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In 1979, Filriters Guaranty Assurance Corporation [Filriters] executed a “Detached Assignment” whereby as registered owner, it sold, transferred, assigned and delivered unto Philippine Underwriters Finance Corporation [Philfinance] all its rights and title to Central Bank Certificates of Indebtedness [CBCI] worth 500K each, amounting to an aggregate value of P3.5M. In Feb 1981, Philfinance, through a Repurchase Agreement, sold, transferred and delivered one of the CBCIs with a face value of 500K to Trader’s Royal Bank [TRB] for the price of P519,361.11. In April 1981, Philfinance agreed to repurchase the CBCI pursuant to the agreement. However, it failed to do so when the checks it issued for TRB was dishonored due to insufficient funds. Philfinance then executed a “Detached Assignment” in favor of TRB to enable the latter to have its title completed and registered. But when TRB presented the CBCI to the Central Bank for registration, the latter refused to do so. TRB then filed a case to compel the Central Bank to register the CBCI in its name. When impleaded in the case, Filriters claimed that the detached assignment forms were executed by its Senior Vice-President-Comptroller and Vice- President-Treasury without the knowledge and consent of its directors and w/o written authorization from its Board. As such, Filriters claimed that the assignment of the CBCI to Philfinance was a personal act of its 2 officers and not its corporate act. Being so, the assignment was null and void. It also claimed that the CBCI was not a negotiable instrument and as a certificate of indebtedness was not payable to bearer but was specifically registered in the name of Filriters. The RTC declared the assignment null and void. The CA ruled that the CBCI was 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. The CA also found that Philfinance acquired the CBCI from Filriters fictitiously because there was really no consideration or value received in the transfer. What happened was Philfinance merely borrowed the CBCI from Filriters, a sister corporation.


HELD: NO. The court held that the subject CBCI was not a negotiable instrument in the

absence of words of negotiability within the meaning of the negotiable instruments law. The CBCI reads that “the Central Bank promises to pay bearer, or if this Certificate of Indebtedness be registered, to Filriters Guaranty Assurance

Corporation, the registered owner hereof, the principal sum of 500k.” A reading of the CBCI indicates that it is payable to Filriters, and to no one else, thus discounting TRB’s submission that it is a negotiable instrument.

The language of negotiability which characterizes a negotiable paper as a credit instrument is its freedom to circulate as a substitute for money. Hence, freedom of negotiability is the touchstone 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. This freedom in negotiability is totally absent in a CBCI as it merely acknowledges to pay a sum of money to a specified person or entity for a period of time. A certificate of indebtedness then pertains to certificates for the creation and maintenance of a permanent improvement revolving fund and is similar to a “bond”. Being equivalent to a bond, it is properly understood as an acknowledgement of an obligation to pay a fixed sum of money. Citing Caltex v CA, the court ruled that the accepted rule is that the negotiability or non-negotiability of an instrument is determined from the writing, or from the face of the instrument itself. As it lacked the words of negotiability, the CBCI is non- negotiable. Thus, the transfer of the instrument from Philfinance to TRB was merely an assignment, and is not governed by the Negotiable Instruments Law. Consequently, the title of Filriters over the subject CBCI was upheld over the claimed interest of TRB.




CALTEX PHILS v CA and Security Bank

Security Bank & Trust Company issued 280 certificates of time deposit [CTDs] in favor of one Angel dela Cruz who deposited with the bank the aggregate amount of P1,120,000. Dela Cruz then delivered the CTDs to Caltex in connection with his purchase of fuel products from the latter. In March 1982, Dela Cruz informed the Bank manager that he lost all the CTDs. The manager agreed to replace the 280 CTDs upon execution and submission of a notarized Affidavit of Loss, as required by bank procedure. Upon replacement of the allegedly lost CTDs, Dela Cruz obtained a loan of P875k from Security Bank. He then executed a notarized Deed of Assignment of Time Deposit, surrendering to the bank full control of the time deposit account, allowing the latter to apply the said time deposits to the payment of whatever amounts may be due on the loan upon maturity. On the other hand, in November 1982, Mr. Aranas, credit manager of Caltex, presented to Security Bank for verification the CTDs declared lost by Dela Cruz. Aranas claimed that the same were delivered to Caltex “as security for purchases made.” Accordingly, Security Bank rejected Caltex’s demand for payment of the value of the CTDs. In April 1983, the loan of Dela Cruz with the Security Bank matured and the latter applied the time deposits in question as payment of the matured loan. Caltex then filed a complaint demanding payment by the ban of the value of the CTDs plus accrued interest and compounded interest. The RTC dismissed the case. CA also dismissed the appeal.







1. YES. A sample text of the CTDs states: “This is to certify that bearer has deposited in this Bank the sum of 4,000 pesos, Philippine Currency, repayable to said depositor 731 das. After date, upon presentation and surrender of this certificate, with interest rate of 16% per annum.” Section 1 of the NIL requires, among others, that for an instrument to be negotiable, it must be payable to order or to bearer [Par.D]. 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. The documents provide that the amounts deposited shall be repayable to the depositor. The court ruled that the “depositor” indicated is actually the “bearer.” The documents do not say that the depositor is Angel Dela Cruz and that the amounts deposited are payable only to him. If it was really the intention of the bank to pay the amount to dela Cruz only, then it could have so expressed in clear and categorical terms instead of having the word “bearer” stamped on the space provided for the name of the depositor in each CTD.

The Security Bank, through its manager, testified that the depositor referred to is Angel dela Cruz. However, the court ruled that the manager merely declared that Dela Cruz is the depositor, “insofar as the bank is concerned,” but obviously other parties not privy to the transaction between them would not 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 that is written thereon. This need for resort to extrinsic evidence is what is sought to be avoided by the Negotiable Instruments law and calls for 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.

2. NO. Unfortunately for Caltex, although the CTDs are bearer instruments, a valid negotiation thereof for the purpose and agreement between it and Dela Cruz, requires both delivery and indorsement. As stated by Aranas in a letter addressed to the bank, “these certificates of deposit were negotiated to us by Mr. Dela Cruz to guarantee his purchases of fuel products.” This admission is conclusive upon Caltex. Under the doctrine of Estoppel, and admission is rendered conclusive upon the person making it and cannot be denied as against the person relying thereon. If it were true that the CTDs were delivered as payment and not as security, Aranas could have easily said so, instead of using the words “to guarantee.” Under the NIL, an instrument is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder thereof, and a holder may be the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof. In the present case, however, there was no negotiation in the sense of a transfer of legal title, in which case deliver would have sufficed. Here, the delivery of the CTDs was only as security for the purchases of Dela Cruz. Therefore, Caltex could only have been a holder for value by reason of lien. Accordingly, a negotiation for such purpose cannot be effected by mere delivery of the instrument because 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.




I. PINEDA v DELA RAMA Presumption that

a negotiable instrument

consideration is only prima facie


issued for a valuable

Jose Dela Rama was a practicing lawyer who was retained by petitioner Jesus Pineda in order to make representations with the chairman & gen. manager of the Nat’l Rice & Corn Admin’n [NARIC] regarding the alleged institution of criminal charges against Pineda for misappropriation of 11,000 cavans of palay. The NARIC gen. manager was supposedly an intimate friend of Dela Rama. Accdg to Dela Rama, Pineda borrowed P9,3000 from him as evidenced by a promissory note signed by the latter. Dela Rama then sued for collection of the amount, including P5k in attorney’s fees for services in the case of NARIC. In his defense, Pineda claims he only signed the note because he was made to believe that Dela Rama had already advanced the amount to bribe the NARIC officials in order to suspend Pineda’s prosecution. In the course of the case, it was proven that the value of the promissory note was not the only amount received by Dela Rama, as Pineda had earlier given him P3k via check to serve as grease money. An air-conditioner bought by Pineda’s son supposedly to give to the NARIC officials also went to Dela Rama and was never given to the officials. 6 sacks of rice were also proven to be received by Dela Rama. It was later found out that none of the authorities had received any of the amounts, and that there were no criminal charges contemplated to be filed against the petitioner by NARIC to begin with. The RTC ruled for Pineda, declaring that the P9300 in the note was not received by Pineda nor given to any party for his benefit. It also ruled that the P3k be returned to petitioner, subtracting P400 as legal fees for the NARIC case, considering Dela Rama already received an air-conditioner and 6 sacks of rice. CA reversed, claiming that Pineda should have known better than to sign a document or paper w/o being aware of its contents & importance. The CA cited Sec.24 of the NIL, providing that every negotiable instrument is deemed prima facie to have been issued for a valuable consideration, and every person whose signature appears thereon to have become a party thereto for value.


Held: NO. Although there is a legal presumption that every negotiable instrument was issued for a valuable consideration, this is only prima facie and may be rebutted by proof to the contrary. The promissory note reads that “This represents the cash advances made by him in connection with my case for which he is my attorney-in-law.” The provisions of the note support petitioner’s claim that he believed Dela Rama’s story that the amounts had already been advanced by the lawyer and given as gifts for the NARIC officials. The SC agreed with the RTC that

it is unusual for a lawyer to lend money to his client whom he had known only for 3 months with no security for the loan. Moreover, there was evidence presented that Dela Rama appropriated for himself the air-conditioner and 6 sacks of rice that were bought by Pineda supposedly to be given to the NARIC officials. Based on the foregoing, the promissory note was executed for an illegal consideration. Whether or not the supposed cash advances reached their destination is of no importance. The consideration for the promissory note – to influence public officers in the performance of their duties – is contrary to law and public policy. Therefore, the note is void ab initio and no cause of action for the collection cases can arise from it.




II. PHIL. BANK OF COMMERCE v ARUEGO Definition, rights and liabilities of an Accommodation Party

Jose M. Aruego was the president of the Philippine Education Foundation Company which published a periodical, “World Current Events.” The Company via Aruego obtained a credit accommodation from the Bank of Commerce in order to facilitate the printing of the periodical. Thus, for every printing, the printer [Encal Press & Photo-Engraving] collected the cost by drawing a draft against the bank then sent it to Aruego for acceptance. As added security, the Bank required Aruego to execute a trust receipt where the latter undertook to hold in trust for the Bank the periodicals and sell the same with the promise to turn over the proceeds as payment of all obligations arising from the draft. The Bank then instituted a case against Aruego for recovery of the total sums due. Aruego claimed that when the various bills of exchange were presented to him for acceptance, the amounts were already paid by the Bank to Encal w/o his knowledge or consent. He also claims to be an accommodating party only for Encal and will be liable only in the event that Encal fails to pay the Bank. The RTC dismissed for lack of cause of action. Upon appeal in the CA, he failed to file his answer on the last day for pleading, but was excused by the SC.





1. NO. Aruego claims that he signed the bills of exchange only as an agent of the company where he is president. Sec20 of the NIL provides that for an agent to avoid liability, he must be duly authorized, indicate that he is only acting as an agent, and disclose the identity of his principal. An inspection of the drafts shows Aruego never disclosed that he was signing only as a representative of the company. He therefore could not have signed as a mere agent.

2.NO. An accommodation party is one who has signed the instrument as maker, drawer, indorser, without receiving value therefore and for the purpose of lending his name to some other person. Such person is liable to a holder for value even if the latter knew him to be only an accommodation party. In lending his name to the accommodated party, he in effect acts as a surety for the latter. In the instant case, Aruego signed as a Drawee/Acceptor. Under the NIL, a drawee is primarily liable

3. YES. Aruego claims that the drafts signed by him were not really bills of exchange but mere pieces of evidence of indebtedness because payments were already made before acceptance. Under NIL, a bill of exchange is an unconditional order in

writing addressed by 1 person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. As long as commercial paper conforms w/ 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.


An accommodation party is a party to the instrument as maker, drawer. Acceptor or indorser; he has not received any value therefor and he must sign for the purpose of lending his name or credit. If, on the other hand, an indorsement is made as a favor to the indorsee, who requests it, not to secure payment but to relieve himself from a distasteful situation, the act of the indorsement ford not make the indorser an accommodation party. The receipt by the accommodation part of an amount in consideration for lending his name does not affect his act as an accommodation. An accommodation party is liable on the instrument under Sec29 of the NIL to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him only to be an accommodation party. The accommodation party will generally be regarded as a surety for the party accommodated. Correspondingly, when the accommodated party makes payment to the holder of the note, he has the right to sue the accommodated party for reimbursement since the relation between them is in effect that of principal and sureties. Should there be more than 1 accommodation party who signs an instrument, each of them is jointly and severally liable to the creditor. However, if one of the accommodation parties pays the obligation of the accommodated party in favor of the creditor, said accommodation party can demand contribution from his solidary co-maker subject to conditions required by the Civil Code. A solidary accommodation maker has the right to contribution from his co- accommodation maker, only if he paid in virtue of a judicial demand or the principal debtor is insolvent. An absence or lack of consideration is a matter of defense as against any person not a holder in due course. [Sec.28] Such lack of consideration can be interposed as a defense against the party accommodated. Appropriately, it has been held that the defense of want of consideration is available against the party accommodated. For an accommodation party to be liable on an instrument, the holder must have acquired it for value in due course. The accommodation party is liable to a holder for value as if the contract was not for accommodation and it is not a valid defense that the accommodation party did not receive any valuable consideration when he executed the instrument.




III. CLARK v SELLNER Joint Surety, not Accommodation Party

Sellner, in conjunction with 2 other persons signed a note in favor of Clark, providing that “6 months after date, for value received, we jointly and severally promise to pay to the order of Clark…the sum of 12 thousand pesos.” The note matured but its amount was not paid. Sellner claims he did not receive in that transaction either the whole or any part of the amount of the debt, and that he only signed as an accommodation party and is therefore not liable unless the note is negotiated, which was not done.








YES. The liability of the defendant, as one of the signers of the note, is not dependent on whether he has, or has not, received any part of the amount of the debt. The defendant is really and expressly one of the joint and several debtors on the note and as such he is liable under the provisions of section 60 of NIL.


NO, he is more of a joint surety. It must be noted that by putting his signature to the note, he lent his name, not to the creditor, but to those who signed with him placing himself with respect to the creditor in the same position and with the same liability as the said signers. It should be noted that the phrase :w/o receiving value therefore” in sec29 means w/o receiving value by virtue of the instrument and does not mean w/o receiving value for lending his name. If as in the instant case, a sum of money was received by virtue of the note, it is immaterial, so far as the creditor is concerned, whether one of the signers has or has not received anything in payment of the use of his name. In reality the legal situation of the defendant in this case may be regarded as that of a joint surety rather than an accommodation party. The defendant, as a joint surety, may upon the maturity of the note, pay the debt, demand the collateral security and dispose of it to his benefit, but there is no proof whatever that this was done. As a joint surety, he may at any time after the maturity of the note, make payment thus subrogating himself in the place of the creditor with the right to enforce the guaranty against the other signers of the note for the reimbursement of what he is entitled to recover from them. As to the plaintiff, he is a holder for value under sec29, for he paid the money to the signers as the time the note was executed.

The court ruled in favor of Clark, allowing him to collect 12k as value of the note.

IV. PNB v MAZA Accommodation Parties are still liable, no defense of lack of consideration

PNB sued Ramon Maza and Francisco Mecenas on 5 promissory notes of 10k each that the 2 executed on two different dates. Defendants claim that the promissory notes were sent in blank to them by an Enrique Echaus with the request that they sign them so that Echaus might negotiate them with the PNB in case of need. They also claim that they have not negotiated the notes with the bank nor have they received the value thereof or delivered them to the bank in payment of any pre-existing debt. The RTC rendered judgment in favor of the bank and ordered defendants jointly and severally to pay the amount due.














YES. The most plausible and reasonable stand for the defendants is that they are accommodation parties. But as accommodation parties, although the defendants have signed the instruments w/o receiving value therefor and for the purpose of lending their names to some other person, they are still liable on the instruments. The law now is that the accommodation party can claim no benefit as such, but he is liable according to the face of his undertaking, the same as if he were himself financially interested in the transaction. Even though ordinarily, lack of consideration does not create any obligation at law, for an accommodation maker to be liable, it is not necessary that any consideration move to him. The consideration which supports the promise of the accommodation maker is that parted with by the person taking the note and received by the person accommodated. It was also noted by the court that when the accommodation parties make payment to the holder of the notes, they have the right to sue the accommodated party for reimbursement, since the relation between them is in effect that of principal and sureties, the accommodation parties being the sureties.




V. SADAYA v SEVILLA Requisites for direct reimbursement from co-accommodation maker

Victor Sevilla, Oscar Verona and Simeon Sadaya executed, jointly and severally, in favor of BPI or its order, a promissory note for P15k, payable on demand. However, the entire amount was received from the bank by Oscar Varona alone. Sevilla and Sadaya signed the promissory note as co-makers only as a favor to Varona. After payments were not made, the bank collected the balance from Sadaya. Varona failed to reimburse Sadaya despite repeated demands. Thereafter, Sevilla died and Francisco Sevilla was named administrator of his estate. Sadaya now filed a creditor’s claim against Sevilla’s estate, for the latter’s share of the sum Sadaya paid to BPI. RTC admitted Sadaya’s claim and directed the administrator to pay the same. However, it was reversed upon appeal.


Held: NO. As joint and several accommodation makers, Sevilla and Sadaya’s individual obligation to the bank is no different from, and no greater and no less than, that contracted by Oscar Varona. In fact, as between Sadaya and Varona, there was an implied contract of indemnity and the latter is bound by the obligation to reimburse the former. On principle, a solidary accommodation maker – who made payment – has the right to contribution, from his co-accommodation maker, in the absence of agreement to the contrary between them and subject to conditions imposed by law. This right springs from an implied promise between the accommodation makers to share equally the burden that may ensue from their having consented to stamp their signatures on the promissory note. For having lent their signatures to the principal debtor, they clearly placed themselves – in so far as payment made by one may

create liability on the other – in the category of mere joint guarantors of the former. The court also held that as to the requisites of reimbursement from a co- accommodation maker, the NIL is silent and so Article 2073 of the Civil Code applies. It provides that when 1 of the 2 or more guarantors of the same debt and the same debtor pays for the obligation, he may seek reimbursement from the other the share that is proportional to him; if any of the guarantors are insolvent, the others shall bear his share; and that the provisions are only applicable when payment is made by virtue of a judicial demand or the debtor’s insolvency.

The court therefore postulated the following rules:

1. A joint & several accommodation maker may demand from the principal debtor

reimbursement for the amount he paid to the payee.

2. A joint several accommodation maker who pays may directly demand reimbursement from his co-accommodation maker w/o first directing his action against the principal debtor provided that:

  • a. Payment is by virtue of judicial demand, or

  • b. Principal debtor is insolvent

VI. REPUBLIC BANK v EBRADA Accommodation Party-Indorser is still liable

In Jan 1963, the Treasury of the Philippines issued a check for P1,246.08 to the order on a Martin Lorenzo and drawn on the Republic Bank. At the back side of the check bears the signatures of the following in order: [1] Martin Lorenzo, [2] Ramon Lorenzo, [3] Delia Dominguez, [4] Mauricia Ebrada. It was stipulated that Dominguez delivered the check to Ebrada for encashment and Ebrada signed her name at the back when she encashed the check with Republic Bank in Feb 1963. Upon presentment, the bank encashed the check. Upon receipt of the cash, Ebrada turned over the amount to Dominguez and the latter handed the amount to a Justina Tinio. The bank was later advised by the Bureau of Treasury that the alleged indorsement of Martin Lorenzo was a forgery since had had died in July 14, 1952. When the bank sought to recover the amount encashed from Ebrada, she refused, claiming she was a holder in due course, that the bank was in estoppel or so negligent as not to be entitled to recover anything from her. RTC ruled in favor of the bank and ordered Ebrada to pay the encashed amount.


Held: YES. As the last indorser of the check, Ebrada was supposed to have warranted that she has food title to the said check, that the instrument is genuine an in all respects what it purports to be, and that the instrument at the time of his indorsement is valid and subsisting. It turned out however that the signature of the original payee of the check was a forgery. According to Sec23, the signature is wholly inoperative and any negotiation based on the forged signature is of no effect. Therefore, only the negotiation of Martin Lorenzo to Ramon Lorenzo is inoperative. It was held that after the drawee bank has paid the amount of the check to the holder thereof and discovers that the signature of the payee was forged, the drawee bank can recover from the holder the money paid to him on a forged instrument because 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, warrant not extending only to holders in due course. In the present case, Ebrada was duty-bound to ascertain whether the check in question was genuine before presenting it to the bank for payment. Even considering the fact that she turned over the proceeds to other parties right after receiving the cash from the bank, and although it may be said that she




acted as an accommodation party in the check, Sec29 of the NIL still provides that she is liable.




be no recovery


an accommodation party on a

promissory note vitiated by illegality of cause - agreement not to prosecute estafa case if accused executed promissory note.

Jose Paler and his wife Purificacion Paler purchased from United General Industries Inc., one Zenith 23” TV set on installment basis. To secure payment of the price, the Spouses Paler executed a promissory note for P2,690.00. A chattel mortgage was also constituted over the TV set. However, Jose Paler then sold the television set, in violation of the terms and conditions of the chattel mortgage. A criminal charge for Estafa was then filed against the spouses. To settle the case, the Spouses once again executed a promissory note, now together with Jose Dela Rama, in the amount of P3083.58. Notwithstanding repeated demands, the defendants failed to pay the amount on the note. In the RTC, judgment was rendered in favor of United Industries, ordering the defendants to pay the amount on the note. In their appeal, defendants claim the obligation arose or was incurred in consideration for the compounding of a crime.


Held: NO. In Arroyo v Berwin, it was held that an agreement to stifle the prosecution of a crime is manifestly contrary to public policy and due administration of justice and will not be enforced in a court of law, Under the law and jurisprudence, there can be no recovery against Jose De La Rama who incidentally appears to have been an accommodation signer only of the promissory note which is vitiated by the illegality of the cause. But it is different with Jose Paler who bought a television set from United General Industries, did not pay for it and even sold the set w/o written consent of the mortgagee which accordingly brought about the filing of the Estafa case. He has an obligation to United Industries independently of the promissory note. For Paler to escape payment of a just obligation will result in unjust enrichment at the expense of another and this cannot be allowed. The court affirmed the judgment of the RTC.





Lt. Rizalino Ubay was an officer in the AFP and was Disbursing Director in the Office of the Chief of Finance. As such, he was entrusted with and had custody and control of public funds. A case for Malversation was filed against him when he conspired with and accepted personal checks issued by Milagros Pamintuan then indorsed by her sister Julia Maniego, in exchange for cash belonging to the government. The checks were subsequently dishonored. Only Lt. Ubay and Mrs. Maniego were arraigned, Mrs. Pamintuan having fled to the US. The CFI convicted Lt. Ubay and imposed a fine of 57k. However, Maniego was acquitted for absence of evidence but also ordered to pay jointly and severally with Ubay, the amount of 57k to the government.


HELD: YES. First of all, the CFI was right in imposing the civil liability even if Maniego was acquitted based on reasonable doubt. Her liability was established by evidence proving she was an indorser of several checks drawn by her sister, which were dishonored after they had been exchanged with cash of public funds. Maniego’s contention that as mere indorser, she is not liable, is untenable. Under the law , the holder or last indorsee of a negotiable instrument has the right to enforce payment of the instrument against all parties liable thereon. Among the parties liable thereon is an indorser of the instrument, i.e., “a person placing his signature upon an instrument otherwise than as maker, drawer or acceptor xxx unless he clearly indicates by appropriate words his intention to be bound in some other capacity. Such an indorser who indorses w/o qualification “engages that on due presentment, the instrument shall be accepted or paid, or both, as the case may be, and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be

compelled to pay it.

Maniego may also be deemed an “accommodation party”

in light of the facts. As such, she is still under the law, liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew her only as an accommodating party. However, she has the right to obtain reimbursement from the party accommodated after she pays the holder. Since the relation between the accommodated party and the accommodating party is one of principal and surety, the accommodation party being the surety, Maniego has the right to recover the amount from her sister, Pamintuan, which was the accommodated party.


Lorenzo Ting issued a Phil. Bank of Communications [PBC] check for P4k payable to cash or bearer, with Felipe Ang’s signature [an indorsement in blank] at the back thereof. The instrument was received by plaintiff Ang Tiong who then presented it to PBC for payment. However, PBC dishonored the check. Ang Tiong then made written demands on Ting & Ang for payment but was unheeded by the two. Ang Tiong then filed a case for collection of the sum and the MTC granted his petition and ruled against the two defendants. Felipe Ang then appealed to the CFI which affirmed the MTC. The CA then certified the case to the SC for involving purely questions of law.


HELD: YES. Having arisen from a bank check which is indisputably a negotiable instrument, the present case is governed by the NIL and not Art. 2071 of the Civil Code on reimbursement by guarantor from principal debtor, as Ang contends. The SC agreed with the trial court that nothing in the check indicates that the appellant is not a general indorser within the purview of Sec.63 of the NIL which makes “a person placing his signature upon an instrument otherwise than as maker, drawer or acceptor,” a general indorser – “unless he clearly indicates by appropriate words his intention to be bound in some other capacity,” which in this case Felipe Ang did not do so.

Sec. 66 ordains that “every indorser who indorses w/o qualification, warrants to all subsequent holders in due course”

  • a) that the instrument is genuine and in all respects what it purports to be

  • b) that he has a good title to it

  • c) that all prior parties have capacity to contract; and

  • d) that the instrument is at the time of his indorsement valid and subsisting.

In addition, “he engages that on due presentment, it shall be accepted or paid, or both, as the case may be, and that if it be dishonored, he will pay the amount thereof to the holder.” Even on the assumption that Ang is a mere accommodation party, Sec.29 of the NIL provides that he is still liable on the instrument to a holder for value. It is not a valid defense that the accommodation party did not receive any valuable consideration when he executed the instrument.




For the sake of argument, granting that Felipe Ang stands only a surety for Ting, as he claims to be, is immaterial to the claim of Ang Tiong because the liability of appellant remains primary and unconditional as surety.

meaning of BDO’s warranty. As the warranty has proven to be false and inaccurate, BDO is liable for any damages arising out of the falsity of its representation.


Equitable Bank [EBC], through its Visa Card Dept. drew 6 crossed Manager’s checks totaling 46k and payable to certain member establishments of Visa Card. The Checks were deposited with Banco De Oro [as collecting bank] to the credit of its depositor, a certain Aida Trencio. Following normal procedures, and after stamping at the back of the checks the usual indorsements: “All prior and/or lack of endorsement guaranteed,” BDO sent the checks for clearing through the Philippine Clearing House Corp. [PCHC]. Accordingly, EBC [as drawer] paid the checks. Thereafter, EBC discovered that the indorsements appearing at the back of the checks were forged and/or unauthorized. EBC then presented the checks directly to BDO, claiming reimbursement. BDO refused. EBC filed a case for collection. The dispute was presented for Arbitration and the Arbiter decided in favor of EBC, ordering the PCHC to debit the clearing account of BDO then credit the clearing account of EBC with the 46k. Upon reconsideration, PCHC affirmed. Petition for review was filed with the QC RTC which affirmed the PCHC ruling.



1. YES. BDO argues that the term check should be interpreted as a negotiable instrument, citing the definition of a “check” as basically a bill of exchange under Sec128 of the NIL and that it should be payable “to order” or “to bearer” under Sec.126. Petitioner alleges that with the cancellation of the printed words “or to bearer” from the face of the check, it becomes non-negotiable so the PCHC has no jurisdiction over the case. The SC ruled that petitioner’s contention was wrong because the PCHC makes no distinction as to the character or nature of the checks subject of its jurisdiction. Where the law does not distinguish, the courts may not distinguish. Sec.185 of the NIL defines a check and the provisions of Sec61 that the drawer may insert in the instrument an express stipulation negating or limiting his own liability to the holder are applicable. The term check as used in the Articles of Incorporation of PCHC can only connote checks in general use in commercial and business activities, it cannot be conceived to be limited to negotiable checks only. The SC also agreed with the lower court’s ruling that in presenting the checks for clearing and for payment, BDO made an express guarantee on the validity of all prior endorsements. No amount of legal jargon can reverse the clear

The principle of estoppel effectively prevents BDO from denying liability for any damage sustained by EBS which, relying upon an action or declaration of the BDO, paid on the checks. A commercial bank cannot escape the liability of an endorser of a check, which may turn out to be a forged endorsement. Whenever any bank treats the signature at the back of the checks as endorsements and thus logically guarantees the same as endorsement, there can be no doubt said bank has considered the checks as negotiable. As to the matter of forgery in indorsements, the collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior indorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the endorsements. [PNB v NCB]

2. YES. Sec. 66 of the NIL provides the warranty issued by every indorser who indorses w/o qualification. It was further held in a US case that “the drawer owes no duty of diligence to the collecting bank [one who had accepted an altered check and had paid over the proceeds to the depositor] except of seasonably discovering the alteration by a comparison of its returned checks and check stubs or other equivalent record, and to inform the drawee thereof.” Thus, the SC held that while the drawer generally owes no duty of diligence to the collecting bank, the law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it for the purpose of determining their genuineness

and regularity. The collecting bank being primarily engaged in banking holds itself out to the public as the expert and the law holds it to a high standard of conduct.

And although the subject checks are non-negotiable there responsibility of petitioner as indorser remains. The SC also agreed with the disquisition of the PCHC that:

  • (A) payments made to persons other than the payees are not valid and give rise to an obligation to return the amounts received, and

  • (B) having violated its warranty on validity of all endorsements, collecting bank [BDO] cannot deny liability to those who relied on its warranty.

Finally, the court held that having accepted the crossed checks from persons other than the payees, the defendant [BDO] is guilty of negligence; the risk of wrongful payment has to be assumed by BDO.





The Province of Tarlac had an account with PNB where the provincial funds are deposited. A portion of the provincial funds is allocated to the Concepcion Emergency Hospital. The allotment checks for the hospital are drawn to the order of “Concepcion Emergency Hospital” or “the Chief, Concepcion Emergency Hospital.” The checks are released by the Office of the Provincial Treasurer and received for the hospital by its administrative officer and cashier. It was then discovered that the hospital did not receive several allotment checks drawn by the Province. 30 checks amounting to P203k were encashed by one Fausto Pangilinan, retired administrative officer and cashier of the hospital. Pangilinan had encashed the checks with Associated Bank acting as collecting Bank. Pangilinan was able to withdraw the money when the checks were cleared and paid by PNB as the drawee bank. Apparently, Pangilinan would forge the signature of Ds. Adena Canlas who was the chief of the hospital and named as payee of the checks. All the checks bore the stamp of the Associated Bank which reads “All prior endorsements guaranteed – associated bank.” Jesus David, manager of Associated Bank testified that Pangilinan made it appear that the checks were paid to him for certain projects with the hospital. He did not find it as irregular that Pangilinan was encashing checks which did not bear his name as payee. Although Pangilinan is the 1 st cousin of David’s wife, he denied any preferential treatment. The provincial treasurer then wrote the manager of PNB to restore the amounts to the province’s account. PNB then demanded reimbursement from Associated Bank. As both banks resisted payment, the Province sued PNB, which in turn impleaded Associated Bank as 3 rd party defendant. RTC ruled in favor of the Province, ordering PNB to pay it the 203k. It then ordered Associated Bank to pay PNB the 203k. The court dismissed the case against Adena Canlas for lack of cause of action and over Pangilinan for lack of jurisdiction over his person. PNB and Associated Bank appealed. CA affirmed.











1. YES. 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 wrongfully. The court clarified the difference between forged indorsement in a bearer instrument and forged indorsement in an order instrument. In bearer instruments, 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. In order instruments, when the holder’s indorsement is forged, all parties prior to the forgery may raise the real defense of forgery against all parties subsequent thereto. An indorser of an order instrument warrants the genuineness of the instrument. He cannot interpose the defense that signatures prior to him are forged because this is exactly what he guaranteed to be true in his indorsement. A collecting bank where a check is deposited and which indorses the check upon presentment with the drawee bank is such an indorser. Even if the indorsement on the check deposited by the bank’s client is forged, the collecting bank is bound by its indorsement. The court then clarified the difference between a forged check containing a forged signature from a forged indorsement. In a forged check where the drawer’s signature is forged, the drawer can recover from the drawee bank and the liability chain ends with the drawee bank who has the responsibility to know the drawer’s signature. As to a forged indorsement, such as the present case, the liability chain does not end with the drawee bank [PNB] because the latter may recover from the collecting bank [in this case Associated] who took the instrument from the forger. However, the collecting bank may recover from the forger himself, if available. The collecting bank is liable for these reasons:

A) Because the indorsement is a forgery, the collecting bank committed a breach of its warranty. B)The collecting bank is privy to the depositor who negotiated the check. The bank knows his address and history and has taken a risk on his deposit. It is in a better position to detect forgery in the indorsement.

2. YES. The Province of Tarlac was equally negligent and should share the burden of loss from the checks. The Province permitted Pangilinan to encash the checks although he was already retired and no longer connected to the hospital. In fact, at one time the checks were being collected by 2 persons, Pangilinan and Juco, the new cashier. The province should be liable for part of the amount paid.

3. NO, PNB did not commit negligent delay. Although drawee bank PNB also breached its duty to pay only according to the terms of the check and cannot escape liability and should bear part of the loss, PNB can recover from the collecting bank Associated. The rule is that a delay in informing the collecting bank Associated 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. CB Circular 580 applies, providing that checks be returned w/in 24 hrs of discovery of the forgery. The rationale of the rule is to give the collecting bank adequate opportunity to proceed against the forger. The court ruled that even if PNB did not return the checks to Associated w/in 24 hours, PNB gave prompt notice to Associated under the circumstances and the latter was not prejudiced in going after Pangilinan.




4. NO. PNB’S duty was only to verify the genuineness of the drawer’s signature, and not the genuineness of the payee’s indorsement. PNB may still recover although it had already paid the amounts.


In 1977, Ford Philippines drew and issued a crossed Citibank Check “for payee’s account only” in favor of the Commissioner of Internal Revenue as payment of sales taxes. The check was deposited with the PCIBank which then endorsed it and was cleared by the Central Bank. Upon presentment with Citibank, the proceeds of the check were paid by Citibank to PCIB. However, the proceeds were never paid to the BIR. Ford was compelled to make a 2 nd payment to the CIR. An NBI investigation revealed that a Godofredo Rivera, the General Ledger Accountant of Ford, recalled the check purportedly because of an error in computation of the taxes due. In 1978, the same thing happened when the syndicate of Rivera embezzled the proceeds of 2 similarly crossed checks issued by Ford to pay for its percentage taxes. The checks never reached the payee, CIR. It was proven that the Tax Receipts allegedly received by Ford after payment of the taxes were “fake and spurious.” Ford again was required to pay BIR for the second time. Investigations revealed that a syndicate consisting of Rivera and his assistant who are employees of Ford, along with a certain Castro who was an employee of PCIB and other employees of PCIB connived to embezzle the funds. The RTC held Citibank liable for the value of the 2 checks for 1978 and absolved PCIB from any liability. Ford and Citibank appealed and the CA affirmed the decision of the RTC.


HELD: YES. The perpetrators now being fugitives from justice, the court sought to resolve the question of liability based on the degree of negligence among the parties concerned. It appears that although the employees of Ford initiated the transactions attributable to an organized syndicate, the SC held that their actions were not the proximate cause of encashing the checks payable to CIR. The degree of Ford’s Negligence, if any, could not be characterized as the proximate cause of the injury to the parties. The court noted that the Board of Directors of Ford did not confirm the request of Rivera to recall the checks and Rivera’s instruction to replace the check was not in the ordinary course of business which could have prompted PCIB to validate the same.

It also appears that PCIB failed to verify the authority of Rivera to negotiate the checks. The neglect of the PCIB employees to verify whether his letter requesting replacement of the checks was duly authorized, showed lack of care and prudence required in the circumstances. Also, PCIB acted as an agent of the BIR in collecting tax payments and was therefore bound to consult its principal regarding the unwarranted instructions given by Rivera, this it failed to do so. Lastly, the check was crossed and should have served as a warning that it should be deposited only to the account of the CIR. It was proven in the investigation that the checks were encashed under a fictitious name of “Reynaldo Reyes.” It is the duty of the collecting bank PCIB to ascertain that the check be deposited in payee’s account only. Having established that the collecting bank’s negligence is the proximate cause of the loss, the SC concluded that PCIB is liable in the amount corresponding to the proceeds of the Citibank checks. However, the court also held that although a bank is liable for the wrongful acts of its officers within the course of their employment, PCIB appears also to be the victim of the scheme hatched by the syndicate. Therefore, the responsibility for negligence does not lie on PCIB alone. The evidence showed that Citibank as drawee bank was likewise negligent in failing to establish that its payment of Ford’s checks were madie in due course and legally in order. As ruled by the CA, Citibank must likewise answer for the damages because of the contractual relationship it breached with Ford in failing to scrutinize the checks before paying to PCIB. Citibank had failed to ensure that the amount of the checks be paid only to its designated payee, the CIR. The fact that the drawee bank did not discover the irregularity seasonably, constitutes negligence in carrying out the bank’s duty to its depositors. The court ruled that PCIB and Citibank must share the loss on a 50-50 ratio.




The Morans then, 6 months after the incident, claimed 1million in moral damages against Citytrust, which was refused by the latter. Case for damages was then filed by the spouses Moran. RTC and CA both dismissed.


George and Librada Moran are the owners of the Wack-Wack Petron gasoline station at Shaw boulevard. They regularly purchased bulk fuel and other related products from Petrophil Corporation on cash on delivery basis. Orders were made by telephone & payments were effected by personal checks upon delivery. The Morans maintained 2 savings accounts and 1 current account with Citytrust Banking Corporation Shaw Boulevard Branch. As an accommodation to a valued client, the bank allowed them to maintain a zero balance in their current account and pursuant to Pre-Authorized transfer Agreement [PAT], transfers may be made from one savings account to the current account when the funds of the latter were insufficient for withdrawals. On December 12, 1983, Librada drew a check for 50k payable to petrophil. The next day, Librada again issued another check for 56k for the same corporation. The 2 checks totaled 106k. On Dec 14, Petrophil deposited the 2 checks to its account with PNB. PNB then presented them for clearing with the Philippine Clearing House Corporation in the afternoon of the same day. Records show that on Dec14, the Current Account of the Morans had zero balance while the Savings Account covered by the PAT had a balance of 26k and the other savings account had 43k. At 10am on Dec15, George Moran personally oversaw their daily transactions with the bank, as was his regular practice. He made the necessary deposits and transfers in the current account so that it would have sufficient funds for the 2 checks. Thereafter, George was informed by Librada that Petrophil refused to deliver their orders on a credit basis because the 2 checks they issued were dishonored upon presentment for payment, Apparently, the bank dishonored the checks for insufficiency of funds. The non-delivery of gasoline forced the Morans to temporarily stop business operations. In addition, Petrophil cancelled their credit accommodation, forcing them to pay for their purposes in cash. On Dec16 or 17, Raul Diaz, branch manager of Citytrust-Shaw, went to the Moran residence to get their signatures on an application for a manager’s check so that the dishonored checks could be redeemed. Diaz personally went to Petrophil to present the checks in payment for the dishonored checks. At a chance meeting with the credit manager of Petrophil on May or June 1983, George found out that Citytrust sent Petrophil a letter notifying them that the 2 checks were “inadvertently dishonored due to operational error.”


HELD: NO. A check is a bill of exchange drawn on a bank payable on demand. Fixed savings and current deposits of money in banks and similar institutions shall be governed by the provisions on Simple Loan. Where the bank possesses funds of a depositor, it is bound to honor his checks to the extent of the amount of his deposits. Failure of a bank to pay the check, when the deposit is sufficient, entitles the drawer to substantial damages. Conversely, a bank is NOT liable for its refusal to pay a check on account of insufficient funds, notwithstanding the fact that a deposit may be made later in the day. Considering the clearing process of checks, it is clear that the available balance on Dec14 was used by the bank in determining whether or not there was sufficient cash to fund the checks, although what was stamped on the dorsal side of the checks was Dec15 as the actual date when the checks were processed. This was proper and done in due course of ordinary business, as the additional funds were deposited at 10am on Dec15, which was unfortunately too late to prevent their dishonor. The spouses claim that it was true that the checks were dishonored in the early morning of Dec15, why would the bank automatically transfer funds from the savings account to the current account pursuant to the PAT? The court ruled that the bank only did so, hoping the checks may be retrieved, thus preventing their dishonor. The transfers were made to preserve its relations with petitioners who were valued clients. Although not admitting fault, it tried its best to make sure the checks would not bounce. Petitioners also claim that on previous occasions, a bank employee would inform George Moran of the insufficiency of the funds via pink slips containing details in a report of rejected transactions from the head office. The court however ruled that if these were mere accommodations of the bank and was not a requirement or a general banking practice, hence non-compliance thereof could not lay the bank open to blame or rebuke. Moreover, the letter to Petrophil was not an admission of liability as it was written only to maintain the goodwill and continued patronage of the Morans. There was neither malice nor bad faith, but rather a clear intent to mollify and obvious agitated client. In conclusion, the court found no cogent and sufficient reason to award actual, moral or exemplary damages to petitioners. It further ruled that a bank may not be




held responsible for such damages in the absence of fraud, bad faith, malice or wanton attitude.


The Republic of the Philippines seeks to recover amounts it paid to Equitable Banking Corporation and PI Bank for the value of 28 Treasury Warrants executed on genuine government forms but where the signature of the drawing office and that of the representative of the Auditor General were forged. The present case involves 2 different suits filed against PI bank and Equitable. Corporacion de los padres Dominicos accommodated its former trusted employee, Jacinto Carranza who asked the Corporacion to cash 24 Treasury Warrants, alleging it was difficult to do so directly with the government and that his wife expected a sort of commission for the encashment. The corporacion acceded, on the condition that the warrants first be deposited with PI bank and the value be cashed only upon actual payment of the warrants credited to the account of the Corporacion with PI bank. The warrants where then deposited, and PI bank presented them for payment through the Clearing Office of the Central Bank. After being cleared, the warrants were paid by the Treasurer and accordingly, PI bank credited the value to the account of the Corporacion, which in tern paid Jacinto Carranza. Thereafter, the Treasurer returned the warrants to the Central Bank, and demanded, on the ground that they had been forged, that the value be charged against the accounts of PI bank and credited back to the demand deposit of the Treasury. Central Bank then forwarded the demand to PI bank, the latter opposing the return of the warrants. On the other hand, the second case involved 4 warrants that were deposited by 3 depositors of Equitable bank. Equitable in due course, cleared said warrants thru the Clearing Office then collected the corresponding amounts from the Treasurer and credited said amounts to the accounts of the depositors. Subsequently, the Treasurer notified Equitable of the alleged defect of said warrants and demanded reimbursement, but was rejected by the bank,


HELD: YES. Sec.4 of the Central Bank Circular No.9 provides that all items cleared at 11am shall be returned not later than 2pm on the same day and all items cleared at 3pm shall be returned not later than 830am of the following business

day, except for items cleared on Saturday which may be returned not later than 830am of the following day. The government maintains that it is not bound by this rule because the treasury is not a bank and the treasurer has objected to the application of said rule to his office. The court ruled that this contention is untenable because the treasury is a member of the Cleearing Office. Furthermore, the opposition of the treasurer to the “24-hr clearing house rule” is not sufficient to exempt the Treasury from the operation thereof.

At any rate, the 28 warrants were cleared and paid by the Treasurer, in view of which the PI Bank and Equitable bank credited the corresponding amounts to the respective depositors of the warrants. The treasury had not only been negligent in clearing its own warrants, but had also, thereby induced the PI Bank and

Equitable Bank to pay the amounts thereof to their depositors, The gross nature of the negligence becomes more apparent when it is considered that each one of the 24 warrants involved in the PI bank case was for over P5k and hence, beyond the authority of the auditor of the Treasury, whose signature was forged thereon, to approve. In other words, the irregularity of the said warrants was apparent of the face thereof, from the viewpoint of the Treasury. Also, the Treasury failed to advertise the loss of genuine forms of its warrants.

Neither PI bank nor Equitable was informed of any irregularity in connection with the warrants, but were only so informed after the warrants had been cleared and honored. As a consequence, the loss of the amounts is mainly imputable to acts and omissions of the Treasury, for which PI bank and Equitable cannot be penalized. It may be held guilty of unreasonable delay in discovering the forgery and giving notice thereof. Also, as between 2 innocent parties, that whose neglect or fault was the cause, even if innocent of any intentional fraud, shall bear the loss.





w/o carefully examining the signature showing marked variation from the genuine signature. The court also ruled that the act of Gozon in leaving his checkbook in the car while he went out for a short while cannot be considered negligence sufficient to excuse PNB from its own negligence.


Francisco Gozon II was a depositor of PNB Caloocan City Branch. He went to

On March 8, 1965, PLDT drew a check on HSBC for 14k, with HSBC as the

the bank in his car, accompanied by his friend Ernesto Santos, who he left in the car while he transacted business in the bank. When Santos saw that Gozon left his checkbook in the car, he took a check and

payee. The check was sent to the payee via mail, but somehow fell in the hands of a certain Florentino Changco who was able to erase the name of the payee Bank and instead typed his own name on the check.

filled it up for the amount of 5k, forged the signature of Gozon and encashed the

Changco previously opened an account with People’s Bank and Trust Company

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

and on March16, deposited the altered check in his name. The check was presented for clearing, wherein People’s Bank made the following

that the 5k be returned to his account as his signature on the check was forged. The bank refused to do so. Upon complaint of Gozon, Santos was apprehended by the police and the latter

indorsement: “For clearance, clearing office. All prior endorsements and/or lack of endorsements guaranteed. Peoples Bank and Trust Company.” The check was duly cleared by the HSBC so that peoples bank credited Changco with the amount

admitted he stole the check, forged the signature and encashed the same. Hence, Gozon filed a complaint for recovery of the amount against the bank.

of the check. Beginning March17, Changco began to withdraw from his account and on

The CFI ruled in favor of Gozon. The Bank claims it was the act of Gozon in putting his checkbook into the hands of Santos which was the proximate cause of the loss, thereby precluding him from setting up the defense or forgery or want of authority under section23 of the Negotiable Instruments Law.

March31, he closed his account. On April12, the check was returned to PLDT when the alteration in the name of the payee was discovered. On that same date, Peoples bank was notified and HSBC requested it to refund the sum previously credited. Peoples bank refused. HSBC filed a case for recovery. The lower court dismissed the case.











HELD: YES. A bank is bound to know the signature of its customer, 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. The rule is based upon the presumed negligence of the drawee in failing to meet its obligation to know the signature of its correspondent. It is not only a question of payment under mistake, but payment in neglect of duty which the commercial law places upon the bank. The prime duty of a bank is to ascertain the genuineness of the signature of the drawer or the depositor on the check being encashed. It is expected to use reasonable business prudence in accepting and cashing a check presented to it. In this case, the lower court found that a comparison of the signature on the forged check and the sample signatures of Gozon show marked differences as the graceful lines in the sample signature was completely different from those on the forged check. Obviously, PNB was negligent it encashing the forged check

indorsements carries with it a concomitant guarantee of genuineness and is therefore liable to HSBC for alteration made in the name of the payee. On the other hand, Peoples bank relies on the 24hour regulation of the Central bank that requires after a clearing, that all cleared items must be returned not later than 3pm of the following business day. And since HSBC only advised Peoples Bank as to the alteration 27 days after clearing, Peoples bank claims it is now too late to do so.


HELD: YES. The court ruled that the indorsement stamped by Peoples bank should re read together with the 24-hour regulation on Clearing house Operations of the Central bank. Once that 24hour period is over, the liability on such an indorsement has ceased. This being so, HSBC has not made out a case for relief. HSBC claims that the 24-hour regulation only applies to forged checks and not to altered checks. The court found this untenable. It held that whatever remedy




HSBC would have lies against the party responsible for changing the name of the payee. Its failure to call the attention of Peoples Bank to such alteration until the lapse of 27 days would, in light of the Central Bank regulation, negate whatever right it might have against the defendant bank.

the payee and the amount on the check. The court also ruled that the indorsement must be read together with the 24hr regulation, that once the period is over, the liability on such an indorsement has ceased. Moreover, before MetroBank allowed the last withdrawal of 18k by Sales, it withheld payment and first verified the regularity and genuineness of the check deposit for FNCB precisely because of the fast movement of the account. Only upon being assured that the same is ‘not unusual’ did Metro bank allow the withdrawal of the balance.


Joaquin Cunanan & Company drew a check for P50 against First National City

Bank [FNCB] payable to Manila Polo Club. Thereafter, the check was altered to P50k payable to Cash and was deposited to

Metro Bank by a certain Salvador Sales. Earlier that day, Sales had opened a current account with Metro Bank, depositing P500 in cash. Metro bank immediately sent the check to the clearing house of the Central Bank with the following words stamped at the back of the check: “Metropolitan Bank and Trust Company Cleared (illegible) office All prior endorsements and/or lack of endorsements Guaranteed.” The check was cleared the same day and FNCB paid Metro bank the amount of

50k through the clearing house, while Sales was credited with the said amount. The day after he opened his account, Sales withdrew P480; 2 days after he

made another withdrawal of 32k and 3 days after withdrew 18k and closed his account with Metro Bank. 9 days later, FNCB returned the cancelled check to Joaquin Cunanan and

Company together with the bank monthly statement. On the same day, the company informed FNCB that the check had been altered. FNCB then wrote Metro bank asking for reimbursement of the amount paid. The latter refused to do so and a case for recovery was filed by FNCB.


HELD: FNCB, the drawee bank is liable for payment of the altered check. Metro Bank invokes the 24-hr regulation of the Central Bank Clearing house which provides that all defective checks must be returned by the drawee bank within 24hours to the collecting bank. On the other hand, FNCB relies on the guarantee of all previous indorsements made by Metro Bank which allegedly misled FNCB into believing that the check was regular and the payee’s indorsements genuine. In this case, the check was not returned to Metro bank in accordance with the 24-hr clearing house period. Failure of FNCB to call the attention of MetroBank to the alteration of the check until lapse of 9 days, negates whatever right it might have had against metro bank in light of the regulation. Its remedy lies not against Metro bank but against the party responsible for changing the name of


On Jan25, 1966, San Miguel Corporation [SMC] drew a check for P240 with the FNCB in favor of J. Roberto Delgado, a stockholder. After the check was delivered to Delgado, the amount on its face was fraudulently and w/o authority of the drawer, altered by increasing it to P9,240. The check was indorsed and deposited by Delgado in his account with Republic Bank on March14. Republic accepted the check for deposit w/o ascertaining it genuineness and regularity. Republic endorsed the check 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, FNCB paid Republic the amount of the check on March15. On April19, SMC notified FNCB of the alteration and FNCB recredited the amount to SMC. On May 19, FNCB informed Republic of the alteration, but by then Delgado had already withdrawn his account from republic. FNCB demanded that Republic refund the amount paid on the basis of the latter’s indorsement and guaranty. Republic refused, claiming there was delay in giving it notice of the alteration, that it was not guilty of negligence, and that it was SMC’s fault in drawing the check in such a way as to permit the insertion of numerals increasing the amount. RTC ruled in favor of FNCB and CA affirmed.


HELD: NO. The 24hour clearing house rule is a valid rule applicable to commercial banks. While it is true that when an endorsement is forged, the collecting bank or last endorser as a general rule bears the loss, but the unqualified endorsement of the collecting bank on the check should be read together with the 24hour rule. 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. 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, and it should be able to detect alterations, erasures or intercalations thereon, for these instruments are prepared, printed and issued by itself, it has




control of the drawer’s account aid 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 for payment is against the party responsible for the forgery or alteration, 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.


On October 9, 1981, a phone call was made to BPI’s Money Market Department by a woman who identified herself as Eligia Fernando who had a money market placement as evidenced by a promissory note with a value of 2.4million. The caller sought to pre-terminate the placement but Reginaldo Estaquio, a Trainee in BPI, told her that trading time was over and suggested she call the following week. Estaquio advised Penelope Bulan who handled Fernando’s account, but Estaquio was left to attend the pretermination process. The next Monday, the caller once again followed up the pretermination with Estaquio. Although not familiar with the voice of Fernando, Estaquio made certain that the caller was really Fernando by verifying that details the caller gave about the placement, which tallied with the details in the ledger/folder of the account. But neither Estaquio nor Bulan who originally handled Fernando’s account, nor any body else in BPI bothered to call up Fernando at her Philamlife office to verify the request. The caller asked that 2 checks be issued for the proceeds of the pretermination, one for 1.8 million and the second for the balance, and that the checks be delivered to her Philamlife office. Later in the same morning, however, the same caller changed the delivery instructions and said her niece, Rosemarie Fernando, would pick up the checks. Estaquio informed her that a written authorization was needed. A Rosemarie Fernando signed the delivery receipt but the dispatcher failed to require the surrender of the promissory note evidencing the placement. There was also no showing that Eligia Fernando’s purported signature on the letter requesting the pretermination and the letter authorizing Rosemarie Fernando to pick up the 2 checks, was compared or verified with Eligia Fernando’s real signature in BPI’s file. Such purported signature has been established to be forged although it has a close similarity to the real signature of Fernando. Thereafter, a woman who represented herself to be Eligia Fernando, applied at China Banking Corporation’s [CBC] head office for the opening of a current account. She was introduced to Emily Cuaso, Cash Supervisor, by Antonio Concepcion whom Cuaso knew to have opened an account upon the introduction of Valentin Co, a long-standing valued client of CBC. What Cuaso indicated on the application form, however was that the new client was

introduced by Valentin Co. The current account was approved by Regina Dy, cashier, who did not interview the new client but affixed her initials on the application form after reviewing it. The following day, the woman purporting to be Eligia Fernando deposited the 2

checks from BPI to the current account with CBC. CBC endorsed the checks, which it sent for clearing and which BPI cleared on the same day. 2 days after, withdrawals began on the current account, the last of which was 19

days after the opening of the account., or on November 4.

The day of reckoning came when the maturity date of Fernando’s money market placement with BPI came and the real Fernando went to BPI for the rollover of her placement. She denied having preterminated her placement and BPI issued her a new promissory note to evidence a roll-over of the placement. BPI returned the 2 checks to CBC for the reason ‘Payee’s endorsement forged.’ A

ping-pong then started when CNC returned the checks for the reason ‘Beyond Clearing Time.’ Cases of Estafa thru falsification of Commercial Documents against 4 employees

of BPI and Susan Lopez San Juan, the impersonator, were filed. Upon submission for Arbitration, the committee ruled in favor of BPI. Upon motion for reconsideration, the Board of Directors of PCHC reversed and ruled that BPI should bear the loss. BPI then filed this petition for review.


HELD: Both are liable, as both banks were negligent. BPI contends that CBC’s clear warranty was an unrestrictive clearing guaranty that all prior indorsements in the checks are genuine. BPI theorizes that Sec23 of the NIL is not applicable in light of the absolute liability of the collecting bank as regards forged endorsements. The court held that the general rule is that a forged signature is wholly inoperative and payment made through such signature is ineffectual or does not discharge the instrument. The exception to the rule is when the party relying on the forgery is precluded from setting up the forgery or want of authority. In this jurisdiction, we recognize negligence of the party invoking forgery as an exception to the general rule. The records show that BPI and CBC were both negligent, resulting in the encashment of the forged checks.

First, BPI should have at least verified with the real Eligia Fernando, vice-president of Philamlife, the transaction even by mere telephone call. Second, BPI failed to verify the signature of Fernando on the letter requesting the pre-termination and the letter authorizing her niece to pick-up the checks. Lastly, BPI neglected to require the surrender of the promissory note evidencing the money market placement before the 2 checks were delivered. On the other hand, the impostor was able to open with CBC a current account in the name of Eligia Fernando due to the negligence of Emily Cuaso, its cash supervisor. Cuaso even misrepresented in the application form as to who introduced the new




depositor, making it appear the introduction was made by Valentin Co instead of Antonio Concepcion. This clearly shows that Cuaso was uncomfortable with the introduction made. Second, the depositor of CBC deposited 2 checks with an aggregate value of 2.4million, which was grossly disproportionate to her initial deposit of 10k in cash. Moreover, withdrawal of the check’s proceeds began on oct16, only 2 days after the checks were deposited, and by Oct22, the account had been emptied of the checks’ proceeds. Lastly, CBC’s contention that big withdrawals are usual business cannot be accepted, especially since the supposed check proceeds were grossly disproportionate to the initial cash deposit. BPI insists that the doctrine of LAST CLEAR CHANCE enunciated in Picart v Smith should be applied, and on the basis thereof, CBC should be made liable. However, the court ruled against such contention, stating that CBC had no prior notice of the fraud perpetrated by BPI’s employees. In the same manner, BPI insists that even if the doctrine of PROXIMATE CAUSE is applied, CBC should still be held liable. It argues that the acts and omissions of CBC are the cause that set into motion the actual and continuous sequence of events that produced the injury and without which the result would not have occurred. BPI claims that there was a gap of 1 day between the issuance and delivery of the checks, and at this stage, there was yet no loss and the impostor could have decided to desist from completing the same plan, and therefore, the acts and omissions of BPI did not end in a loss. However the court ruled that BPI’s contentions are untenable. It was natural and expected for one who took the risk of impersonating a person and conniving with bank employees, to encash the check to complete her deception. There is therefore greater reason to rule that the proximate cause of the payment of the checks by an impostor was due to the negligence of BPI, however it must not bear the loss solely. Due care on the part of CBC could have prevented any loss. The court finally ruled that both banks were negligent in the selection and supervision of their employees resulting in the encashment of the checks. Considering the comparative negligence of the 2 banks, the SC ruled that the 2.4 million loss and the costs of arbitration should be shouldered by the 2 banks on a 60- 40 ratio. BPI would shoulder 60% while CBC would shoulder 40%.


Rommel’s Marketing Corporation, represented by its Pres. and GM, Romeo

Lipana, seeks to recover from PBC the sum of 300k representing various deposits made in its current account with said bank which were not credited to its account. It appears that RMC funds were entrusted in the form of cash to Lipana’s

secretary, Irene Yabut, for the purpose of depositing said funds to RMC’s current account with PBC. However, Yabut deposited them in the account of her husband Bienvenido Cotas, who maintained an account with the same bank. Irene Yabut would accomplish 2 copies of a deposit slip, an original and a

duplicate. The original would show the name of her husband as depositor and his current account number. On the duplicate copy was written the account number of her husband but the name of the accountholder was left blank. PBC’s teller, Azucena Mabayad, would then validate and stamp both copies. The

2 nd copy was kept by Irene Yabut allegedly for record purposes. After validation, Yabut would then fill up the name of RMC in the blank space and change the account number to that of RMC. This went on for more than a year. Upon discovery of the loss of funds, RMC demanded PBC to credit its account but was refused by the bank. RTC found PBC negligent and was affirmed by the CA.




HELD: PBC’S Negligence was the proximate cause. Negligence is the omission to do something which a reasonable man, guided by considerations which ordinarily regulate the conduct of human affairs, would do, or the doing of something which a prudent or reasonable man would not do. According to Picart v Smith, the test is whether the defendant used reasonable care and caution which an ordinarily prudent person would have used in the same situation. On the other hand, proximate cause us 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. Applying such, it appears that the bank’s teller, Ms. Azucena Mabayad, was negligent in validating, officially stamping and signing all the deposit slips prepared and presented by Ms. Yabut, despite the glaring fact that the duplicate copy was not completely accomplished, contrary to the procedures of the bank. Negligence here lies not only on the part of Ms. Mabayad but also on the part of the bank itself in its lackadaisical selection and supervision of Ms. Mabayad. Furthermore, under the




doctrine of last clear chance which provides that where both parties are negligent, but the negligent act of one came later in time, or when it is impossible to determine whose fault or negligence should be attributed to the incident, the one who had the last clear opportunity to avoid the impending harm and failed to do so is chargeable with the consequences thereof. It cannot be denied that the petitioner bank, thru its teller, had the last clear opportunity to avert the injury incurred by its client. However, RMC was likewise negligent in not checking its monthly statements of account. Had it done so, the company would have been alerted to the series of frauds committed by its secretary. The court therefore ruled that PBC should bear 60% of the damage while RMC will bear 40% of the damage.


For over a period of 18 months, from Jan29 1960 until June22 1961, Augusto

Perez collected from different clients of Manila Lighter Transportation Inc. [MLTI] some 49 checks with a total value of P91k. The endorsement of the payee MLTI, by its GM Luis Gaskell, appears on the checks, which were later on proved to have been forged. The checks as thus were negotiated by Wilfredo Lagamon, accountant of MLTI and relative of Luis Gaskell, with Cao pek and Co., and electronic store whose treasurer is Ko Lit. Most of the checks were deposited by Ko Lit in his account with China Banking

Corporation. 3 checks were deposited to an account of Cao Pek & Co while one check was deposited to the account of Lu Siu Po, manager of Cao Pek & Co. At present, all these accounts have no more balances. Until July 21, 1961, MLTI had no idea what was happening because it sent one

of its clients whose check was collected by Augusto Perez, a demand letter. MLTI then made initial demand against China Banking Corporation [CBC] for the

refund of the amount of the checks but was refused. RTC found both parties equally negligent, MLTI for allowing a state of affairs in which its employees could appropriate the checks and falsify the indorsement of its manager, and CBC for not detecting the falsification. CA dismissed and CBC was freed from any liability to MLTI.


HELD: NO. The issues raised are factual. The main issue of MLTI’s negligence had already been determined by the Trial Court against MLTI and affirmed by the CA. Since the petitioner was not a client of CBC, the latter had no way of ascertaining the authenticity of its indorsements on the checks which were deposited in the accounts of the depositors in said bank. CBC 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. Wherefore, the petition for review was denied.


Eugene Ong maintained a current account with Westmont Bank [WB]. Sometime


in May1976,






stocks through Island Securities

Corporation and in payment thereof, Island Securities purchased 2 Pacific Banking Corporation Manager’s Checks in the name of Ong. But before Ong could get a hold of the checks, his friend Paciano Tanlimco got

hold of them, forged Ong’s signature and deposited these with WB where Tanlimco was a depositor. Even though Ong’s specimen signature was on file, WB accepted and credited both checks to the account of Tanlimco, without verifying the signature indorsements at the back thereof. Tanlimco immediately withdrew the money and absconded. Ong then sought the help of Tanlimco’s family instead of going straight to the bank

to stop or question the payment. Later, he reported the incident to the Central Bank which like his first effort. Proved futile.

It was only 5months after the discovery of the fraud did Ong demand in his complaint that WB pay the value of the 2 checks. WB simply contended that since Ong claimed to have never received the originals of the 2 checks, he never acquired ownership of these checks. Thus, he had no legal personality to sue as he is a real party in interest. The bank then filed a demurrer to evidence which was denied. The RTC judged in favor of Ong while CA affirmed the RTC in toto.




W/N Ong has a cause of action against Westmont Bank


W/N Ong is barred to recover the money from Westmont due to Laches?


  • 1. YES, Ong has a cause of action against Westmont Bank. The complaint filed expressly alleged Ong’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 the petitioner. Sec23 of the NIL applies since the signature of the payee was forged to make it appear that he made an indorsement in favor of the forger. Such signature should be deemed inoperative and ineffectual. WB grossly erred in making payment by virtue of said forged signature. 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. In this case, WB was grossly negligent in performing its duties and must bear the loss.

  • 2. NO. Laches may be defined as the failure or neglect for an unreasonable length of time, to do that which should have been done earlier. In the case at bar, it cannot be said that Ong slept on his rights, He immediately acted after discovery of the forgery by seeking the help of Tanlimco’s family and later the Central Bank. Only after he exhausted possibilities of settling the matter amicably did he resort to making the demand upon the petitioner. It is WB who had the last clear chance to stop the fraudulent encashment had it exercised due diligence and followed proper banking procedures in clearing checks.

upon return from the Central bank, using the correct slip this time so it can be cleared properly. Instead, RCBC promptly debited 30k against the petitioner’s account and left it at that. Moreover, the case at bar involves a cashier’s check which is a primary obligation of the issuing bank and accepted in advance by its mere issuance. A cashier’s check is regarded substantially to be as good as the money which it represents. The court held that Tan had a right to recover moral damages even if the bank’s negligence may not have been attended with malice and bad faith. The court modified moral damages from 700k to 100k and deleted the exemplary damages of 200k, ruling on 50k for attorney’s fees.


Ramon Tan was a trader-businessman and community leader in Puerto

Princesa. He maintained since 1976 a Current Account with RCBC Binondo Branch. To avoid carrying cash, he secured a Cashier’s Check in the amount of 30k from PCIB while en route to Manila. He deposited the check in his Binondo account. However, Tan used the wrong

deposit slip and on the same day, RCBC erroneously sent the check to the Central Bank which was returned for having been mis-sent or misrouted. The next day, RCBC debited the amount covered by the cashier’s check from Tan’s account. RCBC did not inform Tan of its action, which the latter claims he learned only 42 days after. Petitioner then issued 2 personal checks. The first was for 5k payable to Go Lac

and was presented 30days after Tan’s deposit of the cashier’s check. The 2 nd check was for 6k payable to MS Development Trading Corporation and was returned twice, 9 days from deposit of the check and 22 days after the cashier’s check was deposited, both for insufficiency of funds. Tan then filed a complaint for damages against RCBC for humiliation and loss of

face in the business sector due to the bounced checks. RTC ruled in favor of petitioner while CA reversed.


HELD: YES. RCBC cannot exculpate itself from liability by claiming that its depositor ‘impliedly instructed’ the bank to clear his check with the Central bank by filling a local check deposit slip. Such posture is untenable. First, why would RCBC follow a patently erroneous act born of ignorance or inattention, and second, bank transactions pass through a succession of bank personnel whose duty is to check and countercheck transactions for possible errors. In this case, the teller should not have accepted the local deposit slip the very moment it was presented to her. Depositors do not pretend to be master of bank technicalities and repose trust in the bank personnel’s master of banking. In this case, RCBC had been remiss in its duty and obligation to its client. The 2 dishonored checks issued by Tan were presented for payment more than 45days from the day the cashier’s check was deposited, which gave RCBC ample time to have the cashier’s check cleared if it corrected the mis-sending


Melissa’s RTW was engaged in the business of ready to wear apparel which it

manufactured for different companies. When Merle Reyes, proprietress of Melissa’s RTW, went to such companies to collect on what she thought were unpaid accounts, she was informed of the issuance of crossed checks. Further inquiry revealed that said checks were deposited with the Associated bank and subsequently paid to Rafael Sayson. Merle Reyes then sued for the recovery of the total value of the checks plus damages. RTC ruled in favor of Reyes while CA affirmed.


HELD: YES. Under accepted banking practice, crossing a check is done by writing 2 parallel lines diagonally on the left top portion of the checks. In State Investment House v IAC, the court held that the effects of crossing a check are: [1] that the check may not be encashed but only deposited on the bank, [2] that the check may be negotiated only one, to one who has an account with a bank, and [3] that the act of crossing the check serves as a warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose. The 6 checks in the case at bar had been crossed and issued “for payee’s account only.” This could only signify that the drawers had intended the same for deposit only by the person indicated, Melissa’s RTW. The checks were accepted for deposit by Associated Bank for the account of Rafael Sayson although they were crossed checks and the payee was Melissa’s RTW. The bank stamped thereon its guarantee that all prior indorsements and/or lack of indorsements were guaranteed. By such deliberate acts, the Bank had for all legal intents treated the said checks as negotiable instruments, and assumed the warranty of the indorser. When the Bank paid the checks so endorsed notwithstanding that title had not passed to the endorser, it did so at its peril and became liable to the payee for the value of the checks. Furthermore, Associated Bank’s claim that it was Merle Reyes’ husband, Eddie Reyes who endorsed the checks, the court held that assuming that Eddie Reyes did endorse the crossed checks, the Bank would still be liable because he was not




authorized to make the endorsements. It was the responsibility of the Bank to inquire as to the authority of Rafael Sayson to deposit crossed checks payable to Melissa’s RTW upon prior endorsement by Eddie Reyes. The Bank was by reason of the nature of the checks, put on notice that they were issued for deposit only to the private respondent’s account. Its failure to inquire into Sayson’s authority was a breach of duty it owed to Merle Reyes. The court also held that it is permissible that the payee of illegally encashed checks be allowed to recover directly from the bank responsible for the encashment, regardless of whether or not the checks were actually delivered to the payee. The court therefore ruled that Merle Reyes had a valid cause of action against Associated Bank and that the latter is liable to her for unauthorized encashment of the subject checks.


Shipper: Ho Kee Waste Paper; Consignee: Keng Hua Paper Products, Co., Inc. Carrier: Sea-Land Service Inc. Conflict is between Consignee and Carrier regarding Bill of Lading

Sea-Land Service Inc is a foreign shipping company licensed to do business in

the Philippines. It received at its Hong Kong Terminal a sealed container of 76 bales of “unsorted waste paper” for shipment to Keng Hua Paper Products, Co. in Manila. A Bill of Lading was issued to Sea-Land to cover the shipment. The shipment was discharged at the Manila International Container Port and

corresponding Notices of Arrival were transmitted to Keng Hua but the latter failed to discharge the shipment from the container during the “free time” period or grace period. Hence, the shipment remained inside Sea-Land’s container from the moment the free time period expired until the time when the shipment was unloaded from the container, totaling a period of 481 days. During the period, Demurrage charges of P67,340 accrued and letters

demanding payment for such were sent by Sea-Land to Keng Hua. When unheeded, Sea-Land commenced a civil action for collection and damages. Keng Hua claims that it purchased 50 tons of waste paper from the shipper in

Hong Kong, Ho Kee Waste Paper, as shown by a Letter Of Credit issued by Equitable Banking Corporation, with partial shipment permitted. Likewise, the Letter of Credit stated that the remaining balance of shipment was only 10 metric tons. It then maintained that if it was to accept the shipment, the company would be violating Central Bank rules and regulations and Custom and Tariff laws. Keng Hua also averred that the cause of action should be against the shipper [Ho Kee] which contracted Sea-Land’s services and not against Keng Hua, who already notified the foreign shipping company of the wrong shipment via letter. RTC found Keng Hua liable for demurrage. CA affirmed.

ISSUE: W/N KENG HUA IS BOUND BY THE BILL OF LADING? HELD: YES, petitioner Keng Hua is liable for demurrage. A Bill of Lading serves 2 functions: [1] as a receipt for the goods shipped, and [2] as a contract by which 3 parties, namely the SHIPPER, the CARRIER and the CONSIGNEE undertake specific responsibilities & assume stipulated obligations. A bill of lading delivered

& accepted constitutes the contract of carriage even though not signed, because the acceptance of a paper containing the terms of a proposed contract generally constitutes an acceptance of the contract & all its terms and conditions of which the acceptor has actual or constructive notice. The acceptance of a bill of lading by the shipper and consignee, with full knowledge of its contents, gives rise to the presumption that the same was a perfected and binding contract. In this case, both lower courts held that the bill of lading was a valid and perfected contract between shipper Ho Kee, the consignee Keng Hua and the carrier Sea-Land. Sec17 of the bill of lading provided that the shipper and the consignee were liable for the payment of demurrage charges for the failure to discharge the containerized shipment beyond the grace period allowed by tariff rules. Applying said stipulation, both lower courts found Keng Hua liable. Keng Hua admits it received the bill of lading immediately after the arrival of the shipment. However, it took 6 months for petitioner to notify Sea-Land that it could not accept the shipment. Keng Hua’s inaction for such a long period conveys the clear inference that it accepted the terms and conditions of the bill of lading. Its contention that the “Notice of Refused or On Hand Freight” it received from Sea-Land, acknowledging that petitioner declined to accept the shipment, supported its claims, was rejected, for the letter merely proved petitioner’s refusal to pick up the cargo and not its rejection of the bill of lading. Since it was sent by Sea-Land to Keng Hua 4 months after the latter received the bill of lading, it only highlighted petitioner’s prolonged failure to object to the bill of lading. As to Keng Hua’s claim that it could not receive the shipment on the pretext of violating customs, tariff and central bank laws, the court held that mere apprehension of violating said laws, without clear demonstration that taking delivery of the shipment has become legally impossible, cannot defeat petitioner’s contractual obligation and liability under the bill of lading. Since the issue of whether petitioner accepted the bill of lading was raised for the first time only in its memorandum before the SC, the court cannot now entertain the issue raised for the fist time on appeal. Due to its prolonged failure to receive and discharge the cargo, Keng Hua violated the terms of the Bill of Lading and is thus liable for demurrage. Demurrage is merely an allowance or compensation for delay or detention of a vessel and is the true measure of damages in all cases of mere detention, for that allowance has reference to the ship’s expenses, wear and tear, and common employment. The contention that there was discrepancy in the amount of demurrage charges demanded does not negate petitioner’s liability, since the different amounts was due to the different dates of the demand letters sent to petitioner. Naturally, the longer the cargo remained unclaimed, the higher the demurrage. In a letter of credit, there are also 3 distinct and independent contracts: [1] the contract of sale between buyer and seller, [2] the contract of the buyer with the issuing bank, and [3] the letter of credit proper in which the bank promises to pay the seller pursuant to the terms and conditions stated therein. A transaction involving the purchase of goods may also require, apart from the letter of credit, a contract of transportation especially when the buyer and seller are not in the same locale. Any discrepancy between the amount of the goods described in the commercial invoice of the contract of sale and the amount allowed in the letter of credit will not affect the validity of the contract of carriage as embodied in the bill of lading. The bank cannot be




expected to look beyond the documents presented to it, and neither can the carrier be expected to go beyond the representations of the shipper in the bill of lading. Petitioner’s remedy in case of over-shipment lies against the seller/shipper, not against the carrier. The case involving an obligation not arising from a loan or forebearance, the applicable interest rate is 6% per annum. Since the bill of lading did not specify the amount of demurrage, the total amount demanded cannot be deemed to have been established with reasonable certainty until the trial court rendered judgment. Hence, the legal interest of 6% from the date of the trial court’s decision, with the rate of 12% on the total then outstanding from the time judgment becomes final and executory until its satisfaction, shall be paid by petitioner.


Correspondent/Advising Bank: Bank of America; Beneficiary/Seller: Inter-Resin Issuing Bank: Bank of Ayudhya; Buyer: General Chemicals. Conflict is between Correspondent Bank and Seller regarding fraudulent Letter of Credit

Bank of America [BA], NT & SA, Manila, received by registered mail an

Irrevocable Letter of Credit purportedly issued by Bank of Ayudhya, Samyaek Branch, for the account of General Chemicals, Ltd. of Thailand in the amount of US$2.782M to cover the sale of plastic ropes and “agricultural files” with the Bank of America as Advising Bank and Inter-Resin as Beneficiary. BA informed Inter-Resin of the LC and transmitted the letter of credit. Inter-Resin

then sought to confirm the LC with Bank of America but the latter did not, an employee of the Bank explaining that there was no need for confirmation because the LC would not have been transmitted if it were not genuine. Inter-Resin then sought to make a partial availment under the LC by submitting

invoices to BA covering shipment of 24k bales of polyethylene rope to General Chemicals valued at $1.3M, the corresponding packing list, export declaration and bill of lading. After being satisfied that Inter-Resin’s docs conformed with the conditions in LC, BA issued in favor of Inter-resin a cashier’s check for P10.2M, equivalent to the draft for $1.3M. BA then wrote Bank of Ayudhya advising the latter of the availment under the LC, seeking reimbursement therefor. A 2 nd availment was then sought by Inter-resin when it presented the same

documents to BA evidencing the 2 nd shipment of goods. Immediately upon receipt of telefax from Bank of Ayudhya declaring the LC fraudulent, BA stopped processing Inter-resin’s documents. It then sought assistance from the NBI. The latter discovered that the vans exported by Inter-Resin did not contain ropes but plastic strips, wrappers, rags and waste materials. Inter-Resin’s President Francisco Trajano and Executive VP Barcelina Tio were thereafter charged with Estafa for falsification of commercial documents, but was later dismissed. BA then sued Inter-Resin for recovery of the P10.2M paid on the 1 st availment on the LC. Inter-Resin claimed it was entitled to retain the amount, moreover, to claim the balance for the 2 nd shipment. RTC ruled for Inter-Resin because BA made assurances to it when the latter confirmed the LC, that BA was negligent

in not using modern means of communication to verify the LC w/ Bank of Ayudhya, & that BA failed to prove Inter-Resin’s participation in the fraud, as the case for Estafa was dismissed. CA affirmed. ISSUE: W/N BA WARRANTED THE GENUINENESS AND AUTHENTICITY OF THE LC AND WHETHER IT ACTED MERELY AS AN ADVISING OR CONFIRMING BANK?

HELD: BA was merely an ADVISING BANK, and not a confirming bank, and so it may recover. What characterizes letters of credit, as distinguished from other accessory contracts, is the engagement of the issuing bank to pay the seller once the draft and the required shipping documents are presented to it. In turn, this arrangement assures the seller of prompt payment, independent of any breach in the main sales

contract. By this so-called INDEPENDENT PRINCIPLE, the bank determines compliance with the LC only by examining the shipping documents presented; it is precluded from determining whether the main contract is actually accomplished or not. There would be at least 3 parties: [1] the buyer who procures the LC and obliges himself to reimburse the issuing bank upon receipt of the documents of title, [2] the bank issuing the LC which undertakes to pay the seller upon receipt of the draft and proper documents of titles and to surrender the documents to the buyer upon reimbursement, and [3] the seller who in compliance with the contract of sale ships the goods to the buyer and delivers the documents of title and draft to the issuing bank to recover payment. The number of parties may also be increased. Thus, the services of an advising [notifying] bank may be utilized to convey to the seller the existence of the credit; or a confirming bank which will lend credence to the LC issued by a lesser known issuing bank; or of a paying bank which undertakes to encash the drafts drawn by the exporter. Further, instead of going to the place of the issuing bank to claim payment, the buyer may approach another bank, termed the negotiating bank to have the draft discounted. In the case at bar, BA was only an advising bank, and not a confiming bank. This is evident in the LC itself, the petitioner bank’s letter of advice, its request for payment of advising fee and the admission of Inter-Resin that it has paid the same. That BA asked Inter-resin to submit documents required by the LC and eventually has paid the P10.2M proceeds thereof did not make it a confirming bank. The fact, too, that the draft required by the LC is to be drawn under the account of General Chemicals as buyer only means that the same had to be presented to Bank of Ayudhya as the issuing bank for payment. Moreover, BA’s letter expressly stated that “the enclosure is solely an advise of credit opened by the above-mentioned correspondent and conveys no engagement by us.” As an advising or notifying bank, BA did not incur any obligation more than just notifying Inter-Resin of the LC. The statement by the employee of BA as to the genuineness of the LC did not novate the LC and BA’s letter of advise. Inter-Resin itself cannot claim to be free from fault. It would have been strange if it did not, prior to the LC, enter into a contract or negotiate at the very least, with General Chemicals. In the ordinary course of business, the perfection of contract precedes the issuance of an LC. Bringing the LC to the attention of the seller is the primordial obligation of an advising bank. BA was not obliged to used advanced modes of business communications to verify the LC under Art18 of the Uniform Customs and Practice




for Documents of Credit [UCP] which provides that banks assume no liability for the consequences arising out of delay or loss in transit of any messages, letters or documents of for delay, mutilation or other errors arising in the transmission of any telecommunication. As advising bank, BA is bound to check only the apparent authenticity of the LC, which it did. BA may recover the P10.2M from Inter-Resin to which it had merely a discounting arrangement where BA acted independently as a negotiating bank, thus saving Inter-resin from the hardship of presenting documents directly to the Bank Of Ayudhya. As a negotiating bank, BA has a right of recourse against issuer bank and until reimbursement is obtained, Inter-Resin, as the drawer of the draft, continues to assume a contingent liability thereon.

Reliance then demanded from Daewoo the amount representing the value of the

short delivery of 135.655 metric tons under the 1 st shipment. When unheeded, it filed an action for damages, with Daewoo filing a counterclaim for damages due to breach of contract when Reliance failed to open the LC under the 2 nd contract. RTC ruled the 3 rd contract did not extinguish Daewoo’s obligation for the short delivery and must pay Reliance. The latter was in turn liable for breach and must therefore pay Daewoo. CA affirmed.



Buyer/Consignee: Reliance Commodities; Seller/Shipper: Daewoo Industrial Supposed Issuing Bank: China Banking Corporation Conflict regarding Failure to Open Letter of Credit as Breach of Contract

Reliance Commodities, Inc. and Daewoo Industrial Co., Ltd. entered into a

contract of sale wherein the latter undertook to ship and deliver to the former 2,000 metric tons of foundry pig iron for the price of US$404k. Daewoo then shipped fro Korea the goods on board the M/S Aurelio III under a Bill of Lading for carriage to and delivery in Manila to its consignee, Reliance. The shipment was fully paid for. Upon arrival in Manila, the cargo was found to be short of 135.655 metric tons. Another contract was entered into between the same parties for the purchase of

another 2,000 metric tons of iron. Daewoo acknowledged the previous short shipment in the 2 nd contract and bound itself to reduce the price by $1-$2 per metric ton for succeeding orders. This undertaking was made part of the 2 nd contract. However, that contract was not consummated and was later superseded by still a 3 rd contract. The 3 rd contract stipulated that payment would be by an Irrevocable at Sight Letter of Credit in favor of Daewoo. Thereafter, Reliance filed with China Banking Corporation an application for an

LC in favor of Daewoo covering the amount of US$380k. The application was endorsed to Iron and Steel Authority [ISA] but it was denied. Reliance was instead asked to submit purchase orders from end-users equivalent to 2,000 metric tons to support its LC application, but because the goods covered fell short of the contracted tonnage [only 900 metric tons], Daewoo rejected the proposed LC and Reliance withdrew its application. Subsequently, Daewoo learned of the failure of Reliance to open the LC due to the fact that earlier, Reliance had already exceeded its foreign exchange allocation for the year. Because of Reliance’s failure to open the LC, Daewoo was compelled to sell the goods to another buyer at a lower price, to cut losses and expenses Daewoo had begun to incur.

HELD: YES, failure of buyer seasonably to furnish an agreed LC is a breach of the contract between buyer and seller. A letter of Credit is one of the modes of payment set out in Sec8 of Central Bank Circular 1389, by which commercial banks sell foreign exchange to service payments for, ex. Commodity imports. The primary purpose of the LC is to substitute for, and therefore support, the agreement of the buyer/importer to pay money under a contract or other arrangement. It creates in the seller/exporter a secure expectation of payment. A letter of credit transaction may thus be seen to be a composite of at least 2 distinct but intertwined relationships, each relationship being concretized in a contract: [1] Between the buyer and he seller, [2] Between the Buyer and the Issuing Bank under an “Application and Agreement” or the “Reimbursement Agreement, ” and [3] between the Issuing bank and the Beneficiary/Seller. The present case relates to the 1 st contractual relation. Examining the 3 rd contract, the court held that under the instrument, the opening of an LC upon application of Reliance was not a condition precedent for the birth of the obligation of Reliance to purchase the goods from Daewoo because there had already been a “meeting of the minds” in respect to the subject matter of the contract, the price therefore and other principal provisions, resulting to a perfected contract. The opening of the LC was an obligation of Reliance and was a condition for enforcement of the reciprocal obligation of Daewoo to ship the SM. Failure to open the LC did not prevent the birth of the contract neither did it extinguish such contract. The Central Bank has established the requirements for opening a letter of credit as: [1] the duly accomplished LC application, [2] firm offer/pro forma invoice containing information on the specific quantity, unit cost, description and total cost of the commodity, [3] permits and clearances from the appropriate gov’t agencies in case of regulated commodities, and [4] duly accomplished Import Entry Declaration form as basis for duties. Further, the LC is to be opened on or before




date of shipment with max validity of 1year and only 1 LC is to be opened for each transaction. For having exceeded its foreign exchange allocation even before it entered into the 3 rd contract with Daewoo, and for having failed to secure end-users’ purchase orders equivalent to 2,000 metric tons, Reliance can hold only itself responsible. The court then ruled that failure of buyer to seasonably furnish the agreed LC is a breach of the contract between buyer and seller. Where the buyer fails to open an LC as stipulated, the seller or exporter is entitled to claim damages for breach. Damages for failure to open a commercial credit may, in appropriate cases, include loss of profit which seller would reasonably have made had the transaction been carried out.

IV. JOHANNES SHUBACK & Sons Philippine Trading v CA & Philippine SJ

In 1981, Philippine SJ Industrial Trading, represented by Ramon San Jose Jr.,

contacted Schuback & Sons through the Philippine Consulate General in Hamburg, West Germany because it wanted to purchase MAN bus spare parts from Germany. Schuback & Sons then communicated with its trading partner Schuback-Hamburg, regarding the spare parts San Jose wanted to order. On Oct16, San Jose submitted to Schuback&sons a list of the parts to be

purchased, w/ specific part numbers and description. Upon receipt of quotations, Schuback sent to SJ a letter enclosing its offer on the items listed by the latter. On Dec4, he informed Schuback that he preferred genuine replacement parts

and requested to be given a 15% discount on all items. On Dec17, Schuback submitted its formal offer containing the item number, quantity, part number, description, unit price and total to San Jose. On Dec24, San Jose informed Schuback of his desire to avail of the prices of the

parts at the time, and enclosed its purchase order containing the item number, part number and description, also promising to submit the quantity per unit it wanted to order at a later date or on Dec28 or 29. On Dec29, San Jose personally submitted the quantities he wanted to Mr. Dieter Reichert, General Manager of Schuback, at the latter’s residence. The quantities promised were written in ink by San Jose in the same PO previously submitted. At the bottom of the PO was a note that the PO will include a 3% discount and shall serve as the initial purchase order. Schuback immediately ordered the items needed, in order to enable San Jose to avail of the old prices. Schuback-Hamburg in turn ordered the items from NDK, a supplier of MAN spare parts in West Germany. Schuback-Hamburg sent Schuback&Sons a proforma invoice to be used by San Jose in applying for a Letter of Credit. Said invoice required that the LC be opened in favor of Schuback-Hamburg. Thereafter, Schuback&Sons reminded San Jose to open the LC to avoid delay in shipment and payment of interest. San Jose replied, mentioning the difficulty he was encountering in securing the required dollar

allocations and applying for the letter of credit, procuring a loan and looking for a partner-financier, and of finding ways to proceed with the orders. In the meantime, Schuback-Hamburg received invoices from NDK for partial deliveries of the goods. Shuback-Hamburg paid NDK for the spare parts. Once again, Schuback&Sons reminded San Jose to open the LC and advised that the case may be endorsed to its lawyers. In reply, San Jose claimed he did not make any valid PO and that there was no definite contract between the. Shuback then sent a rejoinder explaining that there was a valid PO and suggesting that San Jose either proceed with the order and open the LC or cancel the order and pay the CANCELLATION FEE of 30% FOB value. Schuback-Hamburg then issued a Statement of Account to Schuback&Sons, enclosing a debit note charging the latter 30% cancellation fee, storage and interest charges in the total amount of DM51,917.81. The amount was charged to Schuback&Sons’ account with Shuback-Hamburg. The latter then filed a complaint for recovery of damages, unearned profits and interest. RTC ruled in favor of Schuback&Sons, holding there was a perfected contract, but CA reversed saying there was no perfection of contract as there was no meeting of the minds as to the price between the last week of Dec1981 and the first week of Jan1982. ISSUE: W/N CONTRACT OF SALE WAS PERFECTED BETWEEN PARTIES? HELD: YES, there was a perfected contract. A contract of sale is perfected at the moment there is a meeting of the minds upon the thing which is the object of the contract and upon the price. Art1319 of the CC states that Consent is manifested by the meeting of the offer and acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a counter offer. The facts in the present case indicate that consent on both sides has been manifested. The offer was made by petitioner on Dec17 and on Dec24, private respondent informed the former of his desire to avail of the prices of the parts at the time and simultaneously enclosed its purchase order. At this stage, a meeting of the minds between vendor and vendee has occurred. Although said PO did not contain the quantity he wanted to order, private respondent made good his promise to communicate the same on Dec29. At this juncture, it is noted that San Jose was already in the process of executing the agreement previously reached between parties. Moreover, the annotation made by San Jose on the PO was another indication of acceptance by the vendee. In the same manner, the court held that failure to open the irrevocable letter of credit w/o recourse in favor of Schuback-Hamburg did not prevent the perfection of the contract between the parties, for the opening of a letter of credit is not to be deemed a suspensive condition. The facts herein do not show that petitioner reserved title to the goods until private respondent opened an LC. The opening of an LC in favor of vendor is only a mode of payment. It is not among the essential requirements of a contract of sale, the absence of which prevents perfection. To adopt the CA’s ruling that the contract of sale was dependent on the opening of the LC is untenable from a pragmatic view because then San Jose would not be able to avail of the old prices open to him only for a limited time. It would have been impossible for private respondent to avail of the old prices since




the perfection of the contract would arise much later, or after the end of the year or when he finally opens the LC.

V. FEATI BANK [Now CityTrust Banking Corp.] v CA & Bernardo Villaluz

Seller/Shipper: Bernardo Villaluz; Consignee: Hanmi Trade Development Ltd. Issuing Bank: Security Pacific National Bank of LA; Correspondent Bank: FEATI Bank and Trust Company Conflict between Seller/Shipper and Correspondent Bank as to Non-Payment of LC due to insufficiency of documents presented by Seller.

respondent receiving any certification from Christiansen. The matter was then brought before the Central Bank, which ruled that the certification of the lumber inspectors of the Bureau of Forestry shall be considered final for purposes of negotiating documents. It also issued a Memorandum/Regulation prohibiting such conditions of certification in any LC. Meanwhile, the logs arrived at Korea and were received by consignee Hanmi

Trade Development Company, to whom Christiansen sold the logs for $37.50 per cubic meter or a net profit of $10 per cubic meter. Hanmi on the other hand sold the logs to Taisung Lumber Company at Korea. Since the demands by Villaluz proved futile, an action for Mandamus and Specific

performance was filed against Christiansen and the Feati Bank, praying that Christiansen be ordered to issue the certification and upon issuance, or if the court should find it unnecessary, that Feati be ordered to accept negotiation of the LC and make payment thereon to Villaluz. While the case was pending, Christiansen absconded and left the Philippines w/o informing the court and his counsel. Villaluz then amended the complaint to make Feati solidarily liable with Christiansen. RTC ruled in favor of Villaluz and held both Christiansen and Feati solidarily liable. CA affirmed.


Bernardo Villaluz agreed to sell to Axel Christiansen 2,000 cubic meters of

Lauan Logs at $27 per cubic meter FOB. After inspecting the logs, Christiansen issued a purchase order. On the arrangements made and upon instructions of the Hanmi Trade Development Ltd., de Santa Ana, California as Consignee, the Security Pacific National Bank of Los Angeles, California issued an Irrevocable Letter of Credit available at sight in favor of Villaluz for the sum of $54k as the total purchase price of the logs. The LC was mailed to Feati Bank and Trust Company with the instruction that

HELD: NO, being a mere notifying bank, Feati cannot be held liable, absent any definitive proof that it has confirmed the LC or has actually negotiated with the private respondent, the refusal by the petitioner to accept the tender of private respondent is justified. It is a settled rule in commercial transactions involving LCs that the documents tendered must strictly conform to the terms of the LC. The tender of documents by the beneficiary must include all documents required by the letter. A

the latter shall forward the enclosed LC to the beneficiary. The LC provided that the draft to be drawn is on Security Pacific National bank and that it be accompanied with [1] Signed Commercial Invoice in 4 copies, [2] Tally sheets in quadruplicate, [3] 2/3 Original Clean on Board Ocean Bills of Lading with Consignee and Parties to be advised by Hans Axel Christiansen, and [4] Certification from Christiansen, Ship and Merchandise Broker, stating that the logs have been approved prior to shipping in accordance with the terms and conditions of the corresponding Purchase Order. Also incorporated in the LC is the Uniform Customs and Practice for Documentary Credits. The logs were then loaded on the vessel “Zenlin Glory” chartered by Christiansen. The logs were inspected by customs inspectors and representatives from the Bureau of Forestry before its loading, and certified to be in good condition and exportability. After loading, the Chief Mate Shao Shu Wang issued a mate receipt of the cargo stating its good condition. However, Christiansen refused to issue the certification required, despite several requests by Villaluz. Because of the absence of the certification by Christiansen, Feati refused to advance payment on the LC. The LC then lapsed w/o private

correspondent bank which departs from what has been stipulated in the LC, as when it accepts a faulty tender, acts on its own risks and it may not thereafter be able to recover from the buyer or the issuing bank, as the case may be, the money thus paid to the beneficiary. This is the RULE OF STRICT COMPLIANCE. Moreover, Art7 and 8 of the UPC provide that the bank may only negotiate, accept or pay if the documents tendered to it are on their face in accordance with the terms and conditions of the documentary credit. And since a correspondent bank, like Feati, principally deals only with documents, the absence of any document required in the LC justifies the refusal by the correspondent bank to negotiate, accept or pay the beneficiary, as it is not its obligation to look beyond the documents. It merely has to rely on the completeness of the documents tendered by the beneficiary. The court also held that an irrevocable credit is not synonymous with a confirmed credit. A credit may be an irrevocable credit and at the same time a confirmed credit or vice-versa. An irrevocable credit refers to the duration of the LC, meaning that the issuing bank may not w/o consent of the beneficiary [seller] and the applicant [buyer] revoke his undertaking under the letter. The issuing bank




does not reserve the right to revoke the credit. On the other hand, a confirmed LC pertains to the kind of obligation assumed by the correspondent bank. In this case, the correspondent bank gives an absolute assurance to the beneficiary that it will undertake the issuing bank’s obligation as its own according to the terms & conditions of the credit. Hence, the mere fact that an LC is irrevocable does not necessarily imply that the correspondent bank accepting the instructions of the issuing bank has also confirmed the LC. In commercial transactions involving LCs, the functions assumed by a correspondent bank are classified according to the obligations taken up by it. The correspondent bank may be called a notifying bank, a negotiating bank or a confirming bank. In this case, the letter merely provided that Feati forward the enclosed original credit to beneficiary. It is indubitable that petitioner is only a NOTIFYING bank, hence its responsibility was solely to notify and transmit the documentary credit to beneficiary. The notifying bank may suggest to the seller its willingness to negotiate, but this fact alone does not imply that the notifying bank promises to accept the draft drawn under the LC. A notifying bank is not privy to the contract of sale between buyer and seller, its relationship is only with the issuing bank and not with the beneficiary. It follows therefore that when Feati refused to negotiate with Villaluz, the latter has no cause of action against petitioner for the enforcement of his rights under the letter. In order that Feati may be held liable under the letter, there should be proof that petitioner confirmed the LC. Villaluz relies on the P75k loan extended by Feati to him, claiming that this was an act of confirmation as the loan was granted in anticipation of the LC. The court held that the loan was only an isolated transaction independent of the documentary credit for which the LC was intended merely to serve as collateral. At most, when petitioner extended the loan, it was acting as a negotiating bank, but even then, a negotiating bank has no contractual relationship with the seller. The mere opening of an LC does not involve a specific appropriation of a sum of money in favor of the beneficiary. It only signifies that the beneficiary may be able to draw funds upon the LC up to the designated amount specified in the letter. It does not convey the notion that a particular sum of money has been specifically reserved or has been held in trust. As a mere notifying bank, not only does the petitioner not have any contractual relationship with the buyer, it has also nothing to do with the contract between the issuing bank and the buyer regarding the issuance of the LC. The concept of guarantee vis-à-vis the concept of an irrevocable credit are inconsistent with each other. In contracts of guarantee, the guarantor’s obligation is merely collateral and arises only upon default of person primarily liable. On the other hand, in an irrevocable credit, the bank undertakes a primary obligation. The relationship between the issuing bank and the correspondent bank is more of an agency. As an agent of the issuing bank, it has only to follow instructions of the latter and to it alone is it obligated and not to the buyer with whom it has no contractual relationship. Finally, even if it be assumed that Feati was a confirming bank, the petitioner cannot be forced to pay the amount under the LC because there was a failure of the part of the private respondent to comply with the terms of the LC.

The Central Bank memorandum prohibiting the 4 th condition of certification under the LC cannot retroact to the case at bar for the resolution did not exist at the time the LC was issued.




HELD: YES. A letter of credit – trust receipt arrangement is endowed with its own distinctive features and characteristics. Under that set-up, a bank extends a loan covered by the LC, with the TR as a security for the loan. In other words, the transaction involves a loan feature represented by the LC and a security feature which is in the covering TR. A trust receipt is therefore a security arrangement, pursuant to which a bank acquires a “security interest” in the goods. “it secures an indebtedness and there can be no such thing as security interest that secures no obligation.” Contrary to the allegation of the Vintolas, IBAA did not become the real owner of the goods. It was merely the holder of a security title for the advances it had made to the Vintolas. The goods the Vintolas had purchased through IBAA financing remain the former’s property and they hold it at their own risk. The trust


Spouses Tirso and Loreta Vintola were doing business under the name and style

“Dax Kin International,” engaged in the manufacture of raw sea shells into finished products. They applied for and were granted a domestic letter of credit by the IBAA in the

amount of P40k. The LC authorized the bank to negotiate for their account, drafts drawn by their supplier, one Stalin Tan, on Dax Kin International for the purchase of puka and olive seashells. In consideration thereof, the Vintolas jointly and severally agreed to pay the

bank “at maturity the equivalent of the aforementioned amount or such portion thereof as may be drawn or paid upon the faith of the credit together with the usual charges.” On the same day, they received from Stalin Tan the shells worth 40k and the

Vintolas executed a Trust Receipt agreement with IBAA. Under the TR, the Vintolas agreed to hold the goods in trust for IBAA as the “latter’s property with liberty to sell the same for its account,” and in case of sale, to turn over the proceeds as soon as received to IBAA. When the spouses defaulted, IBAA demanded payment but the Vintolas, who

were unable to dispose of the shells, responded by offering to return the goods. IBAA refused and charged the spouses with Estafa for having misappropriated, misapplied and converted for their own personal use and bnefit the aforesaid goods. The lower court acquitted the Vintolas, ruling that the remedy of the bank was

civil and not criminal in nature. Shortly thereafter, IBAA instituted a civil action to recover the value of the goods. The Lower Court initially dismissed but then ruled in favor of IBAA upon

reconsideration. Vintolas claim their acquittal in the Estafa case bars filing of the civil action which is deemed instituted with the criminal action.


receipt arrangement did not convert IBAA into an investor, the latter remained a lender and a creditor. Since the IBAA is not the factual owner of the goods, the Vintolas cannot justifiably claim that because they have surrendered the goods to IBAA and subsequently deposited them in the custody of the court, they are absolutely relieved of the obligation to pay their loan because of their inability to dispose of the goods. The fact that they were unable to sell the seashells does not affect IBAA’s right to recover the advances it had made under the LC. It follows that the acquittal of the Vintolas in the Estafa case is no bar to the institution of a civil action for collected. The decision of the acquittal expressly provided that the remedy of the Bank is civil and not criminal in nature. The Vintolas are liable ex contractu for breach of the Letter of Credit. Their civil liability does not arise ex delicto which is deemed instituted with the criminal action. The civil action is therefore distinct and independent from any criminal proceedings and may proceed regardless of the result of the latter.