppel in his favor must have relied or
acted on such representations. Said article provides:
Art. 1431. Through 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.
An essential element of estoppel is that the person invoking it has been influenced and has relied on
the representations or conduct of the person sought to be estopped, and this element is wanting in
the instant case. In Cristobal vs. Gomez, 5 this Court held that no estoppel based on a document can be
invoked by one who has not been mislead by the false statements contained therein. And in Republic of
the Philippines vs. Garcia, et al., 6 this Court ruled that there is no estoppel when the statement or action
invoked as its basis did not mislead the adverse party-Estoppel has been characterized as harsh or
odious and not favored in law. 7 When misapplied, estoppel becomes a most effective weapon to
accomplish an injustice, inasmuch as it shuts a man's mouth from speaking the truth and debars the truth
in a particular case. 8 Estoppel cannot be sustained by mere argument or doubtful inference: it must be
clearly proved in all its essential elements by clear, convincing and satisfactory evidence. 9 No party
should be precluded from making out his case according to its truth unless by force of some positive
principle of law, and, consequently, estoppel in pains must be applied strictly and should not be enforced
unless substantiated in every particular. 1 0

The essential elements of estoppel in pais may be considered in relation to the party sought to be
estopped, and in relation to the party invoking the estoppel in his favor. As related to the party to be
estopped, the essential elements are: (1) conduct amounting to false representation or concealment

of material facts or at least calculated to convey the impression that the facts are otherwise than,
and inconsistent with, those which the party subsequently attempts to assert; (2) intent, or at least
expectation that his conduct shall be acted upon by, or at least influence, the other party; and (3)
knowledge, actual or constructive, of the real facts. As related to the party claiming the estoppel, the
essential elements are (1) lack of knowledge and of the means of knowledge of the truth as the facts
in questions; (2) (reliance, in good faith, upon the conduct or statements of the party to be estopped;
(3) action or inaction based thereon of such character as To change the position or status of the
party claiming the estoppel, to his injury, detriment or prejudice. 1 1
The first essential element in relation to the party sought to be estopped does not obtain in the
instant case, for, as appears in the Report of the Commissioner, appellee testified "that when he
wrote Exhibit 1 and prepared Exhibit 1-A, he had not yet consulted the services of his counsel and it
was only upon advice of counsel that the terms of the contract were interpreted to him resulting in
his subsequent letters to the defendant demanding payments of his fees pursuant to the contract
Exhibit A." 1 2 This finding of the Commissioner was adopted by the trial court. 1 3 It is established ,
therefore, that Exhibit 1-A was written by appellee through ignorance or mistake. Anent this matter, it has
been held that if an act, conduct or misrepresentation of the party sought to be estopped is due to
ignorance founded on innocent mistake, estoppel will not arise. 1 4 Regarding the essential elements of
estoppel in relation to the party claiming the estoppel, the first element does not obtain in the instant case,
for it cannot be said that appellant did not know, or at least did not have the means of knowing, the
services rendered to him by appellee and the fees due thereon as provided in Exhibit A. The second
element is also wanting, for, as adverted to, appellant did not rely on Exhibit 1-A but consistently denied
the accounts stated therein. Neither does the third element obtain, for appellant did not act on the basis of
the representations in Exhibit 1-A, and there was no change in his position, to his own injury or prejudice.

Appellant, however, insists that if Exhibit 1-A did not put appellee in estoppel, it at least constituted
an admission binding upon the latter. In this connection, it cannot be gainsaid that Exhibit 1-A is not
a judicial admission. Statements which are not estoppels nor judicial admissions have no quality of
conclusiveness, and an opponent. whose admissions have been offered against him may offer any
evidence which serves as an explanation for his former assertion of what he now denies as a fact.
This may involve the showing of a mistake. Accordingly, in Oas vs. Roa, 1 6 it was held that when a
party to a suit has made an admission of any fact pertinent to the issue involved, the admission can be
received against him; but such an admission is not conclusive against him, and he is entitled to present
evidence to overcome the effect of the admission. Appellee did explain, and the trial court concluded, that
Exhibit 1-A was based on either his ignorance or innocent mistake and he, therefore, is not bound by it.

Appellant further contends that Exhibit 1-A being a statement of account, establishes prima facie the
accuracy and correctness of the items stated therein. If prima facie, as contended by appellant, then
it is not absolutely conclusive upon the parties. An account stated may be impeached for fraud,
mistake or error. In American Decisions, Vol. 62, p. 95, cited as authority by appellant himself. we
read thus:
An account stated or settled is a mere admission that the account is correct. It is not
an estoppel. The account is still open to impeachment for mistakes or errors. Its
effect is to establish, prima facie, the accuracy of the items without other proof; and
the party seeking to impeach it is bound to show affirmatively the mistake or error
alleged. The force of the admission and the strength of the evidence necessary to
overcome it will depend upon the circumstances of the case.
In the instant case, it is Our view that the ignorance mistake that attended the writing of Exhibit 1-A
by appellee was sufficient to overcome the prima facie evidence of correctness and accuracy of said
Exhibit 1-A.

Appellant also urges that Exhibit 1-A constitutes appellee's own interpretation of the contract, and is,
therefore, conclusive against him. Although the practical construction of the contract by one party,
evidenced by his words or acts, can be used against him in behalf of the other party, 1 7 yet, if one of
the parties carelessly makes a wrong interpretation of the words of his contract, or performs more than
the contract requires (as reasonably interpreted independently of his performance), as happened in the
instant case, he should be entitled to a restitutionary remedy, instead of being bound to continue to his
erroneous interpretation or his erroneous performance and "the other party should not be permitted to
profit by such mistake unless he can establish an estoppel by proving a material change of position made
in good faith. The rule as to practical construction does not nullify the equitable rules with respect to
performance by mistake."1 8 In the instant case, it has been shown that Exhibit 1-A was written through
mistake by appellee and that the latter is not estopped by it. Hence, even if said Exhibit 1-A be
considered as practical construction of the contract by appellee, he cannot be bound by such erroneous
interpretation. It has been held that if by mistake the parties followed a practice in violation of the terms of
the agreement, the court should not perpetuate the error. 1 9

2. In support of the second assignment of error, that the lower court erred in holding that the balance
from appellant on the IRRI project should be paid on the basis of the rate of exchange of the U.S.
dollar to the Philippine peso at the time of payment of the judgment, appellant contends: first, that
the official rate at the time appellant received his architect's fees for the IRRI project, and
correspondingly his obligation to appellee's fee on August 25, 1961, was P2.00 to $1.00, and cites in
support thereof Section 1612 of the Revised Administrative Code, Section 48 of Republic Act 265
and Section 6 of Commonwealth Act No. 699; second, that the lower court's conclusion that the rate
of exchange to be applied in the conversion of the $28,000.00 is the current rate of exchange at the
time the judgment shall be satisfied was based solely on a mere presumption of the trial court that
the defendant did not convert, there being no showing to that effect, the dollars into Philippine
currency at the official rate, when the legal presumption should be that the dollars were converted at
the official rate of $1.00 to P2.00 because on August 25, 1961, when the IRRI project became due
and payable, foreign exchange controls were in full force and effect, and partial decontrol was
effected only afterwards, during the Macapagal administration; third, that the other ground advanced
by the lower court for its ruling, to wit, that appellant committed a breach of his obligation to turn over
to the appellee the engineering fees received in U.S. dollars for the IRRI project, cannot be upheld,
because there was no such breach, as proven by the fact that appellee never claimed in Exhibit 1-A
that he should be paid in dollars; and there was no provision in the basic contract (Exh. "A") that he
should be paid in dollars; and, finally, even if there were such provision, it would have no binding
effect under the provision of Republic Act 529; that, moreover, it cannot really be said that no
payment was made on that account for appellant had already paid P57,000.00 to appellee, and
under Article 125 of the Civil Code, said payment could be said to have been applied to the fees due
from the IRRI project, this project being the biggest and this debt being the most onerous.
In refutation of appellant's argument in support of the second assignment of error, appellee argues
that notwithstanding Republic Act 529, appellant can be compelled to pay the appellee in dollars in
view of the fact that appellant received his fees in dollars, and appellee's fee is 20% of appellant's
fees; and that if said amount is be converted into Philippine Currency, the rate of exchange should
be that at the time of the execution of the judgment. 2 0
We have taken note of the fact that on August 25, 1961, the date when appellant said his obligation
to pay appellee's fees became due, there was two rates of exchange, to wit: the preferred rate of
P2.00 to $1.00, and the free market rate. It was so provided in Circular No. 121 of the Central Bank
of the Philippines, dated March 2, 1961. amending an earlier Circular No. 117, and in force until
January 21, 1962 when it was amended by Circular No. 133, thus:
1. All foreign exchange receipts shall be surrendered to the Central Bank of those
authorized to deal in foreign exchange as follows:

Percentage of Total to be surrendered at
Preferred: Free Market Rate: Rate:
(a) Export Proceeds, U.S. Government Expenditures invisibles other than those
specifically mentioned below. ................................................ 25 75
(b) Foreign Investments, Gold Proceeds, Tourists and Inward Remittances of
Veterans and Filipino Citizens; and Personal Expenses of Diplomatic Per personnel
................................. 100" 2 1
The amount of $140,000.00 received by appellant foil the International Rice Research Institute
project is not within the scope of sub-paragraph (a) of paragraph No. 1 of Circular No. 121. Appellant
has not shown that 25% of said amount had to be surrendered to the Central Bank at the preferred
rate because it was either export proceeds, or U.S. Government expenditures, or invisibles not
included in sub-paragraph (b). Hence, it cannot be said that the trial court erred in presuming that
appellant converted said amount at the free market rate. It is hard to believe that a person
possessing dollars would exchange his dollars at the preferred rate of P2.00 to $1.00, when he is not
obligated to do so, rather than at the free market rate which is much higher. A person is presumed to
take ordinary care of his concerns, and that the ordinary course of business has been
followed. 2 2
Under the agreement, Exhibit A, appellee was entitled to 20% of $140,000.00, or the amount of
$28,000.00. Appellee, however, cannot oblige the appellant to pay him in dollars, even if appellant
himself had received his fee for the IRRI project in dollars. This payment in dollars is prohibited by
Republic Act 529 which was enacted on June 16, 1950. Said act provides as follows:
SECTION 1. Every provision contained in, or made with respect to, any obligation
which provision purports to give the obligee the right to require payment in gold or in
a particular kind of coin or currency other than Philippine currency or in an amount of
money of the Philippines measured thereby, be as it is hereby declared against
public policy, and null, void and of no effect, and no such provision shall be contained
in, or made with respect to, any obligation hereafter incurred. Every obligation
heretofore or here after incurred, whether or not any such provision as to payment is
contained therein or made with respect thereto, shall be discharged upon payment in
any coin or currency which at the time of payment is legal tender for public and
private debts: Provided, That, ( a) if the obligation was incurred prior to the
enactment of this Act and required payment in a particular kind of coin or currency
other than Philippine currency, it shall be discharged in Philippine currency measured
at the prevailing rate of exchange at the time the obligation was incurred, (b) except
in case of a loan made in a foreign currency stipulated to be payable in the same
currency in which case the rate of exchange prevailing at the time of the stipulated
date of payment shall prevail. All coin and currency, including Central Bank notes,
heretofore or hereafter issued and declared by the Government of the Philippines
shall be legal tender for all debts, public and private.
Under the above-quoted provision of Republic Act 529, if the obligation was incurred prior to the
enactment of the Act and require payment in a particular kind of coin or currency other than the
Philippine currency the same shall be discharged in Philippine currency measured at the
prevailing rate of exchange at the time the obligation was incurred. As We have adverted to,
Republic Act 529 was enacted on June 16, 1950. In the case now before Us the obligation of
appellant to pay appellee the 20% of $140,000.00, or the sum of $28,000.00, accrued on August 25,

1961, or after the enactment of Republic Act 529. It follows that the provision of Republic Act 529
which requires payment at the prevailing rate of exchange when the obligation was incurred cannot
be applied. Republic Act 529 does not provide for the rate of exchange for the payment of obligation
incurred after the enactment of said Act. The logical Conclusion, therefore, is that the rate of
exchange should be that prevailing at the time of payment. This view finds support in the ruling of
this Court in the case of Engel vs. Velasco & Co. 2 3 where this Court held that even if the obligation
assumed by the defendant was to pay the plaintiff a sum of money expressed in American currency, the
indemnity to be allowed should be expressed in Philippine currency at the rate of exchange at the time of
judgment rather than at the rate of exchange prevailing on the date of defendant's breach. This is also the
ruling of American court as follows:

The value in domestic money of a payment made in foreign money is fixed with
respect to the rate of exchange at the time of payment. (70 CJS p. 228)
According to the weight of authority the amount of recovery depends upon the
current rate of exchange, and not the par value of the particular money involved. (48
C.J. 605-606)
The value in domestic money of a payment made in foreign money is fixed in
reference to the rate of exchange at the time of such payment. (48 C.J. 605)
It is Our considered view, therefore, that appellant should pay the appellee the equivalent in pesos of
the $28,000.00 at the free market rate of exchange at the time of payment. And so the trial court did
not err when it held that herein appellant should pay appellee $28,000.00 "to be converted into the
Philippine currency on the basis of the current rate of exchange at the time of payment of this
judgment, as certified to by the Central Bank of the Philippines, ...." 2 4
Appellant also contends that the P57,000.00 that he had paid to appellee should have been applied
to the due to the latter on the IRRI project because such debt was the most onerous to appellant.
This contention is untenable. The Commissioner who was authorized by the trial court to receive
evidence in this case, however, reports that the appellee had not been paid for the account of the
$28,000.00 which represents the fees of appellee equivalent to 20% of the $140,000.00 that the
appellant received as fee for the IRRI project. This is a finding of fact by the Commissioner which
was adopted by the trial court. The parties in this case have agreed that they do not question the
finding of fact of the Commissioner. Thus, in the decision appealed from the lower court says:
At the hearing on the Report of the Commissioner on February 15, 1966, the
counsels for both parties manifested to the court that they have no objection to the
findings of facts of the Commissioner in his report; and agreed that the said report
only poses two (2)legal issues, namely: (1) whether under the facts stated in the
Report, the doctrine of estoppel will apply; and (2) whether the recommendation in
the Report that the payment of amount due to the plaintiff in dollars is permissible
under the law, and, if not, at what rate of exchange should it be paid in pesos
(Philippine currency) .... 2 5
In the Commissioner's report, it is spetifically recommended that the appellant be ordered to pay the
plaintiff the sum of "$28,000. 00 or its equivalent as the fee of the plaintiff under Exhibit A on the
IRRI project." It is clear from this report of the Commissioner that no payment for the account of this
$28,000.00 had been made. Indeed, it is not shown in the record that the peso equivalent of the
$28,000.00 had been fixed or agreed upon by the parties at the different times when the appellant
had made partial payments to the appellee.

3. In his third assignment of error, appellant contends that the lower court erred in not declaring that
the aggregate amount due from him to appellee is only P15,792.05. Appellant questions the
propriety or correctness of most of the items of fees that were found by the Commissioner to be due
to appellee for services rendered. We believe that it is too late for the appellant to question the
propriety or correctness of those items in the present appeal. The record shows that after the
Commissioner had submitted his report the lower court, on February 15, 1966, issued the following
order:
When this case was called for hearing today on the report of the Commissioner, the
counsels of the parties manifested that they have no objection to the findings of facts
in the report. However, the report poses only legal issues, namely: (1) whether under
the facts stated in the report, the doctrine of estoppel will apply; and (2) whether the
recommendation in the report that the alleged payment of the defendant be made in
dollars is permissible by law and, if not, in what rate it should be paid in pesos
(Philippine Currency). For the purpose of resolving these issues the parties prayed
that they be allowed to file their respective memoranda which will aid the court in the
determination of said issues. 2 6
In consonance with the afore-quoted order of the trial court, the appellant submitted his
memorandum which opens with the following statements:
As previously manifested, this Memorandum shall be confined to:
(a) the finding in the Commissioner's Report that defendant's defense of estoppel will
not lie (pp. 17-18, Report); and
(b) the recommendation in the Commissioner's Report that defendant be ordered to
pay plaintiff the sum of '$28,000.00 (U.S.) or its equivalent as the fee of the plaintiff
under Exhibit 'A' in the IRRI project.'
More specifically this Memorandum proposes to demonstrate the affirmative of three
legal issuesposed, namely:
First: Whether or not plaintiff's letter dated December 11, 1961 (Exhibit 'I') and/or
Statement of Account (Exhibit '1-A') therein enclosed has the effect of placing plaintiff
in estoppel from thereafter modifying the representations made in said letter and
Statement of Account or of making plaintiff otherwise bound thereby; or of being
decisive or great weight in determining the true intent of the parties as to the amount
of the engineering fees owing from defendant to plaintiff;
Second: Whether or not defendant can be compelled to pay whatever balance is
owing to plaintiff on the IRRI (International Rice and Research Institute) project in
United States dollars; and
Third: Whether or not in case the ruling of this Honorable Court be that defendant
cannot be compelled to pay plaintiff in United States dollars, the dollar-to-peso
convertion rate for determining the peso equivalent of whatever balance is owing to
plaintiff in connection with the IRRI project should be the 2 to 1 official rate and not
any other rate. 2 7
It is clear, therefore, that what was submitted by appellant to the lower court for resolution did not
include the question of correctness or propriety of the amounts due to appellee in connection with

the different projects for which the appellee had rendered engineering services. Only legal
questions, as above enumerated, were submitted to the trial court for resolution. So much so, that
the lower court in another portion of its decision said, as follows:
The objections to the Commissioner's Report embodied in defendant's memorandum
of objections, dated March 18, 1966, cannot likewise be entertained by the Court
because at the hearing of the Commissioner's Report the parties had expressly
manifested that they had no objection to the findings of facts embodied therein.
We, therefore hold that the third assignment of error of the appellant has no merit.
4. In his fourth assignment of error, appellant questions the award by the lower court of P8,000.00
for attorney's fees. Appellant argues that the Commissioner, in his report, fixed the sum of P5,000.00
as "just and reasonable" attorney's fees, to which amount appellee did not interpose any objection,
and by not so objecting he is bound by said finding; and that, moreover, the lower court gave no
reason in its decision for increasing the amount to P8,000.00.
Appellee contends that while the parties had not objected to the findings of the Commissioner, the
assessment of attorney's fees is always subject to the court's appraisal, and in increasing the
recommended fees from P5,000.00 to P8,000.00 the trial court must have taken into consideration
certain circumstances which warrant the award of P8,000.00 for attorney's fees.
We believe that the trial court committed no error in this connection. Section 12 of Rule 33 of the
Rules of Court, on which the fourth assignment of error is presumably based, provides that when the
parties stipulate that a commissioner's findings of fact shall be final, only questions of law arising
from the facts mentioned in the report shall thereafter be considered. Consequently, an agreement
by the parties to abide by the findings of fact of the commissioner is equivalent to an agreement of
facts binding upon them which the court cannot disregard. The question, therefore, is whether or not
the estimate of the reasonable fees stated in the report of the Commissioner is a finding of fact.
The report of the Commissioner on this matter reads as follows:
As regards attorney's fees, under the provisions of Art 2208, par (11), the same may be awarded,
and considering the number of hearings held in this case, the nature of the case (taking into account
the technical nature of the case and the voluminous exhibits offered in evidence), as well as the way
the case was handled by counsel, it is believed, subject to the Court's appraisal of the matter, that
the sum of P5,000.00 is just and reasonable as attorney's fees." 2 8
It is thus seen that the estimate made by the Commissioner was an expression of belief, or an
opinion. An opinionis different from a fact. The generally recognized distinction between a statement
of "fact" and an expression of "opinion" is that whatever is susceptible of exact knowledge is a matter
of fact, while that not susceptible of exact knowledge is generally regarded as an expression of
opinion. 2 9 It has also been said that the word "fact," as employed in the legal sense includes "those
conclusions reached by the trior from shifting testimony, weighing evidence, and passing on the credit of
the witnesses, and it does not denote those inferences drawn by the trial court from the facts ascertained
and settled by it. 3 0 In the case at bar, the estimate made by the Commissioner of the attorney's fees was
an inference from the facts ascertained by him, and is, therefore, not a finding of facts. The trial court
was, consequently, not bound by that estimate, in spite of the manifestation of the parties that they had
no objection to the findings of facts of the Commissioner in his report. Moreover, under Section 11 of Rule
33 of the Rules of Court, the court may adopt, modify, or reject the report of the commissioner, in whole or
in part, and hence, it was within the trial court's authority to increase the recommended attorney's fees of

P5,000.00 to P8,000.00. It is a settled rule that the amount of attorney's fees is addressed to the sound
discretion of the court. 3 1

It is true, as appellant contends, that the trial court did not state in the decision the reasons for
increasing the attorney's fees. The trial court, however, had adopted the report of the Commissioner,
and in adopting the report the trial court is deemed to have adopted the reasons given by the
Commissioner in awarding attorney's fees, as stated in the above-quoted portion of the report.
Based on the reasons stated in the report, the trial court must have considered that the reasonable
attorney's fees should be P8,000.00. Considering that the judgment against the appellant would
amount to more than P100,000.00, We believe that the award of P8,000.00 for attorney's fees is
reasonable.
5. In his fifth assignment of error appellant urges that he is entitled to relief on his counterclaim. In
view of what We have stated in connection with the preceding four assignments of error, We do not
consider it necessary to dwell any further on this assignment of error.
WHEREFORE, the decision appealed from is affirmed, with costs against the defendant-appellant. It
is so ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Castro, Fernando, Teehankee, Barredo and
Villamor, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 97753 August 10, 1992
CALTEX (PHILIPPINES), INC., petitioner,
vs.
COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.
Bito, Lozada, Ortega & Castillo for petitioners.
Nepomuceno, Hofileña & Guingona for private.

REGALADO, J.:
This petition for review on certiorari impugns and seeks the reversal of the decision promulgated by
respondent court on March 8, 1991 in CA-G.R. CV No. 23615 1 affirming with modifications, the earlier
decision of the Regional Trial Court of Manila, Branch XLII, 2 which dismissed the complaint filed therein
by herein petitioner against respondent bank.

The undisputed background of this case, as found by the court a quo and adopted by respondent
court, appears of record:

1. On various dates, defendant, a commercial banking institution, through its Sucat
Branch issued 280 certificates of time deposit (CTDs) in favor of one Angel dela Cruz
who deposited with herein defendant the aggregate amount of P1,120,000.00, as
follows: (Joint Partial Stipulation of Facts and Statement of Issues, Original Records,
p. 207; Defendant's Exhibits 1 to 280);
CTD CTD
Dates Serial Nos. Quantity Amount
22 Feb. 82 90101 to 90120 20 P80,000
26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000
——— ————
Total 280 P1,120,000
===== ========
2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff in
connection with his purchased of fuel products from the latter (Original Record, p.
208).
3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the
Sucat Branch Manger, that he lost all the certificates of time deposit in dispute. Mr.
Tiangco advised said depositor to execute and submit a notarized Affidavit of Loss,
as required by defendant bank's procedure, if he desired replacement of said lost
CTDs (TSN, February 9, 1987, pp. 48-50).
4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank
the required Affidavit of Loss (Defendant's Exhibit 281). On the basis of said affidavit
of loss, 280 replacement CTDs were issued in favor of said depositor (Defendant's
Exhibits 282-561).
5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from
defendant bank in the amount of Eight Hundred Seventy Five Thousand Pesos
(P875,000.00). On the same date, said depositor executed a notarized Deed of
Assignment of Time Deposit (Exhibit 562) which stated, among others, that he (de la
Cruz) surrenders to defendant bank "full control of the indicated time deposits from
and after date" of the assignment and further authorizes said bank to pre-terminate,
set-off and "apply the said time deposits to the payment of whatever amount or
amounts may be due" on the loan upon its maturity (TSN, February 9, 1987, pp. 6062).
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 ofpayment 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.
Narvasa, C.J., Padilla and Nocon, JJ., concur.

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-16968

July 31, 1962

PHILIPPINE NATIONAL BANK, plaintiff-appellee,
vs.
CONCEPCION MINING COMPANY, INC., ET AL., defendants-appellants.
Ramon B. de los Reyes for plaintiff-appellee.
Demetrio Miraflor for defendants-appellants.
LABRADOR, J.:
Appeal from a judgment or decision of the Court of First Instance of Manila, Hon. Gustavo
Victoriano, presiding, sentencing defendants Concepcion Mining Company and Jose Sarte to pay
jointly and severally to the plaintiff the amount of P7,197.26 with interest up to September 29, 1959,
plus a daily interest of P1.3698 thereafter up to the time the amount is fully paid, plus 10% of the
amount as attorney's fees, and costs of this suit.
The present action was instituted by the plaintiff to recover from the defendants the face of a
promissory note the pertinent part of which reads as follows:
Manila, March 12, 1954
NINETY DAYS after date, for value received, I promise to pay to the order of the Philippine National
Bank . . . .
In case it is necessary to collect this note by or through an attorney-at-law, the makers and indorsers
shall pay ten percent (10%) of the amount due on the note as attorney's fees, which in no case shall
be less than P100.00 exclusive of all costs and fees allowed by law as stipulated in the contract of
real estate mortgage. Demand and Dishonor Waived. Holder may accept partial payment reserving
his right of recourse again each and all indorsers.
(Purpose — mining industry)
CONCEPCION MINING COMPANY, INC.,
By:
(Sgd.) VICENTE LEGARDA
President
(Sgd.) VICENTE LEGARDA
(Sgd.) JOSE S SARTE
"Please issue check to —
Mr. Jose S. Sarte"
Upon the filing of the complaint the defendants presented their answer in which they allege that the
co-maker the promissory note Don Vicente L. Legarda died on February 24, 1946 and his estate is
in the process of judicial determination in Special Proceedings No. 29060 of the Court of First
Instance of Manila. On the basis of this allegation it is prayed, as a special defense, that the estate
of said deceased Vicente L. Legarda be included as party-defendant. The court in its decision ruled
that the inclusion of said defendant is unnecessary and immaterial, in accordance with the provisions
of Article 1216 of the Deny Civil Code and section 17 (g) of the Negotiable Instruments Law.
A motion to reconsider this decision was denied and thereupon defendants presented a petition for
relief, asking that the effects of the judgment be suspended for the reason that the deceased Vicente
L. Legarda should have been included as a party-defendant and his liability should be determined in

pursuance of the provisions of the promissory note. This motion for relief was also denied, hence
defendant appealed to this Court.
Section 17 (g) of the Negotiable Instruments Law provides as follows:
SEC. 17. Construction where instrument is ambiguous. — Where the language of the
instrument is ambiguous or there are omissions therein, the following rules of construction
apply:
xxx

xxx

xxx

(g) Where an instrument containing the word "I promise to pay" is signed by two or more
persons, they are deemed to be jointly and severally liable thereon.
And Article 1216 of the Civil Code of the Philippines also provides as follows:
ART. 1216. The creditor may proceed against any one of the solidary debtors or some of
them simultaneously. The demand made against one of them shall not be an obstacle to
those which may subsequently be directed against the others so long as the debt has not
been fully collected.
In view of the above quoted provisions, and as the promissory note was executed jointly and
severally by the same parties, namely, Concepcion Mining Company, Inc. and Vicente L. Legarda
and Jose S. Sarte, the payee of the promissory note had the right to hold any one or any two of the
signers of the promissory note responsible for the payment of the amount of the note. This judgment
of the lower court should be affirmed.
Our attention has been attracted to the discrepancies in the printed record on appeal. We note, first,
that the names of the defendants, who are evidently the Concepcion Mining Co., Inc. and Jose S.
Sarte, do not appear in the printed record on appeal. The title of the complaint set forth in the record
on appeal does not contain the name of Jose Sarte, when it should, as two defendants are named in
the complaint and the only defense of the defendants is the non-inclusion of the deceased Vicente L.
Legarda as a defendant in the action. We also note that the copy of the promissory note which is set
forth in the record on appeal does not contain the name of the third maker Jose S. Sarte.
Fortunately, the brief of appellee on page 4 sets forth said name of Jose S. Sarte as one of the comaker of the promissory note. Evidently, there is an attempt to mislead the court into believing that
Jose S. Sarte is no one of the co-makers. The attorney for the defendants Atty. Jose S. Sarte
himself and he should be held primarily responsible for the correctness of the record on appeal. We,
therefore, order the said Atty. Jose S. Sarte to explain why in his record on appeal his own name as
one of the defendants does not appear and neither does his name appear as one of the co-signers
of the promissory note in question. So ordered.
Bengzon, C.J., Padilla, Bautista Angelo, Concepcion, Barrera, Paredes, Dizon, Regala and
Makalintal, JJ., concur.
Reyes, J.B.L., J., took no part.

The Lawphil Project - Arellano Law Foundation

SECOND DIVISION

[G.R. No. 136729. September 23 ,2003]

ASTRO ELECTRONICS CORP. and PETER ROXAS, petitioner,
vs. PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE
CORPORATION, respondent.
DECISION
AUSTRIA-MARTINEZ, J.:

Assailed in this petition for review on certiorari under Rule 45 of the Rules of Court
is the decision of the Court of Appeals in CA-G.R. CV No. 41274,[1] affirming the decision
of the Regional Trial Court (Branch 147) of Makati, then Metro Manila, whereby
petitioners Peter Roxas and Astro Electronics Corp. (Astro for brevity) were ordered to
pay respondent Philippine Export and Foreign Loan Guarantee Corporation
(Philguarantee), jointly and severally, the amount of P3,621,187.52 with interests and
costs.
The antecedent facts are undisputed.
Astro was granted several loans by the Philippine Trust Company (Philtrust)
amounting to P3,000,000.00 with interest and secured by three promissory notes: PN
NO. PFX-254 dated December 14, 1981 for P600,000.00, PN No. PFX-258 also dated
December 14, 1981 for P400,000.00 and PN No. 15477 dated August 27, 1981 for
P2,000,000.00. In each of these promissory notes, it appears that petitioner Roxas
signed twice, as President of Astro and in his personal capacity. [2] Roxas also signed a
Continuing Surety ship Agreement in favor of Philtrust Bank, as President of Astro and
as surety.[3]
Thereafter, Philguarantee, with the consent of Astro, guaranteed in favor of Philtrust
the payment of 70% of Astro‘s loan,[4] subject to the condition that upon payment by
Philguanrantee of said amount, it shall be proportionally subrogated to the rights of
Philtrust against Astro.[5]
As a result of Astro‘s failure to pay its loan obligations, despite demands,
Philguarantee paid 70% of the guaranteed loan to Philtrust. Subsequently,
Philguarantee filed against Astro and Roxas a complaint for sum of money with the RTC
of Makati.
In his Answer, Roxas disclaims any liability on the instruments, alleging, inter alia,
that he merely signed the same in blank and the phrases ―in his personal capacity‖ and
―in his official capacity‖ were fraudulently inserted without his knowledge. [6]
After trial, the RTC rendered its decision in favor of Philguarantee with the following
dispositive portion:

WHEREFORE, in view of all the foregoing, the Court hereby renders judgment in
favor or (sic) the plaintiff and against the defendants Astro Electronics Corporation
and Peter T. Roxas, ordering the then (sic) to pay, jointly and severally, the plaintiff
the sum of P3,621.187.52 representing the total obligation of defendants in favor of
plaintiff Philguarantee as of December 31, 1984 with interest at the stipulated rate of
16% per annum and stipulated penalty charges of 16% per annum computed from
January 1, 1985 until the amount is fully paid. With costs.
SO ORDERED.

[7]

The trial court observed that if Roxas really intended to sign the instruments merely
in his capacity as President of Astro, then he should have signed only once in the
promissory note.[8]
On appeal, the Court of Appeals affirmed the RTC decision agreeing with the trial
court that Roxas failed to explain satisfactorily why he had to sign twice in the contract
and therefore the presumption that private transactions have been fair and regular must
be sustained.[9]
In the present petition, the principal issue to be resolved is whether or not Roxas
should be jointly and severally liable (solidary) with Astro for the sum awarded by the
RTC.
The answer is in the affirmative.
Astro‘s loan with Philtrust Bank is secured by three promissory notes. These
promissory notes are valid and binding against Astro and Roxas. As it appears on the
notes, Roxas signed twice: first, as president of Astro and second, in his personal
capacity. In signing his name aside from being the President of Asro, Roxas became a
co-maker of the promissory notes and cannot escape any liability arising from it. Under
the Negotiable Instruments Law, persons who write their names on the face of
promissory notes are makers,[10] promising that they will pay to the order of the payee or
any holder according to its tenor.[11] Thus, even without the phrase ―personal capacity,‖
Roxas will still be primarily liable as a joint and several debtor under the notes
considering that his intention to be liable as such is manifested by the fact that he
affixed his signature on each of the promissory notes twice which necessarily would
imply that he is undertaking the obligation in two different capacities, official and
personal.
Unnoticed by both the trial court and the Court of Appeals, a closer examination of
the signatures affixed by Roxas on the promissory notes, Exhibits ―A-4‖ and ―3-A‖ and
―B-4‖ and ―4-A‖ readily reveals that portions of his signatures covered portions of the
typewritten words ―personal capacity‖ indicating with certainty that the typewritten words
were already existing at the time Roxas affixed his signatures thus demolishing his
claim that the typewritten words were just inserted after he signed the promissory
notes. If what he claims is true, then portions of the typewritten words would have
covered portions of his signatures, and not vice versa.

As to the third promissory note, Exhibit ―C-4‖ and ―5-A‖, the copy submitted is not
clear so that this Court could not discern the same observations on the notes, Exhibits
―A-4‖ and ―3-A‖ and ―B-4‖ and ―4-A‖.
Nevertheless, the following discussions equally apply to all three promissory notes.
The three promissory notes uniformly provide: ―FOR VALUE RECEIVED, I/We
jointly, severally and solidarily, promise to pay to PHILTRUST BANK or order...‖ [12] An
instrument which begins with ―I‖, ―We‖, or ―Either of us‖ promise to pay, when signed by
two or more persons, makes them solidarily liable. [13] Also, the phrase ―joint and several‖
binds the makers jointly and individually to the payee so that all may be sued together
for its enforcement, or the creditor may select one or more as the object of the
suit.[14] Having signed under such terms, Roxas assumed the solidary liability of a debtor
and Philtrust Bank may choose to enforce the notes against him alone or jointly with
Astro.
Roxas‘ claim that the phrases ―in his personal capacity‖ and ―in his official capacity‖
were inserted on the notes without his knowledge was correctly disregarded by the RTC
and the Court of Appeals. It is not disputed that Roxas does not deny that he signed
the notes twice. As aptly found by both the trial and appellate court, Roxas did not offer
any explanation why he did so. It devolves upon him to overcome the presumptions
that private transactions are presumed to be fair and regular[15] and that a person takes
ordinary care of his concerns.[16] Aside from his self-serving allegations, Roxas failed to
prove the truth of such allegations. Thus, said presumptions prevail over his
claims. Bare allegations, when unsubstantiated by evidence, documentary or
otherwise, are not equivalent to proof under our Rules of Court.[17]
Roxas is the President of Astro and reasonably, a businessman who is presumed to
take ordinary care of his concerns. Absent any countervailing evidence, it cannot be
gainsaid that he will not sign document without first informing himself of its contents and
consequences. Clearly, he knew the nature of the transactions and documents involved
as he not only executed these notes on two different dates but he also executed, and
again, signed twice, a ―continuing Surety ship Agreement‖ notarized on July 31, 1981,
wherein he guaranteed, jointly and severally with Astro the repayment of P3,000,000.00
due to Philtrust. Such continuing suretyship agreement even re-enforced his solidary
liability Philtrust because as a surety, he bound himself jointly and severally with Astro‘s
obligation.[18] Roxas cannot now avoid liability by hiding under the convenient excuse that
he merely signed the notes in blank and the phrases ―in personal capacity‖ and ―in his
official capacity‖ were fraudulently inserted without his knowledge.
Lastly, Philguarantee has all the right to proceed against petitioner, it is subrogated
to the rights of Philtrust to demand for and collect payment from both Roxas and Astro
since it already paid the value of 70% of roxas and Astro Electronics Corp.‘s loan
obligation. In compliance with its contract of ―Guarantee‖ in favor of Philtrust.
Subrogation is the transfer of all the rights of the creditor to a third person, who
substitutes him in all his rights.[19] It may either be legal or conventional. Legal
subrogation is that which takes place without agreement but by operation of law
because of certain acts.[20] Instances of legal subrogation are those provided in Article

1302 of the Civil Code. Conventional subrogation, on the other hand, is that which
takes place by agreement of the parties.[21]
Roxas‘ acquiescence is not necessary for subrogation to take place because the
instant case is one of the legal subrogation that occurs by operation of law, and without
need of the debtor‘s knowledge.[22] Further, Philguarantee, as guarantor, became the
transferee of all the rights of Philtrust as against Roxas and Astro because the
―guarantor who pays is subrogated by virtue thereof to all the rights which the creditor
had against the debtor.‖[23]
WHEREFORE, finding no error with the decision of the Court of Appeals dated
December 10, 1998, the same is hereby AFFIRMED in toto.
SO ORDERED.
Bellosillo, (Chairman), Callejo, Sr., and Tinga, JJ., concur.
Quisumbing, J., in the result.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 111190 June 27, 1995
LORETO D. DE LA VICTORIA, as City Fiscal of Mandaue City and in his personal capacity as
garnishee,petitioner,
vs.
HON. JOSE P. BURGOS, Presiding Judge, RTC, Br. XVII, Cebu City, and RAUL H.
SESBREÑO, respondents.

BELLOSILLO, J.:
RAUL H. SESBREÑO filed a complaint for damages against Assistant City Fiscals Bienvenido N.
Mabanto, Jr., and Dario D. Rama, Jr., before the Regional Trial Court of Cebu City. After trial
judgment was rendered ordering the defendants to pay P11,000.00 to the plaintiff, private
respondent herein. The decision having become final and executory, on motion of the latter, the trial
court ordered its execution. This order was questioned by the defendants before the Court of
Appeals. However, on 15 January 1992 a writ of execution was issued.
On 4 February 1992 a notice of garnishment was served on petitioner Loreto D. de la Victoria as City
Fiscal of Mandaue City where defendant Mabanto, Jr., was then detailed. The notice directed
petitioner not to disburse, transfer, release or convey to any other person except to the deputy sheriff
concerned the salary checks or other checks, monies, or cash due or belonging to Mabanto, Jr.,
under penalty of law. 1 On 10 March 1992 private respondent filed a motion before the trial court for
examination of the garnishees.

On 25 May 1992 the petition pending before the Court of Appeals was dismissed. Thus the trial
court, finding no more legal obstacle to act on the motion for examination of the garnishees, directed
petitioner on 4 November 1992 to submit his report showing the amount of the garnished salaries of
Mabanto, Jr., within fifteen (15) days from receipt 2 taking into consideration the provisions of Sec. 12,
pars. (f) and (i), Rule 39 of the Rules of Court.

On 24 November 1992 private respondent filed a motion to require petitioner to explain why he
should not be cited in contempt of court for failing to comply with the order of 4 November 1992.
On the other hand, on 19 January 1993 petitioner moved to quash the notice of garnishment
claiming that he was not in possession of any money, funds, credit, property or anything of value
belonging to Mabanto, Jr., except his salary and RATA checks, but that said checks were not yet
properties of Mabanto, Jr., until delivered to him. He further claimed that, as such, they were still
public funds which could not be subject to garnishment.
On 9 March 1993 the trial court denied both motions and ordered petitioner to immediately comply
with its order of 4 November 1992. 3 It opined that the checks of Mabanto, Jr., had already been
released through petitioner by the Department of Justice duly signed by the officer concerned. Upon
service of the writ of garnishment, petitioner as custodian of the checks was under obligation to hold them
for the judgment creditor. Petitioner became a virtual party to, or a forced intervenor in, the case and the
trial court thereby acquired jurisdiction to bind him to its orders and processes with a view to the complete
satisfaction of the judgment. Additionally, there was no sufficient reason for petitioner to hold the checks
because they were no longer government funds and presumably delivered to the payee, conformably with
the last sentence of Sec. 16 of the Negotiable Instruments Law.

With regard to the contempt charge, the trial court was not morally convinced of petitioner's guilt.
For, while his explanation suffered from procedural infirmities nevertheless he took pains in
enlightening the court by sending a written explanation dated 22 July 1992 requesting for the lifting
of the notice of garnishment on the ground that the notice should have been sent to the Finance
Officer of the Department of Justice. Petitioner insists that he had no authority to segregate a portion
of the salary of Mabanto, Jr. The explanation however was not submitted to the trial court for action
since the stenographic reporter failed to attach it to the record. 4
On 20 April 1993 the motion for reconsideration was denied. The trial court explained that it was not
the duty of the garnishee to inquire or judge for himself whether the issuance of the order of
execution, writ of execution and notice of garnishment was justified. His only duty was to turn over
the garnished checks to the trial court which issued the order of execution. 5
Petitioner raises the following relevant issues: (1) whether a check still in the hands of the maker or
its duly authorized representative is owned by the payee before physical delivery to the latter: and,
(2) whether the salary check of a government official or employee funded with public funds can be
subject to garnishment.
Petitioner reiterates his position that the salary checks were not owned by Mabanto, Jr., because
they were not yet delivered to him, and that petitioner as garnishee has no legal obligation to hold
and deliver them to the trial court to be applied to Mabanto, Jr.'s judgment debt. The thesis of
petitioner is that the salary checks still formed part of public funds and therefore beyond the reach of
garnishment proceedings.
Petitioner has well argued his case.

Garnishment is considered as a species of attachment for reaching credits belonging to the
judgment debtor owing to him from a stranger to the litigation. 6 Emphasis is laid on the phrase
"belonging to the judgment debtor" since it is the focal point in resolving the issues raised.

As Assistant City Fiscal, the source of the salary of Mabanto, Jr., is public funds. He receives his
compensation in the form of checks from the Department of Justice through petitioner as City Fiscal
of Mandaue City and head of office. Under Sec. 16 of the Negotiable Instruments Law, every
contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for
the purpose of giving effect thereto. As ordinarily understood, delivery means the transfer of the
possession of the instrument by the maker or drawer with intent to transfer title to the payee and
recognize him as the holder thereof. 7
According to the trial court, the checks of Mabanto, Jr., were already released by the Department of
Justice duly signed by the officer concerned through petitioner and upon service of the writ of
garnishment by the sheriff petitioner was under obligation to hold them for the judgment creditor. It
recognized the role of petitioner ascustodian of the checks. At the same time however it considered
the checks as no longer government funds and presumed delivered to the payee based on the last
sentence of Sec. 16 of the Negotiable Instruments Law which states: "And where the instrument is
no longer in the possession of a party whose signature appears thereon, a valid and intentional
delivery by him is presumed." Yet, the presumption is not conclusive because the last portion of the
provision says "until the contrary is proved." However this phrase was deleted by the trial court for no
apparent reason. Proof to the contrary is its own finding that the checks were in the custody of
petitioner. Inasmuch as said checks had not yet been delivered to Mabanto, Jr., they did not belong
to him and still had the character of public funds. In Tiro v. Hontanosas 8 we ruled that —
The salary check of a government officer or employee such as a teacher does not
belong to him before it is physically delivered to him. Until that time the check
belongs to the government. Accordingly, before there is actual delivery of the check,
the payee has no power over it; he cannot assign it without the consent of the
Government.
As a necessary consequence of being public fund, the checks may not be garnished to satisfy the
judgment. 9 The rationale behind this doctrine is obvious consideration of public policy. The Court
succinctly stated in Commissioner of Public Highways v. San Diego 10 that —

The functions and public services rendered by the State cannot be allowed to be
paralyzed or disrupted by the diversion of public funds from their legitimate and
specific objects, as appropriated by law.
In denying petitioner's motion for reconsideration, the trial court expressed the additional
ratiocination that it was not the duty of the garnishee to inquire or judge for himself whether the
issuance of the order of execution, the writ of execution, and the notice of garnishment was justified,
citing our ruling in Philippine Commercial Industrial Bank v. Court of Appeals. 11 Our precise ruling in
that case was that "[I]t is not incumbent upon the garnishee to inquire or to judge for itself whether or not
the order for the advance execution of a judgment is valid." But that is invoking only the general rule. We
have also established therein the compelling reasons, as exceptions thereto, which were not taken into
account by the trial court, e.g., a defect on the face of the writ or actual knowledge by the garnishee of
lack of entitlement on the part of the garnisher. It is worth to note that the ruling referred to the validity of
advance execution of judgments, but a careful scrutiny of that case and similar cases reveals that it was
applicable to a notice of garnishment as well. In the case at bench, it was incumbent upon petitioner to
inquire into the validity of the notice of garnishment as he had actual knowledge of the non-entitlement of
private respondent to the checks in question. Consequently, we find no difficulty concluding that the trial

court exceeded its jurisdiction in issuing the notice of garnishment concerning the salary checks of
Mabanto, Jr., in the possession of petitioner.

WHEREFORE, the petition is GRANTED. The orders of 9 March 1993 and 20 April 1993 of the
Regional Trial Court of Cebu City, Br. 17, subject of the petition are SET ASIDE. The notice of
garnishment served on petitioner dated 3 February 1992 is ordered DISCHARGED.
SO ORDERED.
Quiason and Kapunan, JJ., concur.

Separate Opinions

DAVIDE, JR., J., concurring and dissenting:
This Court may take judicial notice of the fact that checks for salaries of employees of various
Departments all over the country are prepared in Manila not at the end of the payroll period, but days
before it to ensure that they reach the employees concerned not later than the end of the payroll
period. As to the employees in the provinces or cities, the checks are sent through the heads of the
corresponding offices of the Departments. Thus, in the case of Prosecutors and Assistant
Prosecutors of the Department of Justice, the checks are sent through the Provincial Prosecutors or
City Prosecutors, as the case may be, who shall then deliver the checks to the payees.
Involved in the instant case are the salary and RATA checks of then Assistant City Fiscal Bienvenido
Mabanto, Jr., who was detailed in the Office of the City Fiscal (now Prosecutor) of Mandaue City.
Conformably with the aforesaid practice, these checks were sent to Mabanto thru the petitioner who
was then the City Fiscal of Mandaue City.
The ponencia failed to indicate the payroll period covered by the salary check and the month to
which the RATA check corresponds.
I respectfully submit that if these salary and RATA checks corresponded, respectively, to a payroll
period and to a month which had already lapsed at the time the notice of garnishment was served,
the garnishment would be valid, as the checks would then cease to be property of the Government
and would become property of Mabanto. Upon the expiration of such period and month, the sums
indicated therein were deemed automatically segregated from the budgetary allocations for the
Department of Justice under the General Appropriations Act.
It must be recalled that the public policy against execution, attachment, or garnishment is directed to
public funds.
Thus, in the case of Director of the Bureau of Commerce and Industry vs. Concepcion 1 where the
core issue was whether or not the salary due from the Government to a public officer or employee can, by

garnishment, be seized before being paid to him and appropriated to the payment of his judgment debts,
this Court held:

A rule, which has never been seriously questioned, is that money in the hands of
public officers, although it may be due government employees, is not liable to the
creditors of these employees in the process of garnishment. One reason is, that the
State, by virtue of its sovereignty, may not be sued in its own courts except by
express authorization by the Legislature, and to subject its officers to garnishment
would be to permit indirectly what is prohibited directly. Another reason is that
moneys sought to be garnished, as long as they remain in the hands of the
disbursing officer of the Government, belong to the latter, although the defendant in
garnishment may be entitled to a specific portion thereof. And still another reason
which covers both of the foregoing is that every consideration of public policy forbids
it.
The United States Supreme Court, in the leading case of Buchanan vs. Alexander
([1846], 4 How., 19), in speaking of the right of creditors of seamen, by process of
attachment, to divert the public money from its legitimate and appropriate object,
said:
To state such a principle is to refute it. No government can sanction
it. At all times it would be found embarrassing, and under some
circumstances it might be fatal to the public service. . . . So long as
money remains in the hands of a disbursing officer, it is as much the
money of the United States, as if it had not been drawn from the
treasury. Until paid over by the agent of the government to the person
entitled to it, the fund cannot, in any legal sense, be considered a part
of his effects." (See, further, 12 R.C.L., p. 841; Keene vs. Smith
[1904], 44 Ore., 525; Wild vs. Ferguson [1871], 23 La. Ann., 752;
Bank of Tennessee vs. Dibrell [1855], 3 Sneed [Tenn.], 379).
(emphasis supplied)
The authorities cited in the ponencia are inapplicable. Garnished or levied on therein were public
funds, to wit: (a) the pump irrigation trust fund deposited with the Philippine National Bank (PNB) in
the account of the Irrigation Service Unit in Republic vs. Palacio; 2 (b) the deposits of the National
Media Production Center in Traders Royal Bank vs. Intermediate Appellate Court; 3 and (c) the deposits
of the Bureau of Public Highways with the PNB under a current account, which may be expended only for
their legitimate object as authorized by the corresponding legislative appropriation in Commissioner of
Public Highways vs. Diego. 4

Neither is Tiro vs. Hontanosas 5 squarely in point. The said case involved the validity of Circular No. 21,
series of 1969, issued by the Director of Public Schools which directed that "henceforth no cashier or
disbursing officer shall pay to attorneys-in-fact or other persons who may be authorized under a power of
attorney or other forms of authority to collect the salary of an employee, except when the persons so
designated and authorized is an immediate member of the family of the employee concerned, and in all
other cases except upon proper authorization of the Assistant Executive Secretary for Legal and
Administrative Matters, with the recommendation of the Financial Assistant." Private respondent Zafra
Financing Enterprise, which had extended loans to public school teachers in Cebu City and obtained from
the latter promissory notes and special powers of attorney authorizing it to take and collect their salary
checks from the Division Office in Cebu City of the Bureau of Public Schools, sought, inter alia, to nullify
the Circular. It is clear that the teachers had in fact assigned to or waived in favor of Zafra their future
salaries which were still public funds. That assignment or waiver was contrary to public policy.

I would therefore vote to grant the petition only if the salary and RATA checks garnished
corresponds to an unexpired payroll period and RATA month, respectively.
Padilla, J., concurs.

Separate Opinions
DAVIDE, JR., J., concurring and dissenting:
This Court may take judicial notice of the fact that checks for salaries of employees of various
Departments all over the country are prepared in Manila not at the end of the payroll period, but days
before it to ensure that they reach the employees concerned not later than the end of the payroll
period. As to the employees in the provinces or cities, the checks are sent through the heads of the
corresponding offices of the Departments. Thus, in the case of Prosecutors and Assistant
Prosecutors of the Department of Justice, the checks are sent through the Provincial Prosecutors or
City Prosecutors, as the case may be, who shall then deliver the checks to the payees.
Involved in the instant case are the salary and RATA checks of then Assistant City Fiscal Bienvenido
Mabanto, Jr., who was detailed in the Office of the City Fiscal (now Prosecutor) of Mandaue City.
Conformably with the aforesaid practice, these checks were sent to Mabanto thru the petitioner who
was then the City Fiscal of Mandaue City.
The ponencia failed to indicate the payroll period covered by the salary check and the month to
which the RATA check corresponds.
I respectfully submit that if these salary and RATA checks corresponded, respectively, to a payroll
period and to a month which had already lapsed at the time the notice of garnishment was served,
the garnishment would be valid, as the checks would then cease to be property of the Government
and would become property of Mabanto. Upon the expiration of such period and month, the sums
indicated therein were deemed automatically segregated from the budgetary allocations for the
Department of Justice under the General Appropriations Act.
It must be recalled that the public policy against execution, attachment, or garnishment is directed to
public funds.
Thus, in the case of Director of the Bureau of Commerce and Industry vs. Concepcion 1 where the
core issue was whether or not the salary due from the Government to a public officer or employee can, by
garnishment, be seized before being paid to him and appropriated to the payment of his judgment debts,
this Court held:

A rule, which has never been seriously questioned, is that money in the hands of
public officers, although it may be due government employees, is not liable to the
creditors of these employees in the process of garnishment. One reason is, that the
State, by virtue of its sovereignty, may not be sued in its own courts except by
express authorization by the Legislature, and to subject its officers to garnishment
would be to permit indirectly what is prohibited directly. Another reason is that
moneys sought to be garnished, as long as they remain in the hands of the
disbursing officer of the Government, belong to the latter, although the defendant in
garnishment may be entitled to a specific portion thereof. And still another reason

which covers both of the foregoing is that every consideration of public policy forbids
it.
The United States Supreme Court, in the leading case of Buchanan vs. Alexander
([1846], 4 How., 19), in speaking of the right of creditors of seamen, by process of
attachment, to divert the public money from its legitimate and appropriate object,
said:
To state such a principle is to refute it. No government can sanction
it. At all times it would be found embarrassing, and under some
circumstances it might be fatal to the public service. . . . So long as
money remains in the hands of a disbursing officer, it is as much the
money of the United States, as if it had not been drawn from the
treasury. Until paid over by the agent of the government to the person
entitled to it, the fund cannot, in any legal sense, be considered a part
of his effects." (See, further, 12 R.C.L., p. 841; Keene vs. Smith
[1904], 44 Ore., 525; Wild vs. Ferguson [1871], 23 La. Ann., 752;
Bank of Tennessee vs. Dibrell [1855], 3 Sneed [Tenn.], 379).
(emphasis supplied)
The authorities cited in the ponencia are inapplicable. Garnished or levied on therein were public
funds, to wit: (a) the pump irrigation trust fund deposited with the Philippine National Bank (PNB) in
the account of the Irrigation Service Unit in Republic vs. Palacio; 2 (b) the deposits of the National
Media Production Center in Traders Royal Bank vs. Intermediate Appellate Court; 3 and (c) the deposits
of the Bureau of Public Highways with the PNB under a current account, which may be expended only for
their legitimate object as authorized by the corresponding legislative appropriation in Commissioner of
Public Highways vs. Diego. 4

Neither is Tiro vs. Hontanosas 5 squarely in point. The said case involved the validity of Circular No. 21,
series of 1969, issued by the Director of Public Schools which directed that "henceforth no cashier or
disbursing officer shall pay to attorneys-in-fact or other persons who may be authorized under a power of
attorney or other forms of authority to collect the salary of an employee, except when the persons so
designated and authorized is an immediate member of the family of the employee concerned, and in all
other cases except upon proper authorization of the Assistant Executive Secretary for Legal and
Administrative Matters, with the recommendation of the Financial Assistant." Private respondent Zafra
Financing Enterprise, which had extended loans to public school teachers in Cebu City and obtained from
the latter promissory notes and special powers of attorney authorizing it to take and collect their salary
checks from the Division Office in Cebu City of the Bureau of Public Schools, sought, inter alia, to nullify
the Circular. It is clear that the teachers had in fact assigned to or waived in favor of Zafra their future
salaries which were still public funds. That assignment or waiver was contrary to public policy.

I would therefore vote to grant the petition only if the salary and RATA checks garnished
corresponds to an unexpired payroll period and RATA month, respectively.
Padilla, J., concurs.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION

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, defendantsrespondents.
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 PLAINTIFFPETITIONER HAS NO CAUSE OF ACTION AGAINST DEFENDANTSRESPONDENTS 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. 3Delivery 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.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC

G.R. No. 108747 April 6, 1995
PABLO C. FRANCISCO, petitioner,
vs.
COURT OF APPEALS AND THE HONORABLE MAXIMO C. CONTRERAS, respondents.

BELLOSILLO, J.:
Probation is a special privilege granted by the state to a penitent qualified offender. It essentially
rejects appeals and encourages an otherwise eligible convict to immediately admit his liability and
save the state of time, effort and expenses to jettison an appeal. The law expressly requires that an
accused must not have appealed his conviction before he can avail of probation. This outlaws the
element of speculation on the part of the accused — to wager on the result of his appeal — that
when his conviction is finally affirmed on appeal, the moment of truth well-nigh at hand, and the
service of his sentence inevitable, he now applies for probation as an "escape hatch" thus rendering
nugatory the appellate court's affirmance of his conviction. Consequently, probation should be
availed of at the first opportunity by convicts who are willing to be reformed and rehabilitated, who
manifest spontaneity, contrition and remorse.
As conceptualized, is petitioner entitled to probation within the purview of P.D. 968, as amended by
P.D. 1257 and P.D. 1990?
Petitioner's woes started when as President and General Manager of ASPAC Trans. Company he
failed to control his outburst and blurted —
You employees in this office are all tanga, son of a bitches (sic), bullshit. Puro kayo
walang utak . . . .Mga anak ng puta . . . . Magkano ba kayo . . . God damn you all.
Thus for humiliating his employees he was accused of multiple grave oral defamation in five (5)
separate Informations instituted by five (5) of his employees, each Information charging him with
gravely maligning them on four different days, i.e., from 9 to 12 April 1980.
On 2 January 1990, after nearly ten (10) years, the Metropolitan Trial Court of Makati, Br. 61, found
petitioner guilty of grave oral defamation in four (4) of the five (5) cases filed against him, i.e., Crim.
Cases Nos. 105206, 105207, 105209 and 105210, sentenced him to a prison term of one (1) year
and one (l) day to one (1) year and eight (8) months of prision correccional "in each crime committed
on each date of each case, as alleqed in the information(s)," ordered him to indemnify each of the
offended parties, Victoria Gatchalian, Rowena Ruiz, Linda Marie Ayala Pigar and Marie Solis,
P10,000.00 as exemplary damages, and P5,000.00 for attorney's fees, plus costs of suit. 1 He was
however acquitted in Crim. Case No. 105208 for persistent failure of the offended party, Edgar Colindres,
to appear and testify.

Not satisfied with the Decision of the MeTC, and insisting on his innocence, petitioner elevated his
case to the Regional Trial Court.
On 5 August 1991 the Regional Trial Court of Makati, Br. 59, affirmed his conviction but appreciated
in his favor a mitigating circumstance analogous to passion or obfuscation. Thus —

. . . (he) was angry and shouting when he uttered the defamatory words complained
of . . . . he must have been angry and worried "about some missing documents . . .
as well as the letter of the Department of Tourism advising ASPAC about its
delinquent tax of P1.2 million . . . . " the said defamatory words must have been
uttered in the heat of anger which is a mitigating circumstance analogous to passion
or obfuscation. 2
Accordingly, petitioner was sentenced "in each case to a STRAIGHT penalty of EIGHT (8) MONTHS
imprisonment . . . . " 3 After he failed to interpose an appeal therefrom the decision.of the RTC became
final. The case was then set for execution of judgment by the MeTC which, as a consequence, issued a
warrant of arrest. But·before he could be arrested petitioner filed an application for probation which the
MeTC denied "in the light of the ruling of the Supreme Court in Llamado v. Court of Appeals, G.R. No,
84850, 29 June 1989, 174 SCRA 566 . . . ." 4

Forthwith he went to the Court of Appeals on certiorari which on 2 July 1992 dismissed his petition
on the following grounds —
Initially, the Court notes that the petitioner has failed to comply with the provisions of
Supreme Court Circular No. 28-91 of September 4, 1991. Violation of the circular is
sufficient cause for dismissal of the petition.
Secondly, the petitioner does not allege anywhere in the petition that he had asked
the respondent court to reconsider its above order; in fact, he had failed to give the
court an.opportunity to correct itself if it had, in fact, committed any error on the
matter. He is, however, required to move for reconsideration of the questioned
order before filing a petition for certiorari (Sy It v. Tiangco, 4 SCRA 436). This failure
is fatal to his cause. It is a ground for dismissal of his petition (Santos v. Vda. de
Cerdenola, 5 SCRA 823; Acquiao v. Estenso, 14 SCRA 18; Del Pilar Transit, Inc. v.
Public Service Commission, 31-SCRA 372).
Thirdly, it is obvious that respondent court did not commit any capricious, arbitrary,
despotic or whimsical exercise of power in denying the petitioner's application for
probation . . . .
Fourthly, the petition for probation was filed by the petitioner out of time . . . .
Fifthly, the Court notes that Section 4 of PD 968 allows the trial court to grant probation after
conviction, upon an application by the defendant within the period of appeal, upon terms and
conditions and period appropriate to each case, but expressly rules out probation where an appeal
has been taken . . . . 5
The motion for reconsideration was likewise denied.
In the present recourse, petitioner squirms out of each ground and seeks this Court's compassion in
dispensing with the minor technicalities which may militate against his petition as he now argues
before us that he has not yet lost his right to avail of probation notwithstanding his appeal from the
MeTC to the RTC since "[t]he reason for his appeal was precisely to enable him to avail himself of
the benefits of the Probation Law because the original Decision of the (Metropolitan) Trial Court was
such that he would not then be entitled to probation." 6 He contends that "he appealed from the
judgment of the trial court precisely for the purpose of reducing the penalties imposed upon him by the
said court to enable him to qualify for probation." 7

The central issue therefore is whether petitioneris still qualified to avail of probation even after
appealing his conviction to the RTC which affirmed the MeTC except with regard to the duration of
the penalties imposed.
Petitioner is no longer eligible for probation.
First. Probation is a mere privilege, not a right. 8 Its benefits cannot extend to those not expressly
included. Probation is not a right of an accused, but rather an act of grace and clemency or immunity
conferred by the state which may be granted by the court to a seemingly deserving defendant who
thereby escapes the extreme rigors of the penalty imposed by law for the offense of which he stands
convicted. 9 It is a special prerogative granted by law to a person or group of persons not enjoyed by
others or by all. Accordingly, the grant of probation rests solely upon the discretion of the court which is to
be exercised primarily for the benefit of organized society, and only incidentally for the benefit of the
accused. 10 The Probation Law should not therefore be permitted to divest the state or its government of
any of the latter's prerogatives, rights or remedies, unless the intention of the legislature to this end is
clearly expressed, and no person should benefit from the terms of the law who is not clearly within them.

Neither Sec. 4 of the Probation Law, as amended, which clearly mandates that "no application for
probation shall be entertained or granted if the defendant has perfected the appeal from the
judgment of conviction," norLlamado v. Court of Appeals 11 which interprets the quoted provision, offers
any ambiguity or qualification. As such, the application of the law should not be subjected to any to suit
the case of petitioner. While the proposition that an appeal should not bar the accused from applying for
probation if the appealis solely to reduce the penalty to within the probationable limit may be equitable,
we are not yet prepared to accept this interpretation under existing law and jurisprudence. Accordingly,
we quote Mr. Justice Feliciano speaking for the Court en banc in Llamado v. Court of Appeals—

. . . we note at the outset that Probation Law is not a penal statute. We, however,
understand petitioner's argument to be really that any statutory language that
appears to favor the accused in acriminal case should be given.a "liberal
interpretation." Courts . . . have no authority to invoke "liberal interpretation" or "the
spirit of the law" where the words of the statute themselves, and·as illuminated by the
history of that statute, leave no room for doubt or interpretation. We do not believe
that "the spirit of·the law" may legitimately be invoked to set at naught words which
have a clear and definite meaning imparted to them by our procedural law. The "true
legislative intent" must obviously be given effect by judges and all others who are
charged with the application and implementation of a statute. It is absolutely
essential to bear in mind, however, that the spirit of the law and the intent that is to
be given effect are derived from the words actually used by the law-maker, and not
from some external, mystical or metajuridical source independent of and
transcending the words of the legislature.
The Court is not here to be understood as giving a "strict interpretation" rather than a
"liberal" one to Section 4 of the Probation Law of 1976 as amended by P.D. No.
1990. "Strict" and "liberal" are adjectives which too frequently impede a disciplined
and principled search for the meaning which the law-making authority projected
when it promulgated the language which we must apply. That meaning is clearly
visible in the text of Section 4, as plain and unmistakable as the nose on a man's
face. The Courtis simply·reading Section 4 as it is in fact written. There is no need for
the involved process of construction that petitioner invites us to engage in, a process
made necessary only because petitioner rejects the conclusion or meaning which
shines through the words of the statute. The first duty of the judge is to take and
apply a statute as he finds it, not as he would like·it to be. Otherwise, as this Court
in Yangco v. Court of First Instance warned, confusion and uncertainty will surely

follow, making, we might add, stability and continuity in the law much more difficult to
achieve:
. . . [w]here language is plain, subtle refinements which tinge words
as to give them the color of a particular judicial theory are not only
unnecessary but decidedly harmful. That which has caused so much
confusion in the law, which has made it so difficult for the public to
understand and know what the law is with respect to a given matter,
is in considerable measure the unwarranted interference by judicial
tribunals with the English language as found in statutes and
contracts, cutting the words here and inserting them there, making
them fit personal ideas of what the legislature ought to have done or
what parties should have agreed upon, giving them meanings which
they do not ordinarily have cutting, trimming, fitting, changing and
coloring until lawyers themselves are unable to advise their clients as
to the meaning of a given statute or contract until it has been
submitted to some court for its interpretation and construction.
The point in this warning may be expected to become sharper as our people's grasp
of English is steadily attenuated. 12
Therefore, that an appeal should not·bar the accused from applying for probation if the appeal is
taken solely to reduce the penalty is simply contrary to the clear and express mandate of Sec, 4 of
the Probation Law, as amended, which opens with a negativeclause, "no application for probation
shall be entertained or granted if the defendant has perfected the appeal from the judgment of
conviction." In Bersabal v. Salvador, 13 we said —
By its very language, the Rule is mandatory. Under the rule of statutory construction.
negative words and phrases are to be regarded as mandatory while those in the
affirmative are merely directory. . . . the use of the term "shall" further emphasizes its
mandatory character and means that it is imperative, operating to impose a duty
which may be enforced.
And where the law does not distinguish the courts should not distinguish; where the law does not
make exception the court should not except.
Second. At the outset, the penalties imposed by the MeTC were already probationable. Hence, there
was no need to appeal if only to reduce the penalties to within the probationable period. Multiple
prison terms imposed against an accused found guilty of several offenses in one decision are not,
and should not be, added up. And, the sum of the multiple prison terms imposed against an
applicant should not be determinative of his eligibility for, nay his disqualification from, probation.
The multiple prison terms are distinct from each other, and if none of the terms exceeds the limit set
out in the Probation Law,i.e., not more than six (6) years, then he is entitled to probation, unless he
is otherwise specifically disqualified. The number of offenses is immaterial as long as all the
penalties imposed, taken separately, are within the probationable period. For, Sec. 9, par. (a), P.D.
968, as amended, uses the word maximum not total when it says that "[t]he benefits of this Decree
shall not be extended to those . . . . sentenced to serve a maximum term of imprisonment of more
than six years." Evidently, the law does not intend to sum up the penalties imposed but to take each
penalty separately and distinctly with the others. Consequently, even if petitioner was supposed to
have served his prison term of one (1) year and one (1) day to one (1) year and eight (8) months
of prision correccional sixteen (16) times as he was sentenced to serve the prison term for "each
crime committed on each date of each case, as alleged in the information(s)," and in each of the four

(4) informations, he was charged with.having defamed the four (4) private complainants on four (4)
different, separate days, he was still·eligible for probation, as each prison term imposed on petitioner
was probationable.
Fixing the cut-off point at a maximum term of six (6) years imprisonment for probation is based on
the assumption that those sentenced to higher penalties pose too great a risk to society, not just
because of their demonstrated capability for serious wrong doing but because of the gravity and
serious consequences of the offense they might further commit. 14 The Probation Law, as amended,
disqualifies only those who have been convicted of grave felonies as defined in Art. 9 in relation to Art. 25
of The Revised Penal Code, 15 and not necessarily those who have been convicted of multiple offenses in
a single proceeding who are deemed to be less perverse. Hence, the basis of the disqualification is
principally the gravity of the offense committed and the concomitant degree of penalty imposed. Those
sentenced to a maximum term not exceeding six (6) years are not generally considered callous, hard core
criminals, and thus may avail of probation.

To demonstrate the point, let ustake for instance one who is convicted in a single decision of, say,
thirteen (13) counts of grave oral defamation (for having defamed thirteen [13] individuals in one
outburst) and sentenced to atotal prison term of thirteen (13) years, and another who has been
found guilty of mutilation and sentenced to six (6) years and one (l) day of prision mayor minimum as
minimum to twelve (l2) years and one (1) day of reclusion temporal minimum as maximuin.
Obviously, the latter offender is more perverse and is disqualified from availing of probation.
Petitioner thus proceeds on an erroneous assumption that under the MeTC Decision he could not
have availed of the benefits of probation. Since he could have, although he did not, his appeal now
precludes him from applying for probation.
And, even if we go along with the premise of petitioner, however erroneous it may be, that the
penalties imposed against him should be summed up, still he would not have qualified under the
Decision rendered by the RTC since if the "STRAIGHT penalty of EIGHT (8) MONTHS
imprisonment" imposed by the RTC is multiplied sixteen (16) times, the total imposable penalty
would be ten (10) years and eight (8) months, which is still way beyond the limit of not more than six
(6) years provided for in the Probation Law, as amended. To illustrate: 8 months multiplied by 16
cases = 128 months; 128 months divided by 12 months (in a year) = 10 years and 8 months, hence,
following his argument, petitioner cannot still be eligible for probation as the total of his penalties
exceeds six (6) years.
The assertion that the Decision of the RTC should be multiplied only four (4) times since there are
only four (4) Informations thereby allowing petitioner to qualify for probation, instead of sixteen (16)
times, is quite difficult to understand. The penalties imposed by the MeTC cannot be any clearer —
"one (1) year and one (1) day to one (1) year and eight (8) months of prision correccional, in each
crime committed on each date of each case, as alleged in the information(s). "Hence, petitioner
should suffer the imposed penalties sixteen (16) times. On the other hand, the RTC affirmed, the
judgment of conviction and merely reduced the duration of each penalty imposed by the MeTC "in
each case to a STRAIGHT penalty of EIGHT (8) MONTHS imprisonment" on account of a mitigating
circumstance for each case, count or incident of grave oral defamation·There is no valid reason
therefore why the penalties imposed by the RTC should be multiplied only four (4) times, and not
sixteen (16) times, considering that the RTC merely affirmed the MeTC as regards the culpability of
petitioner in each of the sixteen (16) cases and reducing only the duration of the penalties imposed
therein. Thus —
Premises considered, the judgment of conviction rendered by the trial court is
AFFIRMED with modification, as follows:

WHEREFORE, the Court hereby finds the accused Pablo C. Francisco GUILTY
beyond reasonable doubt in each of the above entitled cases and appreciating in his
favor the mitigating circumstance which is analogous to passion or obfuscation, the
Court hereby sentences the said accused in each case to a straight penalty of
EIGHT (8) MONTHS imprisonment, with the accessory penalties prescribed by law;
and to pay the costs. 16
Nowhere in the RTC Decision is it stated or even hinted at that the accused was acquitted or
absolved in any of the four (4) counts under each of the four (4) Informatfons, or that any part of
thejudgment of conviction was reversed, or that any of the cases, counts or incidents was dismissed.
Otherwise, we will have to account for the twelve (12) other penalties imposed by the MeTC. Can
we? What is clear is that the judgment of conviction rendered by the was affirmed with the sole
modification on the duration of the penalties.
In fine, considering that the multiple prison terms should not be summed up but taken separately as
the totality of all the penalties is not the test, petitioner should have immediately filed an application
for probation as he was already qualified after being convicted by the MeTC, if indeed thereafter he
felt humbled, was ready to unconditionally accept the verdict of the court and admit his liability.
Consequently, in appealing the Decision of the MeTC to the RTC, petitioner lost his right to
probation. For, plainly, the law considers appeal and probation mutually exclusive remedies. 17
Third. Petitioner appealed to the RTC not to reduce or even correct the penalties imposed by the
MeTC, but to assert his innocence. Nothing more. The cold fact is that petitioner appealed his
conviction to the RTC not for the sole purpose of reducing his penalties to make him eligible for
probation — since he was already qualified under the MeTC Decision — but rather to insist on his
innocence. The appeal record is wanting of any other purpose. Thus, in his Memorandum before the
RTC, he raised only three (3) statements of error purportedly committed by the MeTC all aimed at
his acquittal: (a) in finding that the guilt of the accused has been established because of his positive
identification by the witness for the prosecution; (b) in giving full faith and credence to the bare
statements of the private complainants despite the absence of corroborating testimonies; and, (c)in
not acquitting him in all the cases," 18 Consequently, petitioner insisted that the trial court committed an
error in relying on his positive identification considering that private complainants could not have missed
identifying him who was their President and General Manager with whom they worked for a good number
of years. Petitioner further argued that although the alleged defamatory words were uttered in the
presence of other persons, mostly private complainants, co-employees and clients, not one of them was
presented as a witness. Hence, according to petitioner, the trial court could not have convicted him on the
basis of the uncorroborative testimony of private complainants. 19

Certainly, the protestations of petitioner connote profession of guiltlessness, if not complete
innocence, and do not simply put in issue the propriety of the penalties imposed. For sure, the
accused never manifested that he was appealing only for the purpose of correcting a wrong penalty
— to reduce it to within the probationable range. Hence, upon interposing an appeal, more so after
asserting his innocence therein, petitioner should be precluded from seeking probation. By
perfecting his appeal, petitioner ipso facto relinquished his alternative remedy of availing of the
Probation Law the purpose of which is simply to prevent speculation or opportunism on the part of
an accused who although already eligible does not at once apply for probation, but doing so only
after failing in his appeal.
The fact that petitioner did not elevate the affirmance of his conviction by the RTC to the Court of
Appeals does not necessarily mean that his appeal to the RTC was solely to reduce his penalties.
Conversely, he was afraid that the Court of Appeals would increase his penalties, which could be
worse for him. Besides, the RTC Decision had already become final and executory because of the

negligence, according to him, of his former counsel who failed to seek possible remedies within the
period allowed by law.
Perhaps it should be mentioned that at the outset petitioner, in accordance with Sec 3, par. (e), Rule
117 of the Rules of Court, 20 should have moved to quash as each of the four (4) Informations filed
against him charged four (4) separate crimes of grave oral defamation, committed on four (4) separate
days. His failure to do so however may now be deemed a waiver under Sec. 8 of the same Rule 21 and he
can be validly convicted, as in the instant case, of as many crimes charged in the Information.

Fourth. The application for probation was filed way beyond the period allowed by law. This is vital
way beyond the period allowed by law and crucial. From the records it is clear that the application for
probation was filed "only after a warrant for the arrest of petitioner had been issued . . . (and) almost
two months after (his) receipt of the Decision" 22 of the RTC. This is a significant fact which militates
against the instant petition. We quote with affirmance the well-written, albeit assailed, ponencia of now
Presiding Justice of the Court of Appeals Nathanael P. De Pano, Jr., on the specific issue —

. . . the petition for probation was filed by the petitioner out of time. The law in point,
Section 4 of P.D. 968, as amended, provides thus:
Sec. 4. Grant of Probation. — Subject to the provisions of this
Decree, the trial court may, after it shall have convicted and
sentenced a defendant, and upon application by said defendant
within the period for perfecting an appeal. . . . place the defendant on
probation . . . .
Going to the extreme, and assuming that an application for probation from one who
had appealed the trial court's judgment is allowed by law, the petitioner's plea for
probation was filed out of time. In the petition is a clear statement that the petitioner
was up for execution of judgment before he filed his application for probation. P.D.
No. 968 says that the application for probation must be filed "within the period for
perfecting an appeal;" but in this case, such period for appeal had passed, meaning
to say that the Regional Trial Court's decision had attained finality, and no appeal
therefrom was possible under the law. Even granting that an appeal from
the appellate court's judgment is contemplated by P.D. 968, in addition to the
judgment rendered by the trial court, that appellate judgment had become final and
was, in fact, up for actual execution before the application for probation was
attempted by the petitioner. The petitioner did not file his application for probation
before the finality of the said judgment; therefore, the petitioner's attempt at probation
was filed too late.
Our minds cannot simply rest easy on. the proposition that an application for probation may yet be
granted even if it was filed only after judgment has become final, the conviction already set for
execution and a warrant of arrest issued for service of sentence.
The argument that petitioner had to await the remand of the case to the MeTC, which necessarily
must be after the decision of the RTC had become final, for him to file the application for probation
with the trial court, is to stretch the law beyond comprehension. The law, simply, does not allow
probation after an appeal has been perfected.
Accordingly, considering that prevailing jurisprudence treats appeal and probation as mutually
exclusive remedies, and petitioner appealed from his conviction by the MeTC although the imposed
penalties were already probationable, and in his appeal, he asserted only his innocence and did not

even raise the issue of the propriety of the penalties imposed on him, and finally, he filed an
application for probation outside the period for perfecting an appeal granting he was otherwise
eligible for probation, the instant petition for review should be as it is hereby DENIED.
SO ORDERED.
Narvasa, C.J., Feliciano, Padilla, Bidin and Regalado, JJ., concur.

Separate Opinions

MENDOZA, J., dissenting:
I vote to reverse the judgment of the Court of Appeals in this case.
I.
The principal basis for the affirmance of the decision of the Court of Appeals denying probation is the
fact that petitioner had appealed his sentence before filing his application for probation. Reliance is
placed on the literal application of § 4 of the Probation Law of 1976 ,as amended, which provides as
follows:
Sec. 4. Grant of Probation. — Subject to the provisions of this Decree, the trial court
may, after it shall have convicted and sentenced a defendant, and upon application
by said defendant within the period for perfecting an appeal, suspend the execution
of the sentence and place the defendant on probation for such period and upon such
terms and conditions as it may deem best; Provided, That no application for
probation shall be entertained or granted if the defendant has perfected the appeal
from the judgment of conviction.
Probation may be granted whether the sentence imposes a term of imprisonment or
a fine only probation shall be filed with the trial court application shall be deemed a
waiver of the right to appeal.
An order granting or denying probation shall not be appealable.
Thus, under § 4 the accused is given the choice of appealing his sentence or applying for probation.
If he appeals, he cannot later apply for probation. If he opts for probation, he can not appeal. Implicit
in the choice, however, is that the accused is not disqualified for probation under any of the cases
mentioned in § 9, to wit:
Sec. 9. Disqualified Offenders. — The benefits of this Decree shall not be extended
to those:

(a) sentenced to serve a maximum term of imprisonment of more than six years;
(b) convicted of subversion or any crime against the national security or the public
order;
(c) who have previously been convicted by final judgment of an offense punished by
imprisonment of not less than one month and one day and/or a fine of not less than
Two Hundred Pesos.
(d) who have been once on probation under the provisions of this Decree; and
(e) who are already serving sentence at the time the substantive provisions of this
Decree became applicable pursuant to Section 33 hereof.
Consequently, if under the sentence given to him an accused is not qualified for probation, as when
the penalty imposed on him by the court singly or in their totality exceeds six (6) years but on appeal
the sentence is modified so that he becomes qualified, I believe that the accused should not be
denied the benefit of probation.
Before its amendment by P.D. No. 1990, the law allowed — even encouraged — speculation on the
outcome of appeals by permitting the accused to apply for probation after he had appealed and
failed to obtain an acquittal. 1It was to change this that § 4 was amended by P.D. No. 1990 by expressly
providing that "no application for probation shall be entertained or granted if the defendant has perfected
the appeal from the judgment of conviction." For an accused, despite the fact that he is eligible for
probation, may be tempted to appeal in the hope of obtaining an acquittal if he knows he can any way
apply for probation in the event his conviction is affirmed. 2

There is, however, nothing in the amendatory Decree to suggest that in limiting the accused to the
choice of either appealing from the decision of the trial court or applying for probation, the purpose is
to deny him the right to probation in cases like the one at bar where he becomes eligible for
probation only because on appeal his sentence is reduced. The purpose of the amendment, it bears
repeating, is simply to prevent speculation or opportunism on the part of an accused who; although
eligible for probation, does not at once apply for probation, doing so only after failing in his appeal.
In the case at bar, it cannot be said that in appealing the decision MeTC petitioner was principally
motivated by a desire to be acquitted. While acquittal might have been an alluring prospect for him,
what is clear is that he had a reason for appealing because under the sentence given to him he was
disqualified to apply for probation. The MeTC had originally sentenced him to 1 year and 1 day to 1
year and 8 months of prision correccional for "each crime committed on each date of each case, as
alleged in the information[s]." This meant, as the majority opinion points out, that petitioner had to
suffer the prison term of 1 year and 1 day to 1 year and 8 months sixteen times, since he was found
guilty of four crimes of grave oral defamation in each of four cases. The totality of the penalties
imposed on petitioner (26 years and 8 months) thus exceeded the limit of six (6) years of
imprisonment allowed by § 9(a) and disqualified him for probation. It was only after this penalty was
reduced on appeal to a straight penalty of eight months imprisonment in each case or to a total term
of 2 years and 8 months in the four cases that petitioner became eligible for probation. Then he did
not appeal further although he could have done so.
The Court of Appeals, while acknowledging that "there may be some space not covered by the
present law on probation . . . where in its original state, the petitioner was disqualified from applying
for probation under Sec. 9 of the Decree, becoming eligible for probation only under the terms of the
judgment on appeal," nevertheless felt bound by the letter of § 4: "No application for probation shall

be entertained or granted if the defendant has perfected the appeal from the judgment of conviction."
The majority opinion, affirming the ruling, states that to allow probation in this case would be to go
against the "clear and express mandate of sec. 4 of the Probation Law, as amended." (p. 9)
To regard probation, however, as a mere privilege, to be given to the accused only where it clearly
appears he comes within its letter is to disregard the teaching in many cases that the Probation Law
should be applied in favor of the accused not because it is a criminal law — it is not — but to achieve
its beneficent purpose. (Santos To v. Paño, 120 SCRA 8, 14 (1983)). The niggardly application of
the law would defeat its purpose to "help the probationer develop into a law-abiding and selfrespecting individual" (Baclayon v. Mutia, 129 SCRA 148, 149 (1984), per Teehankee, J.) or "afford
[him] a chance to reform and rehabilitate himself without the stigma of a prison record, to save
government funds that may otherwise be spent for his food and maintenance while incarcerated, and
to decongest the jails of the country." (Del Rosario v. Rosero, 126 SCRA 228, 232 (1983), per
Makasiar, J.)
The approach followed by the Court in Atienza v. Court of Appeals, 140 SCRA 391, 395 (1985)
instead commends itself to me:
Regarding this, it suffices to state that the Probation Law was never intended to limit
the right of an accused person to present all relevant evidence he can avail of in
order to secure a verdict of acquittal or a reduction of the penalty. Neither does the
law require a plea of guilty on the part of the accused to enable him to avail of the
benefits of probation. A contrary view would certainly negate the constitutional right
of an accused to be presumed innocent until the contrary is proved.
As already stated, petitioner did not appeal primarily to seek acquittal. Proof of this is that after the
penalty imposed on him by the MeTC had been reduced by the RTC so that he thereby became
qualified for probation, he did not appeal further. The majority says that this was because he was
afraid that if he did the penalty could be increased. That possibility, however, was also there when
he appealed from the MeTC to the RTC. For by appealing the sentence of the MeTC, petitioner took
as much risk that the penalty would be raised as the chance that he would he acquitted.
It is true that in appealing the sentence of the MeTC petitioner professed his innocence and not
simply questioned the propriety of his sentence, but no more so does an accused who, upon being
arraigned, pleads, "Not Guilty." And yet the latter cannot be denied probation if he is otherwise
eligible for probation.
It is argued that there is a difference because an accused who pleads "not guilty'' in the beginning,
later acknowledges his guilt and shows contrition after he is found guilty. So does an accused who
appeals a sentence because under it he is not qualified for probation, but after the penalty is
reduced, instead of appealing further, accepts the new sentence and applies for probation.
This case is thus distinguishable from Llamado v. Court of Appeals, 174 SCRA 566 (1989), in which
it was held that because the petitioner had appealed his sentence, he could not subsequently apply
for probation. For, unlike petitioner in the case at bar, the accused in that case could have applied
for probation as his original sentence of one year of prision correccional did not disqualify him for
probation. That case fell squarely within the ambit of the prohibition in § 4 that one who applies for
probation must not "have perfected an appeal from the judgment of conviction."
II.

It is contended that petitioner did not have to appeal because under the original sentence meted out
to him he was not disqualified for probation. The issue here is whether the multiple prison terms
imposed on petitioner are to be considered singly or in their totality for the purpose of § 9(a) which
disqualifies from probation those "sentenced to serve a maximum term of imprisonment of more than
six years."
I submit that they should be taken in their totality. As the sentence originally imposed on petitioner
was for "one (1) year and one (1) day to one (1) year and eight (8) months of prision correccional in
each crime committed on each date of each case" and as there are four offenses of grave oral
defamation against petitioner in each of the four cases, the total prison term which he would have to
serve was 26 years and 8 months. This is clearly beyond the probationable maximum allowed by
law.
It is said, however, that even if the totality of the prison terms is the test, the modified sentence
imposed by the RTC would not qualify the petitioner for probation because he has to suffer
imprisonment of eight months sixteen times. That is not so. The RTC only "sentence[d] the said
accused in each case to STRAIGHT penalty of EIGHT (8) MONTHS imprisonment." This means
eight (8) months times four (4), since there are four cases, or 32 months or 2 years and 8 months.
The policy of the law indeed appears to be to treat as only one multiple sentences imposed in cases
which are jointly tried and decided. For example, § 9(c) disqualifies from probation persons "who
have previously been convicted by final judgment of an offense punished by imprisonment of not
less than one month and one day and/or a fine of not less than Two Hundred Pesos. It was held
in Rura v. Lopena, 137 SCRA 121 (1985) that the accused, who had been found guilty of estafa in
five criminal cases, was qualified for probation because although the crimes had been committed on
different dates he was found guilty of each crime on the same day. As this Court noted, "Rura was
sentenced to a total prison term of seventeen (l7) months and twenty-five (25) days. In each criminal
case the sentence was three (3) months and fifteen (15) days.
That the duration of a convict's sentence is determined by considering the totality of several
penalties for different offenses committed is also implicit in the provisions of the Revised Penal Code
on the accumulation of penalties. (See e.g., arts. 48 and 70)
It is said that the basis of disqualification under § 9 is the gravity of the offense committed and the
penalty imposed. I agree. That is why I contend that a person who is convicted of multiple grave oral
defamation for which the total prison term is, say, 6 years and 8 months, is guilty of a graver offense
than another who is guilty of only offense of grave oral defamation and sentenced to a single penalty
of 1 year and 8 months. The relevant comparison is between an accused convicted of one offense of
grave oral defamation and another one convicted of the same offense, say four or more times. The
relevant comparison is not, as the majority says, between an accused found guilty of grave oral
defamation four or more times and another one found guilty of mutilation and sentenced to an
indeterminate term of 6 years and 1 day of prision mayor to 12 years and 1 day of reclusion
temporal.
III.
Finally, it is said that there is a more fundamental reason for denying probation in this case and that
is that petitioner applied for probation only after his case had been remanded to the MeTC for the
execution of its decision as modified. But that is because § 4 provides that "an application for
probation shall be filed with the trial court." In the circumstances of this case, petitioner had to await
the remand of the case to the MeTC, which necessarily must be after the decision of the RTC had
become final.

The decision of the Court of Appeals should be REVERSED and respondent judge of the
Metropolitan Trial Court of Makati, Metro Manila should be ORDERED to GRANT petitioner's
application for probation.
VITUG, J., concurring:
While I subscribe to the observation made by Mr. Justice Vicente V. Mendoza in his dissenting
opinion that an accused, who originally is not qualified for probation because the penalty imposed on
him by a court a quoexceeds six (6) years, should not be denied that benefit of probation if on
appeal the sentence is ultimately reduced to within the prescribed limit, I am unable, however, to
second the other proposition that multiple prison terms imposed by a court should be taken in their
totality for purposes of Section 9 (a), P.D. No. 968. In this respect, I concur with Mr. Justice Josue
Bellosillo in his ponencia that in determining the eligibility or disqualification of an applicant for
probation charged with, and sentenced to serve multiple prison terms for, several offenses, "the
number of offenses is immaterial as long as all the penalties imposed, taken separately, are within
the probationable period." The use of the word maximum instead of the word total in Section 9,
paragraph (a) of P.D. 968, as amended, should be enough to reveal that such has been the
legislative intent.
Thus, I still must vote for the denial of the petition.

Separate Opinions
MENDOZA, J., dissenting:
I vote to reverse the judgment of the Court of Appeals in this case.
I.
The principal basis for the affirmance of the decision of the Court of Appeals denying probation is the
fact that petitioner had appealed his sentence before filing his application for probation. Reliance is
placed on the literal application of § 4 of the Probation Law of 1976 ,as amended, which provides as
follows:
Sec. 4. Grant of Probation. — Subject to the provisions of this Decree, the trial court
may, after it shall have convicted and sentenced a defendant, and upon application
by said defendant within the period for perfecting an appeal, suspend the execution
of the sentence and place the defendant on probation for such period and upon such
terms and conditions as it may deem best; Provided, That no application for
probation shall be entertained or granted if the defendant has perfected the appeal
from the judgment of conviction.
Probation may be granted whether the sentence imposes a term of imprisonment or
a fine only probation shall be filed with the trial court application shall be deemed a
waiver of the right to appeal.
An order granting or denying probation shall not be appealable.

Thus, under § 4 the accused is given the choice of appealing his sentence or applying for probation.
If he appeals, he cannot later apply for probation. If he opts for probation, he can not appeal. Implicit
in the choice, however, is that the accused is not disqualified for probation under any of the cases
mentioned in § 9, to wit:
Sec. 9. Disqualified Offenders. — The benefits of this Decree shall not be extended
to those:
(a) sentenced to serve a maximum term of imprisonment of more than six years;
(b) convicted of subversion or any crime against the national security or the public
order;
(c) who have previously been convicted by final judgment of an offense punished by
imprisonment of not less than one month and one day and/or a fine of not less than
Two Hundred Pesos.
(d) who have been once on probation under the provisions of this Decree; and
(e) who are already serving sentence at the time the substantive provisions of this
Decree became applicable pursuant to Section 33 hereof.
Consequently, if under the sentence given to him an accused is not qualified for probation, as when
the penalty imposed on him by the court singly or in their totality exceeds six (6) years but on appeal
the sentence is modified so that he becomes qualified, I believe that the accused should not be
denied the benefit of probation.
Before its amendment by P.D. No. 1990, the law allowed — even encouraged — speculation on the
outcome of appeals by permitting the accused to apply for probation after he had appealed and
failed to obtain an acquittal. 1It was to change this that § 4 was amended by P.D. No. 1990 by expressly
providing that "no application for probation shall be entertained or granted if the defendant has perfected
the appeal from the judgment of conviction." For an accused, despite the fact that he is eligible for
probation, may be tempted to appeal in the hope of obtaining an acquittal if he knows he can any way
apply for probation in the event his conviction is affirmed. 2

There is, however, nothing in the amendatory Decree to suggest that in limiting the accused to the
choice of either appealing from the decision of the trial court or applying for probation, the purpose is
to deny him the right to probation in cases like the one at bar where he becomes eligible for
probation only because on appeal his sentence is reduced. The purpose of the amendment, it bears
repeating, is simply to prevent speculation or opportunism on the part of an accused who; although
eligible for probation, does not at once apply for probation, doing so only after failing in his appeal.
In the case at bar, it cannot be said that in appealing the decision MeTC petitioner was principally
motivated by a desire to be acquitted. While acquittal might have been an alluring prospect for him,
what is clear is that he had a reason for appealing because under the sentence given to him he was
disqualified to apply for probation. The MeTC had originally sentenced him to 1 year and 1 day to 1
year and 8 months of prision correccional for "each crime committed on each date of each case, as
alleged in the information[s]." This meant, as the majority opinion points out, that petitioner had to
suffer the prison term of 1 year and 1 day to 1 year and 8 months sixteen times, since he was found
guilty of four crimes of grave oral defamation in each of four cases. The totality of the penalties
imposed on petitioner (26 years and 8 months) thus exceeded the limit of six (6) years of
imprisonment allowed by § 9(a) and disqualified him for probation. It was only after this penalty was

reduced on appeal to a straight penalty of eight months imprisonment in each case or to a total term
of 2 years and 8 months in the four cases that petitioner became eligible for probation. Then he did
not appeal further although he could have done so.
The Court of Appeals, while acknowledging that "there may be some space not covered by the
present law on probation . . . where in its original state, the petitioner was disqualified from applying
for probation under Sec. 9 of the Decree, becoming eligible for probation only under the terms of the
judgment on appeal," nevertheless felt bound by the letter of § 4: "No application for probation shall
be entertained or granted if the defendant has perfected the appeal from the judgment of conviction."
The majority opinion, affirming the ruling, states that to allow probation in this case would be to go
against the "clear and express mandate of sec. 4 of the Probation Law, as amended." (p. 9)
To regard probation, however, as a mere privilege, to be given to the accused only where it clearly
appears he comes within its letter is to disregard the teaching in many cases that the Probation Law
should be applied in favor of the accused not because it is a criminal law — it is not — but to achieve
its beneficent purpose. (Santos To v. Paño, 120 SCRA 8, 14 (1983)). The niggardly application of
the law would defeat its purpose to "help the probationer develop into a law-abiding and selfrespecting individual" (Baclayon v. Mutia, 129 SCRA 148, 149 (1984), per Teehankee, J.) or "afford
[him] a chance to reform and rehabilitate himself without the stigma of a prison record, to save
government funds that may otherwise be spent for his food and maintenance while incarcerated, and
to decongest the jails of the country." (Del Rosario v. Rosero, 126 SCRA 228, 232 (1983), per
Makasiar, J.)
The approach followed by the Court in Atienza v. Court of Appeals, 140 SCRA 391, 395 (1985)
instead commends itself to me:
Regarding this, it suffices to state that the Probation Law was never intended to limit
the right of an accused person to present all relevant evidence he can avail of in
order to secure a verdict of acquittal or a reduction of the penalty. Neither does the
law require a plea of guilty on the part of the accused to enable him to avail of the
benefits of probation. A contrary view would certainly negate the constitutional right
of an accused to be presumed innocent until the contrary is proved.
As already stated, petitioner did not appeal primarily to seek acquittal. Proof of this is that after the
penalty imposed on him by the MeTC had been reduced by the RTC so that he thereby became
qualified for probation, he did not appeal further. The majority says that this was because he was
afraid that if he did the penalty could be increased. That possibility, however, was also there when
he appealed from the MeTC to the RTC. For by appealing the sentence of the MeTC, petitioner took
as much risk that the penalty would be raised as the chance that he would he acquitted.
It is true that in appealing the sentence of the MeTC petitioner professed his innocence and not
simply questioned the propriety of his sentence, but no more so does an accused who, upon being
arraigned, pleads, "Not Guilty." And yet the latter cannot be denied probation if he is otherwise
eligible for probation.
It is argued that there is a difference because an accused who pleads "not guilty'' in the beginning,
later acknowledges his guilt and shows contrition after he is found guilty. So does an accused who
appeals a sentence because under it he is not qualified for probation, but after the penalty is
reduced, instead of appealing further, accepts the new sentence and applies for probation.
This case is thus distinguishable from Llamado v. Court of Appeals, 174 SCRA 566 (1989), in which
it was held that because the petitioner had appealed his sentence, he could not subsequently apply

for probation. For, unlike petitioner in the case at bar, the accused in that case could have applied
for probation as his original sentence of one year of prision correccional did not disqualify him for
probation. That case fell squarely within the ambit of the prohibition in § 4 that one who applies for
probation must not "have perfected an appeal from the judgment of conviction."
II.
It is contended that petitioner did not have to appeal because under the original sentence meted out
to him he was not disqualified for probation. The issue here is whether the multiple prison terms
imposed on petitioner are to be considered singly or in their totality for the purpose of § 9(a) which
disqualifies from probation those "sentenced to serve a maximum term of imprisonment of more than
six years."
I submit that they should be taken in their totality. As the sentence originally imposed on petitioner
was for "one (1) year and one (1) day to one (1) year and eight (8) months of prision correccional in
each crime committed on each date of each case" and as there are four offenses of grave oral
defamation against petitioner in each of the four cases, the total prison term which he would have to
serve was 26 years and 8 months. This is clearly beyond the probationable maximum allowed by
law.
It is said, however, that even if the totality of the prison terms is the test, the modified sentence
imposed by the RTC would not qualify the petitioner for probation because he has to suffer
imprisonment of eight months sixteen times. That is not so. The RTC only "sentence[d] the said
accused in each case to STRAIGHT penalty of EIGHT (8) MONTHS imprisonment." This means
eight (8) months times four (4), since there are four cases, or 32 months or 2 years and 8 months.
The policy of the law indeed appears to be to treat as only one multiple sentences imposed in cases
which are jointly tried and decided. For example, § 9(c) disqualifies from probation persons "who
have previously been convicted by final judgment of an offense punished by imprisonment of not
less than one month and one day and/or a fine of not less than Two Hundred Pesos. It was held
in Rura v. Lopena, 137 SCRA 121 (1985) that the accused, who had been found guilty of estafa in
five criminal cases, was qualified for probation because although the crimes had been committed on
different dates he was found guilty of each crime on the same day. As this Court noted, "Rura was
sentenced to a total prison term of seventeen (l7) months and twenty-five (25) days. In each criminal
case the sentence was three (3) months and fifteen (15) days.
That the duration of a convict's sentence is determined by considering the totality of several
penalties for different offenses committed is also implicit in the provisions of the Revised Penal Code
on the accumulation of penalties. (See e.g., arts. 48 and 70)
It is said that the basis of disqualification under § 9 is the gravity of the offense committed and the
penalty imposed. I agree. That is why I contend that a person who is convicted of multiple grave oral
defamation for which the total prison term is, say, 6 years and 8 months, is guilty of a graver offense
than another who is guilty of only offense of grave oral defamation and sentenced to a single penalty
of 1 year and 8 months. The relevant comparison is between an accused convicted of one offense of
grave oral defamation and another one convicted of the same offense, say four or more times. The
relevant comparison is not, as the majority says, between an accused found guilty of grave oral
defamation four or more times and another one found guilty of mutilation and sentenced to an
indeterminate term of 6 years and 1 day of prision mayor to 12 years and 1 day of reclusion
temporal.
III.

Finally, it is said that there is a more fundamental reason for denying probation in this case and that
is that petitioner applied for probation only after his case had been remanded to the MeTC for the
execution of its decision as modified. But that is because § 4 provides that "an application for
probation shall be filed with the trial court." In the circumstances of this case, petitioner had to await
the remand of the case to the MeTC, which necessarily must be after the decision of the RTC had
become final.
The decision of the Court of Appeals should be REVERSED and respondent judge of the
Metropolitan Trial Court of Makati, Metro Manila should be ORDERED to GRANT petitioner's
application for probation.
VITUG, J., concurring:
While I subscribe to the observation made by Mr. Justice Vicente V. Mendoza in his dissenting
opinion that an accused, who originally is not qualified for probation because the penalty imposed on
him by a court a quoexceeds six (6) years, should not be denied that benefit of probation if on
appeal the sentence is ultimately reduced to within the prescribed limit, I am unable, however, to
second the other proposition that multiple prison terms imposed by a court should be taken in their
totality for purposes of Section 9 (a), P.D. No. 968. In this respect, I concur with Mr. Justice Josue
Bellosillo in his ponencia that in determining the eligibility or disqualification of an applicant for
probation charged with, and sentenced to serve multiple prison terms for, several offenses, "the
number of offenses is immaterial as long as all the penalties imposed, taken separately, are within
the probationable period." The use of the word maximum instead of the word total in Section 9,
paragraph (a) of P.D. 968, as amended, should be enough to reveal that such has been the
legislative intent.
Thus, I still must vote for the denial of the petition.
Footnotes
1 Decision penned by Judge Andres B. Reyes. Jr., pp. 13-14; Rollo, pp. 46-47.
2 Decision penned-by Judge Lucia V. Isnani, pp. 12-13; Rollo, pp. 59-60.
3 Ibid.
4 Order of Judge Maximo C. Contreras, Metropolitan Trial Court of Makati, Br.
61, Rollo, p. 67.
5 Decision of the Special Eleventh Division penned by then Associate Justice
Nathanael P. De Pano, Jr. (now Presiding Justice), concurred in by Associate
Justices Jesus M. Elbinias and Consuelo Y. Santiago.
6 Urgent Petition for Review, p, 15; Rollo, p, 16.
7 Id., p, 10; Rollo, p.11.
8 Baclayon v. Mutia, G.R. No. 59298, 30 April 1984, 129 SCRA 149; Amandy v.
People, G.R. No. 76258, 23 May 1988, 161 SCRA 436.
9 34 Words and Phrases 111.

10 Bala v. Martinez, G.R. No. 67301, 29 January 1990, 181 SCRA 459.
11 G.R. No. 84850, 29 June 1989, 174 SCRA 566.
12 See Note 11, pp. 577-578.
13 No. L - 35910, 21 July 1978, 84 SCRA 176, citing McGee v. Republic, 94 Phil.
820 (1954).
14 Bautista, E., Statutory Concept and Objectives, Coverage and Selection Criteria
for Probation. Lecture delivered during the 1977 Regional Seminar on Probation,
Philippine International Convention Center.
15 Art. 9 defines grave felonies as those to which the law attaches the capital
punishment or penalties which in any of their periods are afflictive, in accordance
with Art. 25. Art. 25 On the other hand lists death as capital punishment,
and reclusion perpetua, reclusion temporal, perpetual or temporary absolute
disqualification, perpetual or temporary special disqualification, and prision mayor as
afflictive penalties.
16 Decision of the RTC, p. 13; Rollo, p. 60.
17 Bernardo v. Balagot, G.R. No. 86561, 10 November 1992, 215 SCRA 526.
18 Decision of the RTC, p. 2; Rollo, p. 49.
19 Ibid.
20 Section 3, par. (e), Rule 117, Rules of Court, provides: "The accused may move
to quash the complaint or information on any of the following grounds: . . . that more
than one offense is charged . . . .
21 Section 8, Rule 117, Rules of Court, provides: "The failure of the accused to
assert any ground of a motion to quash before he pleads to the complaint or
information, either because he did not file a motion to quash or failed to alleged the
same in the said motion shall be deemed a waiver of the grounds of a motion to
quash . . . .
22 Urgent Petition for Review, p. 5; Rollo, P 6.
MENDOZA, J., dissenting:
1 As originally promulgated on July 24, 1976, P.D. No. 968, § 4 provided:
Sec. 4. Grant of Probation. — Subject to the provisions of this Decree, the court may,
after it shall have convicted and sentenced a defendant and upon application at any
time of said defendant, suspend the execution of said sentence and place the
defendant on probation for such period and upon such terms and conditions as it
may deem best.

Probation may be granted whether the sentence imposes a term of imprisonment or
a fine only. An application for probation shall be filed with the trial court, with notice to
the appellate court if an appeal has been taken from the sentence of conviction. The
filing of the application shall be deemed a waiver of the right to appeal, or the
automatic withdrawal of a pending appeal.
An order granting or denying probation shall not be appealable. (Emphasis added)
Thus, under the law as originally promulgated, any time after the trial court had
convicted and sentenced the accused and even if he had taken an appeal, the trial
court could grant him probation in the event he is convicted.
On December 1, 1977, § 4 of the law was again amended by P.D. No. 1257 so as to
read as follows:
Sec. 4. Grant of Probation. — Subject to the provisions of this Decree, the court may,
after it shall have convicted and sentenced a defendant but before he begins to serve
his sentence and upon his application, suspend the execution of said sentence and
place the defendant on probation for such period and upon such terms and
conditions as it may deem best.
The prosecuting officer concerned shall be notified by the court of the filing of the
application for probation and he may submit his comment on such application within
ten days from receipt of the notification.
Probation may be granted whether the sentence imposes a term of imprisonment or
a fine with subsidiary imprisonment in case of insolvency. An application for
probation shall be filed with the trial court, with notice to the appellate court if an
appeal has been taken from the sentence of conviction. The filing of the application
shall be deemed a waiver of the right to appeal, or the automatic withdrawal of a
pending appeal. In the latter case, however, if the application is filed on or after the
date of the judgment of the appellate court, said application shall be acted upon by
the trial court on the basis of the judgment of the appellate court.
An order granting or denying probation shall not be appealable. (Emphasis added)
This amendment limited the period for applying for probation to the point just "before
he begins to serve his sentence." This meant not only after an appeal had been
taken but even after a judgment had been rendered by the appellate court and after
the latter's judgment had become final. Hence the proviso that "the application [for
probation] shall be acted upon by the trial court on the basis of the judgment of the
appellate court."
On October 5, 1985, § 4 of the Probation Law was again amended to further limit the
period for applying for probation to the "period for perfecting an appeal." The purpose
was to confine the accused to the choice of either applying for probation or
appealing. While heretofore an accused could appeal and, after his appeal had
failed, apply for probation, under the amendatory Decree, this is no longer possible. If
he appeals he cannot later apply for probation. If he applies for probation he cannot
later appeal. As amended by P.D. No. 1990, § 4 reads:

Sec. 4. Grant of Probation. — Subject to the provisions of this Decree, the trial court
may, after it shall have convicted and sentenced a defendant, and upon application
by said defendant within the period for perfecting an appeal, suspend the execution
of the sentence and place the defendant on probation for such period and upon such
terms and conditions as it may deem best; Provided, That no application for
probation shall be entertained or granted if the defendant has perfected the appeal
from the judgment of conviction.
Probation may be granted whether the sentence imposes a term of imprisonment or
a fine only. An application for probation shall be filed with the trial court. The filing of
the application shall be deemed a waiver of the right to appeal.
An order granting or denying probation shall not be appealable. (Emphasis added)
2 The preamble of P.D. No. 1990 states:
WHEREAS, it has been the sad experience that persons who are convicted of
offenses and who may be entitled to probation still appeal the judgment of conviction
even up to the Supreme Court, only to pursue their application for probation when
their appeal is eventually dismissed;
WHEREAS, the process of criminal investigation, prosecution, conviction and appeal
entails too much time and effort, not to mention the huge expenses of litigation, on
the part of the State;
WHEREAS, the time, effort and expenses of the Government in investigating and
prosecuting accused persons from the lower courts up to the Supreme Court, are
often times rendered nugatory when, after the appellate court finally affirms the
judgment of conviction, the defendant applies for and is granted probation;
WHEREAS, probation was not intended as an escape hatch and should not be used
to obstruct and delay the administration of justice, but should be availed of at the first
opportunity by offenders who are willing to be reformed and rehabilitated; (Emphasis
added)

Philippine Supreme Court Jurisprudence > Year 1991 > April 1991 Decisions > G.R. No. 42725 April 22, 1991 REPUBLIC BANK v. COURT OF APPEALS:

FIRST DIVISION
[G.R. No. 42725. April 22, 1991.]
REPUBLIC BANK, Petitioner, v. COURT OF APPEALS and FIRST NATIONAL CITY

BANK,Respondents.
Lourdes C. Dorado for Petitioner.
Siguion Reyna, Montecillo & Ongsiako for private respondent Citibank.

SYLLABUS

1. COMMERCIAL LAW; BANKING LAWS; 24-HOUR CLEARING HOUSE RULE APPLIES TO
COMMERCIAL BANKS; FAILURE OF DRAWEE BANK TO COMPLY WITH RULE ABSOLVES COLLECTING
BANKS. — 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., 157 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.
2. ID.; ID.; ID.; ID.; REMEDY OF DRAWEE BANK IS AGAINST PARTY RESPONSIBLE FOR FORGERY
OR ALTERATION. — Every bank that issues checks for the use of its customers should know
whether or not the drawer’s signature thereon is genuine, whether there are sufficient funds in the
drawer’s account to cover checks issued, and it should be able to detect alterations, erasures,
superimpositions or intercalations thereon, for these instruments are prepared, printed and issued
by itself, it has control of the drawer’s account, and it is supposed to be familiar with the drawer’s
signature. It should possess appropriate detecting devices for uncovering forgeries and/or
alterations on these instruments. 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 forge and/or altered check for payment is against the party responsible for
the forgery or alteration (Hongkong & Shanghai Banking Corp. v. People’s Bank & Trust Co., 35
SCRA 140), otherwise, it bears the loss. It may not charge the amount so paid to the account of
the drawer, if the latter was free from blame, nor recover it from the collecting bank if the latter
made payment after proper clearance from the drawee.

DECISION

GRIÑO-AQUINO, J.:

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 latter’s
endorsement and guaranty. Republic refused, claiming there was delay in giving it notice of the
alteration; that it was not guilty of negligence; that it was the drawer’s (SMC’s) fault in drawing the
check in such a way as to permit the insertion of numerals increasing the amount; that FNCB, as
drawee, was absolved of any liability to the drawer (SMC), thus, FNCB had no right of recourse
against Republic.
On 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 attorney’s fees and
costs of the suit. The Court of Appeals affirmed that decision, but modified the award of attorney’s
fees by reducing it to P1,000 without pronouncement as to costs (CA-G.R. No. 41691-R, December
22, 1975).
chanro bles vi rtua l lawlib ra ry

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:c hanro bles. 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 o’clock A.M. shall be
returned not later than 2:00 o’clock P.M. on the same day and all items cleared at 3:00 o’clock
P.M. shall be returned not later than 8:30 A.M. of the following business day except for items
cleared on Saturday which may be returned not later than 8:30 A.M. of the following day."
cralaw virtua 1aw lib rary

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:
chan rob 1es vi rtual 1aw lib rary

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

"For clearance, clearing office. All prior endorsements and or lack of endorsements guaranteed.
People’s Bank and Trust Company."
cralaw virtua1aw l ibra ry

The check was cleared by the drawee bank (Hongkong & Shanghai Bank), whereupon the People’s

Bank credited Changco with the amount of the check. Changco thereafter withdrew the contents of
his bank account. A month later, when the check was returned to PLDT, the alteration was
discovered. The Hongkong & Shanghai Bank sued to recover from the People’s Bank the sum of
P14,608.05. The complaint was dismissed. Affirming the decision of the trial court, this Court
held:
jgc:c hanro bles. 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 People’s Bank and since such an
indorsement carries with it a concomitant guarantee of genuineness, the People’s Bank is liable to
the Hongkong Shanghai Bank for alteration made in the name of payee. On the other hand, the
People’s 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 People’s Bank as to the alteration on April 12,
1965 or 27 days after clearing, the People’s 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 rt ua1aw lib rary

"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:
jg c: 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.
chanrobl es.com.ph : vi rtua l law lib rary

"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. People’s 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

drawer’s signature thereon is genuine, whether there are sufficient funds in the drawers account to
cover checks issued, and it should be able to detect alterations, erasures, superimpositions or
intercalations thereon, for these instruments are prepared, printed and issued by itself, it has
control of the drawer’s account, and it is supposed to be familiar with the drawer’s signature. It
should possess appropriate detecting devices for uncovering forgeries and/or alterations on these
instruments. 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. People’s Bank & Trust Co., 35
SCRA 140), otherwise, it bears the loss. It may not charge the amount so paid to the account of
the drawer, if the latter was free from blame, nor recover it from the collecting bank if the latter
made payment after proper clearance from the drawee. As this Court pointed out in Philippine
National Bank v. Quimpo, Et Al., 158 SCRA 582, 584:
jgc:chanro bles. 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 virt ua1aw

libra ry

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:chanroble s.com.p h

"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.
Narvasa, Gancayco and Medialdea, JJ., concur.
Cruz, J., took no part.

FIRST DIVISION

[G.R. No. 149454. May 28, 2004]

BANK OF THE PHILIPPINE ISLANDS, petitioner, vs. CASA
MONTESSORI
INTERNATIONALE
and
LEONARDO
T.
YABUT, respondents.

[G.R. No. 149507. May 28, 2004]

CASA MONTESSORI INTERNATIONALE, petitioner, vs. BANK OF THE
PHILIPPINE ISLANDS, respondent.
DECISION
PANGANIBAN, J.:

By the nature of its functions, a bank is required to take meticulous care of
the deposits of its clients, who have the right to expect high standards of
integrity and performance from it. Among its obligations in furtherance
thereof is knowing the signatures of its clients. Depositors are not estopped
from questioning wrongful withdrawals, even if they have failed to question
those errors in the statements sent by the bank to them for verification.
The Case
Before us are two Petitions for Review under Rule 45 of the Rules of
Court, assailing the March 23, 2001 Decision and the August 17,
2001 Resolution of the Court of Appeals (CA) in CA-GR CV No. 63561. The
decretal portion of the assailed Decision reads as follows:
[1]

[2]

[3]

―WHEREFORE, upon the premises, the decision appealed from is AFFIRMED with
the modification that defendant bank [Bank of the Philippine Islands (BPI)] is held
liable only for one-half of the value of the forged checks in the amount ofP547,115.00
after deductions subject to REIMBURSEMENT from third party defendant Yabut
who is likewise ORDERED to pay the other half to plaintiff corporation [Casa
Montessori Internationale (CASA)].‖
[4]

The assailed
Reconsideration.

Resolution

denied

all

the

parties‘

The Facts
The facts of the case are narrated by the CA as follows:

Motions

for

―On November 8, 1982, plaintiff CASA Montessori International opened Current
Account No. 0291-0081-01 with defendant BPI[,] with CASA‘s President Ms. Ma.
Carina C. Lebron as one of its authorized signatories.
[5]

―In 1991, after conducting an investigation, plaintiff discovered that nine (9) of its
checks had been encashed by a certain Sonny D. Santos since 1990 in the total amount
of P782,000.00, on the following dates and amounts:
‗Check No.

Date

1. 839700

April 24, 1990

2. 839459

Nov. 2, 1990

110,500.00

3. 839609

Oct. 17, 1990

47,723.00

4. 839549

April 7, 1990

5. 839569

Sept. 23, 1990

52,277.00

6. 729149

Mar. 22, 1990

148,000.00

7. 729129

Mar. 16, 1990

51,015.00

8. 839684

Dec. 1, 1990

140,000.00

9. 729034

Mar. 2, 1990

98,985.00

Amount

Total --

P

43,400.00

90,700.00

P

782,600.00

[6]

―It turned out that ‗Sonny D. Santos‘ with account at BPI‘s Greenbelt Branch
[was] a fictitious name used by third party defendant Leonardo T. Yabut who
worked as external auditor of CASA. Third party defendant voluntarily
admitted that he forged the signature of Ms. Lebron and encashed the checks.
―The PNP Crime Laboratory conducted an examination of the nine (9)
checks and concluded that the handwritings thereon compared to the
standard signature of Ms. Lebron were not written by the latter.
―On March 4, 1991, plaintiff filed the herein Complaint for Collection with
Damages against defendant bank praying that the latter be ordered to
reinstate the amount of P782,500.00 in the current and savings accounts of
the plaintiff with interest at 6% per annum.
[7]

―On February 16, 1999, the RTC rendered the appealed decision in favor
of the plaintiff.‖
[8]

Ruling of the Court of Appeals
Modifying the Decision of the Regional Trial Court (RTC), the CA
apportioned the loss between BPI and CASA. The appellate court took into
account CASA‘s contributory negligence that resulted in the undetected
forgery. It then ordered Leonardo T. Yabut to reimburse BPI half the total
amount claimed; and CASA, the other half. It also disallowed attorney‘s fees
and moral and exemplary damages.
Hence, these Petitions.

[9]

Issues
In GR No. 149454, Petitioner BPI submits the following issues for our
consideration:
―I. The Honorable Court of Appeals erred in deciding this case NOT in accord with
the applicable decisions of this Honorable Court to the effect that forgery cannot be
presumed; that it must be proved by clear, positive and convincing evidence; and that
the burden of proof lies on the party alleging the forgery.
―II. The Honorable Court of Appeals erred in deciding this case not in accord with
applicable laws, in particular the Negotiable Instruments Law (NIL) which precludes
CASA, on account of its own negligence, from asserting its forgery claim against BPI,
specially taking into account the absence of any negligence on the part of BPI.‖
[10]

In GR No. 149507, Petitioner CASA submits the following issues:
―1. The Honorable Court of Appeals erred when it ruled that ‗there is no showing that
[BPI], although negligent, acted in bad faith x x x‘ thus denying the prayer for the
award of attorney‘s fees, moral damages and exemplary damages to [CASA]. The
Honorable Court also erred when it did not order [BPI] to pay interest on the amounts
due to [CASA].
―2. The Honorable Court of Appeals erred when it declared that [CASA] was likewise
negligent in the case at bar, thus warranting its conclusion that the loss in the amount
of P547,115.00 be ‗apportioned between [CASA] and [BPI] x x x.‘‖
[11]

These issues can be narrowed down to three. First, was there forgery
under the Negotiable Instruments Law (NIL)? Second, were any of the parties
negligent and therefore precluded from setting up forgery as a
defense? Third, should moral and exemplary damages, attorney‘s fees, and
interest be awarded?
The Court’s Ruling
The Petition in GR No. 149454 has no merit, while that in GR No. 149507
is partly meritorious.
First Issue:
Forged Signature Wholly Inoperative
Section 23 of the NIL provides:
―Section 23. Forged signature; effect of. -- 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 x x x 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.‖
[12]

Under this provision, a forged signature is a real or absolute
defense, and a person whose signature on a negotiable instrument is forged
is deemed to have never become a party thereto and to have never
consented to the contract that allegedly gave rise to it.
[13]

[14]

[15]

The counterfeiting of any writing, consisting in the signing of another‘s
name with intent to defraud, is forgery.
[16]

In the present case, we hold that there was forgery of the drawer‘s
signature on the check.
First, both the CA and the RTC found that Respondent Yabut himself
had voluntarily admitted, through an Affidavit, that he had forged the drawer‘s
signature and encashed the checks. He never refuted these findings. That
he had been coerced into admission was not corroborated by any evidence on
record.
[17]

[18]

[19]

[21]

[20]

Second, the appellate and the trial courts also ruled that the PNP Crime
Laboratory, after its examination of the said checks, had concluded that the
handwritings thereon -- compared to the standard signature of the drawer -were not hers. This conclusion was the same as that in the Report that the
PNP Crime Laboratory had earlier issued to BPI -- the drawee bank -- upon
the latter‘s request.
[22]

[23]

[24]

Indeed, we respect and affirm the RTC‘s factual findings, especially when
affirmed by the CA, since these are supported by substantial evidence on
record.
[25]

Voluntary Admission Not
Violative of Constitutional Rights
The voluntary admission of Yabut did not violate his constitutional rights
(1) on custodial investigation, and (2) against self-incrimination.
In the first place, he was not under custodial investigation. His Affidavit
was executed in private and before private individuals. The mantle of
protection under Section 12 of Article III of the 1987 Constitution covers only
the period ―from the time a person is taken into custody for investigation of his
possible participation in the commission of a crime or from the time he is
singled out as a suspect in the commission of a crime although not yet in
custody.‖
[26]

[27]

[28]

[29]

Therefore, to fall within the ambit of Section 12, quoted above, there must
be an arrest or a deprivation of freedom, with ―questions propounded on him
by the police authorities for the purpose of eliciting admissions, confessions,
or any information.‖ The said constitutional provision does ―not apply to
spontaneous statements made in a voluntary manner‖ whereby an individual
orally admits to authorship of a crime. ―What the Constitution proscribes is
the compulsory or coercive disclosure of incriminating facts.‖
[30]

[31]

[32]

[33]

Moreover, the right against self-incrimination under Section 17 of Article
III of the Constitution, which is ordinarily available only in criminal
prosecutions, extends to all other government proceedings -- including civil
actions, legislative investigations, and administrative proceedings that
possess a criminal or penal aspect -- but not to private investigations done
by private individuals. Even in such government proceedings, this right may
be waived, provided the waiver is certain; unequivocal; and intelligently,
understandingly and willingly made.
[34]

[35]

[36]

[37]

[38]

[39]

If in these government proceedings waiver is allowed, all the more is it so
in private investigations. It is of no moment that no criminal case has yet been
filed against Yabut. The filing thereof is entirely up to the appropriate
authorities or to the private individuals upon whom damage has been
caused. As we shall also explain later, it is not mandatory for CASA -- the
plaintiff below -- to implead Yabut in the civil case before the lower court.
Under these two constitutional provisions, ―[t]he Bill of Rights does not
concern itself with the relation between a private individual and another
individual. It governs the relationship between the individual and the
State.‖ Moreover, the Bill of Rights ―is a charter of liberties for the individual
and a limitation upon the power of the [S]tate.‖ These rights are guaranteed
to preclude the slightest coercion by the State that may lead the accused ―to
admit something false, not prevent him from freely and voluntarily telling the
truth.‖
[40]

[41]

[42]

[43]

[44]

Yabut is not an accused here. Besides, his mere invocation of the
aforesaid rights ―does not automatically entitle him to the constitutional
protection.‖ When he freely and voluntarily executed his Affidavit, the State
was not even involved. Such Affidavit may therefore be admitted without
violating his constitutional rights while under custodial investigation and
against self-incrimination.
[45]

[46]

Clear, Positive and Convincing
Examination and Evidence
The examination by the PNP, though inconclusive, was nevertheless
clear, positive and convincing.
Forgery ―cannot be presumed.‖ It must be established by clear, positive
and convincing evidence. Under the best evidence rule as applied to
documentary evidence like the checks in question, no secondary or
substitutionary evidence may inceptively be introduced, as the original writing
itself must be produced in court. But when, without bad faith on the part of
the offeror, the original checks have already been destroyed or cannot be
produced in court, secondary evidence may be produced. Without bad faith
on its part, CASA proved the loss or destruction of the original checks through
the Affidavit of the one person who knew of that fact -- Yabut. He clearly
admitted to discarding the paid checks to cover up his misdeed. In such a
situation, secondary evidence like microfilm copies may be introduced in
court.
[47]

[48]

[49]

[50]

[51]

[52]

The drawer‘s signatures on the microfilm copies were compared with the
standard signature. PNP Document Examiner II Josefina de la Cruz testified
on cross-examination that two different persons had written them. Although
no conclusive report could be issued in the absence of the original
checks, she
affirmed
that
her
findings
were
90
percent
conclusive. According to her, even if the microfilm copies were the only basis
of comparison, the differences were evident. Besides, the RTC explained
that although the Report was inconclusive, no conclusive report could have
been given by the PNP, anyway, in the absence of the original checks. This
explanation is valid; otherwise, no such report can ever be relied upon in
court.
[53]

[54]

[55]

[56]

[57]

Even with respect to documentary evidence, the best evidence rule
applies only when the contents of a document -- such as the drawer‘s
signature on a check -- is the subject of inquiry. As to whether the document
has been actually executed, this rule does not apply; and testimonial as well
as any other secondary evidence is admissible. Carina Lebron herself, the
drawer‘s authorized signatory, testified many times that she had never signed
those checks. Her testimonial evidence is admissible; the checks have not
been actually executed. The genuineness of her handwriting is proved, not
only through the court‘s comparison of the questioned handwritings and
admittedly genuine specimens thereof, but above all by her.
[58]

[59]

[60]

The failure of CASA to produce the original checks neither gives rise to the
presumption of suppression of evidence nor creates an unfavorable
inference against it. Such failure merely authorizes the introduction of
secondary evidence in the form of microfilm copies. Of no consequence is
the fact that CASA did not present the signature card containing the
signatures with which those on the checks were compared. Specimens of
standard signatures are not limited to such a card. Considering that it was not
produced in evidence, other documents that bear the drawer‘s authentic
signature may be resorted to. Besides, that card was in the possession of
BPI -- the adverse party.
[61]

[62]

[63]

[64]

[65]

We have held that without the original document containing the allegedly
forged signature, one cannot make a definitive comparison that would
establish forgery; and that a comparison based on a mere reproduction of
the document under controversy cannot produce reliable results. We have
also said, however, that a judge cannot merely rely on a handwriting expert‘s
testimony, but should also exercise independent judgment in evaluating the
authenticity of a signature under scrutiny. In the present case, both the RTC
and the CA conducted independent examinations of the evidence presented
and arrived at reasonable and similar conclusions. Not only did they admit
[66]

[67]

[68]

[69]

secondary evidence; they also appositely considered testimonial and other
documentary evidence in the form of the Affidavit.
The best evidence rule admits of exceptions and, as we have discussed
earlier, the first of these has been met. The result of examining a questioned
handwriting, even with the aid of experts and scientific instruments, may be
inconclusive; but it is a non sequitur to say that such result is not clear,
positive and convincing. The preponderance of evidence required in this case
has been satisfied.
[70]

[71]

[72]

Second Issue:
Negligence Attributable to BPI Alone
Having established the forgery of the drawer‘s signature, BPI -- the drawee -erred in making payments by virtue thereof. The forged signatures are wholly
inoperative, and CASA -- the drawer whose authorized signatures do not
appear on the negotiable instruments -- cannot be held liable thereon. Neither
is the latter precluded from setting up forgery as a real defense.
Clear Negligence
in Allowing Payment
Under a Forged Signature
We have repeatedly emphasized that, since the banking business is
impressed with public interest, of paramount importance thereto is the trust
and confidence of the public in general. Consequently, the highest degree of
diligence is expected, and high standards of integrity and performance are
even required, of it. 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.‖
[73]

[74]

[75]

[76]

[77]

BPI contends that it has a signature verification procedure, in which
checks are honored only when the signatures therein are verified to be the
same with or similar to the specimen signatures on the signature
cards. Nonetheless, it still failed to detect the eight instances of forgery. Its
negligence consisted in the omission of that degree of diligence required of a
bank. It cannot now feign ignorance, for very early on we have already ruled
that a bank is ―bound to know the signatures of its customers; and if it pays a
forged check, it must be considered as making the payment out of its own
funds, and cannot ordinarily charge the amount so paid to the account of the
[78]

depositor whose name was forged.‖ In fact, BPI was the same bank involved
when we issued this ruling seventy years ago.
[79]

Neither Waiver nor Estoppel
Results from Failure to
Report Error in Bank Statement
The monthly statements issued by BPI to its clients contain a notice
worded as follows: ―If no error is reported in ten (10) days, account will be
correct.‖ Such notice cannot be considered a waiver, even if CASA failed to
report the error. Neither is it estopped from questioning the mistake after the
lapse of the ten-day period.
[80]

This notice is a simple confirmation or ―circularization‖ -- in accounting
parlance -- that requests client-depositors to affirm the accuracy of items
recorded by the banks. Its purpose is to obtain from the depositors a direct
corroboration of the correctness of their account balances with their respective
banks. Internal or external auditors of a bank use it as a basic audit
procedure -- the results of which its client-depositors are neither interested in
nor privy to -- to test the details of transactions and balances in the bank‘s
records. Evidential matter obtained from independent sources outside a
bank only serves to provide greater assurance of reliability than that
obtained solely within it for purposes of an audit of its own financial
statements, not those of its client-depositors.
[81]

[82]

[83]

[84]

[85]

[86]

Furthermore, there is always the audit risk that errors would not be
detected for various reasons. One, materiality is a consideration in audit
planning; and two, the information obtained from such a substantive test is
merely presumptive and cannot be the basis of a valid waiver. BPI has no
right to impose a condition unilaterally and thereafter consider failure to meet
such condition a waiver. Neither may CASA renounce a right it has never
possessed.
[87]

[88]

[89]

[90]

[91]

Every right has subjects -- active and passive. While the active subject is
entitled to demand its enforcement, the passive one is duty-bound to suffer
such enforcement.
[92]

On the one hand, BPI could not have been an active subject, because it
could not have demanded from CASA a response to its notice. Besides, the
notice was a measly request worded as follows: ―Please examine x x x and
report x x x.‖ CASA, on the other hand, could not have been a passive
[93]

subject, either, because it had no obligation to respond. It could -- as it did -choose not to respond.
Estoppel precludes individuals from denying or asserting, by their own
deed or representation, anything contrary to that established as the truth, in
legal contemplation. Our rules on evidence even make a juris et de
jure presumption that whenever one has, by one‘s own act or omission,
intentionally and deliberately led another to believe a particular thing to be true
and to act upon that belief, one cannot -- in any litigation arising from such act
or omission -- be permitted to falsify that supposed truth.
[94]

[95]

[96]

In the instant case, CASA never made any deed or representation that
misled BPI. The former‘s omission, if any, may only be deemed an innocent
mistake oblivious to the procedures and consequences of periodic
audits. Since its conduct was due to such ignorance founded upon an
innocent mistake, estoppel will not arise. A person who has no knowledge of
or consent to a transaction may not be estopped by it. ―Estoppel cannot be
sustained by mere argument or doubtful inference x x x.‖ CASA is not barred
from questioning BPI‘s error even after the lapse of the period given in the
notice.
[97]

[98]

[99]

Loss Borne by
Proximate Source
of Negligence
For allowing payment on the checks to a wrongful and fictitious payee,
BPI -- the drawee bank -- becomes liable to its depositor-drawer. Since the
encashing bank is one of its branches, BPI can easily go after it and hold it
liable for reimbursement. It ―may not debit the drawer‘s account and is not
entitled to indemnification from the drawer.‖ In both law and equity, when
one of two innocent persons ―must suffer by the wrongful act of a third person,
the loss must be borne by the one whose negligence was the proximate
cause of the loss or who put it into the power of the third person to perpetrate
the wrong.‖
[100]

[101]

[102]

[103]

[104]

[105]

Proximate cause is determined by the facts of the case. ―It 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.‖
[106]

[107]

Pursuant to its prime duty to ascertain well the genuineness of the
signatures of its client-depositors on checks being encashed, BPI is ―expected

to use reasonable business prudence.‖ In the performance of that obligation,
it is bound by its internal banking rules and regulations that form part of the
contract it enters into with its depositors.
[108]

[109]

Unfortunately, it failed in that regard. First, Yabut was able to open a bank
account in one of its branches without privity; that is, without the proper
verification of his corresponding identification papers. Second, BPI was
unable to discover early on not only this irregularity, but also the marked
differences in the signatures on the checks and those on the signature
card. Third, despite the examination procedures it conducted, the Central
Verification Unit of the bank even passed off these evidently different
signatures as genuine. Without exercising the required prudence on its part,
BPI accepted and encashed the eight checks presented to it. As a result, it
proximately contributed to the fraud and should be held primarily liable for
the ―negligence of its officers or agents when acting within the course and
scope of their employment.‖ It must bear the loss.
[110]

[111]

[112]

[113]

CASA Not Negligent
in Its Financial Affairs
In this jurisdiction, the negligence of the party invoking forgery is
recognized as an exception to the general rule that a forged signature is
wholly inoperative. Contrary to BPI‘s claim, however, we do not find CASA
negligent in handling its financial affairs. CASA, we stress, is not precluded
from setting up forgery as a real defense.
[114]

[115]

Role of Independent Auditor
The major purpose of an independent audit is to investigate and determine
objectively if the financial statements submitted for audit by a corporation have
been prepared in accordance with the appropriate financial reporting
practices of private entities. The relationship that arises therefrom is both
legal and moral. It begins with the execution of the engagement letter that
embodies the terms and conditions of the audit and ends with the fulfilled
expectation of the auditor‘s ethical and competent performance in all
aspects of the audit.
[116]

[117]

[118]

[119]

[120]

The financial statements are representations of the client; but it is the
auditor who has the responsibility for the accuracy in the recording of data that
underlies their preparation, their form of presentation, and the

opinion expressed therein. The auditor does not assume the role of
employee or of management in the client‘s conduct of operations and is
never under the control or supervision of the client.
[121]

[122]

[123]

[124]

Yabut was an independent auditor hired by CASA. He handled its
monthly bank reconciliations and had access to all relevant documents and
checkbooks. In him was reposed the client‘s trust and confidence that he
would perform precisely those functions and apply the appropriate procedures
in accordance with generally accepted auditing standards. Yet he did not
meet these expectations. Nothing could be more horrible to a client than to
discover later on that the person tasked to detect fraud was the same one
who perpetrated it.
[125]

[126]

[127]

[128]

[129]

Cash Balances
Open to Manipulation
It is a non sequitur to say that the person who receives the monthly bank
statements, together with the cancelled checks and other debit/credit
memoranda, shall examine the contents and give notice of any discrepancies
within a reasonable time. Awareness is not equipollent with discernment.
Besides, in the internal accounting control system prudently installed by
CASA, it was Yabut who should examine those documents in order to
prepare the bank reconciliations. He owned his working papers, and his
output consisted of his opinion as well as the client‘s financial statements and
accompanying notes thereto. CASA had every right to rely solely upon his
output -- based on the terms of the audit engagement -- and could thus be
unwittingly duped into believing that everything was in order. Besides, ―[g]ood
faith is always presumed and it is the burden of the party claiming otherwise to
adduce clear and convincing evidence to the contrary.‖
[130]

[131]

[132]

[133]

Moreover, there was a time gap between the period covered by the bank
statement and the date of its actual receipt. Lebron personally received the
December 1990 bank statement only in January 1991 -- when she was also
informed of the forgery for the first time, after which she immediately
requested a ―stop payment order.‖ She cannot be faulted for the late
detection of the forged December check. After all, the bank account with BPI
was not personal but corporate, and she could not be expected to monitor
closely all its finances. A preschool teacher charged with molding the minds
of the youth cannot be burdened with the intricacies or complexities of
corporate existence.
[134]

There is also a cutoff period such that checks issued during a given
month, but not presented for payment within that period, will not be reflected
therein. An experienced auditor with intent to defraud can easily conceal any
devious scheme from a client unwary of the accounting processes involved by
manipulating the cash balances on record -- especially when bank
transactions are numerous, large and frequent. CASA could only be blamed,
if at all, for its unintelligent choice in the selection and appointment of an
auditor -- a fault that is not tantamount to negligence.
[135]

Negligence is not presumed, but proven by whoever alleges it. Its mere
existence ―is not sufficient without proof that it, and no other cause,‖ has
given rise to damages. In addition, this fault is common to, if not prevalent
among, small and medium-sized business entities, thus leading the
Professional Regulation Commission (PRC), through the Board of
Accountancy (BOA), to require today not only accreditation for the practice of
public accountancy, but also the registration of firms in the practice
thereof. In fact, among the attachments now required upon registration are
the code of good governance and a sworn statement on adequate and
effective training.
[136]

[137]

[138]

[139]

[140]

[141]

The missing checks were certainly reported by the bookkeeper to the
accountant -- her immediate supervisor -- and by the latter to the
auditor. However, both the accountant and the auditor, for reasons known
only to them, assured the bookkeeper that there were no irregularities.
[142]

[143]

The bookkeeper who had exclusive custody of the checkbooks did not
have to go directly to CASA‘s president or to BPI. Although she rightfully
reported the matter, neither an investigation was conducted nor a resolution of
it was arrived at, precisely because the person at the top of the helm was the
culprit. The vouchers, invoices and check stubs in support of all check
disbursements could be concealed or fabricated -- even in collusion -- and
management would still have no way to verify its cash accountabilities.
[144]

[145]

Clearly then, Yabut was able to perpetrate the wrongful act through no
fault of CASA. If auditors may be held liable for breach of contract and
negligence, with all the more reason may they be charged with the
perpetration of fraud upon an unsuspecting client. CASA had the discretion to
pursue BPI alone under the NIL, by reason of expediency or munificence or
both. Money paid under a mistake may rightfully be recovered, and under
such terms as the injured party may choose.
[146]

[147]

Third Issue:
Award of Monetary Claims

Moral Damages Denied
We deny CASA‘s claim for moral damages.
In the absence of a wrongful act or omission, or of fraud or bad
faith, moral damages cannot be awarded. The adverse result of an action
does not per se make the action wrongful, or the party liable for it. One may
err, but error alone is not a ground for granting such damages. While no
proof of pecuniary loss is necessary therefor -- with the amount to be awarded
left to the court‘s discretion -- the claimant must nonetheless satisfactorily
prove the existence of its factual basis and causal relation to the
claimant‘s act or omission.
[148]

[149]

[150]

[151]

[152]

[153]

[154]

[155]

Regrettably, in this case CASA was unable to identify the particular
instance -- enumerated in the Civil Code -- upon which its claim for moral
damages is predicated. Neither bad faith nor negligence so gross that it
amounts to malice can be imputed to BPI. Bad faith, under the law, ―does
not simply connote bad judgment or negligence; it imports a dishonest
purpose or some moral obliquity and conscious doing of a wrong, a breach of
a known duty through some motive or interest or ill will that partakes of the
nature of fraud.‖
[156]

[157]

[158]

[159]

As a general rule, a corporation -- being an artificial person without
feelings, emotions and senses, and having existence only in legal
contemplation -- is not entitled to moral damages, because it cannot
experience physical suffering and mental anguish. However, for breach of
the fiduciary duty required of a bank, a corporate client may claim such
damages when its good reputation is besmirched by such breach, and social
humiliation results therefrom. CASA was unable to prove that BPI had
debased the good reputation of, and consequently caused incalculable
embarrassment to, the former. CASA‘s mere allegation or supposition
thereof, without any sufficient evidence on record, is not enough.
[160]

[161]

[162]

[163]

[164]

Exemplary Damages Also Denied
We also deny CASA‘s claim for exemplary damages.
Imposed by way of correction for the public good, exemplary damages
cannot be recovered as a matter of right. As we have said earlier, there is
no bad faith on the part of BPI for paying the checks of CASA upon forged
signatures. Therefore, the former cannot be said to have acted in a wanton,
[165]

[166]

[167]

fraudulent, reckless, oppressive or malevolent manner. The latter, having no
right to moral damages, cannot demand exemplary damages.
[168]

[169]

Attorney’s Fees Granted
Although it is a sound policy not to set a premium on the right to
litigate, we find that CASA is entitled to reasonable attorney‘s fees based on
―factual, legal, and equitable justification.‖
[170]

[171]

When the act or omission of the defendant has compelled the plaintiff to
incur expenses to protect the latter‘s interest, or where the court deems it
just and equitable, attorney‘s fees may be recovered. In the present case,
BPI persistently denied the claim of CASA under the NIL to recredit the latter‘s
account for the value of the forged checks. This denial constrained CASA to
incur expenses and exert effort for more than ten years in order to protect its
corporate interest in its bank account. Besides, we have already cautioned
BPI on a similar act of negligence it had committed seventy years ago, but it
has remained unrelenting. Therefore, the Court deems it just and equitable to
grant ten percent (10%) of the total value adjudged to CASA as attorney‘s
fees.
[172]

[173]

[174]

Interest Allowed
For the failure of BPI to pay CASA upon demand and for compelling the
latter to resort to the courts to obtain payment, legal interest may be
adjudicated at the discretion of the Court, the same to run from the filing of
the Complaint. Since a court judgment is not a loan or a forbearance of
recovery, the legal interest shall be at six percent (6%) per annum. ―If the
obligation consists in the payment of a sum of money, and the debtor incurs in
delay, the indemnity for damages, there being no stipulation to the contrary,
shall be the payment of x x x legal interest, which is six percent per
annum.‖ The actual base for its computation shall be ―on the amount finally
adjudged,‖ compounded annually to make up for the cost of
money already lost to CASA.
[175]

[176]

[177]

[178]

[179]

[180]

[181]

Moreover, the failure of the CA to award interest does not prevent us from
granting it upon damages awarded for breach of contract. Because BPI
evidently breached its contract of deposit with CASA, we award interest in
addition to the total amount adjudged. Under Section 196 of the NIL, any
case not provided for shall be ―governed by the provisions of existing
[182]

legislation or, in default thereof, by the rules of the law merchant.‖ Damages
are not provided for in the NIL. Thus, we resort to the Code of Commerce and
the Civil Code. Under Article 2 of the Code of Commerce, acts of commerce
shall be governed by its provisions and, ―in their absence, by the usages of
commerce generally observed in each place; and in the absence of both rules,
by those of the civil law.‖ This law being silent, we look at Article 18 of the
Civil Code, which states: ―In matters which are governed by the Code of
Commerce and special laws, their deficiency shall be supplied‖ by its
provisions. A perusal of these three statutes unmistakably shows that the
award of interest under our civil law is justified.
[183]

[184]

WHEREFORE, the Petition in GR No. 149454 is hereby DENIED, and that
in GR No. 149507 PARTLY GRANTED. The assailed Decision of the Court of
Appeals is AFFIRMED with modification: BPI is held liable forP547,115, the
total value of the forged checks less the amount already recovered by CASA
from Leonardo T. Yabut, plus interest at the legal rate of six percent (6%) per
annum -- compounded annually, from the filing of the complaint until paid in
full; and attorney‘s fees of ten percent (10%) thereof, subject to
reimbursement from Respondent Yabut for the entire amount, excepting
attorney‘s fees. Let a copy of this Decision be furnished the Board of
Accountancy of the Professional Regulation Commission for such action as it
may deem appropriate against Respondent Yabut. No costs.
SO ORDERED.
Ynares-Santiago, Carpio, and Azcuna, JJ., concur.
Davide, Jr., C.J., (Chairman), on official leave.

SECOND DIVISION

[G.R. No. 129015. August 13, 2004]

SAMSUNG
CONSTRUCTION
COMPANY
PHILIPPINES,
INC., petitioner, vs. FAR EAST BANK AND TRUST COMPANY
AND COURT OF APPEALS, respondents.
DECISION
TINGA, J.:

Called to fore in the present petition is a classic textbook question – if a bank pays
out on a forged check, is it liable to reimburse the drawer from whose account the funds

were paid out? The Court of Appeals, in reversing a trial court decision adverse to the
bank, invoked tenuous reasoning to acquit the bank of liability. We reverse, applying
time-honored principles of law.
The salient facts follow.
Plaintiff Samsung Construction Company Philippines, Inc. (―Samsung
Construction‖), while based in Biñan, Laguna, maintained a current account with
defendant Far East Bank and Trust Company[1] (―FEBTC‖) at the latter‘s BelAir, Makati branch.[2] The sole signatory to Samsung Construction‘s account was Jong
Kyu Lee (―Jong‖), its Project Manager,[3] while the checks remained in the custody of the
company‘s accountant, Kyu Yong Lee (―Kyu‖).[4]
On 19 March 1992, a certain Roberto Gonzaga presented for payment FEBTC
Check No. 432100 to the bank‘s branch in Bel-Air, Makati. The check, payable to cash
and drawn against Samsung Construction‘s current account, was in the amount of Nine
Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00). The bank teller,
Cleofe Justiani, first checked the balance of Samsung Construction‘s account. After
ascertaining there were enough funds to cover the check,[5] she compared the signature
appearing on the check with the specimen signature of Jong as contained in the
specimen signature card with the bank. After comparing the two signatures, Justiani
was satisfied as to the authenticity of the signature appearing on the check. She then
asked Gonzaga to submit proof of his identity, and the latter presented three (3)
identification cards.[6]
At the same time, Justiani forwarded the check to the branch Senior Assistant
Cashier Gemma Velez, as it was bank policy that two bank branch officers approve
checks exceeding One Hundred Thousand Pesos, for payment or encashment. Velez
likewise counterchecked the signature on the check as against that on the signature
card. He too concluded that the check was indeed signed by Jong. Velez then
forwarded the check and signature card to Shirley Syfu, another bank officer, for
approval. Syfu then noticed that Jose Sempio III (―Sempio‖), the assistant accountant of
Samsung Construction, was also in the bank. Sempio was well-known to Syfu and the
other bank officers, he being the assistant accountant of Samsung Construction. Syfu
showed the check to Sempio, who vouched for the genuineness of Jong‘s
signature. Confirming the identity of Gonzaga, Sempio said that the check was for the
purchase of equipment for Samsung Construction. Satisfied with the genuineness of the
signature of Jong, Syfu authorized the bank‘s encashment of the check to Gonzaga.
The following day, the accountant of Samsung Construction, Kyu, examined the
balance of the bank account and discovered that a check in the amount of Nine
Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00) had been
encashed. Aware that he had not prepared such a check for Jong‘s signature, Kyu
perused the checkbook and found that the last blank check was missing. [7] He reported
the matter to Jong, who then proceeded to the bank. Jong learned of the encashment of
the check, and realized that his signature had been forged. The Bank Manager
reputedly told Jong that he would be reimbursed for the amount of the check. [8] Jong
proceeded to the police station and consulted with his lawyers. [9] Subsequently, a
criminal case for qualified theft was filed against Sempio before the Laguna court.[10]

In a letter dated 6 May 1992, Samsung Construction, through counsel, demanded
that FEBTC credit to it the amount of Nine Hundred Ninety Nine Thousand Five
Hundred Pesos (P999,500.00), with interest.[11] In response, FEBTC said that it was still
conducting an investigation on the matter. Unsatisfied, Samsung Construction filed
a Complaint on 10 June 1992 for violation of Section 23 of the Negotiable Instruments
Law, and prayed for the payment of the amount debited as a result of the questioned
check plus interest, and attorney‘s fees.[12] The case was docketed as Civil Case No. 9261506 before the Regional Trial Court (―RTC‖) of Manila, Branch 9.[13]
During the trial, both sides presented their respective expert witnesses to testify on
the claim that Jong‘s signature was forged. Samsung Corporation, which had referred
the check for investigation to the NBI, presented Senior NBI Document Examiner Roda
B. Flores. She testified that based on her examination, she concluded that Jong‘s
signature had been forged on the check. On the other hand, FEBTC, which had sought
the assistance of the Philippine National Police (PNP),[14] presented Rosario C. Perez, a
document examiner from the PNP Crime Laboratory. She testified that her findings
showed that Jong‘s signature on the check was genuine.[15]
Confronted with conflicting expert testimony, the RTC chose to believe the findings
of the NBI expert. In a Decision dated 25 April 1994, the RTC held that Jong‘s
signature on the check was forged and accordingly directed the bank to pay or credit
back to Samsung Construction‘s account the amount of Nine Hundred Ninety Nine
Thousand Five Hundred Pesos (P999,500.00), together with interest tolled from the
time the complaint was filed, and attorney‘s fees in the amount of Fifteen Thousand
Pesos (P15,000.00).
FEBTC timely appealed to the Court of Appeals. On 28 November 1996, the
Special Fourteenth Division of the Court of Appeals rendered a Decision,[16] reversing the
RTC Decision and absolving FEBTC from any liability. The Court of Appeals held that
the contradictory findings of the NBI and the PNP created doubt as to whether there
was forgery.[17] Moreover, the appellate court also held that assuming there was forgery,
it occurred due to the negligence of Samsung Construction, imputing blame on the
accountant Kyu for lack of care and prudence in keeping the checks, which if observed
would have prevented Sempio from gaining access thereto. [18] The Court of Appeals
invoked the ruling in PNB v. National City Bank of New York[19] that, if a loss, which must
be borne by one or two innocent persons, can be traced to the neglect or fault of either,
such loss would be borne by the negligent party, even if innocent of intentional fraud. [20]
Samsung Construction now argues that the Court of Appeals had seriously
misapprehended the facts when it overturned the RTC‘s finding of forgery. It also
contends that the appellate court erred in finding that it had been negligent in
safekeeping the check, and in applying the equity principle enunciated in PNB v.
National City Bank of New York.
Since the trial court and the Court of Appeals arrived at contrary findings on
questions of fact, the Court is obliged to examine the record to draw out the correct
conclusions. Upon examination of the record, and based on the applicable laws and
jurisprudence, we reverse the Court of Appeals.

Section 23 of the Negotiable Instruments Law states:

When a signature is forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce payment thereof against any
party thereto, can be acquired through or under such signature, unless the party
against whom it is sought to enforce such right is precluded from setting up the
forgery or want of authority. (Emphasis supplied)
The general rule is to the effect that a forged signature is ―wholly inoperative,‖ and
payment made ―through or under such signature‖ is ineffectual or does not discharge
the instrument.[21] If payment is made, the drawee cannot charge it to the drawer‘s
account. The traditional justification for the result is that the drawee is in a superior
position to detect a forgery because he has the maker‘s signature and is expected to
know and compare it.[22] The rule has a healthy cautionary effect on banks by
encouraging care in the comparison of the signatures against those on the signature
cards they have on file. Moreover, the very opportunity of the drawee to insure and to
distribute the cost among its customers who use checks makes the drawee an ideal
party to spread the risk to insurance.[23]
Brady, in his treatise The Law of Forged and Altered Checks, elucidates:

When a person deposits money in a general account in a bank, against which he has
the privilege of drawing checks in the ordinary course of business, the relationship
between the bank and the depositor is that of debtor and creditor. So far as the legal
relationship between the two is concerned, the situation is the same as though the
bank had borrowed money from the depositor, agreeing to repay it on demand, or had
bought goods from the depositor, agreeing to pay for them on demand. The bank owes
the depositor money in the same sense that any debtor owes money to his
creditor. Added to this, in the case of bank and depositor, there is, of course, the
bank‘s obligation to pay checks drawn by the depositor in proper form and presented
in due course. When the bank receives the deposit, it impliedly agrees to pay only
upon the depositor‘s order. When the bank pays a check, on which the depositor‘s
signature is a forgery, it has failed to comply with its contract in this
respect. Therefore, the bank is held liable.
The fact that the forgery is a clever one is immaterial. The forged signature may so
closely resemble the genuine as to defy detection by the depositor himself. And yet, if
a bank pays the check, it is paying out its own money and not the depositor‘s.
The forgery may be committed by a trusted employee or confidential agent. The bank
still must bear the loss. Even in a case where the forged check was drawn by the
depositor‘s partner, the loss was placed upon the bank. The case referred to is
Robinson v. Security Bank, Ark., 216 S. W. Rep. 717. In this case, the plaintiff

brought suit against the defendant bank for money which had been deposited to the
plaintiff‘s credit and which the bank had paid out on checks bearing forgeries of the
plaintiff‘s signature.
xxx
It was held that the bank was liable. It was further held that the fact that the plaintiff
waited eight or nine months after discovering the forgery, before notifying the bank,
did not, as a matter of law, constitute a ratification of the payment, so as to preclude
the plaintiff from holding the bank liable. xxx
This rule of liability can be stated briefly in these words: ―A bank is bound to know
its depositors‘ signature.‖ The rule is variously expressed in the many decisions in
which the question has been considered. But they all sum up to the proposition that a
bank must know the signatures of those whose general deposits it carries.
[24]

By no means is the principle rendered obsolete with the advent of modern
commercial transactions. Contemporary texts still affirm this well-entrenched
standard. Nickles, in his book Negotiable Instruments and Other Related Commercial
Paper wrote, thus:

The deposit contract between a payor bank and its customer determines who can draw
against the customer‘s account by specifying whose signature is necessary on checks
that are chargeable against the customer‘s account. Therefore, a check drawn against
the account of an individual customer that is signed by someone other than the
customer, and without authority from her, is not properly payable and is not
chargeable to the customer‘s account, inasmuch as any ―unauthorized signature on an
instrument is ineffective‖ as the signature of the person whose name is signed.
[25]

Under Section 23 of the Negotiable Instruments Law, forgery is a real or absolute
defense by the party whose signature is forged. [26] On the premise that Jong‘s signature
was indeed forged, FEBTC is liable for the loss since it authorized the discharge of the
forged check. Such liability attaches even if the bank exerts due diligence and care in
preventing such faulty discharge. Forgeries often deceive the eye of the most cautious
experts; and when a bank has been so deceived, it is a harsh rule which compels it to
suffer although no one has suffered by its being deceived. [27] The forgery may be so near
like the genuine as to defy detection by the depositor himself, and yet the bank is liable
to the depositor if it pays the check.[28]
Thus, the first matter of inquiry is into whether the check was indeed forged. A
document formally presented is presumed to be genuine until it is proved to be
fraudulent. In a forgery trial, this presumption must be overcome but this can only be
done by convincing testimony and effective illustrations.[29]
In ruling that forgery was not duly proven, the Court of Appeals held:

[There] is ground to doubt the findings of the trial court sustaining the alleged forgery
in view of the conflicting conclusions made by handwriting experts from the NBI and
the PNP, both agencies of the government.
xxx
These contradictory findings create doubt on whether there was indeed a forgery. In
the case of Tenio-Obsequio v. Court of Appeals, 230 SCRA 550, the Supreme Court
held that forgery cannot be presumed; it must be proved by clear, positive and
convincing evidence.
This reasoning is pure sophistry. Any litigator worth his or her salt would never
allow an opponent‘s expert witness to stand uncontradicted, thus the spectacle of
competing expert witnesses is not unusual. The trier of fact will have to decide which
version to believe, and explain why or why not such version is more credible than the
other. Reliance therefore cannot be placed merely on the fact that there are colliding
opinions of two experts, both clothed with the presumption of official duty, in order to
draw a conclusion, especially one which is extremely crucial. Doing so is tantamount to
a jurisprudential cop-out.
Much is expected from the Court of Appeals as it occupies the penultimate tier in
the judicial hierarchy. This Court has long deferred to the appellate court as to its
findings of fact in the understanding that it has the appropriate skill and competence to
plough through the minutiae that scatters the factual field. In failing to thoroughly
evaluate the evidence before it, and relying instead on presumptions haphazardly
drawn, the Court of Appeals was sadly remiss. Of course, courts, like humans, are
fallible, and not every error deserves a stern rebuke. Yet, the appellate court‘s error in
this case warrants special attention, as it is absurd and even dangerous as a
precedent. If this rationale were adopted as a governing standard by every court in the
land, barely any actionable claim would prosper, defeated as it would be by the mere
invocation of the existence of a contrary ―expert‖ opinion.
On the other hand, the RTC did adjudge the testimony of the NBI expert as more
credible than that of the PNP, and explained its reason behind the conclusion:

After subjecting the evidence of both parties to a crucible of analysis, the court arrived
at the conclusion that the testimony of the NBI document examiner
is more credible because the testimony of the PNP Crime
Laboratory Services document examiner reveals that there are a lot of differences in
the questioned signature as compared to the standard specimen signature.
Furthermore, as testified to by Ms. Rhoda Flores, NBI expert, the manner of execution
of the standard signatures used reveals that it is a free rapid continuous execution or
stroke as shown by the tampering terminal stroke of the signatures whereas the
questioned signature is a hesitating slow drawn execution stroke. Clearly, the person
who executed the questioned signature was hesitant when the signature was made.
[30]

During the testimony of PNP expert Rosario Perez, the RTC bluntly noted that
―apparently, there [are] differences on that questioned signature and the standard
signatures.‖[31] This Court, in examining the signatures, makes a similar finding. The PNP
expert excused the noted ―differences‖ by asserting that they were mere ―variations,‖
which are normal deviations found in writing. [32] Yet the RTC, which had the opportunity
to examine the relevant documents and to personally observe the expert witness,
clearly disbelieved the PNP expert. The Court similarly finds the testimony of the PNP
expert as unconvincing. During the trial, she was confronted several times with
apparent differences between strokes in the questioned signature and the genuine
samples. Each time, she would just blandly assert that these differences were just
―variations,‖[33] as if the mere conjuration of the word would sufficiently disquiet whatever
doubts about the deviations. Such conclusion, standing alone, would be of little or no
value unless supported by sufficiently cogent reasons which might amount almost to a
demonstration.[34]
The most telling difference between the questioned and genuine signatures
examined by the PNP is in the final upward stroke in the signature, or ―the point to the
short stroke of the terminal in the capital letter ‗L,‘‖ as referred to by the PNP examiner
who had marked it in her comparison chart as ―point no. 6.‖ To the plain eye, such
upward final stroke consists of a vertical line which forms a ninety degree (90º) angle
with the previous stroke. Of the twenty one (21) other genuine samples examined by the
PNP, at least nine (9) ended with an upward stroke.[35] However, unlike the questioned
signature, the upward strokes of eight (8) of these signatures are looped, while the
upward stroke of the seventh[36] forms a severe forty-five degree (45º) with the previous
stroke. The difference is glaring, and indeed, the PNP examiner was confronted with
the inconsistency in point no. 6.
Q: Now, in this questioned document point no. 6, the ―s‖ stroke is directly upwards.
A:

Yes, sir.

Q: Now, can you look at all these standard signature (sic) were (sic) point 6 is
repeated or the last stroke ―s‖ is pointing directly upwards?
A:

There is none in the standard signature, sir.[37]

Again, the PNP examiner downplayed the uniqueness of the final stroke in the
questioned signature as a mere variation,[38] the same excuse she proffered for the other
marked differences noted by the Court and the counsel for petitioner.[39]
There is no reason to doubt why the RTC gave credence to the testimony of the NBI
examiner, and not the PNP expert‘s. The NBI expert, Rhoda Flores, clearly qualifies as
an expert witness. A document examiner for fifteen years, she had been promoted to
the rank of Senior Document Examiner with the NBI, and had held that rank for twelve
years prior to her testimony. She had placed among the top five examinees in the
Competitive Seminar in Question Document Examination, conducted by
the NBI Academy, which qualified her 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 fiftyfive thousand questioned documents, on an average of fifteen to twenty documents a

day.[42] In comparison, PNP document examiner Perez admitted to having examined only
around five hundred documents as of her testimony.[43]
In analyzing the signatures, NBI Examiner Flores utilized the scientific comparative
examination method consisting of analysis, recognition, comparison and evaluation of
the writing habits with the use of instruments such as a magnifying lense, a
stereoscopic microscope, and varied lighting substances. She also prepared enlarged
photographs of the signatures in order to facilitate the necessary comparisons. [44] She
compared the questioned signature as against ten (10) other sample signatures of
Jong. Five of these signatures were executed on checks previously issued by Jong,
while the other five contained in business letters Jong had signed. [45]The NBI found that
there were significant differences in the handwriting characteristics existing between the
questioned and the sample signatures, as to manner of execution, link/connecting
strokes, proportion characteristics, and other identifying details.[46]
The RTC was sufficiently convinced by the NBI examiner‘s testimony, and
explained her reasons in its Decisions. While the Court of Appeals disagreed and
upheld the findings of the PNP, it failed to convincingly demonstrate why such findings
were more credible than those of the NBI expert. As a throwaway, the
assailed Decision noted that the PNP, not the NBI, had the opportunity to examine the
specimen signature card signed by Jong, which was relied upon by the employees of
FEBTC in authenticating Jong‘s signature. The distinction is irrelevant in establishing
forgery. Forgery can be established comparing the contested signatures as against
those of any sample signature duly established as that of the persons whose signature
was forged.
FEBTC lays undue emphasis on the fact that the PNP examiner did compare the
questioned signature against the bank signature cards. The crucial fact in question is
whether or not the check was forged, not whether the bank could have detected
the forgery. The latter issue becomes relevant only if there is need to weigh the
comparative negligence between the bank and the party whose signature was
forged.
At the same time, the Court of Appeals failed to assess the effect of Jong‘s
testimony that the signature on the check was not his.[47] The assertion may seem selfserving at first blush, yet it cannot be ignored that Jong was in the best position to know
whether or not the signature on the check was his. While his claim should not be taken
at face value, any averments he would have on the matter, if adjudged as truthful,
deserve primacy in consideration. Jong‘s testimony is supported by the findings of the
NBI examiner. They are also backed by factual circumstances that support the
conclusion that the assailed check was indeed forged. Judicial notice can be taken that
is highly unusual in practice for a business establishment to draw a check for close to a
million pesos and make it payable to cash or bearer, and not to order. Jong
immediately reported the forgery upon its discovery. He filed the appropriate criminal
charges against Sempio, the putative forger.[48]
Now for determination is whether Samsung Construction was precluded from
setting up the defense of forgery under Section 23 of the Negotiable Instruments
Law. The Court of Appeals concluded that Samsung Construction was negligent, and

invoked the doctrines that ―where a loss must be borne by one of two innocent person,
can be traced to the neglect or fault of either, it is reasonable that it would be borne by
him, even if innocent of any intentional fraud, through whose means it has
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 party‘s negligence was the
cause for the forgery. Employers do not possess the preternatural gift of cognition as to
the evil that may lurk within the hearts and minds of their employees. The Court‘s
pronouncement in PCI Bank v. Court of Appeals[53] applies in this case, to wit:

[T]he mere fact that the forgery was committed by a drawer-payor‘s confidential
employee or agent, who by virtue of his position had unusual facilities for perpetrating
the fraud and imposing the forged paper upon the bank, does not entitle the bank to
shift the loss to the drawer-payor, in the absence of some circumstance raising
estoppel against the drawer.
[54]

Admittedly, the record does not clearly establish what measures Samsung
Construction employed to safeguard its blank checks. Jong did testify that his
accountant, Kyu, kept the checks inside a ―safety box,‖[55] and no contrary version was
presented by FEBTC. However, such testimony cannot prove that the checks were
indeed kept in a safety box, as Jong‘s testimony on that point is hearsay, since Kyu, and
not Jong, would have the personal knowledge as to how the checks were kept.

Still, in the absence of evidence to the contrary, we can conclude that there was no
negligence on Samsung Construction‘s part. The presumption remains that every
person takes ordinary care of his concerns,[56] and that the ordinary course of business
has been followed.[57] Negligence is not presumed, but must be proven by him who
alleges it.[58] While the complaint was lodged at the instance of Samsung Construction,
the matter it had to prove was the claim it had alleged - whether the check was
forged. It cannot be required as well to prove that it was not negligent, because the
legal presumption remains that ordinary care was employed.
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. (Emphasis supplied)
[61]

Quite palpably, the general rule remains that the drawee who has paid upon the
forged signature bears the loss. The exception to this rule arises only when negligence
can be traced on the part of the drawer whose signature was forged, and the need
arises to weigh the comparative negligence between the drawer and the drawee to
determine who should bear the burden of loss. The Court finds no basis to conclude
that Samsung Construction was negligent in the safekeeping of its checks. For one, the
settled rule is that the mere fact that the depositor leaves his check book lying around
does not constitute such negligence as will free the bank from liability to him, where a
clerk of the depositor or other persons, taking advantage of the opportunity, abstract
some of the check blanks, forges the depositor‘s signature and collect on the checks
from the bank.[62] And for another, in point of fact Samsung Construction was not
negligent at all since it reported the forgery almost immediately upon discovery. [63]

It is also worth noting that the forged signatures in PNB v. National City Bank of
New York were not of the drawer, but of indorsers. The same circumstance
attends PNB v. Court of Appeals,[64] which was also cited by the Court of Appeals. It is
accepted that a forged signature of the drawer differs in treatment than a forged
signature of the indorser.

The justification for the distinction between forgery of the signature of the drawer and
forgery of an indorsement is that the drawee is in a position to verify the drawer‘s
signature by comparison with one in his hands, but has ordinarily no opportunity to
verify an indorsement.
[65]

Thus, a drawee bank is generally liable to its depositor in paying a check which bears
either a forgery of the drawer‘s signature or a forged indorsement. But the bank may,
as a general rule, recover back the money which it has paid on a check bearing a
forged indorsement, whereas it has not this right to the same extent with reference to a
check bearing a forgery of the drawer‘s signature.
[66]

The general rule imputing liability on the drawee who paid out on the forgery holds
in this case.
Since FEBTC puts into issue the degree of care it exercised before paying out on
the forged check, we might as well comment on the bank‘s performance of its duty. It
might be so that the bank complied with its own internal rules prior to paying out on the
questionable check. Yet, there are several troubling circumstances that lead us to
believe that the bank itself was remiss in its duty.
The fact that the check was made out in the amount of nearly one million pesos is
unusual enough to require a higher degree of caution on the part of the bank. Indeed,
FEBTC confirms this through its own internal procedures. Checks below twenty-five
thousand pesos require only the approval of the teller; those between twenty-five
thousand to one hundred thousand pesos necessitate the approval of one bank officer;
and should the amount exceed one hundred thousand pesos, the concurrence of two
bank officers is required.[67]
In this case, not only did the amount in the check nearly total one million pesos, it
was also payable to cash. That latter circumstance should have aroused the suspicion
of the bank, as it is not ordinary business practice for a check for such large amount to
be made payable to cash or to bearer, instead of to the order of a specified
person.[68] Moreover, the check was presented for payment by one Roberto Gonzaga,
who was not designated as the payee of the check, and who did not carry with him any
written proof that he was authorized by Samsung Construction to encash the
check. Gonzaga, a stranger to FEBTC, was not even an employee of Samsung
Construction.[69] These circumstances are already suspicious if taken independently,
much more so if they are evaluated in concurrence. Given the shadiness attending
Gonzaga‘s presentment of the check, it was not sufficient for FEBTC to have merely
complied with its internal procedures, but mandatory that all earnest efforts be

undertaken to ensure the validity of the check, and of the authority of Gonzaga to collect
payment therefor.
According to FEBTC Senior Assistant Cashier Gemma Velez, the bank tried, but
failed, to contact Jong over the phone to verify the check. [70] She added that calling the
issuer or drawer of the check to verify the same was not part of the standard procedure
of the bank, but an ―extra effort.‖[71] Even assuming that such personal verification is
tantamount to extraordinary diligence, it cannot be denied that FEBTC still paid out the
check despite the absence of any proof of verification from the drawer. Instead, the
bank seems to have relied heavily on the say-so of Sempio, who was present at the
bank at the time the check was presented.
FEBTC alleges that Sempio was well-known to the bank officers, as he had
regularly transacted with the bank in behalf of Samsung Construction. It was even
claimed that everytime FEBTC would contact Jong about problems with his account,
Jong would hand the phone over to Sempio.[72] However, the only proof of such
allegations is the testimony of Gemma Velez, who also testified that she did not know
Sempio personally,[73] and had met Sempio for the first time only on the day the check
was encashed.[74] In fact, Velez had to inquire with the other officers of the bank as to
whether Sempio was actually known to the employees of the bank. [75] Obviously, Velez
had no personal knowledge as to the past relationship between FEBTC and Sempio,
and any averments of her to that effect should be deemed hearsay
evidence. Interestingly, FEBTC did not present as a witness any other employee of
their Bel-Air branch, including those who supposedly had transacted with Sempio
before.
Even assuming that FEBTC had a standing habit of dealing with Sempio, acting in
behalf of Samsung Construction, the irregular circumstances attending the presentment
of the forged check should have put the bank on the highest degree of alert. The Court
recently emphasized that the highest degree of care and diligence is required of banks.

Banks are engaged in a business impressed with public interest, and it is their duty to
protect in return their many clients and depositors who transact business with
them. They have the obligation to treat their client‘s account meticulously and with
the highest degree of care, considering the fiduciary nature of their relationship. The
diligence required of banks, therefore, is more than that of a good father of a family.

[76]

Given the circumstances, extraordinary diligence dictates that FEBTC should have
ascertained from Jong personally that the signature in the questionable check was his.
Still, even if the bank performed with utmost diligence, the drawer whose signature
was forged may still recover from the bank as long as he or she is not precluded from
setting up the defense of forgery. After all, Section 23 of the Negotiable Instruments
Law plainly states that no right to enforce the payment of a check can arise out of a
forged signature. Since the drawer, Samsung Construction, is not precluded by
negligence from setting up the forgery, the general rule should apply. Consequently, if a
bank pays a forged check, it must be considered as paying out of its funds and cannot

charge the amount so paid to the account of the depositor. [77] A bank is liable,
irrespective of its good faith, in paying a forged check.[78]
WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals
dated 28 November 1996 is REVERSED, and the Decision of the Regional Trial Court
of Manila, Branch 9, dated 25 April 1994 is REINSTATED. Costs against respondent.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.

COND DIVISION

[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.
DECISION
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
plaintiff‘s 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. SN04867 in the amount of P4,746,114.41, in favor of the Commissioner of Internal
Revenue as payment of plaintiff‘s percentage or manufacturer‘s sales taxes for the
third quarter of 1977.
The aforesaid check was deposited with the 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 ―Payee‘s
Account Only‖; and that defendant Citibank paid the full face value of the check in
the amount of P4,746,114.41 to the defendant IBAA.
It has been duly established that for the payment of plaintiff‘s percentage tax for the
last quarter of 1977, the Bureau of Internal Revenue issued Revenue Tax Receipt No.
18747002, dated October 20, 1977, designating therein in Muntinlupa, Metro Manila,
as the authorized agent bank of Metrobank, Alabang Branch to receive the tax
payment of the plaintiff.
On December 19, 1977, plaintiff‘s Citibank Check No. SN-04867, together with the
Revenue Tax Receipt No. 18747002, was deposited with defendant IBAA, through its
Ermita Branch. The latter accepted the check and sent it to the Central Clearing
House for clearing on the 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 plaintiff‘s
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 plaintiff‘s lawyers, plaintiff on March 11, 1982, paid to the
Bureau of Internal Revenue, the amount of P4,746,114.41, representing payment of
plaintiff‘s percentage tax for the third quarter of 1977.

As a consequence of defendant‘s refusal to reimburse plaintiff of the payment it had
made for the second time to the BIR of its percentage taxes, plaintiff filed on January
20, 1983 its original complaint before this Court.
On December 24, 1985, defendant IBAA was merged with the Philippine Commercial
International Bank (PCI Bank) with the latter as the surviving entity.
Defendant Citibank maintains that; the payment it made of plaintiff‘s Citibank Check
No. SN-04867 in the amount of P4,746,114.41 ―was in due course‖; it merely relied
on the clearing stamp of the depository/collecting bank, the defendant IBAA that ―all
prior indorsements and/or lack of indorsements guaranteed‖; and the proximate cause
of plaintiff‘s injury is the gross negligence of defendant IBAA in indorsing the
plaintiff‘s Citibank check in question.
It is admitted that on December 19, 1977 when the proceeds of plaintiff‘s Citibank
Check No. SN-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 Rivera‘s
instruction, PCIBank replaced the check with two of its own Manager‘s Checks
(MCs). Alleged members of a syndicate later deposited the two MCs with the Pacific
Banking Corporation.
Ford, with leave of court, filed a third-party complaint before the trial court
impleading Pacific Banking Corporation (PBC) and Godofredo Rivera, as third party
defendants. But the court dismissed the complaint against PBC for lack of cause of
action. The 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 plaintiff‘s Citibank
Check No. SN-04867, with interest thereon at the legal rate starting January 20, 1983, the
date when the original complaint was filed until the amount is fully paid, plus costs;

2. On defendant Citibank‘s cross-claim: ordering the cross-defendant IBAA (now PCI BANK)
to reimburse defendant Citibank for whatever amount the latter has paid or may pay to the
plaintiff in accordance with 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 plaintiff‘s Citibank Check No. SN-04867, with
interest thereon at the legal rate starting January 20, 1983. the date when the original
complaint was filed until the amount is fully paid;
3. Dismissing the counterclaims asserted by the defendants against the plaintiff as well as that
asserted by the cross-defendant against the cross-claimant, for lack of merits.

Costs against the defendant IBAA (now PCI Bank).
IT IS SO ORDERED.‖[7]
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 respondent‘s instructions, it nevertheless found the petitioner
liable to the said respondent for the full amount of the said check.

II. Did the respondent court err when it did not find prescription in favor of the petitioner.[8]

In a counter move, Ford filed its petition docketed as G.R. No. 121479, questioning the
same decision and resolution of the Court of Appeals, and praying for the reinstatement in toto of
the decision of the trial court which found both PCIBank and Citibank jointly and severally
liable for the loss.
In G.R. No. 121479, appellant Ford presents the following propositions for consideration:

I. Respondent Citibank is liable to petitioner Ford considering that:
1. As drawee bank, respondent Citibank owes to petitioner Ford, as the drawer of the subject
check and a depositor of respondent Citibank, an absolute and contractual duty to pay the
proceeds of the subject check only to the payee thereof, the Commissioner of Internal
Revenue.
2. Respondent Citibank failed to observe its duty as banker with respect to the subject check,
which was crossed and payable to ―Payee‘s Account Only.‖
3. Respondent Citibank raises an issue for the first time on appeal; thus the same should not be
considered by the Honorable Court.
4. As correctly held by the trial court, there is no evidence of gross negligence on the part of
petitioner Ford.[9]

II. 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, PCIBank‘s only obligation is to deliver the proceeds to the Commissioner of
the Bureau of Internal Revenue.[10]
2. PCIBank which affixed its indorsement on the subject check (―All prior indorsement and/or
lack of indorsement guaranteed‖), is liable as collecting bank.[11]
3. PCIBank is barred from raising issues of fact in the instant proceedings.[12]
4. Petitioner Ford‘s cause of action had not prescribed.[13]

II. G.R. No. 128604

The same syndicate apparently embezzled the proceeds of checks intended, this time, to
settle Ford‘s percentage taxes appertaining to the second quarter of 1978 and the first quarter of
1979.
The facts as narrated by the Court of Appeals are as follows:
Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount of P5,851,706.37
representing the percentage tax due for the second quarter of 1978 payable to the Commissioner
of Internal Revenue. A BIR Revenue Tax Receipt No. 28645385 was issued for the said
purpose.

On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in the amount of
P6,311,591.73, representing the payment of percentage tax for the first quarter of 1979 and
payable to the Commissioner of Internal Revenue. Again a BIR Revenue Tax Receipt No. A1697160 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 payee‘s account only.‖
The checks never reached the payee, CIR. Thus, in a letter dated February 28, 1980, the
BIR, Region 4-B, demanded for the said tax payments the corresponding periods abovementioned.
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 plaintiff‘s 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
PCIB‘s main office enroute to the Central Bank for clearing, replaced this worthless
check with FORD‘s Exhibit ‗A‘ and accordingly tampered the accompanying
documents to cover the replacement. As a result, Exhibit ‗A‘ was cleared by
defendant CITIBANK, and the fictitious deposit account of ‗Reynaldo Reyes‘ was
credited at the PCIB Meralco Branch with the total amount of the FORD check
Exhibit ‗A‘. The same method was again utilized by the syndicate in profiting from
Exh. ‗B‘ [Citibank Check No. SN-16508] which was subsequently pilfered by Alexis
Marindo, Rivera‘s Assistant at FORD.
From this ‗Reynaldo Reyes‘ account, Castro drew various checks distributing the
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, FORD‘s

Godofredo Rivera and PCIB‘s Remberto Castro; (3) JUAN CASTILLO who assisted
de Leon in the initial arrangements; (4) GODOFREDO RIVERA, FORD‘s accountant
who passed on the first check (Exhibit ―A‖) to Castro; (5) REMBERTO CASTRO,
PCIB‘s pro-manager at San Andres who performed the switching of checks in the
clearing process and opened the fictitious Reynaldo Reyes account at the PCIB
Meralco Branch; (6) WINSTON DULAY, PCIB‘s Assistant Manager at its Meralco
Branch, who assisted Castro in switching the checks in the clearing process and
facilitated the opening of the fictitious Reynaldo Reyes‘ bank account; (7) ALEXIS
MARINDO, Rivera‘s Assistant at FORD, who gave the second check (Exh. ―B‖) to
Castro; (8) ELEUTERIO JIMENEZ, BIR Collection Agent who provided the fake
and spurious revenue tax receipts to make it appear that the BIR had received FORD‘s
tax payments.
Several other persons and entities were utilized by the syndicate as conduits in the
disbursements of the proceeds of the two checks, but like the aforementioned
participants in the conspiracy, have not been impleaded in the present case. The
manner by which the said funds were distributed among them are traceable from the
record of checks drawn against the original ―Reynaldo Reyes‖ account and
indubitably identify the parties who illegally benefited therefrom and readily indicate
in what amounts they did so.‖[14]
On December 9, 1988, Regional Trial Court of Makati, Branch 57, held drawee-bank,
Citibank, liable for the value of the two checks while 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 attorney‘s fees and expenses of litigation, and to pay the
defendant, PCIB (on its counterclaim to crossclaim) the sum of P300,000.00 as
attorney‘s fees and costs of litigation, and pay the costs.
SO ORDERED.‖[15]
Both Ford and Citibank appealed to the Court of Appeals which affirmed, in toto, the
decision of the trial court. Hence, this petition.
Petitioner Ford prays that judgment be rendered setting aside the portion of the Court of
Appeals decision and its resolution dated March 5, 1997, with respect to the dismissal of the
complaint against PCIBank and holding Citibank solely responsible for the proceeds of Citibank
Check Numbers SN-10597 and 16508 for P5,851,706.73 and P6,311,591.73 respectively.
Ford avers that the Court of Appeals erred in dismissing the complaint against defendant
PCIBank considering that:

I. Defendant PCIBank was clearly negligent when it failed to exercise the diligence required to
be exercised by it as a banking 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 Ford‘s cause of action already prescribed?
Note that in these cases, the checks were drawn against the drawee bank, but the title of the
person negotiating the same was allegedly defective because the instrument was obtained by
fraud and unlawful means, and the proceeds of the checks were not remitted to the payee. It was
established that instead of paying the checks to the CIR, for the settlement of the 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 syndicate‘s activities through the information given by the payee of the checks
after an unreasonable period of time.
PCIBank also blames Ford of negligence when it allegedly authorized Godofredo Rivera to
divert the proceeds of Citibank Check No. SN-04867, instead of using it to pay the BIR. As to
the subsequent run-around of 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 masterservant relationship is instructive. Since a master may be held for his servant‘s wrongful act, the
law imputes to the master the act of the servant, and if that act is negligent or wrongful and
proximately results in injury to a third person, the negligence or wrongful conduct is the
negligence or wrongful conduct of the master, for which he is liable.[18] The general rule is that if
the master is injured by the negligence of a third person and by the concurring contributory
negligence of his own servant or agent, the latter‘s negligence is imputed to his superior and will
defeat the superior‘s action against the third person, 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, Ford‘s
General Ledger Accountant, and/or Alexis Marindo, his assistant, was the proximate cause of the
loss or damage. As defined, proximate cause is that which, in the natural and continuous
sequence, unbroken by any efficient, intervening cause produces the injury, and without 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 Ford‘s negligence, if any, could not be characterized
as the proximate cause of the injury to the parties.

The Board of Directors of Ford, we note, did not confirm the request of Godofredo Rivera to
recall Citibank Check No. SN-04867. Rivera‘s instruction to replace the said check with
PCIBank‘s Manager‘s Check was not in 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 Ford‘s employees, who were acting on their own personal capacity.
Given these circumstances, the mere fact that the forgery was committed by a drawerpayor‘s confidential employee or agent, who by virtue of his position had unusual facilities for
perpetrating the fraud and imposing the forged paper upon the bank, does not entitle the bank to
shift the loss to the drawer-payor, in the absence of some circumstance raising estoppel against
the drawer.[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. SN04867 and the misapplication of total proceeds of Checks SN-10597 and 16508. Therefore, we
have to scrutinize, separately, PCIBank‘s share of negligence when the syndicate achieved its
ultimate agenda of stealing the proceeds of these checks.
G.R. Nos. 121413 and 121479

Citibank Check No. SN-04867 was deposited at PCIBank through its Ermita Branch. It was
coursed through the ordinary banking transaction, sent to Central Clearing with the indorsement
at the back ―all prior indorsements and/or lack of indorsements guaranteed,‖ and was presented
to Citibank for payment. Thereafter PCIBank, instead of remitting the proceeds to the CIR,
prepared two of its Manager‘s checks and enabled the syndicate to encash the same.
On record, PCIBank failed to verify the authority of Mr. Rivera to negotiate the checks. The
neglect of PCIBank employees to verify whether his letter requesting for the replacement of the
Citibank Check No. SN-04867 was duly authorized, showed lack of care and prudence required
in the circumstances.
Furthermore, it was admitted that PCIBank is authorized to collect the payment of taxpayers
in behalf of the BIR. As an agent of BIR, PCIBank is duty bound to consult its principal
regarding the unwarranted instructions given by the payor or its agent. As aptly stated by the
trial court, to wit:

―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 Payee‘s account
only.
xxx

xxx

xxx

As agent of the BIR (the payee of the check), defendant IBAA should receive
instructions only from its principal BIR and not from any other person especially so
when that person is not known to the defendant. It is very imprudent on the part of
the defendant IBAA to just rely on the alleged telephone call of 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 Bank‘s 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 Ford‘s 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 Payee‘s account only.
Indeed, the crossing of the check with the phrase ―Payee‘s Account Only,‖ is a warning that
the check should be deposited only in the account of the CIR. Thus, it is the duty of the
collecting bank PCIBank to ascertain that the check be deposited in payee‘s account
only. Therefore, it is the collecting bank (PCIBank) which is bound to 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 petitioner‘s liability on said instruments, this court is in full accord with the
ruling of the PCHC‘s Board of Directors that:
‗In presenting the checks for clearing and for payment, the defendant made an express
guarantee on the validity of ―all prior endorsements.‖ Thus, stamped at the back of the
checks are the 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.‖[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 bank‘s negligence is the proximate cause of the loss,
we conclude that PCIBank is liable in the amount corresponding to the proceeds of Citibank
Check No. SN-04867.
G.R. No. 128604

The trial court and the Court of Appeals found that PCIBank had no official act in the
ordinary course of business that would attribute to it the case of the embezzlement of Citibank
Check Numbers SN-10597 and 16508, because PCIBank did not actually receive nor hold the
two Ford checks at all. The trial court held, thus:

―Neither is there any proof that defendant PCIBank contributed any official or
conscious participation in the process of the embezzlement. This Court is convinced
that the switching operation (involving the checks while in transit for ―clearing‖) were
the clandestine or hidden actuations performed by the members of the syndicate in
their own 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 PCIBank‘s 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 PCIBank‘s shoulders alone.
The evidence on record shows that Citibank as drawee bank was likewise negligent in the
performance of its duties. Citibank failed to establish that its payment of Ford‘s 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 court‘s ruling.

Citibank should have scrutinized Citibank Check Numbers SN 10597 and 16508 before
paying the amount of the proceeds thereof to the collecting bank of the BIR. One thing is clear
from the record: the clearing stamps at the back of Citibank Check Nos. SN 10597 and 16508 do
not bear any initials. Citibank failed to notice and verify the absence of the clearing
stamps. Had this been duly examined, the switching of the worthless checks to Citibank Check
Nos. 10597 and 16508 would have been discovered in time. For this reason, Citibank had indeed
failed to perform what was incumbent upon it, which is to ensure that the amount of the checks
should be paid only to its designated payee. The fact that the drawee bank did not discover the
irregularity seasonably, in our view, constitutes negligence in carrying out the bank‘s duty to its
depositors. The point is that as a business affected with public interest and because of the nature
of its functions, the bank is under obligation to treat the accounts of its depositors with
meticulous care, always having in mind the fiduciary nature of their relationship.[33]
Thus, invoking the doctrine of comparative negligence, we are of the view that both
PCIBank and Citibank failed in their respective obligations and both were negligent in the
selection and supervision of their employees resulting in the encashment of Citibank Check Nos.
SN 10597 and 16508. Thus, we are constrained to hold them equally liable for the loss of the
proceeds of said checks issued by Ford in favor of the CIR.
Time and again, we have stressed that banking business is so impressed with public interest
where the trust and confidence of the public in general is of paramount importance such that the
appropriate standard of diligence must be very high, if not the highest, degree of diligence.[34] A
bank‘s liability as obligor is not merely vicarious but primary, wherein the defense of exercise of
due diligence in the selection and supervision of its employees is of no moment.[35]
Banks handle daily transactions involving millions of pesos.[36] By the very nature of their
work the degree of responsibility, care and trustworthiness expected of their employees and
officials is far greater than those of ordinary clerks and employees.[37] Banks are expected to
exercise the highest degree of diligence in the selection and supervision of their employees.[38]
On the issue of prescription, PCIBank claims that the action of Ford had prescribed because
of its inability to seek judicial relief seasonably, considering that the alleged negligent act took
place prior to December 19, 1977 but the relief was sought only in 1983, or seven years
thereafter.
The statute of limitations begins to run when the bank gives the depositor notice of the
payment, which is ordinarily when the check is returned to the alleged drawer as a voucher with
a statement of his account,[39] and an action upon a check is ordinarily governed by the statutory
period applicable to instruments in writing.[40]
Our laws on the matter provide that the action upon a written contract must be brought
within ten 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 Ford‘s 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.
Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 107382/G.R. No. 107612

January 31, 1996

ASSOCIATED BANK, petitioner,
vs.
HON. COURT OF APPEALS, PROVINCE OF TARLAC and PHILIPPINE NATIONAL
BANK, respondents.
xxxxxxxxxxxxxxxxxxxxx
G.R. No. 107612

January 31, 1996

PHILIPPINE NATIONAL BANK, petitioner,
vs.
HONORABLE COURT OF APPEALS, PROVINCE OF TARLAC, and ASSOCIATED
BANK, respondents.
DECISION
ROMERO, J.:
Where thirty checks bearing forged endorsements are paid, who bears the loss, the drawer, the
drawee bank or the collecting bank?
This is the main issue in these consolidated petitions for review assailing the decision of the Court of
Appeals in "Province of Tarlac v. Philippine National Bank v. Associated Bank v. Fausto Pangilinan,
et. al." (CA-G.R. No. CV No. 17962). 1
The facts of the case are as follows:
The Province of Tarlac maintains a current account with the Philippine National Bank (PNB) Tarlac
Branch where the provincial funds are deposited. Checks issued by the Province are signed by the
Provincial Treasurer and countersigned by the Provincial Auditor or the Secretary of the
Sangguniang Bayan.
A portion of the funds of the province is allocated to the Concepcion Emergency Hospital. 2 The
allotment checks for said government hospital are drawn to the order of "Concepcion Emergency
Hospital, Concepcion, Tarlac" or "The Chief, Concepcion Emergency Hospital, Concepcion, Tarlac."
The checks are released by the Office of the Provincial Treasurer and received for the hospital by its
administrative officer and cashier.
In January 1981, the books of account of the Provincial Treasurer were post-audited by the
Provincial Auditor. It was then discovered that the hospital did not receive several allotment checks
drawn by the Province.
On February 19, 1981, the Provincial Treasurer requested the manager of the PNB to return all of its
cleared checks which were issued from 1977 to 1980 in order to verify the regularity of their
encashment. After the checks were examined, the Provincial Treasurer learned that 30 checks
amounting to P203,300.00 were encashed by one Fausto Pangilinan, with the Associated Bank
acting as collecting bank.
It turned out that Fausto Pangilinan, who was the administrative officer and cashier of payee hospital
until his retirement on February 28, 1978, collected the questioned checks from the office of the
Provincial Treasurer. He claimed to be assisting or helping the hospital follow up the release of the
checks and had official receipts. 3Pangilinan 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. 38Hence, 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.
Regalado, Puno and Mendoza, JJ., concur.

Footnotes
1

Penned by Justice Asaali S. Isnani, with Associate Justices Arturo S. Buena and Ricardo P.
Galvez, concurring, dated September 30, 1992. Rollo, p. 22.
2

Provincial aid was given irregularly. Hospital staff would often call the provincial treasurer's
office to inquire whether there was an allotment check for the hospital. The hospital's
administrative officer and cashier would then go to the provincial treasurer's office to pick up
the check.
Checks received by the hospital are deposited in the account of the National Treasury with
the PNB. All income of the hospital in excess of the amount which the National Government
has directed it to raise, is excess income. The latter is given back to the hospital after a
supplemental budget is prepared. When the latter is approved, an advice of allotment is
made. Then the hospital requests a cash disbursement ceiling. When approved, this is
brought to the Ministry of Health. The regional office of said Ministry then prepares a check
for the hospital. The check will be deposited in the hospital's current account at the PNB.

(Culled from the testimony of Dr. Adena Canlas, TSN, October 17, 1983, pp. 8-11;
December 6, 1983, pp. 43-44.)
3

TSN, March 13, 1984, pp. 51-60.

4

Check No. 530863 K, dated January 17, 1978 for P10,000.00.

5

Check No. 526788 K.

6

Check No. 391351 L.

7

TSN, July 10, 1985, pp. 14-15.

8

TSN, July 10, 1985, p. 20-21, 34-35; September 24, 1985.

9

Exhibit FF for Province of Tarlac. On March 20, 1981, the Province of Tarlac reiterated its
request in another letter to PNB. Associated Bank was allegedly furnished with a copy of this
letter. (Records, pp. 246-247) PNB requested the Province to return the checks in a letter
dated March 31, 1981. The checks were returned to PNB on April 22, 1981. (Exhibit GG) On
April 24, 1981, PNB gave the checks to Associated Bank. (Exhibit 5) Associated Bank
returned the checks to PNB on April 28, 1981, along with a letter stating its refusal to return
the money paid by PNB. (Exhibit 6)

SECOND DIVISION

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

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

BANKING

DECISION
QUISUMBING, J.:

This is a petition for review of the decision[1] dated January 13, 1998, of the Court of
Appeals in CA-G.R. CV No. 28304 ordering the petitioner to pay
respondent P1,754,787.50 plus twelve percent (12%) interest per annum computed
from October 7, 1977, the date of the first extrajudicial demand, plus damages.
The facts of this case are undisputed.
Respondent Eugene Ong maintained a current account with petitioner, formerly the
Associated Banking Corporation, but now known as Westmont Bank. Sometime in May
1976, he sold certain shares of stocks through Island Securities Corporation. To pay
Ong, Island Securities purchased two (2) Pacific Banking Corporation manager‘s
checks,[2] both dated May 4, 1976, issued in the name of Eugene Ong as payee. Before

Ong could get hold of the checks, his friend Paciano Tanlimco got hold of them, forged
Ong‘s signature and deposited these with petitioner, where Tanlimco was also a
depositor. Even though Ong‘s specimen signature was on file, petitioner accepted and
credited both checks to the account of Tanlimco, without verifying the ‗signature
indorsements‘ appearing at the back thereof. Tanlimco then immediately withdrew the
money and absconded.
Instead of going straight to the bank to stop or question the payment, Ong first
sought the help of Tanlimco‘s family to recover the amount. Later, he reported the
incident to the Central Bank, which like the first effort, unfortunately proved futile.
It was only on October 7, 1977, about five (5) months from discovery of the fraud,
did Ong cry foul and demanded in his complaint that petitioner pay the value of the two
checks from the bank on whose gross negligence he imputed his loss. In his suit, he
insisted that he did not ―deliver, negotiate, endorse or transfer to any person or entity‖
the subject checks issued to him and asserted that the signatures on the back were
spurious.[3]
The bank did not present evidence to the contrary, but simply contended that since
plaintiff Ong claimed to have never received the originals of the two (2) checks in
question from Island Securities, much less to have authorized Tanlimco to receive the
same, he never acquired ownership of these checks. Thus, he had no legal personality
to sue as he is not a real party in interest. The bank then filed a demurrer to evidence
which was denied.
On February 8, 1989, after trial on the merits, the Regional Trial Court of Manila,
Branch 38, rendered a decision, thus:

IN VIEW OF THE FOREGOING, the court hereby renders judgment for the plaintiff
and against the defendant, and orders the defendant to pay the plaintiff:
1. The sum of P1,754,787.50 representing the total face value of the two checks in
question, exhibits ―A‖ and ―B‖, respectively, with interest thereon at the legal rate of
twelve percent (12%) per annum computed from October 7, 1977 (the date of the
first extrajudicial demand) up to and until the same shall have been paid in full;
2. Moral damages in the amount of P250,000.00;
3. Exemplary or corrective damages in the sum of P100,000.00 by way of example or
correction for the public good;
4. Attorney‘s fees of P50,000.00 and costs of suit.

Defendant‘s counterclaims are dismissed for lack of merit.
SO ORDERED.

[4]

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

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

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

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

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

... IN NOT ADJUDGING RESPONDENT GUILTY OF LACHES AND IN NOT
ABSOLVING PETITIONER FROM LIABILITY.
Essentially the issues in this case are: (1) whether or not respondent Ong has a
cause of action against petitioner Westmont Bank; and (2) whether or not Ong is barred
to recover the money from Westmont Bank due to laches.
Respondent admitted that he was never in actual or physical possession of the two
(2) checks of the Island Securities nor did he authorize Tanlimco or any of the latter‘s
representative to demand, accept and receive the same. For this reason, petitioner
argues, respondent cannot sue petitioner because under Section 51 of the Negotiable
Instruments Law[6] it is only when a person becomes a holder of a negotiable instrument
can he sue in his own name. Conversely, prior to his becoming a holder, he had no
right or cause of action under such negotiable instrument. Petitioner further argues that
since Section 191[7] of the Negotiable Instruments Law defines a ―holder‖ as the ‗payee
or indorsee of a bill or note, who is in possession of it, or the bearer thereof,‘ in order to
be a holder, it is a requirement that he be in possession of the instrument or the bearer
thereof. Simply stated, since Ong never had possession of the checks nor did he
authorize anybody, he did not become a holder thereof hence he cannot sue in his own
name.[8]
Petitioner also cites Article 1249[9] of the Civil Code explaining that a check, even if it
is a manager‘s check, is not legal tender. Hence, the creditor cannot be compelled to
accept payment thru this means.[10] It is petitioner‘s position that for all intents and
purposes, Island Securities has not yet tendered payment to respondent Ong, thus, any
action by Ong should be directed towards collecting the amount from Island
Securities. Petitioner claims that Ong‘s cause of action against it has not ripened as of

yet. It may be that petitioner would be liable to the drawee bank - - but that is a matter
between petitioner and drawee-bank, Pacific Banking Corporation.[11]
For its part, respondent Ong leans on the ruling of the trial court and the Court of
Appeals which held that the suit of Ong against the petitioner bank is a desirable
shortcut to reach the party who ought in any event to be ultimately liable. [12] It likewise
cites the ruling of the courts a quo which held that according to the general rule, a bank
who has obtained possession of a check upon an unauthorized or forged indorsement
of the payee‘s signature and who collects the amount of the check from the drawee is
liable for the proceeds thereof to the payee. The theory of said rule is that the collecting
bank‘s possession of such check is wrongful.[13]
Respondent also cites Associated Bank vs. Court of Appeals[14] which held that the
collecting bank or last endorser generally suffers the loss because it has the duty to
ascertain the genuineness of all prior endorsements. The collecting bank is also made
liable because it is privy to the depositor who negotiated the check. The bank knows
him, his address and history because he is a client. Hence, it is in a better position to
detect forgery, fraud or irregularity in the indorsement.[15]
Anent Article 1249 of the Civil Code, Ong points out that bank checks are
specifically governed by the Negotiable Instruments Law which is a special law and only
in the absence of specific provisions or deficiency in the special law may the Civil Code
be invoked.[16]
Considering the contentions of the parties and the evidence on record, we find no
reversible error in the assailed decisions of the appellate and trial courts, hence there is
no justifiable reason to grant the petition.
Petitioner‘s claim that respondent has no cause of action against the bank is clearly
misplaced. As defined, a cause of action is the act or omission by which a party
violates a right of another.[17] The essential elements of a cause of action are: (a) a legal
right or rights of the plaintiff, (b) a correlative obligation of the defendant, and (c) an act
or omission of the defendant in violation of said legal right.[18]
The complaint filed before the trial court expressly alleged respondent‘s right as
payee of the manager‘s checks to receive the amount involved, petitioner‘s
correlative duty as collecting bank to ensure that the amount gets to the rightful payee
or his order, and a breach of that duty because of a blatant act of negligence on the part
of petitioner which violated respondent‘s rights.[19]
Under Section 23 of the Negotiable Instruments Law:

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

Since the signature of the payee, in the case at bar, was forged to make it appear
that he had made an indorsement in favor of the forger, such signature should be
deemed as inoperative and ineffectual. Petitioner, as the collecting bank, grossly erred
in making payment by virtue of said forged signature. The payee, herein respondent,
should therefore be allowed to recover from the collecting bank.
The collecting bank is liable to the payee and must bear the loss because it is its
legal duty to ascertain that the payee‘s endorsement was genuine before cashing the
check.[20] As a general rule, a bank or corporation who has obtained possession of a
check upon an unauthorized or forged indorsement of the payee‘s signature and who
collects the amount of the check from the drawee, is liable for the proceeds thereof to
the payee or other owner, notwithstanding that the amount has been paid to the person
from whom the check was obtained.[21]
The theory of the rule is that the possession of the check on the forged or
unauthorized indorsement is wrongful, and when the money had been collected on the
check, the bank or other person or corporation can be held as for moneys had and
received, and the proceeds are held for the rightful owners who may recover them. The
position of the bank taking the check on the forged or unauthorized indorsement is the
same as if it had taken the check and collected the money without indorsement at all
and the act of the bank amounts to conversion of the check.[22]
Petitioner‘s claim that since there was no delivery yet and respondent has never
acquired possession of the checks, respondent‘s remedy is with the drawer and not with
petitioner bank. Petitioner relies on the view to the effect that where there is no delivery
to the payee and no title vests in him, he ought not to be allowed to recover on the
ground that he lost nothing because he never became the owner of the check and still
retained his claim of debt against the drawer.[23] However, another view in certain cases
holds that even if the absence of delivery is considered, such consideration is not
material. The rationale for this view is that in said cases the plaintiff uses one action to
reach, by a desirable short cut, the person who ought in any event to be ultimately liable
as among the innocent persons involved in the transaction. In other words, the payee
ought to be allowed to recover directly from the collecting bank, regardless of whether
the check was delivered to the payee or not.[24]
Considering the circumstances in this case, in our view, petitioner could not escape
liability for its negligent acts. Admittedly, respondent Eugene Ong at the time the
fraudulent transaction took place was a depositor of petitioner bank. Banks are
engaged in a business impressed with public interest, and it is their duty to protect in
return their many clients and depositors who transact business with them. [25] They have
the obligation to treat their client‘s account meticulously and with the highest degree of
care, considering the fiduciary nature of their relationship. The diligence required of
banks, therefore, is more than that of a good father of a family. [26]In the present case,
petitioner was held to be grossly negligent in performing its duties. As found by the trial
court:

xxx (A)t the time the questioned checks were accepted for deposit to Paciano
Tanlimco‘s account by defendant bank, defendant bank, admittedly had in its files

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

These findings are binding and conclusive on the appellate and the reviewing
courts.
On the second issue, petitioner avers that respondent Ong is barred by laches for
failing to assert his right for recovery from the bank as soon as he discovered the
scam. The lapse of five months before he went to seek relief from the bank, according
to petitioner, constitutes laches.
In turn, respondent contends that petitioner presented no evidence to support its
claim of laches. On the contrary, the established facts of the case as found by the trial
court and affirmed by the Court of Appeals are that respondent left no stone unturned to
obtain relief from his predicament.
On the matter of delay in reporting the loss, respondent calls attention to the fact
that the checks were issued on May 4, 1976, and on the very next day, May 5, 1976,
these were already credited to the account of Paciano Tanlimco and presented for
payment to Pacific Banking Corporation. So even if the theft of the checks were
discovered and reported earlier, respondent argues, it would not have altered the
situation as the encashment of the checks was consummated within twenty four hours
and facilitated by the gross negligence of the petitioner bank.[28]
Laches may be defined as the failure or neglect for an unreasonable and
unexplained length of time, to do that which, by exercising due diligence, could or
should have been done earlier. It is negligence or omission to assert a right within a
reasonable time, warranting a presumption that the party entitled thereto has either
abandoned or declined to assert it.[29] It concerns itself with whether or not by reason of
long inaction or inexcusable neglect, a person claiming a right should be barred from
asserting the same, because to allow him to do so would be unjust to the person
against whom such right is sought to be enforced.[30]
In the case at bar, it cannot be said that respondent sat on his rights. He
immediately acted after knowing of the forgery by proceeding to seek help from the
Tanlimco family and later the Central Bank, to remedy the situation and recover his

money from the forger, Paciano Tanlimco. Only after he had exhausted possibilities of
settling the matter amicably with the family of Tanlimco and through the CB, about five
months after the unlawful transaction took place, did he resort to making the demand
upon the petitioner and eventually before the court for recovery of the money value of
the two checks. These acts cannot be construed as undue delay in or abandonment of
the assertion of his rights.
Moreover, the claim of petitioner that respondent should be barred by laches is
clearly a vain attempt to deflect responsibility for its negligent act. As explained by the
appellate court, it is petitioner which had the last clear chance to stop the fraudulent
encashment of the subject checks had it exercised due diligence and followed the
proper and regular banking procedures in clearing checks.[31] As we had earlier ruled, the
one who had the last clear opportunity to avoid the impending harm but failed to do so is
chargeable with the consequences thereof.[32]
WHEREFORE, the instant petition is DENIED for lack of merit. The assailed
decision of the Court of Appeals, sustaining the judgment of the Regional Trial Court of
Manila, is AFFIRMED.
Costs against petitioner.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.

[1]

Rollo, pp. 32-39.

Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION

G.R. No. L-40796 July 31, 1975
REPUBLIC BANK, plaintiff-appellee,
vs.
MAURICIA T. EBRADA, defendant-appellant.
Sabino de Leon, Jr. for plaintiff-appellee.
Julio Baldonado for defendant-appellant.

MARTIN, J.:

Appeal on a question of law of the decision of the Court of First Instance of Manila, Branch XXIII in
Civil Case No. 69288, entitled "Republic Bank vs. Mauricia T. Ebrada."
On or about February 27, 1963 defendant Mauricia T. Ebrada, encashed Back Pay Check No.
508060 dated January 15, 1963 for P1,246.08 at the main office of the plaintiff Republic Bank at
Escolta, Manila. The check was issued by the Bureau of Treasury. 1 Plaintiff Bank was later advised by
the said bureau that the alleged indorsement on the reverse side of the aforesaid check by the payee,
"Martin Lorenzo" was a forgery 2 since the latter had allegedly died as of July 14, 1952. 3 Plaintiff Bank
was then requested by the Bureau of Treasury to refund the amount of P1,246.08. 4 To recover what it
had refunded to the Bureau of Treasury, plaintiff Bank made verbal and formal demands upon defendant
Ebrada to account for the sum of P1,246.08, but said defendant refused to do so. So plaintiff Bank sued
defendant Ebrada before the City Court of Manila.

On July 11, 1966, defendant Ebrada filed her answer denying the material allegations of the
complaint and as affirmative defenses alleged that she was a holder in due course of the check in
question, or at the very least, has acquired her rights from a holder in due course and therefore
entitled to the proceeds thereof. She also alleged that the plaintiff Bank has no cause of action
against her; that it is in estoppel, or so negligent as not to be entitled to recover anything from her. 5
About the same day, July 11, 1966 defendant Ebrada filed a Third-Party complaint against Adelaida
Dominguez who, in turn, filed on September 14, 1966 a Fourth-Party complaint against Justina Tinio.
On March 21, 1967, the City Court of Manila rendered judgment for the plaintiff Bank against
defendant Ebrada; for Third-Party plaintiff against Third-Party defendant, Adelaida Dominguez, and
for Fourth-Party plaintiff against Fourth-Party defendant, Justina Tinio.
From the judgment of the City Court, defendant Ebrada took an appeal to the Court of First Instance
of Manila where the parties submitted a partial stipulation of facts as follows:
COME NOW the undersigned counsel for the plaintiff, defendant, Third-Party
defendant and Fourth-Party plaintiff and unto this Honorable Court most respectfully
submit the following:
PARTIAL STIPULATION OF FACTS
1. That they admit their respective capacities to sue and be sued;
2. That on January 15, 1963 the Treasury of the Philippines issued its Check No. BP508060, 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 fourthparty 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 11-½ YEARS AND
THAT THE APPELLANT DID NOT BENEFIT FROM ENCASHING SAID CHECK.
From the stipulation of facts it is admitted that the check in question was delivered to defendantappellant by Adelaida Dominguez for the purpose of encashment and that her signature was affixed
on said check when she cashed it with the plaintiff Bank. Likewise it is admitted that defendantappellant was the last indorser of the said check. As such indorser, she was supposed to have
warranted that she has good title to said check; for under Section 65 of the Negotiable Instruments
Law: 6
Every person negotiating an instrument by delivery or by qualified indorsement,
warrants:

(a) That the instrument is genuine and in all respects what it purports to be.
(b) That she has good title to it.
xxx xxx xxx
and under Section 65 of the same Act:
Every indorser who indorses without qualification warrants to all subsequent holders
in due course:
(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next
preceding sections;
(b) That the instrument is at the time of his indorsement valid and subsisting.
It turned out, however, that the signature of the original payee of the check, Martin Lorenzo was a
forgery because he was already dead 7 almost 11 years before the check in question was issued by
the Bureau of Treasury. Under action 23 of the Negotiable Instruments Law (Act 2031):
When a signature is forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no right to retain the
instruments, or to give a discharge thereof against any party thereto, can be acquired
through or under such signature unless the party against whom it is sought to
enforce such right is precluded from setting up the forgery or want of authority.
It is clear from the provision that where the signature on a negotiable instrument if forged, the
negotiation of the check is without force or effect. But does this mean that the existence of one
forged signature therein will render void all the other negotiations of the check with respect to the
other parties whose signature are genuine?
In the case of Beam vs. Farrel, 135 Iowa 670, 113 N.W. 590, where a check has several
indorsements on it, it was held that it is only the negotiation based on the forged or unauthorized
signature which is inoperative. Applying this principle to the case before Us, it can be safely
concluded that it is only the negotiation predicated on the forged indorsement that should be
declared inoperative. This means that the negotiation of the check in question from Martin Lorenzo,
the original payee, to Ramon R. Lorenzo, the second indorser, should be declared of no affect, but
the negotiation of the aforesaid check from Ramon R. Lorenzo to Adelaida Dominguez, the third
indorser, and from Adelaida Dominguez to the defendant-appellant who did not know of the forgery,
should be considered valid and enforceable, barring any claim of forgery.
What happens then, if, after the drawee bank has paid the amount of the check to the holder thereof,
it was discovered that the signature of the payee was forged? Can the drawee bank recover from the
one who encashed the check?
In the case of State v. Broadway Mut. Bank, 282 S.W. 196, 197, it was held that the drawee of a
check can recover from the holder the money paid to him on a forged instrument. It is not supposed
to be its duty to ascertain whether the signatures of the payee or indorsers are genuine or not. This
is because the indorser is supposed to warrant to the drawee that the signatures of the payee and
previous indorsers are genuine, warranty not extending only to holders in due course. One who
purchases a check or draft is bound to satisfy himself that the paper is genuine and that by indorsing

it or presenting it for payment or putting it into circulation before presentation he impliedly asserts
that he has performed his duty and the drawee who has paid the forged check, without actual
negligence on his part, may recover the money paid from such negligent purchasers. In such cases
the recovery is permitted because although the drawee was in a way negligent in failing to detect the
forgery, yet if the encasher of the check had performed his duty, the forgery would in all probability,
have been detected and the fraud defeated. The reason for allowing the drawee bank to recover
from the encasher is:
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.
Makalintal, C.J, Castro, Makasiar and Esguerra, JJ., concur.

Footnotes
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-43596

October 31, 1936

PHILIPPINE NATIONAL BANK, plaintiff-appellee,
vs.
THE NATIONAL CITY BANK OF NEW YORK, and MOTOR SERVICE COMPANY,
INC., defendants.
MOTOR SERVICE COMPANY, INC., appellant.
L. D. Lockwood for appellant.
Camus and Delgado for appellee.

RECTO, J.:
This case was submitted for decision to the court below on the following stipulation of facts:
1. That plaintiff is a banking corporation organized and existing under and by virtue of a
special act of the Philippine Legislature, with office as principal place of business at the
Masonic Temple Bldg., Escolta, Manila, P. I.; that the defendant National City Bank of New
York is a foreign banking corporation with a branch office duly authorized and licensed to
carry and engage in banking business in the Philippine Islands, with branch office and place
of business in the National City Bank Bldg., City of Manila, P. I., and that the defendant
Motor Service Company, Inc., is a corporation organized and existing under and by virtue of
the general corporation law of the Philippine Islands, with office and principal place of
business at 408 Rizal Avenue, City of Manila, P. I., engaged in the purchase and sale of
automobile spare parts and accessories.
2. That on April 7 and 9, 1933, an unknown person or persons negotiated with defendant
Motor Service Company, Inc., the checks marked as Exhibits A and A-1, respectively, which

are made parts of the stipulation, in payment for automobile tires purchased from said
defendant's stores, purporting to have been issued by the "Pangasinan Transportation Co.,
Inc. by J. L. Klar, Manager and Treasurer", against the Philippine National Bank and in favor
of the International Auto Repair Shop, for P144.50 and P215.75; and said checks were
indorsed by said unknown persons in the manner indicated at the back thereof, the Motor
Service Co., Inc., believing at the time that the signature of J. L. Klar, Manager and
Treasurer of the Pangasinan Transportation Co., Inc., on both checks were genuine.
3. The checks Exhibits A and A-1 were then indorsed for deposit by the defendant Motor
Service Company, Inc, at the National City Bank of New York and the former was
accordingly credited with the amounts thereof, or P144.50 and P215.75.
4. On April 8 and 10, 1933, the said checks were cleared at the clearing house and the
Philippine National Bank credited the National City Bank of New York for the amounts
thereof, believing at the time that the signatures of the drawer were genuine, that the payee
is an existing entity and the endorsement at the back thereof regular and genuine.
5. The Philippine National Bank then found out that the purported signatures of J. L. Klar, as
Manager and Treasurer of the Pangasinan Transportation Company, Inc., in said Exhibits A
and A-1 were forged when so informed by the said Company, and it accordingly demanded
from the defendants the reimbursement of the amounts for which it credited the National City
Bank of New York at the clearing house and for which the latter credited the Motor Service
Co., but the defendants refused, and continue to refuse, to make such reimbursements.
6. The Pangasinan Transportation Co., Inc., objected to have the proceeds of said check
deducted from their deposit.
7. Exhibits B, C, D, E, F, and G, which were introduced at the trial in the municipal court of
Manila and forming part of the record of the present case, are admitted by the parties as
genuine and are made part of this stipulation as well as Exhibit H hereto attached and made
a part hereof.
Upon plaintiff's motion, the case was dismissed before trial as to the defendant National City Bank of
New York. a decision was thereafter rendered giving plaintiff judgment for the total amount of
P360.25, with interest and costs. From this decision the instant appeal was taken.
Before us is the preliminary question of whether the original appeal taken by the plaintiff from the
decision of the municipal court of Manila where this case originated, became perfected because of
plaintiff's failure to attach to the record within 15 days from receipt of notice of said decision, the
certificate of appeal bond required by section 76 of the Code of Civil Procedure. It is not disputed
that both the appeal docket fee and the appeal cash bond were paid and deposited within the
prescribed time. The issue is whether the mere failure to file the official receipt showing that such
deposit was made within the said period is a sufficient ground to dismiss plaintiff's appeal. This
question was settled by our decision in the case of Blanco vs. Bernabe and lawyers Cooperative
Publishing Co. (page 124, ante), and no further consideration. No error was committed in allowing
said appeal.
We now pass on to consider and determine the main question presented by this appeal, namely,
whether the appellee has the right to recover from the appellant, under the circumstances of this
case, the value of the checks on which the signatures of the drawer were forged. The appellant
maintains that the question should be answered in the negative and in support of its contention
appellant advanced various reasons presently to be examined carefully.

I. It is contended, first of all, that the payment of the checks in question made by the drawee bank
constitutes an "acceptance", and, consequently, the case should be governed by the provisions of
section 62 of the Negotiable Instruments Law, which says:
SEC. 62. Liability of acceptor. —The acceptor by accepting the instrument engages that he
will pay it according to the tenor of his acceptance; and admits:
(a) The existence of the drawer, the genuineness of his signature, and his capacity
and authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
This contention is without merit. A check is a bill of exchange payable on demand and only the rules
governing bills of exchange payable on demand are applicable to it, according to section 185 of the
Negotiable Instruments Law. In view of the fact that acceptance is a step unnecessary, in so far as
bills of exchange payable on demand are concerned (sec. 143), it follows that the provisions relative
to "acceptance" are without application to checks. Acceptance implies, in effect, subsequent
negotiation of the instrument, which is not true in case of the payment of a check because from the
moment a check is paid it is withdrawn from circulation. The warranty established by section 62, is in
favor of holders of the instrument after its acceptance. When the drawee bank cashes or pays a
check, the cycle of negotiation is terminated, and it is illogical thereafter to speak of subsequent
holders who can invoke the warranty provided in section 62 against the drawee. Moreover,
according to section 191, "acceptance" means "an acceptance completed by delivery or notification"
and this concept is entirely incompatible with payment, because when payment is made the check is
retained by the bank, and there is no such thing as delivery or notification to the party receiving the
payment. Checks are not to be accepted, but presented at once for payment. (1 Bouvier's Law
Dictionary, 476.) There can be no such thing as "acceptance" in the ordinary sense of the term. A
check being payable immediately and on demand, the bank can fulfill its duty to the depositor only
by paying the amount demanded. The holder has no right to demand from the bank anything but
payment of the check, and the bank has no right, as against the drawer, to do anything but pay it. (5
R. C. L., p. 516, par. 38.) A check is not an instrument which in the ordinary course of business calls
for acceptance. The holder can never claim acceptance as his legal right. He can present for
payment, and only for payment. (1 Morse on Banks and Banking, 6th ed., pp. 898, 899.)
There is, however, nothing in the law or in, business practice against the presentation of checks for
acceptance, before they are paid, in which case we have a "certification" equivalent to "acceptance"
according to section 187, which provides that "where a check is certified by the bank on which it is
drawn, the certification is equivalent to an acceptance", and it is then that the warranty under section
62 exists. This certification or acceptance consists in the signification by the drawee of his assent to
the order of the drawer, which must not express that the drawee will perform his promise by any
other means than the payment of money. (Sec. 132.) When the holder of a check procures it to be
accepted or certified, the drawer and all indorsers are discharged from liability thereon (sec. 188),
and then the check operates as an assignment of a part of the funds to the credit of the drawer with
the bank. (Sec. 189.) There is nothing in the nature of the check which intrinsically precludes its
acceptance, in like manner and with like effect as a bill of exchange or draft may be accepted. The
bank may accept if it chooses; and it is frequently induced by convenience, by the exigencies of
business, or by the desire to oblige customers, voluntarily to incur the obligation. The act by which
the bank places itself under obligation to pay to the holder the sum called for by a check must be the
expressed promise or undertaking of the bank signifying its intent to assume the obligation, or some
act from which the law will imperatively imply such valid promise or undertaking. The most ordinary
form which such an act assumes is the acceptance by the bank of the check, or, as it is perhaps

more often called, the certifying of the check. (1 Morse on Banks and Banking, pp. 898, 899; 5 R. C.
L., p. 520.)
No doubt a bank may by an unequivocal promise in writing make itself liable in any event to pay the
check upon demand, but this is not an "acceptance" of the check in the true sense of that term.
Although a check does not call for acceptance, and the holder can present it only for payment, the
certification of checks is a means in constant and extensive use in the business of banking, and its
effects and consequences are regulated by the law merchant. Checks drawn upon banks or
bankers, thus marked and certified, enter largely into the commercial and financial transactions of
the country; they pass from hand to hand, in the payment of debts, the purchase of property, and in
the transfer of balances from one house and one bank to another. In the great commercial centers,
they make up no inconsiderable portion of the circulation, and thus perform a useful, valuable, and
an almost indispensable office. The purpose of procuring a check to be certified is to impart strength
and credit to the paper by obtaining an acknowledgment from the certifying bank that the drawer has
funds therein sufficient to cover the check and securing the engagement of the bank that the check
will be paid upon presentation. A certified check has a distinctive character as a species of
commercial paper, and performs important functions in banking and commercial business. When a
check is certified, it ceases to possess the character, or to perform the functions, of a check, and
represents so much money on deposit, payable to the holder on demand. The check becomes a
basis of credit — an easy mode of passing money from hand to hand, and answers the purposes of
money. (5 R. C. L., pp. 516, 517.)
lâwphi1.nêt

All the authorities, both English and American, hold that a check may be accepted, though
acceptance is not usual. By the law merchant, the certificate of the bank that a check is good is
equivalent to acceptance. It implies that the check is drawn upon sufficient funds in the hands of the
drawee, that they have been set apart for its satisfaction, and that they shall be so applied whenever
the check is presented for payment. It is an undertaking that the check is good then, and shall
continue good, and this agreement is as binding on the bank as its notes of circulation, a certificate
of deposit payable to the order of the depositor, or any other obligation it can assume. The object of
certifying a check, as regards both parties is to enable the holder to use it as money. The transferee
takes it with the same readiness and sense of security that he would take the notes of the bank. It is
available also to him for all the purposes of money. Thus it continues to perform its important
functions until in the course of business it goes back to the bank for redemption, and is extinguished
by payment. It cannot be doubted that the certifying bank intended these consequences, and it is
liable accordingly. To hold otherwise would render these important securities only a snare and a
delusion. A bank incurs no greater risk in certifying a check than in giving a certificate of deposit. In
well-regulated banks the practice is at once to charge the check to the account of the drawer, to
credit it in a certified check account, and, when the check is paid, to debit that account with the
amount. Nothing can be simpler or safer than this process. (Merchants' Bank vs. States Bank, 10
Wall., 604, at p. 647; 19 Law. ed., 1008, 1019.)
Ordinarily the acceptance or certification of a check is performed and evidenced by some word or
mark, usually the words "good", "certified" or "accepted" written upon the check by the banker or
bank officer. (1 Morse, Banks and Banking, 915; 1 Bouvier's Law Dictionary, 476.) The bank virtually
says, that check is good; we have the money of the drawer here ready to pay it. We will pay it now if
you will receive it. The holder says, No, I will not take the money; you may certify the check and
retain the money for me until this check is presented. The law will not permit a check, when due, to
be thus presented, and the money to be left with the bank for the accommodation of the holder
without discharging the drawer. The money being due and the check presented, it is his own fault if
the holder declines to receive the pay, and for his own convenience has the money appropriated to
that check subject to its future presentment at any time within the statute of limitations. (1 Morse on
Banks and Banking, p. 920.)

The theory of the appellant and of the decisions on which it relies to support its view is vitiated by the
fact that they take the word "acceptance" in its ordinary meaning and not in the technical sense in
which it is used in the Negotiable Instruments Law. Appellant says that when payment is made, such
payment amounts to an acceptance, because he who pays accepts. This is true in common parlance
but "acceptance" in legal contemplation. The word "acceptance" has a peculiar meaning in the
Negotiable Instruments Law, and, as has been above stated, in the instant case there was payment
but no acceptatance, or what is equivalent to acceptance, certification.
With few exceptions, the weight of authority is to the effect that "payment" neither includes nor
implies "acceptance".
In National Bank vs. First National Bank ([19101, 141 Mo. App., 719; 125 S. W., 513), the court
asks, if a mere promise to pay a check is binding on a bank, why should not the absolute payment of
the check have the same effect? In response, it is submitted that the two things, — that is
acceptance and payment, — are entirely different. If the drawee accepts the paper after seeing it,
and then permits it to go into circulation as genuine, on all the principles of estoppel, he ought to be
prevented from setting up forgery to defeat liability to one who has taken the paper on the faith of the
acceptance, or certification. On the other hand, mere payment of the paper at the termination of its
course does not act as an estoppel. The attempt to state a general rule covering both acceptance
and payment is responsible for a large part of the conflicting arguments which have been advanced
by the courts with respect to the rule. (Annotation at 12 A. L. R., 1090 1921].)
In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079, 1085), the court said:
We are of the opinion that "payment is not acceptance". Acceptance, as defined by section
131, cannot be confounded with payment. . . .
Acceptance, certification, or payment of a check, by the express language of the statute,
discharges the liability only of the persons named in the statute, to wit, the drawer and all
indorsers, and the contract of indorsement by the negotiator if the check is discharged by
acceptance, certification, or payment. But clearly the statute does not say that the contract of
warranty of the negotiator, created by section 65, is discharged by these acts.
The rule supported by the majority of the cases (14 A. L. R. 764), that payment of a check on a
forged or unauthorized indorsement of the payee's name, and charging the same to the drawer's
account, do not amount to an acceptance so as to make the bank liable to the payee, is supported
by all of the recent cases in which the question is considered. (Cases cited, Annotation at 69 A. L.
R., 1076, 1077 [1930].)
Merely stamping a check "Paid" upon its payment on a forged or unauthorized indorsement is not an
acceptance thereof so as to render the drawee bank liable to the true payee. (Anderson vs. Tacoma
National Bank [1928], 146 Wash., 520; 264 Pac., 8; Annotation at 69 A. L. R., 1077, [1930].)
In State Bank of Chicago vs. Mid-City Trust & Savings Bank (12 A. L. R., 989, 991, 992), the court
said:
The defendant in error contends that the payment of the check shows acceptance by the bank,
urging that there can be no more definite act by the bank upon which a check has been drawn,
showing acceptance than the payment of the check. Section 184 of the Negotiable Instruments Act
(sec. 202) provides that the provisions of the act applicable to bills of exchange apply to a check,
and section 131 (sec. 149), that the acceptance of a bill must be in writing signed by the drawee.
Payment is the final act which extinguishes a bill. Acceptance is a promise to pay in the future and

continues the life of the bill. It was held in the First National Bank vs. Whitman (94 U. S., 343; 24 L.
ed., 229), that payment of a check upon a forged indorsement did not operate as an acceptance in
favor of the true owner. The contrary was held in Pickle vs. Muse (Fickle vs. People's Nat. Bank, 88
Tenn., 380; 7 L.R.A., 93; 17 Am. St. Rep., 900; 12 S. W., 919), and Seventh National Bank vs. Cook
(73 Pa., 483; 13 Am. Rep., 751) at a time when the Negotiable Instruments Act was not in force in
those states. The opinion of the Supreme Court of the United States seems more logical, and the
provision of the Negotiable Instruments Act now require an acceptance to be in writing. Under this
statute the payment of a check on a forged indorsement, stamping it "paid," and charging it to the
account of the drawer, do not constitute an acceptance of the check or create a liability of the bank
to the true holder or the payee. (Elyria Sav. & Bkg. Co. vs. Walker Bin Co., 92 Ohio St., 406; L. R.
A., 1916D, 433; 111 N. E., 147; Ann. Cas. 1917D, 1055; Baltimore & O. R. Co. vs. First National
Bank, 102 Va., 753; 47 S. E., 837; State Bank of Chicago vs. Mid-City Trust & Savings Bank 12 A. L.
R., pp. 989, 991, 992.)
Before drawee's acceptance of check there is no privity of contract between drawee and payee.
Drawee's payment of check on unauthorized indorsement does not constitute "acceptance" of check.
(Sinclair Refining Co.vs. Moultrie Banking Co., 165 S. E., 860 [1932].)
The great weight of authority is to the effect that the payment of a check upon a forged or
unauthorized indorsement and the stamping of it "paid" does not constitute an acceptance. (Dakota
Radio Apparatus Co. vs.First Nat. Bank of Rapid City, 244 N. W., 351, 352 [1932].)
Payment of the check, cashing it on presentment is not acceptance. (South Boston Trust
Co. vs. Levin, 249 Mass., 45, 48, 49; 143 N. E., 816; Blocker, Shepard Co. vs. Granite Trust
Company, 187 Me., 53, 54 [1933].)
In Rauch vs. Bankers National Bank of Chicago (143 Ill. App., 625, 636, 637 [1908]), the language of
the decision was as follows:
. . . The plaintiffs say that this acceptance was made by the very unauthorized payments of
which they complain. This suggestion does not seem forceful to us. It is the contention which
was made before the Supreme Court of the United States in First National Bank vs. Whitman
(94 U. S., 343), and repudiated by that court. The language of the opinion in that case is so
apt in the present case that we quote it:
"It is further contended that such an acceptance of a check as creates a privity between the
payee and the bank is established by the payment of the amount of this check in the manner
described. This argument is based upon the erroneous assumption that the bank has paid
this check. If this were true, it would have discharged all of its duty, and there would be an
end to the claim against it. The bank supposed that it had paid the check, but this was an
error. The money it paid was upon a pretended and not a real indorsement of the name of
the payee. . . . We cannot recognize the argument that payment of the amount of the check
or sight draft under such circumstances amounts to an acceptance creating a privity of
contract with the real owner.
"It is difficult to construe a payment as an acceptance under any circumstances. . . . A
banker or individual may be ready to make actual payment of a check or draft when
presented, while unwilling to make a promise to pay at a future time. Many, on the other
hand, are more ready to promise to pay than to meet the promise when required. The
difference between the transactions is essential and inherent."
And in Wharf vs. Seattle National Bank (24 Pac. [2d]), 120, 123 [1933]):

It is the rule that payment of a check on unauthorized or forged indorsement does not
operate as an acceptance of the check so as to authorize an action by the real owner to
recover its amount from the drawee bank. (Michie on Banks and Banking, vol. 5, sec. 278, p.
521.) A full list of the authorities supporting the rule will be found in a footnote to the
foregoing citation. (See also, Federal Land Bank vs. Collins, 156 Miss., 893; 127 So., 570;
69 A. L. R., 1068.)
In a very recent case, Federal Land Bank vs. Collins (69 A. L. R., 1068, 1072-1074), this question
was discussed at considerable length. The court said:
In the light of the first of these statutes, counsel for appellant is forced to stand upon the narrow
ledge that the payment of the check by the two banks will constitute an acceptance. The drawee
bank simply marked it "paid" and did not write anything else except the date. The bank first paying
the check, the Commercial National Bank and Trust Company, simply wrote its name as indorser
and passed the check on to the drawee bank; does this constitute an acceptance? The precise
question has not been presented to this court for decision. Without reference to authorities in other
jurisdictions it would appear that the drawee bank had never written its name across the paper and
therefore, under the strict terms of the statute, could not be bound as an acceptor; in the second
place, it does not appear to us to be illogical and unsound to say that the payment of a check by the
drawee, and the stamping of it "paid", is equivalent to the same thing as the acceptance of a check;
however, there is a variety of opinions in the various jurisdictions on this question. Counsel correctly
states that the theory upon which the numerous courts hold that the payment of a check creates
privity between the holder of the check and the drawee bank is tantamount to a pro tanto assignment
of that part of the funds. It is most easily understood how the payment of the check, when not
authorized to be done by the drawee bank, might under such circumstances create liability on the
part of the drawee to the drawer. Counsel cites the case of Pickle vs.Muse (88 Tenn, 380; 12 S. W.,
919; 7 L. R. A., 93; 17 Am. St. Rep., 900), wherein Judge Lurton held that the acceptance of a check
was necessary in order to give the holder thereof a right of action thereon against the bank, and
further held in a case similar to this, so far as this question is concerned, that the acceptance of a
check so as to give a right of action to the payee is inferred from the retention of the check by the
bank and its subsequent charge of the amount to the drawer, although it was presented by, and
payment made, an unauthorized person. Judge Lurton cited the case of National Bank of the
Republic vs. Millard (10 Wall., 152; 19 L. ed., 897), wherein the Supreme Court of the United States,
not having such a case before it, threw out the suggestion that, if it was shown that a bank had
charged the check on its books against the drawer and made settlement with the drawee that the
holder could recover on account of money had and received, invoking the rule of justice and
fairness, it might be said there was an implied promise to the holder to pay it on demand.
(SeeNational Bank of the Republic vs. Millard, 10 Wall. [77 U. S.], 152; 19 L. ed., 899.) The
Tennessee court then argued that it would be inequitable and unconscionable for the owner and
payee of the check to be limited to an action against an insolvent drawer and might thereby lose the
debt. They recognized the legal principle that there is no privity between the drawer bank and the
holder, or payee, of the check, and proceeded to hold that no particular kind of writing was
necessary to constitute an acceptance and that it became a question of fact, and the bank became
liable when it stamped it "paid" and charged it to the account of the drawer, and cites, in support of
its opinion, Seventh National Bank vs. Cook (73 Pa., 483; 13 Am. Rep., 751); Saylor vs. Bushong
(100 Pa., 23; 45 Am. Rep., 353); and Dodge vs. Bank (20 Ohio St., 234; 5 Am. Rep., 648).
This decision was in 1890, prior to the enactment of the Negotiable Instruments Law by the
State of Tennessee. However, in this case Judge Snodgrass points out that the Millard
case, supra, was dicta. The Dodge case, from the Ohio court, held exactly as the Tennessee
court, but subsequently in the case of Elyria Bank vs. Walker Bin Co. (92 Ohio St., 406; 111
N. E., 147; L. R. A. 1916D, 433; Ann. Cas. 1917D, 1055), the court held to the contrary,
called attention to the fact that the Dodge case was no longer the law, and proceeded to

announce that, whatever might have been the law before the passage of the Negotiable
Instrument Act in that state, it was no longer the law; that the rule announced in the Dodge
case had been "discarded." The court, in the latter case, expressed its doubts that the courts
of Tennessee and Pennsylvania would adhere to the rule announced in the Pickle case,
quoted supra, in the face of the Negotiable Instrument Law. Subsequent to the Millard case,
the Supreme Court of the United States, in the case of First National Bank of
Washington vs. Whitman (94 U. S., 343, 347; 24 L. ed., 229), where the bank, without any
knowledge that the indorsement of the payee was unauthorized, paid the check, and it was
contended that by the payment the privity of contract existing between the drawer and
drawee was imparted to the payee, said:
"It is further contended that such an acceptance of the check as creates a privity between
the payee and the bank is established by the payment of the amount of this check in the
manner described. This argument is based upon the erroneous assumption that the bank
has paid this check. If this were true, it would have discharged all of its duty, and there would
be an end of the claim against it. The bank supposed that it had paid the check; but this was
an error. The money it paid was upon a pretended and not a real indorsement of the name of
the payee. The real indorsement of the payee was as necessary to a valid payment as the
real signature of the drawer; and in law the check remains unpaid. Its pretended payment did
not diminish the funds of the drawer in the bank, or put money in the pocket of the person
entitled to the payment. The state of the account was the same after the pretended payment
as it was before.
"We cannot recognize the argument that a payment of the amount of a check or sight draft
under such circumstances amounts to an acceptance, creating a privity of contract with the
real owner. It is difficult to construe a payment as an acceptance under any circumstances.
The two things are essentially different. One is a promise to perform an act, the other an
actual performance. A banker or an individual may be ready to make actual payment of a
check or draft when presented, while unwilling to make a promise to pay at a future time.
Many, on the other hand, are more ready to promise to pay than to meet the promise when
required. The difference between the transactions is essential and inherent."
Counsel for the appellant cite other cases holding that the stamping of the check "paid" and
the charging of the amount thereof to the drawer constituted an acceptance, but we are of
opinion that none of these cases cited hold that it is in compliance with the Negotiable
Instruments Act; paying the check and stamping same is not the equivalent of accepting the
check in writing signed by the drawee. The cases holding that payment as indicated above
constituted acceptance were rendered prior to the adoption of the Negotiable Instruments
Act in the particular state, and these decisions are divided into two classes: the one holding
that the check delivered by the drawer to the holder and presented to the bank or drawee
constitutes an assignment pro tanto; the other holding that the payment of the check and the
charging of same to the drawee although paid to an unauthorized person creates privity of
contract between the holder and the drawee bank.
We have already seen that our own court has repudiated the assignment pro tanto theory,
and since the adoption of the Negotiable Instrument Act by this state we are compelled to
say that payment of a check is not equivalent to accepting a check in writing and signing the
name of the acceptor thereon. Payment of the check and the charging of same to the drawer
does not constitute an acceptance. Payment of the check is the end of the voyage;
acceptance of the check is to fuel the vessel and strengthen it for continued operation on the
commercial sea. What we have said applies to the holder and not to the drawer of the check.
On this question we conclude that the general rule is that an action cannot be maintained by
a payee of the check against the bank on which is draw unless the check has been certified

or accepted by the bank in compliance with the statute, even though at the time the check is
that an action cannot be maintained by a payee of the drawer of the check out of which the
check is legally payable; and that the payment of the check by the bank on which it is drawn,
even though paid on the unauthorized indorsement of the name of the holder (without notice
of the defect by the bank), does not constitute a certification thereof, neither is it an
acceptance thereof; and without acceptance or certification, as provided by statute, there is
no privity of contract between the drawee bank and the payee, or holder of the check.
Neither is there an assignment pro tanto of the funds where the check is not drawn on a
particular fund, or does not show on its face that it is an assignment of a particular fund. The
above rule as stated seems to have been the rule in the majority of the states even before
the passage of the uniform Negotiable Instruments Act in the several states.
The decision in the case of First National Bank vs. Bank of Cottage Grove (59 Or., 388), which
appellant cites in its brief (pp. 12, 13 ) has been expressly overruled by the Supreme Court of
Massachusetts in South Boston Trust Co. vs. Levin (143 N. E., 816, 817), in the following language:
In First National Bank vs. Bank of Cottage Grove (59 Or., 388; 117 Pac., 293, 296, at page
396), it was said: "The payment of a bill or check by the drawee amounts to more than an
acceptance. The rule, holding that such a payment has all the efficacy of an acceptance, is
founded upon the principle that the greater includes the less." We are unable to agree with
this statement as there is no similarity between acceptance and payment; payment
discharges the instrument, and no one else is expected to advance anything on the faith of it;
acceptance, contemplates further circulation, induced by the fact of acceptance. The rule
that the acceptor made certain admissions which will inure to the benefit of subsequent
holders, has no applicability to payment of the instrument where subsequent holders can
never exist.
II. The old doctrine that a bank was bound to know its correspondent's signature and that a drawee
could not recover money paid upon a forgery of the drawer's name, because it was said, the drawee
was negligent not to know the forgery and it must bear the consequence of its negligence, is fast
fading into the misty past, where it belongs. It was founded in misconception of the fundamental
principles of law and common sense. (2 Morse, Banks and Banking, p. 1031.)
Some of the cases carried the rule to its furthest limit and held that under no circumstances (except,
of course, where the purchaser of the bill has participated in the fraud upon the drawee) would the
drawee be allowed to recover bank money paid under a mistake of fact upon a bill of exchange to
which the name of the drawer had been forged. This doctrine has been freely criticized by the
eminent authorities, as a rule too favorable to the holder, not the most fair, nor best calculated to
effectuate justice between the drawee and the drawer. (5 R.C.L., p. 556.)
The old rule which was originally announced by Lord Mansfield in the leading case of Price vs. Neal
(3 Burr., 1354), elicited the following comment from Justice Holmes, then Chief Justice of the
Supreme Court of Massachusetts, in the case of Dedham National Bank vs. Everett National Bank
(177 Mass., 392). "Probably the rule was adopted from an impression of convenience rather than for
any more academic reason; or perhaps we may say that Lord Mansfield took the case out of the
doctrine as to payments under a mistake of fact by the assumption that a holder who simply
presents negotiable paper for payment makes no representation as to the signature, and that the
drawee pays at his peril."
Such was the reaction that followed Lord Mansfield's rule which Justice Story of the United States
Supreme adopted in the case of Bank of United States vs. Georgia (10 Wheat., 333), that in B. B.
Ford & Co. vs. People's Bank of Orangeburg (74 S. C., 180), it was held that "an unrestricted

indorsement of a draft and presentation to the drawee is a representation that the signature of the
drawer is genuine", and in Lisbon First National Bank vs.Wyndmere Bank (15 N. D., 299), it was also
held that "the drawee of a forged check who has paid the same without detecting the forgery, may
upon discovery of the forgery, recover the money paid from the party who received the money, even
though the latter was a good faith holder, provided the latter has not been misled or prejudiced by
the drawee's failure to detect the forgery."
Daniel, in his treatise on Negotiable Instruments, has the following to say:
In all the cases which hold the drawee absolutely estoppel by acceptance or payment from denying
genuineness of the drawer's name, the loss is thrown upon him on the ground of negligence on his
part in accepting or paying, until he has ascertained the bill to be genuine. But the holder has
preceded him in negligence, by himself not ascertaining the true character of the paper before he
received it, or presented it for acceptance or payment. And although, as a general rule, the drawee
is more likely to know the drawer's handwriting than a stranger is, if he is in fact deceived as to its
genuineness, we do not perceive that he should suffer more deeply by mistake than a stranger, who,
without knowing the handwriting, has taken the paper without previously ascertaining its
genuineness. And the mistake of the drawee should always be allowed to be corrected, unless the
holder, acting upon faith and confidence induced by his honoring the draft, would be placed in a
worse position by according such privilege to him. This view has been applied in a well considered
case, and is intimidated in another; and is forcibly presented by Mr. Chitty, who says it is going a
great way to charge the acceptor with knowledge of his correspondent's handwriting, "unless
some bona fide holder has purchased the paper on the faith of such an act." Negligence in making
payment under a mistake of fact is not now deemed a bar to recovery of it, and we do not see why
any exception should be made to the principle, which would apply as well as to release an obligation
not consummated by payment. ( Vol. 2, 6th edition, pp. 1537-1539.)
III. But now the rule is perfectly well settled that in determining the relative rights of a drawee who,
under a mistake of fact, has paid, and a holder who has received such payment, upon a check to
which the name of the drawer has been forged, it is only fair to consider the question of diligence or
negligence of the parties in respect thereto. (Woods and Malone vs. Colony Bank [1902], 56 L. R. A.,
929, 932.) The responsibility of the drawee who pays a forged check, for the genuineness of the
drawer's signature, is absolute only in favor of one who has not, by his own fault or negligence,
contributed to the success of the fraud or to mislead the drawee. (National Bank of
America vs. Bangs, 106 Mass., 441; 8 Am. Rep., 349; Woods and Malone vs. Colony Bank, supra;
De Feriet vs.Bank of America, 23 La. Ann., 310; B. B. Ford & Co. vs. People's Bank of Orangeburg,
74 S. C., 180; 10 L. R. A. [N. S.], 63.) If it appears that the one to whom payment was made was not
an innocent sufferer, but was guilty of negligence in not doing something, which plain duty
demanded, and which, if it had been done, would have avoided entailing loss on any one, he is not
entitled to retain the moneys paid through a mistake on the part of the drawee bank. (First Nat. Bank
of Danvers vs. First Nat. Bank of Salem, 151 Mass., 280; 24 N. E., 44; 21 A. S. R., 450; First Nat.
Bank of Orleans vs. State Bank of Alma, 22 Neb., 769; 36 N. W., 289; 3 A. S. R., 294; American
Exp. Co. vs. State Nat. Bank, 27 Okla., 824; 113 Pac., 711; 33 L. R. A. [N. S.], 188; B. B. Ford &
Co. vs. People's Bank of Orangeburg, 74 S. C., 180; 54 S. E., 204; 114 A. S. R., 986; 7 Ann. Cas.,
744; 10 L. R. A. [N. S.], 63; People's Bank vs. Franklin Bank, 88 Tenn. 299; 12 S. W., 716; 17 A. S.
R.) 884; 6 L. R. A., 724; Canadian Bank of Commerce vs. Bingham, 30 Wash., 484; 71 Pac., 43; 60
L. R. A., 955.) In other words, to entitle the holder of a forged check to retain the money obtained he
must be able to show that the whole responsibility of determining the validity of the signature was
upon the drawee, and that the negligence of such drawee was not lessened by any failure of any
precaution which, from his implied assertion in presenting the check as a sufficient voucher, the
drawee had the right to believe he had taken. (Ellis vs. Ohio Life Insurance & Trust Co., 4 Ohio St.,
628; Rouvantvs. Bank, 63 Tex., 610; Bank vs. Ricker, 71 Ill., 429; First National Bank of
Danvers vs. First Nat. Bank of Salem, 24 N. E., 44, 45; B. B. Ford & Co. vs. People's Bank of

Orangeburg, supra.) The recovery is permitted in such case, because, although the drawee was
constructively negligent in failing to detect the forgery, yet if the purchaser had performed his duty,
the forgery would in all probability have been detected and the fraud defeated. (First National Bank
of Lisbon vs. Bank of Wyndmere, 15 N. D., 209; 10 L. R. A. [N. S.], 49.) In the absence of actual fault
on the part of the drawee, his constructive fault in not knowing the signature of the drawer and
detecting the forgery will not preclude his recovery from one who took the check under
circumstances of suspicion without proper precaution, or whose conduct has been such as to
mislead the drawee or induce him to pay the check without the usual scrutiny or other precautions
against mistake or fraud. (National Bank of America vs.Bangs, supra; First National Bank vs. Indiana
National Bank, 30 N. E., 808-810; Woods and Malone vs. Colony Bank, supra; First National Bank of
Danvers vs. First Nat. Bank of Salem, 151 Mass., 280.) Where a loss, which must be borne by one
of two parties alike innocent of forgery, can be traced to the neglect or fault of either, it is
unreasonable that it would be borne by him, even if innocent of any intentional fraud, through whose
means it has succeeded. (Gloucester Bank vs. Salem Bank, 17 Mass., 33; First Nat. Bank of
Danvers vs. First National Bank of Salem, supra; B. B. Ford & Co. vs. People's Bank of
Orangeburg, supra.) Again if the indorser is guilty of negligence in receiving and paying the check or
draft, or has reason to believe that the instrument is not genuine, but fails to inform the drawee of his
suspicions the indorser according to the reasoning of some courts will be held liable to the drawee
upon his implied warranty that the instrument is genuine. (B. B. Ford & Co. vs. People's Bank of
Orangeburg, supra; Newberry Sav. Bank vs. Bank of Columbia, 93 S. C., 294; 38 L. R. A. [N. S],
1200.) Most of the courts now agree that one who purchases a check or draft is bound to satisfy
himself that the paper is genuine; and that by indorsing it or presenting it for payment or putting it
into circulation before presentation he impliedly asserts that he has performed his duty, the drawee,
who has, without actual negligence on his part, paid the forged demand, may recover the money
paid from such negligent purchaser. (Lisbon First National Bank vs.Wyndmere Bank, supra.) Of
course, the drawee must, in order to recover back the holder, show that he himself was free from
fault. (See also 5 R. C. L., pp. 556-558.)
So, if a collecting bank is alone culpable, and, on account of its negligence only, the loss has
occurred, the drawee may recover the amount it paid on the forged draft or check. (Security
Commercial & Sav. Bank vs.Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945.)
But we are aware of no case in which the principle that the drawee is bound to know the signature of
the drawer of a bill or check which he undertakes to pay has been held to be decisive in favor of a
payee of a forged bill or check to which he has himself given credit by his indorsement. (Secalso,
Mckleroy vs. Bank, 14 La. Ann., 458; Canal Bank vs. Bank of Albany, 1 Hill, 287;
Rouvant vs. Bank, supra, First Nat. Bank vs. Indiana National Bank; 30 N. E., 808-810.)
In First Nat. Bank vs. United States National Bank ([1921], 100 Or., 264; 14 A. L. R., 479; 197 Pac.,
547), the court declared: "A holder cannot profit by a mistake which his negligent disregard of duty
has contributed to induce the drawee to commit. . . . The holder must refund, if by his negligence he
has contributed to the consummation of the mistake on the part of the drawee by misleading him. . . .
If the only fault attributable to the drawee is the constructive fault which the law raises from the bald
fact that he has failed to detect the forgery, and if he is not chargeable with actual fault in addition to
such constructive fault, then he is not precluded from recovery from a holder whose conduct has
been such as to mislead the drawee or induce him to pay the check or bill of exchange without the
usual security against fraud. The holder must refund to a drawee who is not guilty of actual fault if
the holder was negligent in not making due inquiry concerning the validity of the check before he
took it, and if the drawee can be said to have been excused from making inquiry before taking the
check because of having had a right to, presume that the holder had made such inquiry."
The rule that one who first negotiates forged paper without taking some precaution to learn whether
or not it is genuine should not be allowed to retain the proceeds of the draft or check from the

drawee, whose sole fault was that he did not discover the forgery before he paid the draft or check,
has been followed by the later cases. (Security Commercial & Savings Bank vs. Southern Trust & C.
Bank [1925], 74 Cal. App., 734; 241 Pac., 945; Hutcheson Hardware Co. vs. Planters State Bank
[1921], 26 Ga. App., 321; 105 S. E., 854; [Annotation at 71 A. L. R., 337].)
Where a bank, without inquiry or identification of the person presenting a forged check, purchases it,
indorses it, generally, and presents it to the drawee bank, which pays it, the latter may recover if its
only negligence was its mistake in having failed to detect the forgery, since its mistake, did not
mislead the purchaser or bring about a change in position. (Security Commercial & Savings
Bank vs. Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945.)
Also, a drawee could recover from another bank the portion of the proceeds of a forged check
cashed by the latter and deposited by the forger in the second bank and never withdrawn, upon the
discovery of the forgery three months later, after the drawee had paid the check and returned the
voucher to the purported drawer, where the purchasing bank was negligent in taking the check, and
was not injured by the drawee's negligence in discovering and reporting the forgery as to the amount
left on deposit, since it was not a purchaser for value. (First State Bank & T. Co. vs. First Nat. Bank
[1924], 314 Ill., 269; 145 N. E., 382.)
Similarly, it has been held that the drawee of a check could recover the amount paid on the check,
after discovery of the forgery, from another bank, which put the check into circulation by cashing it
for the one who had forged the signature of both drawer and payee without making any inquiry as to
who he was although he was a stranger, after which the check reached, and was paid by, the
drawee, after going through the hands of several intermediate indorsees. (71 A. L. R., p. 340.)
In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079, 1085), the following
statement was made:
We are clearly of opinion, therefore that the warranty of genuineness, arising upon the act of the
Brule National Bank in putting the check in circulation, was not discharged by payment of the check
by the drawee (First National Bank), nor was the Brule National Bank deceived or misled to its
prejudice by such payment. The Brule National Bank by its indorsement and delivery warranted its
own identification of Kost and the genuineness of his signature. The indorsement of the check by the
Brule National Bank was such as to assign the title to the check to its assignee, the Whitbeck
National Bank, and the amount was credited to the indorser. The check bore no indication that it was
deposited for collection, and was not in any manner restricted so as to constitute the indorsee the
agent of the indorser, nor did it prohibit farther negotiation of the instrument, nor did it appear to be in
trust for, or to the use of, any other person, nor was it conditional. Certainly the Pukwana Bank was
justified in relying upon the warrant of genuineness, which implied the full identification of Kost, and
his signature by the defendant bank. This view of the statute is in accord with the decisions of many
courts. (First National Bank vs.State Bank, 22 Neb., 769; 3 Am. St. Rep., 294; 36 N. W., 289; First
National Bank vs. First National Bank, 151 Mass., 280; 21 Am. St. Rep., 450; 24 N. E., 44; People's
Bank vs. Franklin Bank, 88 Tenn., 299; 6 L. R. A., 727; 17 Am. St. Rep., 884; 12 S. W., 716.)"
The appellant leans heavily on the case of Fidelity & Co. vs. Planenscheck (71 A. L. R., 331),
decided in 1929. We have carefully examined this decision and we do not feel justified in accepting
its conclusions. It is but a restatement of the long abandoned rule of Neal vs. Price, and it predicated
on the wrong premise that the payment includes acceptance, and that a bank drawee paying a
check drawn on it becomes ipso facto an acceptor within the meaning of section 62 of the
Negotiable Instruments Act. Moreover in a more recent decision, that of Louisa National
Bank vs. Kentucky National Bank (39 S. W. [2nd] 497, 501) decided in 1931, the Court of Appeals of
Kentucky held the following:

The appellee, on presentation for payment of $600 check, failed to discover it was a forgery.
It was bound to know the signature of its customer, Armstrong, and it was derelict in failing to
give his signature to the check sufficient attention and examination to enable it to discover
instantly the forgery. The appellant, when the check was presented to it by Banfield, failed to
make an inquiry of or about him and did not cause or have him to be identified. Its act in so
paying to him the check is a degree of negligence on its part equivalent to positive
negligence. It indorsed the check, and, while such indorsement may not be regarded within
the meaning of the Negotiable Instrument Law as amounting to a warranty to appellant of
that which it indorsed, it at least substantially served as a representation to it that it had
exercised ordinary care and had complied with the rules and customs of prudent banking. Its
indorsement was calculated, if it did not in fact do so, to lull the drawee bank into indifference
as to the drawer's signature to it when paying the check and charging it to its customer's
account and remitting its proceeds to appellant's correspondent.
If in such a transaction between the drawee and the holder of a check both are without fault,
no recovery may be had of the money so paid. (Deposit Bank of Georgetown vs. Fayette
National Bank, supra, and cases cited.) Or the rule may be more accurately stated that,
where the drawee pays the money, he cannot recover it back from a holder in good faith, for
value and without fault.
If, on the other hand, the holder acts in bad faith, or is guilty of culpable negligence, a
recovery may be had by the drawee of such holder. The negligence of the Bank of Louisa in
failing to inquire of and about Banfield, and to cause or to have him identified before it parted
with its money on the forged check, may be regarded as the primary and proximate cause of
the loss. Its negligence in this respect reached in its effect the appellee, and induced
incaution on its part. In comparison of the degrees of the negligence of the two, it is apparent
that of the appellant excels in culpability. Both appellant and appellee inadvertently made a
mistake, doubtless due to a hurry incident to business. The first and most grievous one was
made by the appellant , amounting to its disregard of the duty, it owed itself as well as the
duty it owed to the appellee, and it cannot on account thereof retain as against the appellee
the money which it so received. It cannot shift the loss to the appellee, for such disregard of
its duty inevitably contributed to induce the appellee to omit its duty critically to examine the
signature of Armstrong, even if it did not know it instantly at the time it paid the check.
(Farmers' Bank of Augusta vs. Farmer's Bank of Maysville, supra, and cases cited.)
IV. The question now is to determine whether the appellant's negligence in purchasing the checks in
question is such as to give the appellee the right to recover upon said checks, and on the other
hand, whether the drawee bank was not itself negligent, except for its constructive fault in not
knowing the signature of the drawer and detecting the forgery.
We quote with approval the following conclusions of the court a quo:
Check Exhibit A bears number 637023-D and is dated April 6, 1933, whereas check Exhibit
A-1 bears number 637020-D and is dated April 7, 1933. Therefore, the latter check, which is
prior in number to the former check, is however, issued on a later date. This circumstance
must have aroused at least the curiosity of the Motor Service Co., Inc.
The Motor Service Co., Inc., accepted the two checks from unknown persons. And not only
this; check Exhibit A is indorsed by a subagent of the agent of the payee, International Auto
Repair Shop. The Motor Service Co., Inc., made no inquiry whatsoever as to the extent of
the authority of these unknown persons. Our Supreme Court said once that "any person
taking checks made payable to a corporation, which can act only by agents, does so at his

peril, and must abide by the consequences if the agent who indorses the same is without
authority" (Insular Drug Co. vs. National Bank, 58, Phil., 684).
xxx

xxx

xxx

Check Exhibit A-1, aside from having been indorsed by a supposed agent of the international
Auto Repair Shop is crossed generally. The existence of two parallel lines transversally
drawn on the face of this check was a warning that the check could only be collected through
a banking institution (Jacobs, Law of Bills of Exchange, etc., pp., 179, 180; Bills of Exchange
Act of England, secs. 76 and 79). Yet the Motor Service Co., Inc., accepted the check in
payment for merchandise.
. . . In Exhibit H attached to the stipulation of facts as an integral part thereof, the Motor
Service Co., Inc., stated the following:
"The Pangasinan Transportation Co. is a good customer of this firm and we received checks
from them every month in payment of their account. The two checks in question seem to be
exactly similar to the checks which we received from the Pangasinan Transportation Co.
every month."
If the failure of the Motor Service Co., Inc., to detect the forgery of the drawer's signature in
the two checks, may be considered as an omission in good faith because of the similarity
stated in the letter, then the same consideration applies to the Philippine National Bank, for
the drawer is a customer of both the Motor Service Co., Inc., and the Philippine National
Bank. (B. of E., pp. 25, 28, 35.)
We are of opinion that the facts of the present case do not make it one between two equally innocent
persons, the drawee bank and the holder, and that they are governed by the authorities already cited
and also the following:
The point in issue has sometimes been said to be that of negligence. The drawee who has
paid upon the forged signature is held to bear the loss, because he has been negligent in
failing to recognize that the handwriting is not that of his customer. But it follows obviously
that if the payee, holder, or presenter of the forged paper has himself been in default, if he
has himself been guilty of a negligence prior to that of the banker, or if by any act of his own
he has at all contributed to induce the banker's negligence, then he may lose his right to cast
the loss upon the banker. The courts have shown a steadily increasing disposition to extend
the application of this rule over the new conditions of fact which from time to time arise, until
it can now rarely happen that the holder, payee, or presenter can escape the imputation of
having been in some degree contributory towards the mistake. Without any actual change in
the abstract doctrines of the law, which are clear, just, and simple enough, the gradual but
sure tendency and effect of the decisions have been to put as heavy a burden of
responsibility upon the payee as upon the drawee, contrary to the original custom. . . . (2
Morse on Banks and Banking, 5th ed., secs. 464 and 466, pp. 82-85 and 86, 87.)
In First National Bank vs. Brule National Bank (12 A. L. R., 1079, 1088, 1089), the following
statement appears in the concurring opinion:
What, then, should be the rule? The drawee asks to recover for money had and received. If
his claim did not rest upon a transaction relating to a negotiable instrument plaintiff could
recover as for money paid under mistake, unless defendant could show some equitable
reason, such as changed condition since, and relying upon, payment by plaintiff. In the

Wyndmere Case, the North Dakota court holds that this rule giving right to recover money
paid under mistake should extend to negotiable paper, and it rejects in its entirety the theory
of estoppel and puts a case of this kind on exactly the same basis as the ordinary case of
payment under mistake. But the great weight of authority, and that based on the better
reasoning, holds that the exigencies of business demand a different rule in relation to
negotiable paper. What is that rule? Is it an absolute estoppel against the drawee in favor of
a holder, no matter how negligent such holder has been? It surely is not. The correct rule
recognizes the fact that, in case of payment without a prior acceptance or certification, the
holder takes the paper upon the of the prior indorsers and the credit of the drawer, and not
upon the credit of the drawee, in making payment, has a right to rely upon the assumption
that the payee used due diligence, especially where such payee negotiated the bill or check
to a holder, thus representing that it had so fully satisfied itself as to the identity and
signature of the maker that it was willing to warrant as relates thereto to all subsequent
holders. (Uniform Act, secs. 65 and 66.) Such correct rule denies the drawee the right to
recover when the holder was without fault or when there has been some change of position
calling for equitable relief. When a holder of a bill of exchange uses all due care in the taking
of bill or check and the drawee thereafter pays same, the transaction is absolutely closed —
modern business could not be done on any other basis. While the correct rule promotes the
fluidity of two recognized mediums of exchange, those mediums by which the great bulk of
business is carried on, checks and drafts, upon the other hand it encourages and demands
prudent business methods upon the part of those receiving such mediums of exchange.
(Pennington County Bank vs. First State Bank, 110 Minn., 263; 26 L. R. A. [N. S.], 849; 136
Am. St. Rep., 496; 125 N. W., 119; First National Bank vs. State Bank, 22 Neb., 769; 3 Am.
St. Rep., 294; 36 N. W., 289; Bank of Williamson, vs. McDowell County Bank, 66 W. Va.,
545; 36 L. R. A. [N. S.], 605; 66 S. E., 761; Germania Bank vs. Boutell, 60 Minn., 189; 27 L.
R. A., 635; 51 Am. St. Rep., 519; 62 N. W., 327; American Express Co. vs. State National
Bank, 27 Okla., 824; 33 L. R. A. [N. S.], 188; 113 Pac., 711; Farmers' National
Bank vs. Farmers' & Traders Bank, L. R. A., 1915A, 77, and note (159 Ky., 141; 166 S. W.,
986].)
That the defendant bank did not use reasonable business prudence is clear. It took this
check from a stranger without other identification than that given by another stranger; its
cashier witnessed the mark of such stranger thus vouching for the identity and signature of
the maker; and it indorsed the check as "Paid," thus further throwing plaintiff off guard.
Defendant could not but have known, when negotiating such check and putting it into the
channel through which it would finally be presented to plaintiff for payment, that plaintiff, if it
paid such check, as defendant was asking it to do, would have to rely solely upon the
apparent faith and credit that defendant had placed in the drawer. From the very
circumstances of this case plaintiff had to act on the facts as presented to it by defendant,
upon such facts only.
But appellant argues that it so changed its position, after payment by plaintiff, that in "equity
and good conscience" plaintiff should not recover — it says it did not pay over any money to
the forger until after plaintiff had paid the check. There would be merit in such contention if
defendant had indorsed the check for "collection," thus advising plaintiff that it was relying on
plaintiff and not on the drawer. It stands in court where it would have been if it had done as it
represented.
In Woods and Malone vs. Colony Bank (56 L. R. A., 929, 932), the court said:
. . . If the holder has been negligent in paying the forged paper, or has by his conduct,
however innocent, misled or deceived the drawee to his damage, it would be unjust for him

to be allowed to shield himself from the results of his own carelessness by asserting that the
drawee was bound in law to know his drawer's signature.
V. Section 23 of the Negotiable Instruments Act provides that "when a signature is forged or made
without the authority of the person whose signature it purports to be, is wholly inoperative, and no
right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against
any party thereto, can be acquired through or under such signature, unless the party against whom it
is sought to enforce such right is precluded from setting up the forgery or want of authority.
It not appearing that the appellee bank did not warrant to the appellant the genuineness of the
checks in question, by its acceptance thereof, nor did it perform any act which would have induced
the appellant to believe in the genuineness of said instruments before appellant purchased them for
value, it can not be said that the appellee is precluded from setting up the forgery and, therefore, the
appellant is not entitled to retain the amount of the forged check paid to it by the appellee.
VI. It has been held by many courts that a drawee of a check, who is deceived by a forgery of the
drawer's signature may recover the payment back, unless his mistake has placed an innocent holder
of the paper in a worse position than he would have been in if the discovery of the forgery had been
made on presentation. (5 R. C. L., p. 559; 2 Daniel on Negotiable Instruments, 1538.) Forgeries
often deceived the eye of the most cautious experts; and when a bank has been deceived, it is a
harsh rule which compels it to suffer although no one has suffered by its being deceived. (17 A. L. R.
891; 5 R. C. L., 559.)
In the instant case should the drawee bank be allowed recovery, the appellant's position would not
become worse than if the drawee had refused the payment of these checks upon their presentation.
The appellant has lost nothing by anything which the drawee has done. It had in its hands some
forged worthless papers. It did not purchase or acquire these papers because of any representation
made to it by the drawee. It purchased them from unknown persons and under suspicious
circumstances. It had no valid title to them, because the persons from whom it received them did not
have such title. The appellant could not have compelled the drawee to pay them, and the drawee
could have refused payment had it been able to detect the forgery. By making a refund, the
appellant would only returning what it had received without any title or right. And when appellant
pays back the money it had received it will be entitled to have restored to it the forged papers it
parted with. There is no good reason why the accidental payment made by the appellant should
inure to the benefit of the appellant. If there were injury to the appellant said injury was caused not
by the failure of the appellee to detect the forgery but by the very negligence of the appellant in
purchasing commercial papers from unknown persons without making inquiry as to their
genuineness.
In the light of the foregoing discussion, we conclude:
1. That where a check is accepted or certified by the bank on which it is drawn, the bank is
estopped to deny the genuineness of the drawer's signature and his capacity to issue the
instrument;
2. That if a drawee bank pays a forged check which was previously accepted or certified by
the said bank it cannot recover from a holder who did not participate in the forgery and did
not have actual notice thereof;
3. That the payment of a check does not include or imply its acceptance in the sense that
this word is used in section 62 of the Negotiable Instruments Law;

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

SECOND DIVISION
BPI FAMILY BANK,

G.R. No. 148196
Petitioner,

- versus -

EDGARDO BUENAVENTURA,
LIZARDO and YOLANDA TICA,

MYRNA

Respondents.

x--------------------------x

EDGARDO BUENAVENTURA,
LIZARDO and YOLANDA TICA,

MYRNA

G.R. No. 148259

Petitioners,

Present:

PUNO, Chairman,
AUSTRIA-MARTINEZ,
- versus -

CALLEJO, SR.,
TINGA, and
CHICO-NAZARIO, JJ.

Promulgated:
BPI FAMILY BANK,
Respondent.

September 30, 2005

x----------------------------------------------------------- x

DECISION
AUSTRIA-MARTINEZ, J.:

Before us are two consolidated petitions for review on certiorari under Rule
45 of the Rules of Court assailing the Decision[1] of the Court of Appeals (CA) dated
November 27, 2000 in CA-G.R. CV No. 53962, which affirmed with modification
the Decision dated August 11, 1995 of the Regional Trial Court, Branch 25, Manila
(Manila RTC); and the CA Resolution dated May 3, 2001, which denied the parties’
separate motions for reconsideration.

The factual background of the case is as follows:

On May 23, 1990, Edgardo Buenaventura, Myrna Lizardo and Yolanda Tica
(Buenaventura, et al.), all officers of the International Baptist Church and
International Baptist Academy in Malabon, Metro Manila, filed a complaint for
“Reinstatement of Current Account/Release of Money plus Damages” against BPI
Family Bank (BPI-FB) before the Manila RTC, docketed as Civil Case No. 9053154.[2]

They alleged that: on August 30, 1989, they accepted from Amado Franco
BPI-FB Check No. 129004 dated August 29, 1989 in the amount of P500,000.00,
jointly issued by Eladio Teves and Joseph Teves;[3] they opened Current Account
No. 807-065314-0 with the BPI-FB Branch at Bonifacio Market, Edsa, Caloocan
City and deposited the check as initial deposit; the check was subsequently
cleared and the amount was credited to their Current
Account; on September 3, 1989, they drew a check in the amount of P10,171.50
and pursuant to normal banking procedure the check was honored and debited
from their Current Account, leaving a balance ofP490,328.50; on September 4,
1989, they drew another check in the amount of P46,189.60;
instead of debiting the said amount against their Current
Account, it was debited, without their knowledge and consent, against their
Savings Account No. 08-95332-5 with the same branch; on September 9, 1989,
they drew a check for P91,270.00 which, upon presentment for payment, was
dishonored for the reason “account closed,” in spite of the balance in the Current
Account of P490,328.50; they thereafter learned from BPI-FB that their Current
Account had been frozen upon instruction of Severino P. Coronacion, VicePresident of BPI-FB on the ground that the source of fund was illegal or
unauthorized; they demanded the reinstatement of the account, but BPI-FB
refused.

On June 20, 1990, BPI-FB filed a motion to dismiss on the ground of litis
pendentia, alleging that there is a pending case for recovery of sum of money
arising from the BPI-FB Check No. 129004 dated August 29, 1989 before the
Regional Trial Court (RTC), Branch 146, Makati[4] and Buenaventura is one of the
defendants therein.[5] Buenaventura, et al. opposed the motion to dismiss on the
ground that there is no identity of parties, rights asserted and reliefs prayed
between the two cases.[6]

On October 10, 1990, the Manila RTC denied the motion to dismiss, ruling
that there can be no res judicata between the two cases since the parties are
different and the causes of action are not the same.[7]

On December 10, 1990, BPI-FB filed its answer alleging that: the check
received by Buenaventura, et al. from Amado Franco was drawn by Eladio Teves
and Joseph Teves against the Current Account of the Tevesteco Arrastre
Stevedoring Co., Inc. (Tevesteco); the funds in the said Tevesteco account
allegedly consisted mainly of funds in the amount of P80,000,000.00 transferred
to it from another account belonging to the First Metro Investment Corporation
(FMIC); such transfer of funds was effected on the basis of an Authority to Debit
bearing the signatures of certain officers of FMIC; upon its investigation, BPI-FB
found that the signatures in the Authority to Debit were forged; before this,
however, Tevesteco had already issued several checks against its Current
Account,
one
of
which
is
the
BPI-FB
Check
No.
129004 received by Buenaventura, et al. from Amado Franco, after a series of
indorsements; it has the right to consider the Current Account of
Buenaventura, et al., which is funded from BPI-FB Check No. 129004, as closed
and to refuse any further withdrawal from the same; assuming that the forgery
claim of FMIC is untrue and incorrect, it is the right of the BPI-FB, as a matter of
protecting its interests, to freeze their account or to hold it in suspense and not to
allow any withdrawals therefrom in the meantime that the issue of forgery
remains unsettled; FMIC has instituted another civil action, presently pending
appeal, against BPI-FB and several other defendants for the recovery of

the P80,000,000.00 transferred from the former’s account to Tevesteco’s
account.[8]

Following trial on the merits, on August 11, 1995, the Manila RTC rendered
its decision, finding that: BPI-FB had no right to unilaterally freeze the deposits of
Buenaventura, et al. since the latter had no participation in any fraud that may
have attended the prior fund transfers from FMIC to Tevesteco; as holders in
good faith and for value of the BPI-FB Check No. 129004, their rights to the sum
embodied in the said check should have been respected; BPI-FB’s unilateral action
of freezing the Current Account amounted to an unlawful confiscation of
their property without due process. The dispositive portion of the RTC decision
reads as follows:

WHEREFORE, in view of the foregoing judgment is rendered in favor of the
plaintiff and against the defendant bank and the latter is ordered as follows:

1. To pay the plaintiff the sum of P490,328.50 representing the balance of the
plaintiff’s deposit under Account No. 807-065-313-0 which was unlawfully frozen by the
bank and finally debited against said account with legal rate of interest from date of
closure;

2. To pay the sum of P200,000.00 as moral damages;

3. To pay the amount of P200,000.00 as exemplary damages to serve as an
example and lesson to serve as a deterrent for similar action which the bank may take
against its depositors in the future;

4. To pay the sum of P50,000.00 as attorney’s fees.

SO ORDERED.[9]

Dissatisfied, BPI-FB appealed to the CA. It alleged that: the case should
have been dismissed for lack of cause of action because it is the International
Baptist Academy which is the owner of the funds deposited with BPI-FB and
therefore the real party-in-interest, although the account is in the name of
Buenaventura, et al.; the RTC should not have ordered the payment of the
balance of the Current Account of Buenaventura, et al. because the latter were
interested only in the reinstatement of their Current Account; the provisions of
the Negotiable Instruments Law should not have been applied by the RTC to
support its position that Buenaventura, et al. are the owners of the funds in their
Current Account; BPI-FB is entitled to freeze the account of Buenaventura, et
al. and to disallow any withdrawals therefrom as a measure to protect its interest;
BPI-FB, not Buenaventura, et al., is entitled to damages.
On November 27, 2000, the CA affirmed the decision of the Manila RTC,
holding that BPI-FB did not act in accordance with law.[10] It ruled that the
relationship between the bank and the depositor is that of debtor and creditor
and, as such, BPI-FB could not lawfully refuse to make payments on the checks
drawn and issued by Buenaventura, et al., provided only that there are funds
available in the latter’s deposit. It further declared that BPI-FB is not justified in
freezing the amounts deposited by Buenaventura, et al. for suspicion of being
“illegal” or “unauthorized” as a result of the claimed fraud perpetuated against
FMIC because: (a) it has not been sufficiently shown that the funds in the account
of Buenaventura, et al. were derived exclusively from the alleged P80,000,000.00
unlawfully transferred from the funds of FMIC or that the deposit under the name
of Tevesteco consisted exclusively of the said P80,000,000.00 debited
from FMIC’s account; and (b) there is no clear proof of any involvement of
Buenaventura, et al., the International Baptist Church or International Baptist
Academy in the alleged irregularities attending the fund transfer from FMIC to
Tevesteco.

The CA also found unmeritorious BPI-FB’s claim that Buenaventura, et
al. have no cause of action since the International Baptist Academy is the real
party-in-interest. It held that since it is undisputed that it is the Current Account

of Buenaventura, et al. which was frozen and closed by BPI-FB, then the former
are the parties-in-interest in the reopening of the said account. It found no error
in the Manila RTC’s order that BPI-FB pay the amount of P490,328.50 plus interest
directly to Buenaventura, et al. since the reinstatement of the Current Account
would mean the same thing as the payment of the balance; Buenaventura, et
al. would necessarily have the right to withdraw their deposit if and when they
see it fit. Furthermore, the CA held that the RTC’s disposition falls under the
general prayer of Buenaventura, et al. for such other reliefs as may be just and
equitable under the attendant circumstances.

With regard to award of damages, the CA sustained the award of moral
damages and attorney’s fees, holding that BPI-FB’s actuations were established to
have caused Buenaventura, et al. to incur the distrust of their Baptist brethren,
besides suffering mental anguish, serious anxiety, wounded feelings, and moral
shock but found no basis for the award of exemplary damages of P200,000.00 for
lack of showing that BPI-FB was not animated by any wanton, fraudulent,
reckless, oppressive or malevolent intent.

Both parties filed separate motions for reconsideration. Buenaventura, et
al. sought reconsideration of the deletion of the award of exemplary
damages.[11] On the other hand, BPI-FB reiterated its argument that the
International Baptist Academy is the real party-in-interest. It also assailed the
findings and conclusions of the CA.[12]

On May 3, 2001, the CA denied both motions for reconsideration.[13]

Hence, the present two consolidated petitions for review on certiorari.

In G.R No. 148196, BPI-FB ascribes six errors upon the CA, to wit:

I.
The Honorable Court of Appeals committed a reversible error in holding
that the respondents are the real parties-in-interest in this case contrary to the
admissions of respondents themselves that it is the International Baptist Academy who
is the owner of the funds in question and hence it is and out to be the real party in
interest in this case.

II.
The Honorable Court of Appeals committed a grave abuse of discretion in
not dismissing respondent’s complaint for lack of cause of action.
III.
The Honorable Court of Appeals committed a reversible error in NOT
holding, based on a misapprehension of facts that BPI-FB is entitled to freeze
respondents’ account and to disallow any withdrawal therefrom as a measure to protect
its interest.

IV.
The Honorable Court of Appeals committed a reversible error in holding,
based on a misapprehension of facts, that it has not been sufficiently shown that the
funds in deposit with BPI-FB under the name of the respondents were derived
exclusively from the alleged 80 million pesos unlawfully transferred from the funds of
FMIC or that the deposit under the name of Tevesteco consisted exclusively of the said
80 million pesos debited from FMIC’s account.

V.
The Honorable Court of Appeals committed a grave abuse of discretion in
NOT upholding the position of BPI-FB on the freezing of respondents’ current account
when it held that there was no clear proof of any involvement by the respondents with
the alleged irregularities attending the fund transfer from FMIC to Tevesteco.

VI.
The Honorable Court of Appeals committed a grave abuse of discretion,
in holding, in effect, that there is nothing wrong with the Lower Court’s order directing
BPI-FB to pay to respondents directly the balance of their account plus interest although
their prayer in their complaint was only to reinstate their current account.[14]

Anent the first and second grounds, BPI-FB maintains that the complaint
should have been dismissed for lack of cause of action because Buenaventura et
al. admit that the International Baptist Academy is the owner of the funds in
question and therefore the real party-in-interest to prosecute the action.

On the third ground, BPI-FB asserts that it has the right to consider the
account of Buenaventura, et al. as frozen and to refuse any withdrawals
from the same because of the forgery claim of FMIC. Assuming the forgery claim
of FMIC is true and correct, the amount transferred from FMIC’s account to
Tevesteco’s account is the money of BPI-FB under the principle that a bank is
deemed to have disbursed its own funds. It submits that as an original owner
who is restored in possession of stolen property, it has a better right over such
property than a mere transferee no matter how innocent the latter may be.

Concerning the fourth ground, BPI-FB submits that ample proof was
presented by it that the deposit under the name of Tevesteco consisted
exclusively of the P80,000,000.00 debited from FMIC’s account and the funds in
deposit with BPI-FB under the name of Buenaventura, et al. were derived
exclusively from the P80,000,000.00 unlawfully transferred from the funds of
FMIC.

With regard to the fifth ground, BPI-FB concedes that there is no clear
proof of any involvement by Buenaventura, et al. in the alleged irregularities
attending the fund transfer from FMIC to Tevesteco. It insists, however, that the
freezing of the account was triggered by the forgery claim of FMIC and the
unauthorized fund transfer to Tevesteco based on the principle that a bank is
deemed to have disbursed its own funds, and not its depositors, where the

authority for such disbursement is a forgery and null and void. It had the right to
set up its ownership of the money as against that of Buenaventura, et al. and to
refuse to return the same to them.

As to the sixth ground, BPI-FB points out that Buenaventura, et al. originally
prayed in the alternative for the reinstatement of their Current Account or for
payment of the balance remaining in said account but they subsequently chose to
delete that portion praying for the payment of the balance of their account. It
submits that Buenaventura, et al. deliberately did this to sidestep the other
pending case filed against the suspected perpetrators of the fraud, including
Amado Franco and Buenaventura, before RTC, Branch 146, Makati.

In G.R. No. 148259, Buenaventura, et al. anchor their petition on a sole
ground, to wit:

The Honorable Court of Appeals has decided the case in a way not in accord
with law and applicable jurisprudence in the deletion of the award of exemplary
damages granted by the court a quo.[15]

They submit that BPI-FB acted in a wanton, reckless, oppressive and
malevolent manner in freezing, and subsequently closing, their account without
prior notification. They insist that BPI-FB failed in its obligation, as an entity
engaged in business affected with public interest, to treat the accounts of its
depositors with meticulous care, having in mind the fiduciary nature of their
relationship. Moreover, as if to compound its reckless conduct, BPI-FB declared
itself the owner of the money which the depositors have placed in its care,
freezing and later closing the depositors’ account, all before due notice and
without first giving the latter the opportunity to properly present their side or at
least sufficient time to direct their course of action, like refraining from issuing

any check, to eventually save themselves from any embarrassment and/or
possible criminal prosecution for estafa or violation of Batas Pambansa Blg. 22.

We rule in favor of Buenaventura, et al.

It is elementary that it is only in the name of a real party-in-interest that a
civil suit may be prosecuted. Under Section 2, Rule 3 of the Rules of Civil
Procedure, a real party-in-interest is the party who stands to be benefited or
injured by the judgment in the suit, or the party entitled to the avails of the suit.
"Interest" within the meaning of the rule means material interest, an interest in
issue and to be affected by the decree, as distinguished from mere interest in the
question involved, or a mere incidental interest.[16] One having no right or
interest to protect cannot invoke the jurisdiction of the court as a party plaintiff in
an action.[17] To qualify a person to be a real party-in-interest in whose name an
action must be prosecuted, he must appear to be the present real owner of the
right sought to be enforced.[18] Since a contract may be violated only by the
parties thereto as against each other, in an action upon that contract, the real
parties-in-interest, either as plaintiff or as defendant, must be parties to the said
contract.[19]

In the present case, Buenaventura, et al. are the real parties-ininterest. They are the parties who contracted with BPI-FB with regard to the
Current Account. While the funds were used for purposes of the International
Baptist Church and the International Baptist Academy, it must be noted that the
Current Account is in the name of Buenaventura, et al. They are the signatories of
the check which was dishonored by BPI-FB upon presentment and the ones who
will be held accountable for the nonpayment or dishonor of any check they
issued. Thus, they are the real parties-in-interest to enforce the terms of the
contract of deposit with BPI-FB.

Furthermore, BPI-FB has no unilateral right to freeze the current account of
Buenaventura, et al. based on the suspicion that the funds in the latter’s
account are illegal or unauthorized having been sourced from the
unlawful transfer of funds from the account of FMIC to Tevesteco and disallow
any withdrawal therefrom to allegedly protect its interest.

Needless to stress, the contract between a bank and its depositor is
governed by the provisions of the Civil Code on simple loan.[20] Thus, there is a
debtor-creditor relationship between a bank and its depositor. The bank is the
debtor and the depositor is the creditor. The depositor lends the bank money
and the bank agrees to pay the depositor on demand. The savings or current
deposit agreement between the bank and the depositor is the contract that
determines the rights and obligations of the parties.

Every bank that issues checks for the use of its customers should know
whether or not the drawer's signature thereon is genuine, whether there are
sufficient funds in the drawers account to cover checks issued, and it should be
able to detect alterations, erasures, superimpositions or intercalations thereon,
for these instruments are prepared, printed and issued by itself, it has control of
the drawer's account, and it is supposed to be familiar with the drawer's
signature. It should possess appropriate detecting devices for uncovering
forgeries and/or alterations on these instruments. Unless a forgery or alteration is
attributable to the fault or negligence of the drawer himself, 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, otherwise, it bears the
loss.[21]

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, as in this case, 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.[22]

Having been negligent in detecting the forgery prior to clearing the check,
BPI-FB should bear the loss and can’t shift the blame to Buenaventura, et
al. having failed to show any participation on their part in the forgery. BPI-FB fails
to point any circumstance which should have put Buenaventura, et al. on inquiry
as to the why and wherefore of the possession of the check by Amado Franco.
Buenaventura,et al. were not privies to any transaction involving FMIC, Tevesteco
or Franco. They thus had no obligation to ascertain from Franco what the nature
of the latter’s title to the checks was, if any, or the nature of his possession. They
cannot be guilty of gross neglect amounting to legal absence of good faith, absent
any showing that there was something amiss about Franco’s acquisition or
possession of the check, which was payable to bearer.[23]

Thus, the fact that the funds in deposit with BPI-FB under the name of
Buenaventura, et al. were allegedly derived exclusively from the
alleged P80,000,000.00 unlawfully transferred from the funds of FMIC or that the
deposit under the name of Tevesteco consisted allegedly exclusively of the
said P80,000,000.00 debited from FMIC’s account is immaterial. These
circumstances cannot be used against a party not privy to the forgery.

There is no merit to the claim that the CA erred in affirming the RTC’s order
directing BPI-FB to pay the balance of their account plus interest although the
prayer was only to reinstate their Current Account. The complaint does contain a
general prayer “for such other relief as may be just and equitable in the
premises.” And this general prayer is broad enough “to justify extension of a
remedy different from or together with the specific remedy sought.”[24] Indeed, a
court may grant relief to a party, even if the party awarded did not pray for it in
his pleadings.[25]

As to the prayer of Buenaventura, et al. for exemplary damages, the Court
finds that the CA erred in deleting the award of exemplary damages. The law
allows the grant of exemplary damages to set an example for the public
good.[26] The business of a bank is affected with public interest; thus, it makes a
sworn profession of diligence and meticulousness in giving irreproachable
service.[27] For this reason, the bank should guard against injury attributable to
negligence or bad faith on its part.[28] The award of exemplary damages is proper
as a warning to BPI-FB and all concerned not to recklessly disregard their
obligation to exercise the highest and strictest diligence in serving their
depositors. However, the award should be in a reduced amount of P50,000.00
since exemplary damages are imposed not to enrich one party or impoverish
another but to serve as a deterrent against or as a negative incentive to curb
socially deleterious actions.[29]

In summation, the Court reminds BPI-FB that the banking sector must at all
times maintain a high level of meticulousness, always having in mind the fiduciary
nature of its relationship with its depositors.[30] This fiduciary relationship means
that the bank’s obligation to observe “high standards of integrity and
performance” is deemed written into every deposit agreement between a bank
and its depositor. Failure to comply with this standard shall render a bank liable
to its depositors for damages.

WHEREFORE, the petition in G.R. No. 148196 is DENIED and the petition in
G.R. No. 148259 is GRANTED. The assailed Decision dated November 27, 2000
and Resolution dated May 3, 2001 of the Court of Appeals in CA-G.R. CV No.
53962, which affirmed with modification the Decision rendered by the Regional
Trial Court, Branch 25, Manila, dated August 11, 1995 in Civil Case No. 90-53154,
are hereby AFFIRMED with the MODIFICATION that BPI Family Bank is directed to
pay Buenaventura, et al. the amount of P50,000.00 as exemplary damages. Costs
against BPI Family Bank.

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-37467

December 11, 1933

SAN CARLOS MILLING CO., LTD., plaintiff-appellant,
vs.
BANK OF THE PHILIPPINE ISLANDS and CHINA BANKING CORPORATION, defendantsappellees.
Gibbs and McDonough and Roman Ozaeta for appellant.
Araneta, De Joya, Zaragosa and Araneta for appellee Bank of the Philippine Islands.
Marcelo Nubla and Guevara, Francisco and Recto for appellee China Banking Corporation.

HULL, J.:
Plaintiff corporation, organized under the laws of the Territory of Hawaii, is authorized to engaged in
business in the Philippine Islands, and maintains its main office in these Islands in the City of Manila.
The business in the Philippine Islands was in the hands of Alfred D. Cooper, its agent under general
power of attorney with authority of substitution. The principal employee in the Manila office was one
Joseph L. Wilson, to whom had been given a general power of attorney but without power of
substitution. In 1926 Cooper, desiring to go on vacation, gave a general power of attorney to
Newland Baldwin and at the same time revoked the power of Wilson relative to the dealings with the
Bank of the Philippine Islands, one of the banks in Manila in which plaintiff maintained a deposit.
About a year thereafter Wilson, conspiring together with one Alfredo Dolores, a messenger-clerk in
plaintiff's Manila office, sent a cable gram in code to the company in Honolulu requesting a
telegraphic transfer to the China Banking Corporation of Manila of $100,00. The money was
transferred by cable, and upon its receipt the China Banking Corporation, likewise a bank in which
plaintiff maintained a deposit, sent an exchange contract to plaintiff corporation offering the sum of
P201,000, which was then the current rate of exchange. On this contract was forged the name of
Newland Baldwin and typed on the body of the contract was a note:
lawphil .net

Please send us certified check in our favor when transfer is received.
A manager's check on the China Banking Corporation for P201,000 payable to San Carlos Milling
Company or order was receipted for by Dolores. On the same date, September 28, 1927, the
manger's check was deposited with the Bank of the Philippine Islands by the following endorsement:
For deposit only with Bank of the Philippine Islands, to credit of account of San Carlos Milling
Co., Ltd.

By (Sgd.) NEWLAND BALDWIN
For Agent
The endorsement to which the name of Newland Baldwin was affixed was spurious.
The Bank of the Philippine Islands thereupon credited the current account of plaintiff in the sum of
P201,000 and passed the cashier's check in the ordinary course of business through the clearing
house, where it was paid by the China Banking Corporation.
On the same day the cashier of the Bank of the Philippine Islands received a letter, purporting to be
signed by Newland Baldwin, directing that P200,000 in bills of various denominations, named in the
letter, be packed for shipment and delivery the next day. The next day, Dolores witnessed the
counting and packing of the money, and shortly afterwards returned with the check for the sum of
P200,000, purporting to be signed by Newland Baldwin as agent.
Plaintiff had frequently withdrawn currency for shipment to its mill from the Bank of the Philippine
Islands but never in so large an amount, and according to the record, never under the sole
supervision of Dolores as the representative of plaintiff.
Before delivering the money, the bank asked Dolores for P1 to cover the cost of packing the money,
and he left the bank and shortly afterwards returned with another check for P1, purporting to be
signed by Newland Baldwin. Whereupon the money was turned over to Dolores, who took it to
plaintiff's office, where he turned the money over to Wilson and received as his share, P10,000.
Shortly thereafter the crime was discovered, and upon the defendant bank refusing to credit plaintiff
with the amount withdrawn by the two forged checks of P200,000 and P1, suit was brought against
the Bank of the Philippine Islands, and finally on the suggestion of the defendant bank, an amended
complaint was filed by plaintiff against both the Bank of the Philippine Islands and the China Banking
Corporation.
At the trial the China Banking Corporation contended that they had drawn a check to the credit of the
plaintiff company, that the check had been endorsed for deposit, and that as the prior endorsement
had in law been guaranteed by the Bank of the Philippine Islands, when they presented the cashier's
check to it for payment, the China Banking Corporation was absolved even if the endorsement of
Newland Baldwin on the check was a forgery.
The Bank of the Philippine Islands presented many special defenses, but in the main their
contentions were that they had been guilty of no negligence, that they had dealt with the accredited
representatives of the company in the due course of business, and that the loss was due to the
dishonesty of plaintiff's employees and the negligence of plaintiff's general agent.
In plaintiff's Manila office, besides the general agent, Wilson, and Dolores, most of the time there
was employed a woman stenographer and cashier. The agent did not keep in his personal
possession either the code-book or the blank checks of either the Bank of the Philippine Islands or
the China Banking Corporation. Baldwin was authorized to draw checks on either of the
depositaries. Wilson could draw checks in the name of the plaintiff on the China Banking
Corporation.
After trial in which much testimony was taken, the trial court held that the deposit of P201,000 in the
Bank of the Philippine Islands being the result of a forged endorsement, the relation of depositor and
banker did not exist, but the bank was only a gratuitous bailee; that the Bank of the Philippine
Islands acted in good faith in the ordinary course of its business, was not guilty of negligence, and

therefore under article 1902 of the Civil Code which should control the case, plaintiff could not
recover; and that as the cause of loss was the criminal actions of Wilson and Dolores, employees of
plaintiff, and as Newland Baldwin, the agent, had not exercised adequate supervision over plaintiff's
Manila office, therefore plaintiff was guilty of negligence, which ground would likewise defeat
recovery.
From the decision of the trial court absolving the defendants, plaintiff brings this appeal and makes
nine assignments of error which we do not deem it necessary to discuss in detail.
There is a mild assertion on the part of the defendant bank that the disputed signatures of Newland
Baldwin were genuine and that he had been in the habit of signing checks in blank and turning the
checks so signed over to Wilson.
The proof as to the falsity of the questioned signatures of Baldwin places the matter beyond
reasonable doubt, nor is it believed that Baldwin signed checks in blank and turned them over to
Wilson.
As to the China Banking Corporation, it will be seen that it drew its check payable to the order of
plaintiff and delivered it to plaintiff's agent who was authorized to receive it. A bank that cashes a
check must know to whom it pays. In connection with the cashier's check, this duty was therefore
upon the Bank of the Philippine Islands, and the China Banking Corporation was not bound to
inspect and verify all endorsements of the check, even if some of them were also those of depositors
in that bank. It had a right to rely upon the endorsement of the Bank of the Philippine Islands when it
gave the latter bank credit for its own cashier's check. Even if we would treat the China Banking
Corporation's cashier's check the same as the check of a depositor and attempt to apply the
doctrines of the Great Eastern Life Insurance Co. vs. Hongkong & Shanghai Banking Corporation
and National Bank (43 Phil., 678), and hold the China Banking Corporation indebted to plaintiff, we
would at the same time have to hold that the Bank of the Philippine Islands was indebted to the
China Banking Corporation in the same amount. As, however, the money was in fact paid to plaintiff
corporation, we must hold that the China Banking Corporation is indebted neither to plaintiff nor to
the Bank of the Philippine Islands, and the judgment of the lower court far as it absolves the China
Banking Corporation from responsibility is affirmed.
Returning to the relation between plaintiff and the Bank of the Philippine Islands, we will now
consider the effect of the deposit of P201,000. It must be noted that this was not a presenting of the
check for cash payment but for deposit only. It is a matter of general knowledge that most
endorsements for deposit only, are informal. Most are by means of a rubber stamp. The bank would
have been justified in accepting the check for deposit even with only a typed endorsement. It
accepted the check and duly credited plaintiff's account with the amount on the face of the check.
Plaintiff was not harmed by the transaction as the only result was the removal of that sum of money
from a bank from which Wilson could have drawn it out in his own name to a bank where Wilson
would not have authority to draw checks and where funds could only be drawn out by the check of
Baldwin.
Plaintiff in its letter of December 23, 1928, to the Bank of the Philippine Islands said in part:
". . . we now leave to demand that you pay over to us the entire amount of said manager's
check of two hundred one thousand (P201,000) pesos, together with interest thereon at the
agreed rate of 3 ½ per cent per annum on daily balances of our credit in account current with
your bank to this date. In the event of your refusal to pay, we shall claim interest at the legal
rate of 6 per cent from and after the date of this demand inasmuch as we desire to withdraw

and make use of the money." Such language might well be treated as a ratification of the
deposit.
The contention of the bank that it was a gratuitous bailee is without merit. In the first place, it is
absolutely contrary to what the bank did. It did not take it up as a separate account but it transferred
the credit to plaintiff's current account as a depositor of that bank. Furthermore, banks are not
gratuitous bailees of the funds deposited with them by their customers. Banks are run for gain, and
they solicit deposits in order that they can use the money for that very purpose. In this case the
action was neither gratuitous nor was it a bailment.
On the other hand, we cannot agree with the theory of plaintiff that the Bank of the Philippine Islands
was an intermeddling bank. In the many cases cited by plaintiff where the bank that cashed the
forged endorsement was held as an intermeddler, in none was the claimant a regular depositor of
the bank, nor in any of the cases cited, was the endorsement for deposit only. It is therefore clear
that the relation of plaintiff with the Bank of the Philippine Islands in regard to this item of P201,000
was that of depositor and banker, creditor and debtor.
We now come to consider the legal effect of payment by the bank to Dolores of the sum of
P201,000, on two checks on which the name of Baldwin was forged as drawer. As above stated, the
fact that these signatures were forged is beyond question. It is an elementary principle both of
banking and of the Negotiable Instruments Law that —
A bank is bound to know the signatures of its customers; and if it pays a forged check, it
must be considered as making the payment out of its own funds, and cannot ordinarily
charge the amount so paid to the account of the depositor whose name was forged. (7 C.J.,
683.)
There is no act of the plaintiff that led the Bank of the Philippine Islands astray. If it was in fact lulled
into a false sense of security, it was by the effrontery of Dolores, the messenger to whom it entrusted
this large sum of money.
The bank paid out its money because it relied upon the genuineness of the purported signatures of
Baldwin. These, they never questioned at the time its employees should have used care. In fact,
even today the bank represents that it has a relief that they are genuine signatures.
The signatures to the check being forged, under section 23 of the Negotiable Instruments Law they
are not a charge against plaintiff nor are the checks of any value to the defendant.
It must therefore be held that the proximate cause of loss was due to the negligence of the Bank of
the Philippine Islands in honoring and cashing the two forged checks.
The judgment absolving the Bank of the Philippine Islands must therefore be reversed, and a
judgment entered in favor of plaintiff-appellant and against the Bank of the Philippine Islands,
defendant-appellee, for the sum of P200,001, with legal interest thereon from December 23,1928,
until payment, together with costs in both instances. So ordered.
Malcolm, Villa-Real, Vickers, and Imperial, JJ., concur.

Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-53194 March 14, 1988
PHILIPPINE NATIONAL BANK petitioner,
vs.
HON. ROMULO S. QUIMPO, Presiding Judge, Court of First Instance of Rizal, Branch XIV, and
FRANCISCO S. GOZON II, respondents.

GANCAYCO, J.:
On July 3, 1973, Francisco S. Gozon II, who was a depositor of the Caloocan City Branch of the
Philippine National Bank, went to the bank in his car accompanied by his friend Ernesto Santos
whom he left in the car while he transacted business in the bank. When Santos saw that Gozon left
his check book he took a check therefrom, filled it up for the amount of P5,000.00, forged the
signature of Gozon, and thereafter he encashed the check in the bank on the same day. The
account of Gozon was debited the said amount. Upon receipt of the statement of account from the
bank, Gozon asked that the said amount of P5,000.00 should be returned to his account as his
signature on the check was forged but the bank refused.
Upon complaint of private respondent on February 1, 1974 Ernesto Santos was apprehended by the
police authorities and upon investigation he admitted that he stole the check of Gozon, forged his
signature and encashed the same with the Bank.
Hence Gozon filed the complaint for recovery of the amount of P5,000.00, plus interest, damages,
attorney's fees and costs against the bank in the Court of First Instance of Rizal. After the issues
were joined and the trial on the merits ensued, a decision was rendered on February 4, 1980, the
dispositive part of which reads as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff. The defendant is
hereby condemned to return to plaintiff the amount of P5,000.00 which it had
unlawfully withheld from the latter, with interest at the legal rate from September 22,
1972 until the amount is fully delivered. The defendant is further condemned to pay
plaintiff the sum of P2,000.00 as attorney's fees and to pay the costs of this suit.
Not satisfied therewith, the bank now filed this petition for review on certiorari in this Court raising the
sole legal issue that —
THE ACT OF RESPONDENT FRANCISCO GOZON, II IN PUTTING HIS CHECK
BOOK CONTAINING THE CHECK IN QUESTION INTO THE HANDS OF
ERNESTO SANTOS WAS INDEED THE PROXIMATE CAUSE OF THE LOSS,
THEREBY PRECLUDING HIM FROM SETTING UP THE DEFENSE OF FORGERY
OR WANT 0F AUTHORITY UNDER SECTION 23 OF THE NEGOTIABLE
INSTRUMENTS LAW, ACT NO. 3201

The petition is devoid of merit.
This Court reproduces with approval the disquisition of the court a quo as follows:
A bank is bound to know the signatures of its customers; and if it pays a forged
check, it must be considered as making the payment out of its own funds, and cannot
ordinarily change the amount so paid to the account of the depositor whose name
was forged' (San Carlos Milling Co. vs. Bank of the P.I., 59 Phil. 59).
This rule is absolutely necessary to the circulation of drafts and checks, and is based
upon the presumed negligence of the drawee in failing to meet its obligation to know
the signature of its correspondent. ... There is nothing inequitable in such a rule. If
the paper comes to the drawee in the regular course of business, and he, having the
opportunity ascertaining its character, pronounces it to be valid and pays it, it is not
only a question of payment under mistake, but payment in neglect of duty which the
commercial law places upon him, and the result of his negligence must rest upon him
(12 ALR 1901, citing many cases found in I Agbayani, supra).
Defendant, however, interposed the defense that it exercised diligence in accordance
with the accepted norms of banking practice when it accepted and paid Exhibit "A". It
presented evidence that the check had to pass scrutiny by a signature verifier as well
as an officer of the bank.
A comparison of the signature (Exhibit "A-l") on the forged check (Exhibit "A") with
plaintiffs exemplar signatures (Exhibits "5-N" and "5-B") found in the PNB Form 35-A
would immediately show the negligence of the employees of the defendant bank.
Even a not too careful comparison would immediately arrest one's attention and
direct it to the graceful lines of plaintiffs exemplar signatures found in Exhibits "5-A"
and "5-B". The formation of the first letter "F" in the exemplars, which could be
regarded as artistic, is completely different from the way the same letter is formed in
Exhibit "A-l". That alone should have alerted a more careful and prudent signature
verifier.
The prime duty of a bank is to ascertain the genuineness of the signature of the drawer or the
depositor on the check being encashed. 1 It is expected to use reasonable business prudence in
accepting and cashing a check presented to it.

In this case the findings of facts of the court a quo are conclusive. The trial court found that a
comparison of the signature on the forged check and the sample signatures of private respondent
show marked differences as the graceful lines in the sample signature which is completely different
from those of the signature on the forged check. Indeed the NBI handwriting expert Estelita Santiago
Agnes whom the trial court considered to be an "unbiased scientific expert" indicated the marked
differences between the signature of private respondent on the sample signatures and the
questioned signature. Notwithstanding the testimony of Col. Fernandez, witness for petitioner,
advancing the opinion that the questioned signature appears to be genuine, the trial court by merely
examining the pictorial report presented by said witness, found a marked difference in the second "c"
in Francisco as written on the questioned signature as compared to the sample signatures, and the
separation between the "s" and the "c" in the questioned signature while they are connected in the
sample signatures. 2
Obviously, petitioner was negligent in encashing said forged check without carefully examining the
signature which shows marked variation from the genuine signature of private respondent.

In reference to the allegation of the petitioner that it is the negligence of private respondent that is
the cause of the loss which he suffered, the trial court held:
The act of plaintiff in leaving his checkbook in the car while he went out for a short
while can not be considered negligence sufficient to excuse the defendant bank from
its own negligence. It should be home in mind that when defendant left his car,
Ernesto Santos, a long time classmate and friend remained in the same. Defendant
could not have been expected to know that the said Ernesto Santos would remove a
check from his checkbook. Defendant had trust in his classmate and friend. He had
no reason to suspect that the latter would breach that trust .
We agree.
Private respondent trustee Ernesto Santos as a classmate and a friend. He brought him along in his
car to the bank and he left his personal belongings in the car. Santos however removed and stole a
check from his cheek book without the knowledge and consent of private respondent. No doubt
private respondent cannot be considered negligent under the circumstances of the case.
WHEREFORE, the petition is DISMISSED for lack of merit with costs against petitioner.
SO ORDERED.
Teehankee, C.J., Narvasa, Cruz and Griño-Aquino, JJ., concur.

Footnotes
1 PNB vs. National City Bank, 63 Phil. 711, 742; Banco de Oro Savings & Mortgage
Bank vs. Equitable Bank Corp., G.R. No. 74917, Jan. 20, 1988.
2 See Decision; p. 59, Rollo.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 107382/G.R. No. 107612

January 31, 1996

ASSOCIATED BANK, petitioner,
vs.
HON. COURT OF APPEALS, PROVINCE OF TARLAC and PHILIPPINE NATIONAL
BANK, respondents.
xxxxxxxxxxxxxxxxxxxxx
G.R. No. 107612

January 31, 1996

PHILIPPINE NATIONAL BANK, petitioner,
vs.
HONORABLE COURT OF APPEALS, PROVINCE OF TARLAC, and ASSOCIATED
BANK, respondents.
DECISION
ROMERO, J.:
Where thirty checks bearing forged endorsements are paid, who bears the loss, the drawer, the
drawee bank or the collecting bank?
This is the main issue in these consolidated petitions for review assailing the decision of the Court of
Appeals in "Province of Tarlac v. Philippine National Bank v. Associated Bank v. Fausto Pangilinan,
et. al." (CA-G.R. No. CV No. 17962). 1
The facts of the case are as follows:
The Province of Tarlac maintains a current account with the Philippine National Bank (PNB) Tarlac
Branch where the provincial funds are deposited. Checks issued by the Province are signed by the
Provincial Treasurer and countersigned by the Provincial Auditor or the Secretary of the
Sangguniang Bayan.
A portion of the funds of the province is allocated to the Concepcion Emergency Hospital. 2 The
allotment checks for said government hospital are drawn to the order of "Concepcion Emergency
Hospital, Concepcion, Tarlac" or "The Chief, Concepcion Emergency Hospital, Concepcion, Tarlac."
The checks are released by the Office of the Provincial Treasurer and received for the hospital by its
administrative officer and cashier.
In January 1981, the books of account of the Provincial Treasurer were post-audited by the
Provincial Auditor. It was then discovered that the hospital did not receive several allotment checks
drawn by the Province.
On February 19, 1981, the Provincial Treasurer requested the manager of the PNB to return all of its
cleared checks which were issued from 1977 to 1980 in order to verify the regularity of their
encashment. After the checks were examined, the Provincial Treasurer learned that 30 checks
amounting to P203,300.00 were encashed by one Fausto Pangilinan, with the Associated Bank
acting as collecting bank.
It turned out that Fausto Pangilinan, who was the administrative officer and cashier of payee hospital
until his retirement on February 28, 1978, collected the questioned checks from the office of the
Provincial Treasurer. He claimed to be assisting or helping the hospital follow up the release of the
checks and had official receipts. 3Pangilinan 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. 38Hence, 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.
Regalado, Puno and Mendoza, JJ., concur.

Footnotes

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-54526 August 25, 1986
METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner,
vs.
THE COURT OF APPEALS and THE CITY OF DAGUPAN, respondents.
Miguel T. Caguioa, Ireneo B. Orlino and Manuel D. Victorio for respondent City of Dagupan.

FERIA, J.:
This is a petition for review on certiorari of the decision of the Court of Appeals which affirmed the
decision of the then Court of First Instance of Pangasinan. The lower court had declared respondent
City of Dagupan the lawful owner of the Dagupan Waterworks System and held that the National
Waterworks and Sewerage Authority, now petitioner Metropolitan Waterworks and Sewerage
System, was a possessor in bad faith and hence not entitled to indemnity for the useful
improvements it had introduced.
Before proceeding further, it may be necessary to invite attention to the common error of joining the
court (be it a Regional Trial Court, the Intermediate Appellate Court, or the Sandiganbayan) as a
party respondent in an appeal by certiorari to this Court under Rule 45 of the Rules of Court. The
only parties in an appeal by certiorari are the appellant as petitioner and the appellee as respondent.
(Cf. Elks Club vs. Rovira, 80 Phil. 272) The court which rendered the judgment appealed from is not
a party in said appeal. It is in the special civil action of certiorari under Section 5 of Rule 65 of the
Rules of Court where the court or judge is required to be joined as party defendant or respondent.
The joinder of the Intermediate Appellate Court or the Sandiganbayan as party respondent in an
appeal by certiorari is necessary in cases where the petitioner-appellant claims that said court acted
without or in excess of its jurisdiction or with grave abuse of discretion. An example of this is a case
where the petitioner-appellant claims that the Intermediate Appellate Court or the Sandiganbayan
acted with grave abuse of discretion in making its findings of fact, thus justifying the review by this
court of said findings of fact. (See the exceptions to the rule of conclusiveness of the findings of fact
of the Intermediate Appellate Court or the Sandiganbayan in the case of Sacay vs. Sandiganbayan,
G.R. Nos. 66497-98, July 10, 1986.) In such a case, the petition for review on certiorari under Rule
45 of the Rules of Court is at the same time a petition for certiorari under Rule 65, and the joinder of
the Intermediate Appellate Court or the Sandiganbayan becomes necessary. (Cf. Lianga Lumber
Company vs. Lianga Timber Co., Inc., March 31, 1977, 76 SCRA 197).
The City of Dagupan (hereinafter referred to as the CITY) filed a complaint against the former
National Waterworks and Sewerage Authority (hereinafter referred to as the NAWASA), now the
Metropolitan Waterworks and Sewerage System (hereinafter referred to as MWSS), for recovery of
the ownership and possession of the Dagupan Waterworks System. NAWASA interposed as one of
its special defenses R.A. 1383 which vested upon it the ownership, possession and control of all
waterworks systems throughout the Philippines and as one of its counterclaims the reimbursement
of the expenses it had incurred for necessary and useful improvements amounting to P255,000.00.
Judgment was rendered by the trial court in favor of the CITY on the basis of a stipulation of facts.
The trial court found NAWASA to be a possessor in bad faith and hence not entitled to the
reimbursement claimed by it. NAWASA appealed to the then Court of Appeals and argued in its lone
assignment of error that the CITY should have been held liable for the amortization of the balance of
the loan secured by NAWASA for the improvement of the Dagupan Waterworks System. The
appellate court affirmed the judgment of the trial court and ruled as follows:
However, as already found above, these useful expenses were made in utter bad
faith for they were instituted after the complaint was filed and after numerous
Supreme Court decisions were promulgated declaring unconstitutional the taking by
NAWASA of the patrimonial waterworks systems of cities, municipalities and
provinces without just compensation.
Under Article 546 of the New Civil Code cited by the appellant, it is clear that a
builder or a possessor in bad faith is not entitled to indemnity for any useful

improvement on the premises. (Santos vs. Mojica, L-25450, Jan. 31, 1969). In fact,
he is not entitled to any right regarding the useful expenses (II Paras (1971) 387). He
shall not have any right whatsoever. Consequently, the owner shall be entitled to all
of the useful improvements without any obligation on his part (Jurado, Civil Law
Reviewer (1974) 223).
Petitioner-Appellant MWSS, successor-in-interest of the NAWASA, appealed to this Court raising the
sole issue of whether or not it has the right to remove all the useful improvements introduced by
NAWASA to the Dagupan Waterworks System, notwithstanding the fact that NAWASA was found to
be a possessor in bad faith. In support of its claim for removal of said useful improvements, MWSS
argues that the pertinent laws on the subject, particularly Articles 546, 547 and 549 of the Civil Code
of the Philippines, do not definitely settle the question of whether a possessor in bad faith has the
right to remove useful improvements. To bolster its claim MWSS further cites the decisions in the
cases of Mindanao Academy, Inc. vs. Yap (13 SCRA 190) and Carbonell vs. Court of Appeals (69
SCRA 99).
The CITY in its brief questions the raising of the issue of the removal of useful improvements for the
first time in this Court, inasmuch as it was not raised in the trial court, much less assigned as an
error before the then Court of Appeals. The CITY further argues that petitioner, as a possessor in
bad faith, has absolutely no right to the useful improvements; that the rulings in the cases cited by
petitioner are not applicable to the case at bar; that even assuming that petitioner has the right to
remove the useful improvements, such improvements were not actually identified, and hence a
rehearing would be required which is improper at this stage of the proceedings; and finally, that such
improvements, even if they could be identified, could not be separated without causing substantial
injury or damage to the Dagupan Waterworks System.
The procedural objection of the CITY is technically correct. NAWASA should have alleged its
additional counterclaim in the alternative-for the reimbursement of the expenses it had incurred for
necessary and useful improvements or for the removal of all the useful improvements it had
introduced.
Petitioner, however, argues that although such issue of removal was never pleaded as a
counterclaim nevertheless it was joined with the implied consent of the CITY, because the latter
never filed a counter-manifestation or objection to petitioner's manifestation wherein it stated that the
improvements were separable from the system, and quotes the first part of Sec. 5 of Rule 10 of the
Rules of Court to support its contention. Said provision reads as follows:
SEC. 5. Amendment to conform to or authorize presentation of evidence.-When
issues not raised by the pleadings are tried by express or implied consent of the
parties, they shall be treated in all respects, as if they had been raised in the
pleadings. Such amendment of the pleadings as may be necessary to cause them to
conform to the evidence and to raise these issues may be made upon motion of any
party at any time, even after judgment; but failure so to amend does not affect the
result of the trial of these issues. ...
This argument is untenable because the above-quoted provision is premised on the fact that
evidence had been introduced on an issue not raised by the pleadings without any objection thereto
being raised by the adverse party. In the case at bar, no evidence whatsoever had been introduced
by petitioner on the issue of removability of the improvements and the case was decided on a
stipulation of facts. Consequently, the pleadings could not be deemed amended to conform to the
evidence.

However, We shall overlook this procedural defect and rule on the main issue raised in this appeal,
to wit: Does a possessor in bad faith have the right to remove useful improvements? The answer is
clearly in the negative. Recognized authorities on the subject are agreed on this point. *
Article 449 of the Civil Code of the Philippines provides that "he who builds, plants or sows in bad
faith on the land of another, loses what is built, planted or sown without right to indemnity." As a
builder in bad faith, NAWASA lost whatever useful improvements it had made without right to
indemnity (Santos vs. Mojica, Jan. 31, 1969, 26 SCRA 703).
Moreover, under Article 546 of said code, only a possessor in good faith shall be refunded for useful
expenses with the right of retention until reimbursed; and under Article 547 thereof, only a possessor
in good faith may remove useful improvements if this can be done without damage to the principal
thing and if the person who recovers the possession does not exercise the option of reimbursing the
useful expenses. The right given a possessor in bad faith is to remove improvements applies only to
improvements for pure luxury or mere pleasure, provided the thing suffers no injury thereby and the
lawful possessor does not prefer to retain them by paying the value they have at the time he enters
into possession (Article 549, Id.).
The decision in the case of Mindanao Academy, Inc. vs. Yap (13 SCRA 190) cited by petitioner does
not support its stand. On the contrary, this Court ruled in said case that "if the defendant constructed
a new building, as he alleges, he cannot recover its value because the construction was done after
the filing of the action for annulment, thus rendering him a builder in bad faith who is denied by law
any right of reimbursement." What this Court allowed appellant Yap to remove were the equipment,
books, furniture and fixtures brought in by him, because they were outside of the scope of the
judgment and may be retained by him.
Neither may the decision in the case of Carbonell vs. Court of Appeals (69 SCRA 99), also cited by
petitioner, be invoked to modify the clear provisions of the Civil Code of the Philippines that a
possessor in bad faith is not entitled to reimbursement of useful expenses or to removal of useful
improvements.
In said case, both the trial court and the Court of Appeals found that respondents Infantes were
possessors in good faith. On appeal, the First Division of this Court reversed the decision of the
Court of Appeals and declared petitioner Carbonell to have the superior right to the land in question.
On the question of whether or not respondents Infantes were possessors in good faith four Members
ruled that they were not, but as a matter of equity allowed them to remove the useful improvements
they had introduced on the land. Justice Teehankee (now Chief Justice) concurred on the same
premise as the dissenting opinion of Justice Munoz Palma that both the conflicting buyers of the real
property in question, namely petitioner Carbonell as the first buyer and respondents Infantes as the
second buyer, may be deemed purchasers in good faith at the respective dates of their purchase.
Justice Munoz Palma dissented on the ground that since both purchasers were undoubtedly in good
faith, respondents Infantes' prior registration of the sale in good faith entitled them to the ownership
of the land. Inasmuch as only four Members concurred in ruling that respondents Infantes were
possessors in bad faith and two Members ruled that they were possessors in good faith said
decision does not establish a precedent. Moreover, the equitable consideration present in said case
are not present in the case at bar.
WHEREFORE, the decision of the appellate court is affirmed with costs against petitioner.
SO ORDERED.
Fernan, Gutierrez, Jr., Paras and Cruz, JJ., concur.

Alampay, ** J., took no part.

Republic of the Philippines
Supreme Court
Manila

FIRST DIVISION

METROPOLITAN BANK AND TRUST G.R. No. 141408
COMPANY,
Petitioner,
Present:
- versus PUNO, C.J., Chairperson,
SANDOVAL-GUTIERREZ,
PHILIPPINE
BANK
OF
COMMUNICATIONS, FILIPINAS ORIENT
FINANCE
CORPORATION,
PIPE
MASTER CORPORATION and TAN
JUAN LIAN,
Respondents.

CORONA,
AZCUNA, and
GARCIA, JJ.

x---------------------------------------------x
SOLID BANK CORPORATION,

G.R. No. 141429

Petitioner,

- versus -

FILIPINAS
ORIENT
FINANCE
CORPORATION,
PIPE
MASTER
CORPORATION, TAN JUAN LIAN
and/or
PHILIPPINE
BANK
OF
COMMUNICATIONS,
Promulgated:
Respondents.
October 18, 2007
x---------------------------------------------------------------------------------------- x

DECISION

SANDOVAL-GUTIERREZ, J.:

Sometime in 1978, Pipe Master Corporation (Pipe Master) represented by
Yu Kio, its president, applied for check discounting with Filipinas Orient Finance
Corporation (Filipinas Orient). The latter approved and granted the same.
On July 1, 1978, the Board of Directors of Pipe Master issued a Board
Resolution authorizing Yu Kio, in his capacity as president, and/or Tan Juan Lian,
in his capacity as vice-president, to execute, indorse, make, sign, deliver or
negotiate instruments, documents and such other papers necessary in connection
with any transaction coursed through Filipinas Orient for and in behalf of the
corporation.
Tan Juan Lian then executed in favor of Filipinas Orient a continuing
guaranty that he shall pay at maturity any and all promissory notes, drafts, checks,
or other instruments or evidence of indebtedness for which Pipe Master may
become liable; that the extent of his liability shall not at any one time exceed the
sum of P1,000,000.00; and that in the event of default by Pipe Master, Filipinas
Orient may proceed directly against him.
On April 9, 1980, under the check discounting agreement between Pipe
Master and Filipinas Orient, Yu Kio sold to Filipinas Orient four Metropolitan
Bank and Trust Company (Metro Bank) checks amounting to P1,000,000.00. In
exchange for the four Metro Bank checks, Filipinas Orient issued to Yu Kio four
Philippine
Bank
of
Communications
(PBCom)
crossed
checks
totaling P964,303.62, payable to Pipe Master with the statement ―for payee‘s
account only.‖
Upon his receipt of the four PBCom checks, Yu Kio indorsed and deposited
in the Metro Bank, in his personal account, three of the checks valued
at P721,596.95. As to the remaining check amounting to P242,706.67, he
deposited it in the Solid Bank Corporation (Solid Bank), also in his personal
account. Eventually, PBCom paid Metro Bank and Solid Bank the amounts of the
checks. In turn, Metro Bank and Solid Bank credited the value of the checks to the
personal accounts of Yu Kio.

Subsequently, when Filipinas Orient presented the four Metro Bank checks
equivalent to P1,000,000.00 it received from Yu Kio, they were dishonored by the
drawee bank. Pipe Master, the drawer, refused to pay the amounts of the checks,
claiming that it never received the proceeds of the PBCom checks as they were
delivered and paid to the wrong party, Yu Kio, who was not the named payee.
Filipinas Orient then demanded that PBCom restore to its (Filipinas
Orient‘s) account the value of the PBCom checks. In turn, PBCom sought
reimbursement from Metro Bank and Solid Bank, being the collecting banks, but
they refused. Thus, Filipinas Orient filed with the Regional Trial Court (RTC),
Branch 39, Manila a complaint for a sum of money against Pipe Master, Tan Juan
Lian and/or PBCom.
In their answer to the complaint, Pipe Master and Tan Juan Lian averred that
they did not authorize Yu Kio to negotiate and enter into discounting transaction
with Filipinas Orient, and even if Yu Kio was so authorized, Pipe Master never
received the proceeds of the checks. Consequently, they filed a cross-claim against
PBCom for gross negligence for having paid the wrong party. In turn, PBCom,
Pipe Master and Tan Juan Lian filed third-party complaints against Metro Bank
and Solid Bank.
On July 12, 1990, the RTC rendered a Decision against Metro Bank and
Solid Bank, the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered:
1. Ordering third-party defendant Metro Bank to pay plaintiff the amount
of Seven Hundred Twenty One Thousand Five Hundred Ninety Six
Pesos and Ninety-Five Centavos (P721,596.95) plus legal interest;
2. Ordering third-party defendant Solid Bank to pay plaintiff the amount
of Two Hundred Forty-Two Thousand Seven Hundred Six Pesos and
Sixty-Seven Centavos (P242,706.67) plus legal interest;
3. Ordering third-party defendants to pay the costs of suit.
SO ORDERED.

On appeal, the appellate court affirmed in toto the Decision of the trial
court. Metro Bank and Solid Bank filed their respective motions for
reconsideration but the same were denied.
Hence, the instant consolidated petitions for review on certiorari filed by
Metro Bank and Solid Bank.
The issue for our resolution is whether Metro Bank and Solid Bank,
petitioners, are liable to respondent Filipinas Orient for accepting the PBCom
crossed checks payable to Pipe Master.
Petitioner banks contend that respondents Pipe Master, Tan Juan Lian and/or
PBCom should be made liable to respondent Filipinas Orient for the value of the
checks.
Respondents Pipe Master and Tan Juan Lian counter that although Yu Kio
was expressly authorized to indorse Pipe Master‘s checks, such authority extended
only to acts done in the ordinary course of business, not in his personal
capacity. For its part, respondent Filipinas Orient contends that petitioner banks
were negligent in allowing Yu Kio to deposit the PBCom checks in his
account. Respondent PBCom, as the drawee bank, maintains that it has no
liability because in clearing the checks, it relied on the express guarantee made by
petitioner banks that the checks were validly indorsed.
We find in favor of respondents.
A check is defined by law as a bill of exchange drawn on a bank payable on
demand.[1] The Negotiable Instruments Law is silent with respect to crossed
checks. Nonetheless, this Court has taken judicial cognizance of the practice that
a check with two parallel lines on the upper left hand corner means that it could
only be deposited and not converted into cash.[2] The crossing of a check with the
phrase ―Payee‘s Account Only‖ is a warning that the check should be deposited in
the account of the payee. It is the collecting bank which is bound to scrutinize the
check and to know its depositors before it can make the clearing indorsement, ―all
prior indorsements and/or lack of indorsement guaranteed.‖[3]

Here, petitioner banks have the obligation to ensure that the PBCom checks
were deposited in accordance with the instructions stated in the checks.[4] The four
PBCom checks in question had been crossed and issued ―for payee‘s account
only.‖ This could only mean that the drawer, Filipinas Orient, intended the same
for deposit only by the payee, Pipe Master. The effect of crossing a check means
that the drawer had intended the check for deposit only by the rightful person, i.e.,
the payee named therein[5] – Pipe Master.
As what transpired in this case, petitioner banks accommodated Yu Kio,
being a valued client and the president of Pipe Master, and accepted the crossed
checks. They stamped at the back thereof that “all prior indorsements and/or
lack of indorsements are guaranteed.” In so doing, they became general
endorsers. Under Section 66 of the Negotiable Instruments Law, an endorser
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.”

Clearly, petitioner banks, being endorsers, cannot deny liability.

In Associated Bank v. Court of Appeals,[6] we held that the collecting bank
or last endorser generally suffers the loss because it has the duty to ascertain the
genuineness of all prior indorsements and is privy to the depositor who negotiated
the check.
PBCom, as the drawee bank, cannot be held liable since it mainly relied on
the express guarantee made by petitioners, the collecting banks, of all prior
indorsements.
Evidently, petitioner banks disregarded established banking rules and
procedures. They were negligent in accepting the checks and allowing the

transaction to push through. In Jai-Alai Corp. of the Phil. v. Bank of the Phil.
Islands,[7] we ruled that one who accepts and encashes a check from an individual
knowing that the payee is a corporation does so at his peril. Therefore,
petitioner banks are liable to respondent Filipinas Orient.

In fine, it must be emphasized that the law imposes on the collecting bank
the duty to diligently scrutinize the checks deposited with it for the purpose of
determining their genuineness and regularity. The collecting bank, being primarily
engaged in banking, holds itself out to the public as the expert on this field, and the
law thus holds it to a high standard of conduct.[8] Since petitioner banks‘
negligence was the direct cause of the misappropriation of the checks, they should
bear and answer for respondent Filipinas Orient‘s loss, without prejudice to their
filing of an appropriate action against Yu Kio.
WHEREFORE, we DENY the petitions. The challenged Decision[9] and
Resolution of the Court of Appeals in CA-G.R. CV No. 30702 are

FIRST DIVISION
[G.R. No. 42725. April 22, 1991.]
REPUBLIC BANK, Petitioner, v. COURT OF APPEALS and FIRST NATIONAL CITY
BANK,Respondents.
Lourdes C. Dorado for Petitioner.
Siguion Reyna, Montecillo & Ongsiako for private respondent Citibank.

SYLLABUS

1. COMMERCIAL LAW; BANKING LAWS; 24-HOUR CLEARING HOUSE RULE APPLIES TO COMMERCIAL
BANKS; FAILURE OF DRAWEE BANK TO COMPLY WITH RULE ABSOLVES COLLECTING BANKS. — The 24hour 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., 157 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.
2. ID.; ID.; ID.; ID.; REMEDY OF DRAWEE BANK IS AGAINST PARTY RESPONSIBLE FOR FORGERY OR
ALTERATION. — Every bank that issues checks for the use of its customers should know whether or not the
drawer’s signature thereon is genuine, whether there are sufficient funds in the drawer’s account to cover
checks issued, and it should be able to detect alterations, erasures, superimpositions or intercalations
thereon, for these instruments are prepared, printed and issued by itself, it has control of the drawer’s
account, and it is supposed to be familiar with the drawer’s signature. It should possess appropriate
detecting devices for uncovering forgeries and/or alterations on these instruments. 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 forge and/or altered check for payment is against the
party responsible for the forgery or alteration (Hongkong & Shanghai Banking Corp. v. People’s Bank & Trust
Co., 35 SCRA 140), otherwise, it bears the loss. It may not charge the amount so paid to the account of the
drawer, if the latter was free from blame, nor recover it from the collecting bank if the latter made payment
after proper clearance from the drawee.

DECISION

GRIÑO-AQUINO, J.:

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 latter’s
endorsement and guaranty. Republic refused, claiming there was delay in giving it notice of the alteration;
that it was not guilty of negligence; that it was the drawer’s (SMC’s) fault in drawing the check in such a
way as to permit the insertion of numerals increasing the amount; that FNCB, as drawee, was absolved of
any liability to the drawer (SMC), thus, FNCB had no right of recourse against Republic.
On 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 attorney’s fees and costs of the
suit. The Court of Appeals affirmed that decision, but modified the award of attorney’s fees by reducing it to
P1,000 without pronouncement as to costs (CA-G.R. No. 41691-R, December 22, 1975).
chanrobles vi rt ual lawli bra ry

In this petition for review, the lone issue is whether Republic, as the collecting bank, is protected, by the 24hour 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:

jg c:chan roble s.com.p h

"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 o’clock A.M. shall be returned not later than 2:00 o’clock P.M. on the same day and all items cleared
at 3:00 o’clock P.M. shall be returned not later than 8:30 A.M. of the following business day except for items
cleared on Saturday which may be returned not later than 8:30 A.M. of the following day."
cralaw virtua 1aw lib rary

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 24hour clearing period, the collecting bank is absolved from liability. The following decisions of this Court are
also relevant and persuasive:
chan rob1es v irt ual 1aw l ibra ry

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

"For clearance, clearing office. All prior endorsements and or lack of endorsements guaranteed. People’s
Bank and Trust Company."
cralaw virtua1 aw libra ry

The check was cleared by the drawee bank (Hongkong & Shanghai Bank), whereupon the People’s Bank
credited Changco with the amount of the check. Changco thereafter withdrew the contents of his bank
account. A month later, when the check was returned to PLDT, the alteration was discovered. The Hongkong
& Shanghai Bank sued to recover from the People’s Bank the sum of P14,608.05. The complaint was
dismissed. Affirming the decision of the trial court, this Court held:
jgc:cha nro bles.c om.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 People’s Bank and since such an indorsement carries with it a
concomitant guarantee of genuineness, the People’s Bank is liable to the Hongkong Shanghai Bank for
alteration made in the name of payee. On the other hand, the People’s 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
People’s Bank as to the alteration on April 12, 1965 or 27 days after clearing, the People’s 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 rtu a1aw libra ry

"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:cha nrob les.co m.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.
chanroble s.com.p h : virt ual 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. People’s 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 drawer’s
signature thereon is genuine, whether there are sufficient funds in the drawers account to cover checks
issued, and it should be able to detect alterations, erasures, superimpositions or intercalations thereon, for
these instruments are prepared, printed and issued by itself, it has control of the drawer’s account, and it is
supposed to be familiar with the drawer’s signature. It should possess appropriate detecting devices for
uncovering forgeries and/or alterations on these instruments. 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. People’s Bank & Trust Co., 35 SCRA 140),
otherwise, it bears the loss. It may not charge the amount so paid to the account of the drawer, if the latter
was free from blame, nor recover it from the collecting bank if the latter made payment after proper
clearance from the drawee. As this Court pointed out in Philippine National Bank v. Quimpo, Et Al., 158
SCRA 582, 584:
jgc:chanrob les.co m.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 virt ua1aw li bra ry

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:chanroble s.com.p h

"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.
Narvasa, Gancayco and Medialdea, JJ., concur.
Cruz, J., took no part.

Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION

G.R. No. L-50373 February 15, 1990
MANILA LIGHTER TRANSPORTATION, INC., petitioner,
vs.
COURT OF APPEALS AND CHINA BANKING CORPORATION, respondents.
Sergio L. Guadiz and Jose Diokno & Associates for petitioner.
Sycip, Salazar, Hernandez & Gatmaitan for private respondent.

GRIÑO-AQUINO, J.:
A complaint for recovery of the value of forty-nine (49) checks with alleged forged/unauthorized
indorsements of the payee of which 26 were paid to the petitioner or order and twenty-three (23) to
petitioner or bearer, was filed by herein petitioner against private respondent China Banking
Corporation on May 22, 1962. The complaint alleged that the checks were issued by customers of
the petitioner in payment of brokerage/lighterage services and were all delivered, without petitioner's
knowledge, to its collector, Augusto Perez. Upon forged indorsements of the petitioner's general
manager, the checks found their way into the accounts of third persons in the respondent bank and
the proceeds were later withdrawn, to the damage of the petitioner who sought reimbursement or
restoration by said bank of the value of the checks.
Respondent Bank denied liability for the petitioner's loss which was due to its own negligence. It
alleged that petitioner is estopped from denying its collector's authority to receive the checks from
the drawers/customers; that petitioner failed to give defendant Bank and the drawee Banks notice of
the alleged forged or unauthorized indorsements within a reasonable time; and that its loss was
occasioned by its own failure to observe the proper degree of diligence in the supervision of its
employees, particularly its collector, Augusta Perez.
Upon leave of court, respondent Bank filed a third-party complaint against Cao Pek & Co. and Ko Lit
who had deposited the checks in question in their respective accounts with the former and had
thereafter withdrawn the proceeds thereof.

The trial court, in its decision dated January 22, 1972, made the following findings of facts:
... . Over a period of eighteen months, from January 29, 1960 (Exh. B) to June 22,
1961 (Exh. B-11), Augusto Perez collected from different clients of plaintiff company
some 49 checks (Exhs. A to E-2) with a total value of P91,153.11. The endorsement
of the payee, plaintiff Manila Lighter Transportation, Inc., by its general manager,
Luis Gaskell appear on the checks. The latter disclaimed such signatures and
presented a handwriting expert who gave the opinion that the signatures "L. Gaskell"
on the indorsement were indeed forgeries. The checks as thus endorsed were
negotiated by Wilfredo Lagamon, accountant of the plaintiff company and relative of
Luis Gaskell with Cao Pek and Co., an electronic store, whose treasurer is Ko Lit.
Most of the checks, with a total amount of P90,500.24, were deposited by Ko Lit in
his account with defendant bank (Exh. 4). Three checks with a total amount of
P1,115.05 were deposited in the account of Cao Pek & Co. while one check for
P2,735.19 was deposited in the accounts of Lu Siu Po, manager of Cao Pek & Co.
These accounts have no more balances at present.
As late as July 21, 1961, plaintiff apparently did not know what was happening
because on that date it sent S. Quintos Transportation, Inc., one of its clients whose
checks were collected by Augusto Perez, the following letter:
"Upon a detailed examination of our records, we found out that
various jobs undertaking (sic) by us in your behalf in 1960 and 1961
are still pending payment as of this date.
We are sending you herewith our statement covering these jobs
which amount to P23,520.30 and would request you to kindly confirm
its correctness at your earliest."
It may be assumed that similar letters were sent to other clients of plaintiff in a similar
situation, namely: Go Fay and Co., for P12,568.77; Peter Paul Phil. Corp. for
P36,967.80; Central Azucarera Don Pedro for P11,190.14; and Helena Cigar Co. for
P4,296.90.
"Another client, Cia. Gral. de Tabacos de Filipinas, had also paid
plaintiff four checks in the total amount of P3,453.53 all drawn against
Hongkong and Shanghai Banking Corp. (Exhs. 2-a to 2-d). Upon
complaint of the drawer after the anomalies were discovered (Exhs.
2-F, 2) defendant bank refunded the amount to drawee bank (Exh. 3)
and the amount is not included in the complaint, although defendant
bank has entered a counterclaim for the amount against plaintiff.
Plaintiff made its initial demand against defendant bank for the refund
of the amount of the checks on September 9, 1961 (Exh T). There
were some attempts made to negotiate an amicable settlement, but
nothing came of it."
On May 30, 1962, the defendant Bank filed a third-party complaint against Cao Pek
and Co. and Ko Lit. Cao Pek and Co., in turn, filed a cross-claim against Ko Lit. (pp.
38-40, Rollo.)

The lower court found both parties equally negligent, the plaintiff (herein petitioner), for allowing a
state of affairs in which its employees could appropriate the checks and falsify the indorsement
thereon of its manager with impunity, and the defendant (private respondent herein), for not
detecting the falsification made by the plaintiffs employees when the checks were presented to it.
The dispositive portion of the trial court's decision reads:
WHEREFORE, judgment is hereby rendered:
1. Ordering defendant China Banking Corporation to pay plaintiff Manila Lighter
Transportation, Inc., an amount equal to 50% of the total amount of the checks
Exhibits A to E-2;
2. Ordering plaintiff to pay defendant 50% of the amount of the Tabacalera checks
Exhibits 2-A to 2-D;
3. Ordering third-party defendant Ko Lit to pay P90,500.24 and third-party defendant
Cao Pek & Co. to pay Pl,215.05, both to China Banking Corporation;
4. Ordering China Banking Corporation to pay plaintiff 50% of any amount it may
recover from Ko Lit and Cao Pek & Co.
The parties shall bear their own costs and attorney's fees. (p. 40, Rollo.)
Both petitioner and private respondent appealed to the Court of Appeals, contending that the other
should be entirely liable. Ko Lit and Cao Pek also appealed but their appeal was dismissed for failure
to pay the docket fee and to file the record on appeal.
On January 18, 1979, the Court of Appeals rendered judgment, the dispositive portion of which
states:
WHEREFORE, the judgment appealed from is hereby modified such that the
complaint is dismissed and the defendant-appellant is freed from any liability to the
plaintiff-appellant. The counterclaim of P3,453.53 is granted with interests from the
date the amended counterclaim was filed. The third-party defendants are adjudged
directly liable to the plaintiff-appellant for the checks they respectively indorsed. No
costs. (p. 49, Rollo.)
Petitioner filed a motion for reconsideration of the decision but it was denied, hence, this petition for
review, alleging that the Court of Appeals erred:
1. in finding that the petitioner was negligent;
2. in holding that said negligence constituted sufficient ground to preclude it from
alleging forgery or want of authority;
3. in not ruling that the proximate cause for the loss was the respondent Bank's
failure in its duty to ascertain the genuineness of the signatures appearing in the
checks;

4. in not ruling that the respondent Bank should have been held entirely liable for the
loss; and
5. in not condemning respondent Bank to pay petitioner damages, attorney's fees,
expenses and costs.
The instant petition for review must necessarily fail. The issues raised therein are factual. The main
issue of petitioner's negligence had already been determined by the trial court against petitioner and
affirmed by the Court of Appeals after examining the evidence in the records.
Since the petitioner was not a client of respondent Bank, i.e., did not maintain an account in said
Bank, the latter had no way of ascertaining the authenticity of its indorsements on the checks which
were deposited in the accounts of the third-party defendants in said Bank. Respondent Bank was not
negligent because, in accordance with banking practice, it caused the checks to pass through the
clearing house before it allowed their proceeds to be withdrawn by the depositors (third-party
defendants in the lower court). (p. 117, Rollo.)
The Supreme Court decides appeals which only involve questions of law. It is not the function of the
Supreme Court to analyze or weigh the evidence all over again, its jurisdiction being limited to
resolving errors of law that might have been committed by the lower court. (Dihiansan vs. Court of
Appeals, 153 SCRA 712; Francisco vs. Mandi, 152 SCRA 711; Director of Lands vs. Funtilar 142
SCRA 57).
WHEREFORE, the petition for review is denied for lack of merit. Costs against the petitioner.
SO ORDERED.
Narvasa (Chairman), Cruz and Gancayco, JJ., concur.
Medialdea, J., is on leave.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-26001

October 29, 1968

PHILIPPINE NATIONAL BANK, petitioner,
vs.
THE COURT OF APPEALS and PHILIPPINE COMMERCIAL AND INDUSTRIAL
BANK, respondents.
Tomas Besa, Jose B. Galang and Juan C. Jimenez for petitioner.
San Juan, Africa & Benedicto for respondents.
CONCEPCION, C.J.:
The Philippine National Bank — hereinafter referred to as the PNB — seeks the review
by certiorari of a decision of the Court of Appeals, which affirmed that of the Court of First Instance

of Manila, dismissing plaintiff's complaint against the Philippine Commercial and Industrial Bank —
hereinafter referred to as the PCIB — for the recovery of P57,415.00.
A partial stipulation of facts entered into by the parties and the decision of the Court of Appeals show
that, on about January 15, 1962, one Augusto Lim deposited in his current account with the PCIB
branch at Padre Faura, Manila, GSIS Check No. 645915- B, in the sum of P57,415.00, drawn
against the PNB; that, following an established banking practice in the Philippines, the check was,
on the same date, forwarded, for clearing, through the Central Bank, to the PNB, which did not
return said check the next day, or at any other time, but retained it and paid its amount to the PCIB,
as well as debited it against the account of the GSIS in the PNB; that, subsequently, or on January
31, 1962, upon demand from the GSIS, said sum of P57,415.00 was re-credited to the latter's
account, for the reason that the signatures of its officers on the check were forged; and that,
thereupon, or on February 2, 1962, the PNB demanded from the PCIB the refund of said sum, which
the PCIB refused to do. Hence, the present action against the PCIB, which was dismissed by the
Court of First Instance of Manila, whose decision was, in turn, affirmed by the Court of Appeals.
It is not disputed that the signatures of the General Manager and the Auditor of the GSIS on the
check, as drawer thereof, are forged; that the person named in the check as its payee was one
Mariano D. Pulido, who purportedly indorsed it to one Manuel Go; that the check purports to have
been indorsed by Manuel Go to Augusto Lim, who, in turn, deposited it with the PCIB, on January
15, 1962; that, thereupon, the PCIB stamped the following on the back of the check: "All prior
indorsements and/or Lack of Endorsement Guaranteed, Philippine Commercial and Industrial Bank,"
Padre Faura Branch, Manila; that, on the same date, the PCIB sent the check to the PNB, for
clearance, through the Central Bank; and that, over two (2) months before, or on November 13,
1961, the GSIS had notified the PNB, which acknowledged receipt of the notice, that said check had
been lost, and, accordingly, requested that its payment be stopped.
In its brief, the PNB maintains that the lower court erred: (1) in not finding the PCIB guilty of
negligence; (2) in not finding that the indorsements at the back of the check are forged; (3) in not
finding the PCIB liable to the PNB by virtue of the former's warranty on the back of the check; (4) in
not holding that "clearing" is not "acceptance", in contemplation of the Negotiable Instruments law;
(5) in not finding that, since the check had not been accepted by the PNB, the latter is entitled to
reimbursement therefor; and (6) in denying the PNB's right to recover from the PCIB.
The first assignment of error will be discussed later, together with the last,with which it is interrelated.
As regards the second assignment of error, the PNB argues that, since the signatures of the drawer
are forged, so must the signatures of the supposed indorsers be; but this conclusion does not
necessarily follow from said premise. Besides, there is absolutely no evidence, and the PNB has not
even tried to prove that the aforementioned indorsements are spurious. Again, the PNB refunded the
amount of the check to the GSIS, on account of the forgery in the signatures, not of the indorsers or
supposed indorsers, but of the officers of the GSISas drawer of the instrument. In other words, the
question whether or not the indorsements have been falsified is immaterial to the PNB's liability as a
drawee, or to its right to recover from the PCIB,1 for, as against the drawee, the indorsement of an
intermediate bank does not guarantee the signature of the drawer,2 since the forgery of the
indorsement is not the cause of the loss.3
With respect to the warranty on the back of the check, to which the third assignment of error refers, it
should be noted that the PCIB thereby guaranteed "all prior indorsements," not the authenticity of the
signatures of the officers of the GSIS who signed on its behalf, because the GSIS is not an indorser
of the check, but its drawer.4Said warranty is irrelevant, therefore, to the PNB's alleged right to
recover from the PCIB. It could have been availed of by a subsequent indorsee5 or a holder in due

course6 subsequent to the PCIB, but, the PNB is neither.7 Indeed, upon payment by the PNB, as
drawee, the check ceased to be a negotiable instrument, and became a mere voucher or proof of
payment.8
Referring to the fourth and fifth assignments of error, we must bear in mind that, in general,
"acceptance", in the sense in which this term is used in the Negotiable Instruments Law9 is not
required for checks, for the same are payable on demand.10 Indeed, "acceptance" and "payment"
are, within the purview of said Law, essentially different things, for the former is "a promise to
perform an act," whereas the latter is the "actual performance" thereof.11 In the words of the
Law,12 "the acceptance of a bill is the signification by the drawee of his assent to the order of the
drawer," which, in the case of checks, is the payment, on demand, of a given sum of money. Upon
the other hand, actual payment of the amount of a check implies not only an assent to said order of
the drawer and a recognition of the drawer's obligation to pay the aforementioned sum, but, also,
a compliance with such obligation.
Let us now consider the first and the last assignments of error. The PNB maintains that the lower
court erred in not finding that the PCIB had been guilty of negligence in not discovering that the
check was forged. Assuming that there had been such negligence on the part of the PCIB, it is
undeniable, however, that the PNB has, also, been negligent, with the particularity that the PNB had
been guilty of a greater degree of negligence, because it had a previous and formal notice from the
GSIS that the check had been lost, with the request that payment thereof be stopped. Just as
important, if not more important and decisive, is the fact that the PNB's negligence was the main or
proximate cause for the corresponding loss.
In this connection, it will be recalled that the PCIB did not cash the check upon its presentation by
Augusto Lim; that the latter had merely deposited it in his current account with the PCIB; that, on the
same day, the PCIB sent it, through the Central Bank, to the PNB, for clearing; that the PNB
did not return the check to the PCIB the next day or at any other time; that said failure to return the
check to the PCIB implied, under the current banking practice, that the PNB considered the check
good and would honor it; that, in fact, the PNB honored the check and paid its amount to the PCIB;
and that only then did the PCIB allow Augusto Lim to draw said amount from his aforementioned
current account.
Thus, by not returning the check to the PCIB, by thereby indicating that the PNB had found nothing
wrong with the check and would honor the same, and by actually paying its amount to the PCIB, the
PNB induced the latter, not only to believe that the check was genuine and good in every respect,
but, also, to pay its amount to Augusto Lim. In other words, the PNB was the primary or proximate
cause of the loss, and, hence, may not recover from the PCIB.13
It is a well-settled maxim of law and equity that when one of two (2) innocent persons must suffer by
the wrongful act of a third person, the loss must be borne by the one whose negligence was the
proximate cause of the loss or who put it into the power of the third person to perpetrate the wrong.14
Then, again, it has, likewise, been held that, where the collecting (PCIB) and the drawee (PNB)
banks are equally at fault, the court will leave the parties where it finds them.15
Lastly, Section 62 of Act No. 2031 provides:
The acceptor by accepting the instrument engages that he will pay it according to the tenor
of his acceptance; and admits:

(a) The existence of the drawer, the genuineness of his signature, and his capacity and
authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
The prevailing view is that the same rule applies in the case of a drawee who pays a bill without
having previously accepted it.16
WHEREFORE, the decision appealed from is hereby affirmed, with costs against the Philippine
National Bank. It is so ordered.
Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro, Angeles, Fernando and Capistrano, JJ., concur.
Zaldivar, J., took no part.

Footnotes
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 92244 February 9, 1993
NATIVIDAD GEMPESAW, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and PHILIPPINE BANK OF
COMMUNICATIONS, respondents.
L.B. Camins for petitioner.
Angara, Abello, Concepcion, Regals & Cruz for private respondent

CAMPOS, JR., J.:
From the adverse decision * of the Court of Appeals (CA-G.R. CV No. 16447), petitioner, Natividad
Gempesaw, appealed to this Court in a Petition for Review, on the issue of the right of the drawer to
recover from the drawee bank who pays a check with a forged indorsement of the payee, debiting
the same against the drawer's account.
The records show that on January 23, 1985, petitioner filed a Complaint against the private
respondent Philippine Bank of Communications (respondent drawee Bank) for recovery of the
money value of eighty-two (82) checks charged against the petitioner's account with the respondent

drawee Bank on the ground that the payees' indorsements were forgeries. The Regional Trial Court,
Branch CXXVIII of Caloocan City, which tried the case, rendered a decision on November 17, 1987
dismissing the complaint as well as the respondent drawee Bank's counterclaim. On appeal, the
Court of Appeals in a decision rendered on February 22, 1990, affirmed the decision of the RTC on
two grounds, namely (1) that the plaintiff's (petitioner herein) gross negligence in issuing the checks
was the proximate cause of the loss and (2) assuming that the bank was also negligent, the loss
must nevertheless be borne by the party whose negligence was the proximate cause of the loss. On
March 5, 1990, the petitioner filed this petition under Rule 45 of the Rules of Court setting forth the
following as the alleged errors of the respondent Court: 1
I
THE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE
NEGLIGENCE OF THE DRAWER IS THE PROXIMATE CAUSE OF THE
RESULTING INJURY TO THE DRAWEE BANK, AND THE DRAWER IS
PRECLUDED FROM SETTING UP THE FORGERY OR WANT OF AUTHORITY.
II
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT FINDING AND
RULING THAT IT IS THE GROSS AND INEXCUSABLE NEGLIGENCE AND
FRAUDULENT ACTS OF THE OFFICIALS AND EMPLOYEES OF THE
RESPONDENT BANK IN FORGING THE SIGNATURE OF THE PAYEES AND THE
WRONG AND/OR ILLEGAL PAYMENTS MADE TO PERSONS, OTHER THAN TO
THE INTENDED PAYEES SPECIFIED IN THE CHECKS, IS THE DIRECT AND
PROXIMATE CAUSE OF THE DAMAGE TO PETITIONER WHOSE SAVING (SIC)
ACCOUNT WAS DEBITED.
III
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT ORDERING
THE RESPONDENT BANK TO RESTORE OR RE-CREDIT THE CHECKING
ACCOUNT OF THE PETITIONER IN THE CALOOCAN CITY BRANCH BY THE
VALUE OF THE EIGHTY-TWO (82) CHECKS WHICH IS IN THE AMOUNT OF
P1,208,606.89 WITH LEGAL INTEREST.
From the records, the relevant facts are as follows:
Petitioner Natividad O. Gempesaw (petitioner) owns and operates four grocery stores located at
Rizal Avenue Extension and at Second Avenue, Caloocan City. Among these groceries are D.G.
Shopper's Mart and D.G. Whole Sale Mart. Petitioner maintains a checking account numbered 1300038-1 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 Elcaño branch of the respondent drawee Bank.
About thirty (30) of the payees whose names were specifically written on the checks testified that
they did not receive nor even see the subject checks and that the indorsements appearing at the
back of the checks were not theirs.
The team of auditors from the main office of the respondent drawee Bank which conducted periodic
inspection of the branches' operations failed to discover, check or stop the unauthorized acts of
Ernest L. Boon. Under the rules of the respondent drawee Bank, only a Branch Manager and no

other official of the respondent drawee bank, may accept a second indorsement on a check for
deposit. In the case at bar, all the deposit slips of the eighty-two (82) checks in question were
initialed and/or approved for deposit by Ernest L. Boon. The Branch Managers of the Ongpin and
Elcaño branches accepted the deposits made in the Buendia branch and credited the accounts of
Alfredo Y. Romero and Benito Lam in their respective branches.
On November 7, 1984, petitioner made a written demand on respondent drawee Bank to credit her
account with the money value of the eighty-two (82) checks totalling P1,208.606.89 for having been
wrongfully charged against her account. Respondent drawee Bank refused to grant petitioner's
demand. On January 23, 1985, petitioner filed the complaint with the Regional Trial Court.
This is not a suit by the party whose signature was forged on a check drawn against the drawee
bank. The payees are not parties to the case. Rather, it is the drawer, whose signature is genuine,
who instituted this action to recover from the drawee bank the money value of eighty-two (82)
checks paid out by the drawee bank to holders of those checks where the indorsements of the
payees were forged. How and by whom the forgeries were committed are not established on the
record, but the respective payees admitted that they did not receive those checks and therefore
never indorsed the same. The applicable law is the Negotiable Instruments Law 4(heretofore referred
to as the NIL). Section 23 of the NIL provides:

When a signature is forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce payment thereof against any
party thereto, can be acquired through or under such signature, unless the party
against whom it is sought to enforce such right is precluded from setting up the
forgery or want of authority.
Under the aforecited provision, forgery is a real or absolute defense by the party whose
signature is forged. A party whose signature to an instrument was forged was never a party
and never gave his consent to the contract which gave rise to the instrument. Since his
signature does not appear in the instrument, he cannot be held liable thereon by anyone, not
even by a holder in due course. Thus, if a person's signature is forged as a maker of a
promissory note, he cannot be made to pay because he never made the promise to pay. Or
where a person's signature as a drawer of a check is forged, the drawee bank cannot charge
the amount thereof against the drawer's account because he never gave the bank the order
to pay. And said section does not refer only to the forged signature of the maker of a
promissory note and of the drawer of a check. It covers also a forged indorsement, i.e., the
forged signature of the payee or indorsee of a note or check. Since under said provision a
forged signature is "wholly inoperative", no one can gain title to the instrument through such
forged indorsement. Such an indorsement prevents any subsequent party from acquiring any
right as against any party whose name appears prior to the forgery. Although rights may
exist between and among parties subsequent to the forged indorsement, not one of them
can acquire rights against parties prior to the forgery. Such forged indorsement cuts off the
rights of all subsequent parties as against parties prior to the forgery. However, the law
makes an exception to these rules where a party is precluded from setting up forgery as a
defense.
As a matter of practical significance, problems arising from forged indorsements of checks may
generally be broken into two types of cases: (1) where forgery was accomplished by a person not
associated with the drawer — for example a mail robbery; and (2) where the indorsement was
forged by an agent of the drawer. This difference in situations would determine the effect of the
drawer's negligence with respect to forged indorsements. While there is no duty resting on the

depositor to look for forged indorsements on his cancelled checks in contrast to a duty imposed
upon him to look for forgeries of his own name, a depositor is under a duty to set up an accounting
system and a business procedure as are reasonably calculated to prevent or render difficult the
forgery of indorsements, particularly by the depositor's own employees. And if the drawer (depositor)
learns that a check drawn by him has been paid under a forged indorsement, the drawer is under
duty promptly to report such fact to the drawee bank. 5 For his negligence or failure either to discover or
to report promptly the fact of such forgery to the drawee, the drawer loses his right against the drawee
who has debited his account under a forged indorsement. 6 In other words, he is precluded from using
forgery as a basis for his claim for re-crediting of his account.

In the case at bar, petitioner admitted that the checks were filled up and completed by her trusted
employee, Alicia Galang, and were given to her for her signature. Her signing the checks made the
negotiable instrument complete. Prior to signing the checks, there was no valid contract yet.
Every contract on a negotiable instrument is incomplete and revocable until delivery of the
instrument to the payee for the purpose of giving effect thereto. 7 The first delivery of the instrument,
complete in form, to the payee who takes it as a holder, is called issuance of the instrument. 8 Without the
initial delivery of the instrument from the drawer of the check to the payee, there can be no valid and
binding contract and no liability on the instrument.

Petitioner completed the checks by signing them as drawer and thereafter authorized her employee
Alicia Galang to deliver the eighty-two (82) checks to their respective payees. Instead of issuing the
checks to the payees as named in the checks, Alicia Galang delivered them to the Chief Accountant
of the Buendia branch of the respondent drawee Bank, a certain Ernest L. Boon. It was established
that the signatures of the payees as first indorsers were forged. The record fails to show the identity
of the party who made the forged signatures. The checks were then indorsed for the second time
with the names of Alfredo Y. Romero and Benito Lam, and were deposited in the latter's accounts as
earlier noted. The second indorsements were all genuine signatures of the alleged holders. All the
eighty-two (82) checks bearing the forged indorsements of the payees and the genuine second
indorsements of Alfredo Y. Romero and Benito Lam were accepted for deposit at the Buendia
branch of respondent drawee Bank to the credit of their respective savings accounts in the Buendia,
Ongpin and Elcaño branches of the same bank. The total amount of P1,208,606.89, represented by
eighty-two (82) checks, were credited and paid out by respondent drawee Bank to Alfredo Y.
Romero and Benito Lam, and debited against petitioner's checking account No. 13-00038-1,
Caloocan branch.
As a rule, a drawee bank who has paid a check on which an indorsement has been forged cannot
charge the drawer's account for the amount of said check. An exception to this rule is where the
drawer is guilty of such negligence which causes the bank to honor such a check or checks. If a
check is stolen from the payee, it is quite obvious that the drawer cannot possibly discover the
forged indorsement by mere examination of his cancelled check. This accounts for the rule that
although a depositor owes a duty to his drawee bank to examine his cancelled checks for forgery of
his own signature, he has no similar duty as to forged indorsements. A different situation arises
where the indorsement was forged by an employee or agent of the drawer, or done with the active
participation of the latter. Most of the cases involving forgery by an agent or employee deal with the
payee's indorsement. The drawer and the payee often time shave business relations of long
standing. The continued occurrence of business transactions of the same nature provides the
opportunity for the agent/employee to commit the fraud after having developed familiarity with the
signatures of the parties. However, sooner or later, some leak will show on the drawer's books. It will
then be just a question of time until the fraud is discovered. This is specially true when the agent
perpetrates a series of forgeries as in the case at bar.

The negligence of a depositor which will prevent recovery of an unauthorized payment is based on
failure of the depositor to act as a prudent businessman would under the circumstances. In the case
at bar, the petitioner relied implicitly upon the honesty and loyalty of her bookkeeper, and did not
even verify the accuracy of amounts of the checks she signed against the invoices attached thereto.
Furthermore, although she regularly received her bank statements, she apparently did not carefully
examine the same nor the check stubs and the returned checks, and did not compare them with the
same invoices. Otherwise, she could have easily discovered the discrepancies between the checks
and the documents serving as bases for the checks. With such discovery, the subsequent forgeries
would not have been accomplished. It was not until two years after the bookkeeper commenced her
fraudulent scheme that petitioner discovered that eighty-two (82) checks were wrongfully charged to
her account, at which she notified the respondent drawee bank.
It is highly improbable that in a period of two years, not one of Petitioner's suppliers complained of
non-payment. Assuming that even one single complaint had been made, petitioner would have been
duty-bound, as far as the respondent drawee Bank was concerned, to make an adequate
investigation on the matter. Had this been done, the discrepancies would have been discovered,
sooner or later. Petitioner's failure to make such adequate inquiry constituted negligence which
resulted in the bank's honoring of the subsequent checks with forged indorsements. On the other
hand, since the record mentions nothing about such a complaint, the possibility exists that the
checks in question covered inexistent sales. But even in such a case, considering the length of a
period of two (2) years, it is hard to believe that petitioner did not know or realize that she was
paying more than she should for the supplies she was actually getting. A depositor may not sit idly
by, after knowledge has come to her that her funds seem to be disappearing or that there may be a
leak in her business, and refrain from taking the steps that a careful and prudent businessman would
take in such circumstances and if taken, would result in stopping the continuance of the fraudulent
scheme. If she fails to take steps, the facts may establish her negligence, and in that event, she
would be estopped from recovering from the bank. 9
One thing is clear from the records — that the petitioner failed to examine her records with
reasonable diligence whether before she signed the checks or after receiving her bank statements.
Had the petitioner examined her records more carefully, particularly the invoice receipts, cancelled
checks, check book stubs, and had she compared the sums written as amounts payable in the
eighty-two (82) checks with the pertinent sales invoices, she would have easily discovered that in
some checks, the amounts did not tally with those appearing in the sales invoices. Had she noticed
these discrepancies, she should not have signed those checks, and should have conducted an
inquiry as to the reason for the irregular entries. Likewise had petitioner been more vigilant in going
over her current 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.

Narvasa, C.J., Feliciano, Regalado and Nocon, JJ., concur.

ASSOCIATED BANK V. CA
252 SCRA 620
FACTS:
The province of Tarlac maintains an account with PNB-Tarlac. Part of its
funds is appropriated for the benefit of Concepcion Emergency Hospital. During a post-audit done
by the province, it was found out that 30 of its checks weren’t received by the hospital. Upon further
investigation, it was found out that the checks were encashed by Pangilinan who was a former
cashier and administrative officer of the hospital through forged
indorsements.
This prompted the provincial treasurer to ask for
reimbursement from PNB and thereafter, PNB from Associated Bank. As the two banks didn't want
to reimburse, an action was filed against them.

HELD:
There

is

a

distinction

instruments

on

forged

indorsements

payable

with

regard

to

bearer instruments and
order.

With instruments payable to bearer, 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
holder
In

in

instruments

essential

to

payable

to

transfer

title

due
order,
to

the
the

course.

signature
same

of

instrument.

the

rightful
When

holder

is

holder’s

the

signature is forged, all parties prior to the forgery may raise the real defense of forgery against all
parties
this,

subsequent
an

indorser

warrants

bank is such an indorser.
his
the

warranties
defense

Furthermore,

in

thereto.
that

the

In

connection

instrument

is

genuine.

to

A

collecting

So even if the indorsement is forged, the collecting bank is bound by
as

of
cases

an

indorser

forgery

as

involving

checks

against
with

and
the
forged

cannot
drawee
indorsements,

set

up

bank.
such

as

the case at bar, the chain of liability doesn't 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, the forger himself, if available.

In other

words,

the

amount

it

drawee
paid

generally

suffers

genuineness
party

the

seek

collecting

the

loss

because

all

prior

check

making

can

the

of

presenting

bank

from

the

for

it

or

payment

to
has

or

te

drawee

done

duty

of

is

its

return

The

considering

the

a

person.

has

endorsements

presentment

genuineness

reimbursement
bank

to
that

an

duty

act

assertion

that

ascertain

the

the
bank

ascertain
the

to

of

collecting

the
of
the
the

indorsements.

With regard the issue of delay, a delay in informing the bank of the forgery, which deprives it of
the

opportunity

to

go

after

the

forger,

signifies

negligence on the part of the drawee bank and will preclude it from claiming reimbursement. In
this
delay.

case,
Its

delay

PNB
hasn't

wasn't

guilty

prejudiced

Associated

of
Bank

any
in

any

negligent
way

because

even if there wasn't delay, the fact that there was nothing left of the account of Pangilinan, there
couldn't be anymore reimbursement.

Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 129910

September 5, 2006

THE INTERNATIONAL CORPORATE BANK, INC., petitioner,
vs.
COURT OF APPEALS and PHILIPPINE NATIONAL BANK, respondents.
DECISION
CARPIO, J.:
The Case
Before the Court is a petition for review1 assailing the 9 August 1994 Amended Decision2 and the 16
July 1997 Resolution3 of the Court of Appeals in CA-G.R. CV No. 25209.
The Antecedent Facts
The case originated from an action for collection of sum of money filed on 16 March 1982 by the
International Corporate Bank, Inc.4 ("petitioner") against the Philippine National Bank ("respondent").
The case was raffled to the then Court of First Instance (CFI) of Manila, Branch 6. The complaint
was amended on 19 March 1982. The case was eventually re-raffled to the Regional Trial Court of
Manila, Branch 52 ("trial court").
The Ministry of Education and Culture issued 15 checks5 drawn against respondent which petitioner
accepted for deposit on various dates. The checks are as follows:

Check Number
7-3694621-4
7-3694609-6
7-3666224-4
7-3528348-4
7-3666225-5
7-3688945-6
7-4535674-1
7-4535675-2
7-4535699-5
7-4535700-6
7-4697902-2
7-4697925-6
7-4697011-6
7-4697909-4
7-4697922-3

Date
7-20-81
7-27-81
8-03-81
8-07-81
8-10-81
8-10-81
8-21-81
8-21-81
8-24-81
8-24-81
9-18-81
9-18-81
10-02-81
10-02-81
10-05-81

Payee
Trade Factors, Inc.
Romero D. Palmares
Trade Factors, Inc.
Trade Factors, Inc.
Antonio Lisan
Antonio Lisan
Golden City Trading
Red Arrow Trading
Antonio Lisan
Antonio Lisan
Ace Enterprises, Inc.
Golden City Trading
Wintrade Marketing
ABC Trading, Inc.
Golden Enterprises

Amount
P 97,500.00
98,500.50
99,800.00
98,600.00
98,900.00
97,700.00
95,300.00
96,400.00
94,200.00
95,100.00
96,000.00
93,030.00
90,960.00
99,300.00
96,630.00

The checks were deposited on the following dates for the following accounts:
Check Number
7-3694621-4
7-3694609-6
7-3666224-4
7-3528348-4
7-3666225-5
7-3688945-6
7-4535674-1
7-4535675-2
7-4535699-5
7-4535700-6
7-4697902-2
7-4697925-6
7-4697011-6
7-4697909-4

Date Deposited
7-23-81
7-28-81
8-4-81
8-11-81
8-11-81
8-17-81
8-26-81
8-27-81
8-31-81
8-24-81
9-23-81
9-23-81
10-7-81
10-7-81

Account Deposited
CA 0060 02360 3
CA 0060 02360 3
CA 0060 02360 3
CA 0060 02360 3
SA 0061 32331 7
CA 0060 30982 5
CA 0060 02360 3
CA 0060 02360 3
CA 0060 30982 5
SA 0061 32331 7
CA 0060 02360 3
CA 0060 30982 5
CA 0060 02360 3
CA 0060 30982 56

After 24 hours from submission of the checks to respondent for clearing, petitioner paid the value of
the checks and allowed the withdrawals of the deposits. However, on 14 October 1981, respondent
returned all the checks to petitioner without clearing them on the ground that they were materially
altered. Thus, petitioner instituted an action for collection of sums of money against respondent to
recover the value of the checks.
The Ruling of the Trial Court
The trial court ruled that respondent is expected to use reasonable business practices in accepting
and paying the checks presented to it. Thus, respondent cannot be faulted for the delay in clearing
the checks considering the ingenuity in which the alterations were effected. The trial court observed
that there was no attempt from petitioner to verify the status of the checks before petitioner paid the
value of the checks or allowed withdrawal of the deposits. According to the trial court, petitioner, as
collecting bank, could have inquired by telephone from respondent, as drawee bank, about the

status of the checks before paying their value. Since the immediate cause of petitioner‘s loss was
the lack of caution of its personnel, the trial court held that petitioner is not entitled to recover the
value of the checks from respondent.
The dispositive portion of the trial court‘s Decision reads:
WHEREFORE, judgment is hereby rendered dismissing both the complaint and the
counterclaim. Costs shall, however be assessed against the plaintiff.
SO ORDERED.7
Petitioner appealed the trial court‘s Decision before the Court of Appeals.
The Ruling of the Court of Appeals
In its 10 October 1991 Decision,8 the Court of Appeals reversed the trial court‘s Decision. Applying
Section 4(c) of Central Bank Circular No. 580, series of 1977,9 the Court of Appeals held that checks
that have been materially altered shall be returned within 24 hours after discovery of the alteration.
However, the Court of Appeals ruled that even if the drawee bank returns a check with material
alterations after discovery of the alteration, the return would not relieve the drawee bank from any
liability for its failure to return the checks within the 24-hour clearing period. The Court of Appeals
explained:
Does this mean that, as long as the drawee bank returns a check with material alteration
within 24 hour[s] after discovery of such alteration, such return would have the effect of
relieving the bank of any liability whatsoever despite its failure to return the check within the
24- hour clearing house rule?
We do not think so.
Obviously, such bank cannot be held liable for its failure to return the check in question not
later than the next regular clearing. However, this Court is of the opinion and so holds that it
could still be held liable if it fails to exercise due diligence in verifying the alterations made. In
other words, such bank would still be expected, nay required, to make the proper verification
before the 24-hour regular clearing period lapses, or in cases where such lapses may be
deemed inevitable, that the required verification should be made within a reasonable time.
The implication of the rule that a check shall be returned within the 24-hour clearing period is
that if the collecting bank paid the check before the end of the aforesaid 24-hour clearing
period, it would be responsible therefor such that if the said check is dishonored and
returned within the 24-hour clearing period, the drawee bank cannot be held liable. Would
such an implication apply in the case of materially altered checks returned within 24 hours
after discovery? This Court finds nothing in the letter of the above-cited C.B. Circular that
would justify a negative answer. Nonetheless, the drawee bank could still be held liable in
certain instances. Even if the return of the check/s in question is done within 24 hours after
discovery, if it can be shown that the drawee bank had been patently negligent in the
performance of its verification function, this Court finds no reason why the said bank should
be relieved of liability.
Although banking practice has it that the presumption of clearance is conclusive when it
comes to the application of the 24-hour clearing period, the same principle may not be

applied to the 24-hour period vis-a-vis material alterations in the sense that the drawee bank
which returns materially altered checks within 24 hours after discovery would be conclusively
relieved of any liability thereon. This is because there could well be various intervening
events or factors that could affect the rights and obligations of the parties in cases such as
the instant one including patent negligence on the part of the drawee bank resulting in an
unreasonable delay in detecting the alterations. While it is true that the pertinent proviso in
C.B. Circular No. 580 allows the drawee bank to return the altered check within the period
"provided by law for filing a legal action", this does not mean that this would entitle or allow
the drawee bank to be grossly negligent and, inspite thereof, avail itself of the maximum
period allowed by the above-cited Circular. The discovery must be made within a reasonable
time taking into consideration the facts and circumstances of the case. In other words, the
aforementioned C.B. Circular does not provide the drawee bank the license to be grossly
negligent on the one hand nor does it preclude the collecting bank from raising available
defenses even if the check is properly returned within the 24-hour period after discovery of
the material alteration.10
The Court of Appeals rejected the trial court‘s opinion that petitioner could have verified the status of
the checks by telephone call since such imposition is not required under Central Bank rules. The
dispositive portion of the 10 October 1991 Decision reads:
PREMISES CONSIDERED, the decision appealed from is hereby REVERSED and the
defendant-appellee Philippine National Bank is declared liable for the value of the fifteen
checks specified and enumerated in the decision of the trial court (page 3) in the amount
of P1,447,920.00
SO ORDERED.11
Respondent filed a motion for reconsideration of the 10 October 1991 Decision. In its 9 August 1994
Amended Decision, the Court of Appeals reversed itself and affirmed the Decision of the trial court
dismissing the complaint.
In reversing itself, the Court of Appeals held that its 10 October 1991 Decision failed to appreciate
that the rule on the return of altered checks within 24 hours from the discovery of the alteration had
been duly passed by the Central Bank and accepted by the members of the banking system. Until
the rule is repealed or amended, the rule has to be applied.
Petitioner moved for the reconsideration of the Amended Decision. In its 16 July 1997 Resolution,
the Court of Appeals denied the motion for lack of merit.
Hence, the recourse to this Court.
The Issues
Petitioner raises the following issues in its Memorandum:
1. Whether the checks were materially altered;
2. Whether respondent was negligent in failing to recognize within a reasonable period the
altered checks and in not returning the checks within the period; and

3. Whether the motion for reconsideration filed by respondent was out of time thus making
the 10 October 1991 Decision final and executory.12
The Ruling of This Court
Filing of the Petition under both Rules 45 and 65
Respondent asserts that the petition should be dismissed outright since petitioner availed of a wrong
mode of appeal. Respondent cites Ybañez v. Court of Appeals13 where the Court ruled that "a
petition cannot be subsumed simultaneously under Rule 45 and Rule 65 of the Rules of Court, and
neither may petitioners delegate upon the court the task of determining under which rule the petition
should fall."
The remedies of appeal and certiorari are mutually exclus